Will a Florida court enforce this liquidated-damages clause, or strike it as a penalty?
Florida applies the two-prong test of Hyman v. Cohen: the damages consequent upon a breach must not be readily ascertainable at the time of contracting, and the sum stipulated must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties intended only to induce full performance. For contracts for the sale of goods, Fla. Stat. § 672.718(1) adds the UCC formulation and provides that a term fixing unreasonably large liquidated damages is void as a penalty.
The trap
The Florida killer is the OPTION. If the clause lets the non-breaching party choose between keeping the stipulated sum and suing for actual damages, the provision is a penalty as a matter of law: not because the amount is wrong, but because the option shows the parties never mutually intended the stipulated sum to be their measure of damages. The clause struck down in Lefemine was ordinary seller-protective drafting: the buyer's deposit “may be retained or recovered by or for the account of Seller as liquidated damages, consideration for the execution of the Contract and in full settlement of any claims ... or Seller, at his option, may proceed at law or in equity to enforce his rights under the Contract.” It failed in Florida while being unremarkable elsewhere, and it failed even though the court AGREED the amount was fine: the $38,500 forfeited was ten percent of a $385,000 price, half of it payable to the broker, and was held not unconscionable and not grossly disproportionate. So do not read a safe amount as a safe clause. Do not read mutual remedies as a cure either: the court said expressly that the 'mutuality' language in its earlier cases was never meant to require the parties to have identical remedies, and that an option to retain the deposit or sue for actual damages is not made enforceable just because the other side also has a choice of remedies. Nor does the ascertainability prong look at the breach: it is determined from the status of the parties at the time the contract was entered into, not at the time of the breach. The consequence of losing the clause is a trial: the court quashed the decision below and remanded for a trial on the seller's actual damages. The option rule did not begin with Lefemine. Hyman itself recorded the rule that where a lease gives the lessor an option either to retain the deposit as liquidated damages or to apply it pro tanto against actual damages, the provision 'by its very terms negatives an intention to liquidate damages in advance and cannot be upheld as such', and because Hyman's own lease contained no such option, the forfeiture stood: the Court held the provision one for liquidated damages, found nothing unconscionable in the record, and reversed the lower court for relieving the lessee from the forfeiture, over two dissents. So the second Hyman prong is a question about the parties' intention at the time of the agreement, and relief from a forfeiture at the time of the breach is a separate equitable question. Lefemine expressly reserved whether the same result follows under the UCC, and reserved the case of an option to pursue only equitable remedies.
13 authorities
The words that state the rule
The default provision reads as follows: 1. DEFAULT BY BUYER: If Buyer fails to perform the Contract within the time specified, the deposit(s) made or agreed to be made by Buyer may be retained or recovered by or for the account of Seller as liquidated damages, consideration for the execution of the Contract and in full settlement of any claims; whereupon all parties shall be relieved of all obligations under the Contract; *328 or Seller, at his option, may proceed at law or in equity to enforce his rights under the Contract.
The words that state the rule
In Hyman v. Cohen, 73 So.2d 393 (Fla. 1954), this Court established the test as to when a liquidated damages provision will be upheld and not stricken as a penalty clause. First, the damages consequent upon a breach must not be readily ascertainable. Second, the sum stipulated to be forfeited must not be so grossly disproportionate to any damages that might reasonably be expected to follow from a breach as to show that the parties could have intended only to induce full performance, rather than to liquidate their damages.
The words that state the rule
First, were the damages consequent upon a premature termination of the lease by the lessor readily ascertainable? And it should be noted that this question is to be determined by a consideration of the status of the parties at the time the contract was entered into, and not at the time of the breach.
The words that state the rule
Under the rationale of the Fourth District Court of Appeal, a liquidated damages clause would constitute a penalty if the damages were readily ascertainable at the time of breach, regardless of whether the damages were not ascertainable at the time the contract was executed. By contrast, in Hyman this Court had decided that in order for a liquidated damages clause to be construed as a penalty it was necessary for the damages to be readily ascertainable at the time of the drawing of the contract. In Hutchison we reaffirmed the validity of the Hyman rationale and held the liquidated damages clause could stand if the damages were not readily ascertainable at the time of the drawing of the contract.
The words that state the rule
We agree with the court below that the forfeiture of the $38,500 deposit was not unconscionable. The deposit represented only ten percent of the purchase price and half of this had to be paid to the broker. The $38,500 was not so grossly disproportionate to any damages that might reasonably be expected to follow from a breach of the contract so as to show that the parties intended only to induce full performance.
The words that state the rule
However, 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 also has a right to choose remedies. [2] The phrase "mutuality of the agreement" used in the Pappas opinion and cited in Cortes was not meant to impose a requirement that the parties to a contract have identical remedies. [3] Rather, we interpret these opinions to mean that the existence of the option reflects that the parties did not have the mutual intention to stipulate to a fixed amount as their liquidated damages in the event of a breach.
The words that state the rule
The reason why the forfeiture clause must fail in this case is that the option granted to Baron either to choose liquidated damages or to sue for actual damages indicates an intent to penalize the defaulting buyer and negates the intent to liquidate damages in the event of a breach. The buyer under a liquidated damages provision *330 with such an option is always at risk for damages greater than the liquidated sum. On the other hand, if the actual damages are less than the liquidated sum, the buyer is nevertheless obligated by the liquidated damages clause because the seller will take the deposit under that clause. Because neither party intends the stipulated sum to be the agreed-upon measure of damages, the provision cannot be a valid liquidated damages clause.
The words that state the rule
We hold that the default provision in the subject contract was not enforceable as a liquidated damages clause. The provision constituted a penalty as a matter of law because the existence of the option negated the intent to liquidate damages. [5] We quash the decision below with directions to remand the case for a trial on the actual damages incurred by Baron as a result of the breach of contract. It is so ordered. SHAW, C.J., and OVERTON, EHRLICH, BARKETT and KOGAN, JJ., concur. McDONALD, J., dissents.
The words that state the rule
[5] We express no opinion with respect to whether the same result would occur if the Uniform Commercial Code were applicable to this transaction, nor do we imply that a liquidated damages clause which merely provided the option of pursuing equitable remedies would be unenforceable.
- statuteFla. Stat. § 672.718enactment date not established
The words that state the rule
(1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.
The words that state the rule
Second, is the sum stipulated to be forfeited so grossly disproportionate to any damages that might reasonably be expected to follow from a premature termination of the lease as to show that the parties could have intended only to induce full performance thereunder, rather than to liquidate their damages?
The words that state the rule
Another rule cited in the Stenor case, and which was held to be applicable to the facts in that case, may be stated as follows: where a lease gives the lessor an *402 option either to retain the deposit as his liquidated damages or to apply it pro tanto against his actual damages, such a provision by its very terms negatives an intention to liquidate damages in advance and cannot be upheld as such. There was no such provision in the lease in the instant case.
The words that state the rule
As has been shown, there is nothing in the record to overcome such presumption here, and it must be held that the provision for the forfeiture of the deposit was one for liquidated damages rather than for a penalty; since the record also fails to show any circumstances which would activate a court of equity in relieving the lessee from the forfeiture of his deposit, the lower court must be held in error for so doing. For the reason stated, the decree is affirmed in part and reversed in part, and the cause remanded for the entry of a decree not inconsistent with the opinions herein expressed. TERRELL, HOBSON, MATHEWS and DREW, JJ., concur. THOMAS and SEBRING, JJ., dissent.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.