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Covington v. Robinson

    Brief Fact Summary.

    Plaintiffs refused to close on the purchase of Defendant’s property even though Defendant lowered the purchase price so that Plaintiffs could meet the financing requirement of the sales contract. The contract also stipulated Plaintiffs to put a $100,000 deposit, which would be forfeited if Plaintiffs breached. Plaintiffs sued Defendant to recover the deposit, after Defendant sold the property.

    Synopsis of Rule of Law.

    A liquidated damages clause is enforceable if it appears that, at the time the contract was executed: 1) the parties contemplated that a failure to close may result in injury; 2) such damages would be indeterminable or difficult to calculate; and 3) the amount represents a reasonable proportion of the contemplated injury.

    Facts.

    Covington and Hurt, Jr. (Plaintiffs) and Robinson (Defendant) contracted for Plaintiffs to purchase 1,500 acres of land for $2,010,675, requiring the Plaintiffs to obtain financing for seventy-five percent of the purchase price or Plaintiffs would have to forfeit their $100,000 deposit. Plaintiffs only obtained 73.98 percent of the purchase price. Defendant lowered the purchase price so that the current finance would equal seventy-five percent of the new purchase price and Plaintiffs would not need additional financing. Plaintiffs still refused to close, therefore, Defendant held the Plaintiffs in breach and deemed the deposit forfeited. A few months later, Defendant sold the property for two million dollars. Plaintiffs sued to recover the entire deposit or, at minimum, the difference between their contract price and the price Defendant actually received from the second buyer.

    Issue.

    Whether a liquidated damages clause is enforceable if it appears that, at the time the contract was executed: 1) the parties contemplated that a failure to close may result in injury; 2) such damages would be indeterminable or difficult to calculate; and 3) the amount represents a reasonable proportion of the contemplated injury.

    Held.

    Yes. The trial court’s ruling was affirmed. A liquidated damages clause is enforceable if it appears that, at the time the contract was executed: 1) the parties contemplated that a failure to close may result in injury; 2) such damages would be indeterminable or difficult to calculate; and 3) the amount represents a reasonable proportion of the contemplated injury.

    Discussion.

    A court must consider the circumstances as they existed at the time the contract was formed, not what happened after the breach—including if the seller sold to another buyer. The $100,000 is a reasonable sum because it represents less than five percent of the $2,010,675 purchase price and there was virtually no way of determining what damages might result from a failure to close and calculate a precise measure of damages.


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