Summary
The Supreme Court of Virginia considered whether a real estate contract provision making a $50,000 deposit non-refundable constituted enforceable liquidated damages or an impermissible penalty or forfeiture. The Court held that the purchaser failed to prove that the damages were susceptible to definite measurement or that the deposit was grossly disproportionate to the probable loss. It reversed the circuit court's judgment and remanded for payment of the deposit to the seller.
Topics
Practice areas
Questions Presented
- Whether the contractual provision making Singh's $50,000 deposit nonrefundable after failure to terminate within the specified financing-contingency period was an enforceable liquidated-damages clause or an impermissible penalty or forfeiture.
Holdings
- The provision was an enforceable liquidated-damages clause, not an impermissible penalty or forfeiture, because Singh failed to prove that Boots's damages were susceptible of definite measurement or that the $50,000 deposit was grossly disproportionate to probable or actual damages.
Key quotations
“parties to a contract may agree in advance about the amount to be paid as compensation for loss or injury which may result from a breach of the contract “[w]hen the actual damages contemplated at the time of the agreement are uncertain and difficult to determine with exactness and when the amount fixed is not out of all proportion to the probable loss.”” (696)
“a liquidated damages clause will be construed as an unenforceable penalty “when the damage resulting from a breach of contract is susceptible of definite measurement, or where the stipulated amount would be grossly in excess of actual damages.”” (696)
Factual background
Boots agreed to sell its Denny's Restaurant to Singh for $1,500,000, with a $50,000 deposit and a financing contingency requiring Singh to terminate the agreement in writing within forty days or the deposit would become nonrefundable. The forty-day period was extended by twenty-two days, but Singh neither obtained financing nor terminated the contract by the extended deadline or the closing date. Boots later sold the restaurant to another buyer for $1,300,000, and the closing attorneys filed an interpleader action after both parties claimed the deposit.
Procedural history
Closing attorneys filed an interpleader action concerning the $50,000 deposit and deposited the funds with the circuit court clerk. The circuit court held that Singh had not effectively terminated the contract but nevertheless ruled that the nonrefundable-deposit provision was an impermissible penalty or forfeiture and ordered the deposit refunded. Boots appealed that ruling to the Supreme Court of Virginia.
Remand instructions
Remand for entry of an order directing payment of the $50,000 deposit to Boots.