Brief Fact Summary.
Plaintiff sued Defendant to enforce a liquidated damages clause in which Defendant pays $200,000 if the $3.375 million purchase of a forty-nine percent interest of Plaintiff’s property was not completed due to Defendant’s default.
Synopsis of Rule of Law.
A liquidated damages clause is unenforceable if it is unreasonably and grossly disproportionate to the actual damages.
Colonial at Lynnfield, Inc. (Plaintiff) contracted to sell a forty-nine percent interest in its Hilton Inn to Colonial Associates (Defendant) for $3.375 million, with a closing date set for June 1, 1981. The contract’s liquidated damages clause provided that if the transaction was not completed due to Defendant’s default, Defendant would be liable for $200,000 in liquidated damages. On May 29, Defendant requested an extension of the closing date due to an inability to secure financing for the purchase. Plaintiff refused and held Defendant in breach. On September a981, Plaintiff and Lincoln National Development Corporation of Indiana (Lincoln) closed on a purchase of the property. The purchase price was $3.7 million for a fifty percent interest of the property in question and included a contingency in which Lincoln would purchase a forty-nine percent interest for $3.626 million if Plaintiff’s mortgage holder did not approve the sale of the fifty percent interest. Plaintiff sued Defendant to enforce their contract’s liquidated damages clause. The district court ruled in favor of Plaintiff. Defendant appealed.
Whether a liquidated damages clause is unenforceable if it is unreasonably and grossly disproportionate to the actual damages.
Yes. The trial court’s ruling that Defendant breached the contract is affirmed, but reversed the award of liquidated damages. A liquidated damages clause is unenforceable if it is unreasonably and grossly disproportionate to the actual damages.
Under Massachusetts law requires that a liquidated damages clause represent a reasonable estimate of damages that, at the time the contract is made, is difficult to predict and if the actual damages are easily calculable, a retrospective appraisal of the liquidated damages clause is required. If the liquidated damages clause is grossly disproportionate to the actual damages, then the liquidated damages clause constitutes a penalty, rendering it unenforceable and entitling the non-breaching party with only actual damages. Here, Lincoln was entitled to purchase the same forty-nine percent interest as Defendant for $3.626 million, which is $251,000 more than Defendant would have paid. Any damages due to loss of interest would have only amounted to $94,500. Plaintiff made a substantial profit by selling to Lincoln instead of Defendant, therefore making the liquidated damages clause grossly disproportionate to actual damages. Therefore, the liquidated damages is a penalty and not enforceable.