Ravenstar, Ltd. Liab. Co. v. One Ski Hill Place, Ltd. Liab. Co. - 2017 CO 83, 401 P.3d 552

Rule:

The mere presence of an option to seek either liquidated damages or actual damages does not render the liquidated damages clause invalid as a matter of law. However, such an option must be exclusive. In other words, a provision that allows a non-breaching party to pursue liquidated or actual damages must only allow the non-breaching party to pursue one of those options. If the non-breaching party elects to pursue the liquidated damages set forth in the contract, it may not in addition pursue the alternative actual damages remedy set forth therein. Otherwise, an election to pursue liquidated damages would function as an invalid penalty.

Facts:

In 2008, Petitioners, five Colorado companies, entered into separate contracts (the "Agreements") to buy to-be-built condominium units from Respondent, developer One Ski Hill Place, LLC ("OSHP"). Each Agreement contains an identical provision governing default (the "Damages Provision"), which provided, in sum, that if a purchaser of a unit defaulted, then OSHP had the option to retain all or some of the paid deposits as liquidated damages or, alternatively, to pursue actual damages and apply the deposits toward that award. The Damages Provisionstated: “If Purchaser defaults in the performance of any obligation under this Agreement . . . Seller shall have the right to terminate this Agreement and shall be entitled to retain all or a portion of the Earnest Money and Construction Deposit . . . as liquidated damages ("Seller's Liquidated Damages"). Alternatively and in lieu of Seller's Liquidated Damages, Seller may elect to terminate this Agreement and recover its actual damages resulting from Purchaser's default calculated in accordance with Colorado law. . .” Petitioners paid earnest money and construction deposits of fifteen percent of the purchase price of each unit. But Petitioners were unable to obtain financing and failed to close by the agreed-upon 2010 deadline, thereby breaching the Agreements. After Petitioners defaulted and breached the Agreements, OSHP chose to keep the full deposits as liquidated damages. Petitioners then filed this case against OSHP, seeking the return of their deposits. OSHP filed a motion for summary judgment. In response, Petitioners contended that the Damages Provision in the Agreements was unenforceable because the Provision gave OSHP the option to choose liquidated damages or actual damages. Therefore, Petitioners argued, the parties did not mutually intend to liquidate damages, as Colorado law requires. The trial court rejected this argument, but nonetheless denied summary judgment. Petitioners then stipulated that the amount of liquidated damages was reasonable and that actual damages were difficult to ascertain, thereby resolving the remaining disputed issues of fact. The trial court entered judgment in favor of OSHP, and Petitioners appealed. A division of the court of appeals affirmed the trial court's judgment and orders and held that the "mere presence of an option to elect between liquidated damages and actual damages does not render the liquidated damages clause unenforceable."

Issue:

Is the subject liquidated damage clause invalid because it gives OSHP the option to choose between liquidated and actual damages?

Answer:

No.

Conclusion:

The freedom to contract for the alternative damages remedies of liquidated damages and actual damages does not negate the parties' intent to liquidate damages. All that this court requires is that "the parties intended to liquidate damages.” An intent to liquidate damages should not be conflated with an intent to liquidate damages as the sole and exclusive remedy. The parties must only mutually intend to make liquidated damages one of the available remedies that the non-breaching party could pursue. So long as the parties mutually intend the stipulated sum to be the agreed-upon measure of damages if the non-breaching party elects liquidated damages, the mutual intent element of Klinger is satisfied. Here, by providing in the Agreements that OSHP "shall be entitled to retain all or a portion of the Earnest Money and Construction Deposit . . . as liquidated damages," the parties clearly mutually intended both that liquidated damages be one of the available remedies OSHP could pursue and that the stipulated sum (i.e., the Earnest Money and Construction Deposit) be the agreed-upon measure of damages if OSHP elected to pursue liquidated damages. Therefore, the liquidated damages clause of the Damages Provision was enforceable, meaning OSHP properly retained Petitioners' full deposits.