Will a Washington court enforce our liquidated damages clause?
Liquidated damages clauses are favored in Washington and will be upheld if the sums do not amount to a penalty or are not otherwise unlawful. The two-part test: first, the amount fixed must be a reasonable forecast of just compensation for the harm that is caused by the breach; second, the harm must be such that it is incapable or very difficult of ascertainment (Walter Implement). Watson fixed the timeframe and with it the standing of that second part: "Having adopted the date of contract formation as the proper timeframe for evaluating the Restatement test, the Restatement's second requirement loses independent significance", and the prospective difficulty of estimating damages "is merely an element of the court's inquiry into the reasonableness of a liquidated damages provision", where "[t]he greater the prospective difficulty of estimating possible damages, the greater the range of reasonableness". The central inquiry is whether the specified sum was reasonable at the time of contract formation: reasonableness is not determined retroactively by correspondence with actual damages, but by reference to the prospective difficulty of estimating possible damages (Watson). Labelling does not decide the issue: the Walter Implement clause fixed "an amount equal to twenty (20) percent of the aggregate minimum rental charges for the unexpired portion of the term of this agreement, not as a penalty, but as and for liquidated damages", and "The designation in this contract that the additional amount is not a penalty but is liquidated damages, therefore, does not decide the issue." For the commonest Washington clause of this kind there is also a statute the common-law test does not displace, but only where the deposit is the seller's sole and exclusive remedy, and Watson's own agreement, which "gives the seller additional remedy options", fell outside it: a provision in a written real-estate purchase and sale agreement for liquidated damages or forfeiture of an earnest money deposit "to the seller as the seller's sole and exclusive remedy" "is valid and enforceable, regardless of whether the other party incurs any actual damages", so long as it does not exceed five percent of the purchase price (RCW 64.04.005(1)); above five percent the section neither prohibits nor supersedes the common law, and the provision "shall be interpreted and enforced without regard to this statute" (RCW 64.04.005(3)).
The trap
A formula can be the defect. In Walter Implement a clause charging 20 percent of the unexpired rentals produced a larger sum the EARLIER the lessee defaulted, although the equipment came back sooner, bore no relation to anticipated damages, and was held a penalty despite the contract's 'not as a penalty' label. Conversely, a clause that was a reasonable forecast when signed is not defeated by showing the seller later suffered little or no actual loss. That was the losing argument in Watson (the buyer "contends the seller suffered no actual damage and the courts below erred by not evaluating the liquidated damages provision as of the date of trial"), and the Court answered "We affirm", holding "the $15,000 earnest money agreement was a reasonable estimate of Ingram's potential damages in the event of a breach".
13 authorities
The words that state the rule
The trial court enforced the agreement, finding it was a reasonable estimate of anticipated harm as of the date of contract formation. The Court of Appeals affirmed, likewise evaluating the provision as of the date of contract formation. Petitioner contends the seller suffered no actual damage and the courts below erred by not evaluating the liquidated damages provision as of the date of trial. We affirm.
The words that state the rule
Liquidated damages clauses are favored in Washington, and courts will uphold them if the sums involved do not amount to a penalty or are not otherwise unlawful.
The words that state the rule
This court has adopted and applied a 2-part test to determine whether a liquidated damages clause is enforceable. First, the amount fixed must be a reasonable forecast of just compensation for the harm that is caused by the breach. Second, the harm must be such that it is incapable or very difficult of ascertainment. Schassberger , at 327-28; Knight, Vale & Gregory v. McDaniel, 37 Wn. App. 366, 371 , 680 P.2d 448 (1984); Northwest Acceptance Corp. v. Hesco Constr., Inc., 26 Wn. App. 823, 828 , 614 P.2d 1302 (1980). Reasonableness of the forecast will be judged as of the time the contract was entered.
The words that state the rule
The designation in this contract that the additional amount is not a penalty but is liquidated damages, therefore, does not decide the issue.
The words that state the rule
For example, using this formula, the earlier the default the greater the penalty although the equipment is returned sooner resulting in less depreciation of the equipment. Besides the formula not appearing to have any relation to the anticipated actual damages, such damages are not difficult to ascertain.
The words that state the rule
The clause provides for "an amount equal to twenty (20) percent of the aggregate minimum rental charges for the unexpired portion of the term of this agreement, not as a penalty, but as and for liquidated damages".
The words that state the rule
We affirm the Court of Appeals and find the liquidated damages clause is a penalty and unenforceable. We remand to the trial court to determine how much the equipment reasonably could have been expected to be worth at the end of the lease term. That value should be included in the Fochts' debt and the deficiency adjusted accordingly.
The words that state the rule
Having adopted the date of contract formation as the proper timeframe for evaluating the Restatement test, the Restatement’s second requirement loses independent significance. The central inquiry is whether the specified liquidated damages were reasonable at the time of contract formation. The reasonableness of liquidated damages is not determined retroactively by their correspondence with actual damages, but by reference to the prospective difficulty of estimating the possible damages that would flow from a breach. The prospective difficulty of estimating possible damages is merely an element of the court’s inquiry into the reasonableness of a liquidated damages provision. The greater the prospective difficulty of estimating possible damages, the greater the range of reasonableness used in assessing a liquidated damages provision.
The words that state the rule
We likewise find Ingram’s potential damages were difficult to ascertain at the time of contracting; the parties could not know what delays might ensue, what might occur in the real estate market, or how a failed sale might affect Ingram’s plans. Real estate purchase and sale agreements are precisely the type of contracts that are amenable to liquidated damages provisions. Under these facts, we hold the $15,000 earnest money agreement was a reasonable estimate of Ingram’s potential damages in the event of a breach. Because Ingram is the prevailing party on appeal, he is entitled to reasonable attorney fees and costs pursuant to the parties’ agreement. The decision of the Court of Appeals is affirmed.
- statuteRCW 64.04.005enactment date not established
The words that state the rule
(1) A provision in a written agreement for the purchase and sale of real estate which provides for liquidated damages or the forfeiture of an earnest money deposit to the seller as the seller's sole and exclusive remedy if a party fails, without legal excuse, to complete the purchase, is valid and enforceable, regardless of whether the other party incurs any actual damages. However, the amount of liquidated damages or amount of earnest money to be forfeited under this subsection may not exceed five percent of the purchase price. (2) For purposes of this section: (a) "Earnest money deposit" means any deposit, deposits, payment, or payments of a part of the purchase price for the property, made in the form of cash, check, promissory note, or other things of value for the purpose of binding the purchaser to the agreement and identified in the agreement as an earnest money deposit, and does not include other deposits or payments made by the purchaser; and (b) "Liquidated damages" means an amount agreed by the parties as the amount of damages to be recovered for a breach of the agreement by the other and identified in the agreement as liquidated damages, and does not include other deposits or payments made by the purchaser.
- statuteRCW 64.04.005enactment date not established
The words that state the rule
(3) This section does not prohibit, or supersede the common law with respect to, liquidated damages or earnest money forfeiture provisions in excess of five percent of the purchase price. A liquidated damages or earnest money forfeiture provision not meeting the requirements of subsection (1) of this section shall be interpreted and enforced without regard to this statute. [ 2005 c 186 s 1; 1991 c 210 s 1.] Notes: Application—2005 c 186: "This act applies to all contracts executed after April 26, 2005." [ 2005 c 186 s 2.] Effective date—2005 c 186: "This act is necessary for the immediate preservation of the public peace, health, or safety, or support of the state government and its existing public institutions, and takes effect immediately [April 26, 2005]." [ 2005 c 186 s 3.] Application—1991 c 210: "The provisions of this act apply only to written agreements entered on or after July 28, 1991." [ 1991 c 210 s 2.]
The words that state the rule
We reverse in part and affirm in part because we hold the notice sufficient and the liquidated damages clause unenforceable. Accordingly, we remand to the trial court for a determination of actual damages.
The words that state the rule
2 We note with respect to purchase and sale agreements providing for the forfeiture of an earnest money deposit to the seller as the seller’s sole and exclusive remedy, the Legislature has eliminated the Lind court’s actual damage requirement and legislatively defined the Restatement’s reasonableness requirement. RCW 64.04.005(1)(a)(i) provides that such agreements are valid and enforceable, regardless of whether the seller incurs any actual damages, so long as the earnest money deposit does not exceed 5 percent of the purchase price. The statute does not apply to this case because it only pertains to agreements executed on or after July 28,1991, and is limited to agreements in which the earnest money deposit is the seller’s sole remedy. Here, the agreement was executed August 6, 1990, and it gives the seller additional remedy options.
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