Liquidated Damages Provisions Unenforceable: Alternatives
Published: February, 2011
The Florida Supreme Court recently ruled that a liquidated damages provision similar to that found in the Florida Bar/Florida Association of Realtors Real Estate Contract (the “FAR/BAR Contract”) is unenforceable.
The Court in Lefemine v. Baron, held that a liquidated damages clause will not be enforceable if the contract also gives the non-defaulting party the right to bring an action at law for accrual damages. The Court reasoned that providing for an option to seek accrual damages means that “the parties did not have the mutual intention to stimulate to a fixed amount as their liquidated damages in the event of a breach.”1 Accordingly, any default in any contract, option agreement, lease agreement, or any other agreement which provides for the retaining of a deposit as liquidated damages or the right to proceed to seek actual damages is not enforceable as a liquidated damages clause. Rather, such a clause constitutes a penalty as a matter of law because the existence of the option negates the intent to liquidate damages. Basically, Lefemine v. Baron requires parties to a contract, lease agreement, option agreement or any other agreement to elect their remedy upon execution of the contract.
The Supreme Court reviewed Lefemine v. Baron, 566 So.2d 1160 (Fla. 4th DCA 1990) based upon an express and direct conflict with Cortes V. Adair, 494 Sp/ 2d 523 (Fla. 3d DCA 1986). The court quashed the decision below in Lefemine and agreed with the principles applied in Cortes. 2 The default found in Cortes is almost identical to the default provision in the FAR/BAR Contract.3 The analysis used by the Supreme Court in Lefemine, therefore, renders the liquidated damages provision in the newly revised FAR/BAR Contract unenforceable as a penalty clause.
The Lefemine case involved a real estate contract by Daniel and Catherine Lefemine to purchase a residence for $385,000.00 from Judith W. Baron. The Lefemines sued Baron for the return of their $38,500.00 deposit after they were unable to obtain financing. Baron filed a counterclaim to retain the deposit as liquidated damages under the default provision in the Contract. The broker cross-claimed against Baron for one-half of any recovery of the deposit. The trial court found that the buyers defaulted under the terms of the Contract, that the default provision in the Contract was a bona fide liquidated damages clause, and that the $38,500.00 deposit was not an unconscionable amount of damages. The trial court also found in favor of the broker on its cross-claim, awarding Baron and the broker each half of the $38,500.00. The Fourth District of Court of Appeals affirmed the trial court judgment.
In analyzing the enforceability of the default provision as a liquidated damage amount, the Florida Supreme Court restated the test established in Hyman v. Cohen, 73 So. 2d 393 (Fla. 1954) for determining the circumstance under which a liquidated damages provision will be upheld. Under Hyman, a two-pronged test is employed.
First, the damages resulting from the breach must not be readily ascertainable.4 Second, the amount the parties agree will be forfeited must not be grossly disproportionate to the amount of damages that would reasonably be expected to flow from a breach so as to indicate that the parties only could have intended to induce full performance, rather than to liquidate their damages.
Applying the test set forth in Hyman, the Florida Supreme Court agreed with the Fourth District Court of Appeals that the $38,500.00 was not unconscionable. It nonetheless declared the liquidated damages clause was non-enforceable because of the existence of the option to elect remedies.5 The Lefemine Court cited Kanter v. Safran 68 So. 2d 553 (Fla. 1953), Stenor, Inc. v. Lester, 58 So. 2d 673 (Fla. 1951), and Pappas v. Deringer, 145 So. 770 (Fla. 3d DCA 1962) in support of its holding. The Court adopted the reasoning employed in Pappas, since the seller would only elect to retain the liquidated damages in the event that they were greater than the accrual damages; then such, the liquidated damages clause constituted a penalty to the buyer. The buyer would then be in the position of either losing the security deposit or paying the accrual damages, whichever were greater.
Giving the buyer, as well as the seller, the right to choose remedies, does not mitigate against the punitive nature of a liquidated damages clause which contains alternative remedies. As the Court said in Lefemine, “we do not read Cortes, or any of the prior cases in which the term ‘mutuality’ appears as meaning that an option by one party either to retain the deposit or to seek actual damages is enforceable whenever the other party has a right to choose remedies.”6