Renaudette v. Barrett Trucking Co., Inc.
Renaudette v. Barrett Trucking Co., Inc. (97-423); 167 Vt. 634; 712 A.2d 387
[Filed 14-Apr-1998]
ENTRY ORDER
SUPREME COURT DOCKET NO. 97-423
MARCH TERM, 1998
Steven Renaudette, et ux } APPEALED FROM:
}
}
v. } Chittenden Superior Court
}
Barrett Trucking Co., Inc., et al. }
} DOCKET NO. S1159-95 CnC
In the above-entitled cause, the Clerk will enter:
This appeal arises out of an action to determine whether defendant
Barrett Trucking Co., or plaintiffs Steven Renaudette and Catherine
Beaudoin, should recover the $4,000 down payment plaintiffs made to an
escrow agent pursuant to a real estate purchase and sale agreement.
Defendant appeals an order of the Chittenden Superior Court finding that
although plaintiff breached the purchase and sale agreement, because
defendant did not suffer any actual damages, defendant was not entitled to
recover the $4,000 down payment specified as liquidated damages in the
agreement. Defendant contends that the reasonableness of the liquidated
damages provision must be assessed at the time the contract is entered
into, and viewed from this perspective, a $4,000 liquidated damages
provision on a $170,000 real estate purchase is reasonable. We agree and
reverse.
The parties signed a purchase and sale agreement for a five unit
apartment building on June 21, 1995. The agreement provided for a purchase
price of $170,000 with a down payment of $4,000 to be held in escrow by
Trombley Real Estate. The agreement set the date for closing as August 15,
1995. The agreement also contained a liquidated damages provision which
stated in part:
Deposits: . . . . In the event either Seller or Purchaser does not
perform and fails to close on the terms specified herein, this shall
constitute a default. In the event of a default undisputed by Seller
and Purchaser, upon written demand, Escrow Agent shall pay the
deposit to the non-defaulting party.
Plaintiffs were unable to close on August 15, 1995, because their bank
was unwilling to finance the sale until it received an appraisal report on
the property. Plaintiffs were prepared to close on August 16, 1995, but
defendant declined to proceed with the sale.
On September 6, 1995, plaintiffs filed suit in superior court seeking
specific performance of the agreement. Defendant filed a counterclaim
seeking a declaration that, due to plaintiffs' breach of the agreement, it
was entitled to retain the $4,000 down payment pursuant to the liquidated
damages provision.
After a trial, the court found that specific performance was
impossible under the
circumstances,(FN1) and instead awarded plaintiffs the deposit, attorney's
fees and costs. The court ruled that plaintiffs should receive the deposit
because, measuring the damages as of August 16, 1996 (one day after the
breach), it was apparent that defendant had never suffered any actual
damages and thus the liquidated damages provision was unreasonable and
unenforceable. This appeal followed.
Defendant claims that the court misinterpreted the law with respect to
liquidated damages by assessing the reasonableness of the liquidated
damages clause after plaintiffs had breached the contract. Defendant
asserts that the reasonableness of the liquidated damages clause must be
assessed at the time the agreement is entered into and not after the breach
has occurred.(FN2)
We begin by noting that a determination of whether a liquidated
damages provision is reasonable is a question of law for the court. See
Highgate Assocs., Ltd. v. Merryfield, 157 Vt. 313, 316, 597 A.2d 1280, 1282
(1991). Thus, where the court applies the correct legal standard, we will
uphold its conclusions of law if reasonably supported by its findings. See
id.
In New England Educ. Training Serv., Inc. v. Silver Street
Partnership, we articulated three factors that should be considered in
determining whether a contract provision is a reasonable liquidated damages
clause rather than an unlawful penalty:
[A] liquidated damages clause must meet three criteria to be
upheld: (1) because of the nature or subject matter of the
agreement, damages arising from a breach would be difficult to
calculate accurately; (2) the sum fixed as liquidated damages must
reflect a reasonable estimate of likely damages; and (3) the
provision must be intended solely to compensate the nonbreaching
party and not as a penalty for breach or as an incentive to
perform.
156 Vt. 604, 613, 595 A.2d 1341, 1346 (1991).
A judgment as to whether these criteria have been met must be made at
the time the contract is entered into and not after the contract has been
breached. See Watson v. Ingram, 851 P.2d 761, 765-66 (Wash. App. Ct. 1993)
("So long as the deposit amount agreed upon is not so disproportionate to
possible damages as to be unconscionable, when estimated prospectively from
the time the contract is formed, the terms of the earnest money agreement
should be enforced without regard to the retrospective calculation of
actual damages or the ease with which they may be proven."); First Nat'l
Bank of Barrington v. Oldenburg, 427 N.E.2d 1312, 1318 (Ill. Ct. App. 1981)
("It is axiomatic that where, as here, the buyers default on a
contract, the sellers may retain the full amount of the earnest money
without reference to the amount of actual damages which the sellers may
have suffered as a result of the purchase . . . ."); Alley v. Rodgers, 399
S.W.2d 739, 741 (Ark. 1980) ("In determining the proper interpretation of a
provision for damages, we must place ourselves in the position of the
contracting parties and view the subject matter of their contract
prospectively and not retrospectively"); see also 14 Powell & Rohan, Powell
on Real Property § 882(2)(d), at 81-224-25 (1992) ("If it later turns out
that the seller has no actual damages because the value of the property has
risen, that fact does not negate the availability of the liquidated damages
remedy, as long as the amount specified as liquidated damages was not
unreasonable at the time the parties entered into their agreement.").
Considering the criteria outlined in Silver Street Partnership as of
the time the parties entered into the contract, we conclude that the
liquidated damages clause is reasonable and enforceable. First, at the
time plaintiffs and defendant entered into the contract, neither party
could have adequately anticipated the amount of damages which would arise
from a breach of the agreement. The damages incurred from a breach of a
real estate contract are hard to anticipate because it is difficult to
determine if the property will be resold for an equivalent price or the
amount of time required for a resale of the property. See Pima Savings And
Loan Ass'n v. Rampello, 812 P.2d 1115, 1118 (Ariz. App. Ct. 1991); Growney
v. CMH Real Estate Co., 238 N.W.2d 240, 243 (Neb. 1976).
The second and third factors are inextricably linked and therefore
best considered together. These factors are intertwined because, if the
liquidated damages provision is reasonable at the time the contract is
entered into, than it should be considered compensation for the breach and
not a penalty or incentive to perform. There is nothing to indicate that a
$4,000 liquidated damages provision is unconscionable or disproportionate
to the damages likely to result from a breach of a $170,000 real estate
purchase. The liquidated damages represent only 2.3% of the total purchase
price of the property. This amount is well within the range of liquidated
damages clauses which have been determined to be reasonable in other
jurisdictions. See Covington v. Robinson, 723 S.W.2d 643, 647 (Tenn. App.
Ct. 1986) (liquidated damages provision representing only 5% of total
purchase price was deemed reasonable); First Nat'l Bank of Barrington, 427
N.E.2d at 1318 ($13,450 liquidated damage provision on purchase of $134,450
home was reasonable); see also 14 Powell & Rohan, supra, § 882(2)(d), at
81-225 (Down payments of up to ten percent of the price are common in many
locations and have been validated by courts as an acceptable amount for
liquidated damages.).
Therefore, considering the liquidated damages clause at the time the
contract was entered into, the $4,000 deposit is reasonable and fair.
Reversed.
BY THE COURT:
_______________________________________
Jeffrey L. Amestoy, Chief Justice
_______________________________________
John A. Dooley, Associate Justice
_______________________________________
James L. Morse, Associate Justice
_______________________________________
Denise R. Johnson, Associate Justice
_______________________________________
Marilyn S. Skoglund, Associate Justice
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Footnotes
FN1. Due to a recently enacted statute requiring landlords to take
certain steps to reduce the risks associated with lead paint, 18 V.S.A. §
1759, the court found that specific performance was no longer feasible.
The court did not believe that an order requiring defendant to bring the
building into compliance with the lead paint laws would be effective.
FN2. Defendant also contends that because plaintiffs failed to raise
the liquidated damages issue in their complaint, the trial court erred by
returning the $4,000 deposit to plaintiffs. We do not reach this issue
because we reverse on separate grounds.
