Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.
Plaintiffs contracted to buy residential property and a house from defendants, and the plaintiffs paid a deposit as well, pursuant to a prepaid liquidated damages clause. A dispute arose and the plaintiffs backed out of the agreement. Defendant then sold the house to a third party. Plaintiffs sued defendant, seeking to have their deposit returned. Plaintiffs moved for summary judgment, and conceded for purposes of the motion that they breached the contract. The trial court granted the plaintiffs’ motion and ordered the deposit returned. The defendants appealed.
Whether the liquidated damages clause in the parties' contract could be enforced by the court?
No, the liquidated damages clause in the parties' contract could not be enforced by the court.
On appeal, the court held that because the defendant incurred no expenses that exceeded the price paid by the new buyers, defendants suffered no actual damages. Thus, the liquidated damages clause did not comply with state law and was unenforceable was against public policy.