Will a Virginia court enforce our liquidated-damages clause?
Yes, unless the party attacking it proves one of two things. Boots, Inc. v. Singh states the test in its operative form: "under the rule recognized in our cases, a liquidated damages clause is invalid only when the actual damages contemplated at the time of the agreement are shown to be certain and not difficult to determine or the stipulated amount is out of all proportion to the actual damages." The burden sits on the challenger: "The party challenging the validity of a liquidated damages clause has the burden of proof on the issue of whether the opposing party's 'damages . . . are susceptible of definite measurement or . . . the stipulated damages are grossly in excess of the actual damages suffered by the non-breaching party.'" And that party gets a real opportunity to try: "The party opposing the imposition of liquidated damages is entitled to conduct discovery and present relevant evidence that the damages resulting from breach of the contract are susceptible of definite measurement or that the stipulated damages are grossly in excess of the actual damages suffered by the nonbreaching party. Upon proof of either of these elements, a liquidated damages clause becomes an unenforceable penalty" (O'Brian v. Langley School).
The trap
The measuring date is the trap. Uncertainty is judged by the "actual damages contemplated at the time of the agreement", so a challenger who proves only that the non-breaching party ended up suffering little or no loss has attacked the wrong thing: in Boots the buyer's evidence that the seller resold at roughly the same price failed for exactly that reason, because he "presented no evidence at all relating to damages contemplated at the time of the sales contract". The facts are worth having, because they show how strong the challenger’s case can look and still fail: the buyer’s only evidence was the seller’s own president saying the $1,300,000.00 resale was "[r]oughly, the same" as the $1,500,000.00 contract once a $239,000.00 commission was taken into account, which the buyer argued showed the seller made $39,000.00 MORE by his breach, and the Court held it would be "pure speculation to say it was certain at the time the Singh contract was signed" that such a resale could be had six months later, adding that the buyer "offered nothing to show that the amount of the deposit would be out of all proportion to any probable loss". The second trap is procedural and cuts against the drafter: under O'Brian, signing a contract containing the clause does not preclude litigating its validity later, and the opposing party is entitled to discovery and evidence on it.
6 authorities
The words that state the rule
under the rule recognized in our cases, a liquidated damages clause is invalid only when the actual damages contemplated at the time of the agreement are shown to be certain and not difficult to determine or the stipulated amount is out of all proportion to the actual damages.
The words that state the rule
The party challenging the validity of a liquidated damages clause has the burden of proof on the issue of whether the opposing party’s “damages . . . are susceptible of definite measurement or . . . the stipulated damages are grossly in excess of the actual damages suffered by the non-breaching party.”
The words that state the rule
The fact that a party enters into a contract containing a liquidated damages clause does not prevent that party from later litigating the validity of the clause. The party opposing the imposition of liquidated damages is entitled to conduct discovery and present relevant evidence that the damages resulting from breach of the contract are susceptible of definite measurement or that the stipulated damages are grossly in excess of the actual damages suffered by the nonbreaching party. Upon proof of either of these elements, a liquidated damages clause becomes an unenforceable penalty.
The words that state the rule
Here, when Singh failed to terminate the sales contract in writing within the forty-day period as extended, the deposit became non- refundable, entitling Boots to payment of the deposit unless Singh could prove that Boots’ damages were susceptible of definite measurement or the deposit amount was grossly in excess of actual damages. Singh contends he carried this burden, and he relies solely upon testimony given by Jagdish Patel, Boots’ president, during his direct examination as a witness for Boots. Patel said the $1,300,000.00 contract with DEN OF HOPEWELL was “[r]oughly, the same” as the $1,500,000.00 contract with Singh because Boots would have had to pay a sales commission of $239,000.00 on the Singh sale but no commission on the sale to DEN OF HOPEWELL. Singh maintains that this testimony shows Boots suffered no damage but actually “received an increase of profit in the amount of $39,000.00.” 5
The words that state the rule
Singh presented no evidence at all relating to damages contemplated at the time of the sales contract, and he does not explain how one could conclude that, at that time, Boots’ damages in event of default were certain and not difficult to determine. Indeed, it would be pure speculation to say it was certain at the time the Singh contract was signed that Boots would be able to obtain a sale of the restaurant more than six months later for “[r]oughly, the same” amount. And Singh offered nothing to show that the amount of the deposit would be out of all proportion to any probable loss. In any event, we upheld as enforceable liquidated damages a deposit of 4.6% of the purchase price of real property in Taylor, 233 Va. at 76, 353 S.E.2d at 747, and a deposit of 10% in Brooks, 248 Va. at 209, 445 S.E.2d at 480. Here, the deposit was only 3.3% of the purchase price, an amount certainly not disproportionate in comparison. 6 Accordingly, we conclude that Singh failed to present evidence to establish that the liquidated damages clause was an unenforceable penalty. We will reverse the judgment of the circuit court and remand the case for the entry of an order directing payment of the $50,000.00 deposit to Boots.
The words that state the rule
However, the court’s actions here substantially affected the O’Brians’ ability and right to litigate the validity of the liquidated damages clause. For these reasons, we will reverse the judgment of the circuit court and remand this case for further proceedings consistent with this opinion.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.