Will North Dakota enforce this liquidated-damages clause?
On two tracks, and both start from a presumption AGAINST the clause rather than for it. For contracts generally, N.D.C.C. § 9-08-04 makes a liquidated-damages clause void by default: "Every contract by which the amount of damages to be paid, or other compensation to be made, for a breach of an obligation is determined in anticipation thereof is to that extent void, except that the parties may agree therein upon an amount presumed to be the damage sustained by a breach in cases in which it would be impracticable or extremely difficult to fix the actual damage." For a sale of goods, N.D.C.C. § 41-02-97 (UCC 2-718) instead asks whether the amount is reasonable: "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." Shull v. Walcker first held that two earnest-money clauses did not cap the seller's remedies at all ("nothing in the agreement's two earnest money clauses precluded Shull from seeking additional remedies"), and then added that § 9-08-04 would not have made the deposit liquidated damages either, because the exception requires a genuine effort to estimate the loss: "Our case law requires that there be a reasonable endeavor by the parties to fix the compensation for the breach of contract." Whether a deposit clause caps the seller's remedies in the first place is, in Shull's words, "a matter of contractual interpretation."
The trap
Section 9-08-04's structure is the reverse of the more familiar rule that treats a liquidated-damages clause as presumptively valid unless it operates as a penalty: a North Dakota liquidated-damages clause outside a sale of goods is void UNLESS the drafter can show it was impracticable or extremely difficult to fix the actual damage at the time of contracting: silence on that point, or a clause that looks like a simple round number, is not enough. Shull illustrates how a court tests that showing without direct evidence of negotiation (its primary holding was that the clauses were part payment, not a remedy cap, and the seller recovered actual damages of over $30,000): the earnest money there ($1,000) was compared to the full contract price ($179,900) and found inadequate as a pre-estimate, and the court noted "[n]o evidence was presented ... that the earnest money amount was the result of a negotiation between the parties to be a reasonable pre-estimate of such damages." A goods contract does not get this narrower default-void treatment (§ 41-02-97 asks only whether the fixed amount is reasonable, not whether estimating actual damages was impracticable), so which of the two statutes applies can decide the case by itself. The goods track does, however, carry a deposit ceiling of its own that the reasonableness test does not state: where the seller justifiably withholds delivery because of the buyer's breach, § 41-02-97(2) returns to the buyer everything above the liquidated figure or, with no liquidation term, above "twenty percent of the value of the total performance for which the buyer is obligated under the contract or five hundred dollars, whichever is smaller."
7 authorities
- statuteN.D.C.C. § 9-08-04enactment date not established
The words that state the rule
Every contract by which the amount of damages to be paid, or other compensation to be made, for a breach of an obligation is determined in anticipation thereof is to that extent void, except that the parties may agree therein upon an amount presumed to be the damage sustained by a breach in cases in which it would be impracticable or extremely difficult to fix the actual damage.
- statuteN.D.C.C. § 41-02-97enactment date not established
The words that state the rule
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
Neither of these clauses considers the earnest money provided for in the agreement to be the sole remedy in case of a breach by Walcker. Nor, as they did in Bishop Ryan High School, 370 N.W.2d at 728 , and Dosland, 424 N.W.2d at 142 , do the clauses refer to liquidated damages. Rather, both clauses consider that the earnest money is simply considered part payment toward the total amount due for purchase of the town home.
The words that state the rule
Here, nothing in the agreement’s two earnest money clauses precluded Shull from seeking additional remedies.
The words that state the rule
Furthermore, the amount Walcker deposited as earnest money — $1000—when compared to the overall contract price of the home — $179,900—can hardly be considered adequate compensation for potential damages resulting from a breach, given the lack of any language limiting Shull’s remedy to the earnest money deposits in the event of Walcker breaching the agreement. Finally, N.D.C.C. § 9-08-04 states that contracts for liquidated damages are void except where the parties agree to an amount presumed to be the damage in cases in which it would be “impracticable or extremely difficult to fix the actual damage.” Our case law requires that there be a reasonable endeavor by the parties to fix the compensation for the breach of contract. Eddy v. Lee, 312 N.W.2d 326, 330 (N.D.1981). No evidence was presented before the trial court that the earnest money amount was the result of a negotiation between the parties to be a reasonable pre-estimate of such damages. We affirm the damages awarded by the district court to Shull in the amount of $30,433.30.
- statuteN.D.C.C. § 41-02-97enactment date not established
The words that state the rule
When the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of the buyer's payments exceeds: - The amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection 1; or - In the absence of such terms, twenty percent of the value of the total performance for which the buyer is obligated under the contract or five hundred dollars, whichever is smaller.
The words that state the rule
Earnest money is a comparatively small down payment made as an assurance that the purchaser is in earnest and good faith, and that if he or she fails to purchase the property after making the payment, the deposit will be forfeited. Bishop Ryan High School v. Lindberg, 370 N.W.2d 726, 728 (N.D.1985). This Court has previously considered whether a particular earnest money agreement limited the seller’s remedy to the earnest money paid, or whether there were additional remedies the seller could pursue. Dosland v. Netland, 424 N.W.2d 141, 141 (N.D.1988). While this Court did not state a hard and fast rule on the matter in Dosland , we did find the clause allowing for the earnest money as liquidated damages “without prejudice or other rights and legal remedies” was ambiguous, suggesting there could or could not be additional remedies available to the seller. Id. at 142 . [¶21] Whether an earnest money agreement limits a seller’s remedies to the earnest money itself, then, is a matter of contractual interpretation.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.