Liquidated Damages

COLORADO COURT OF APPEALS AGREES THAT DEFAULT CLAUSE OF CONTRACT PERMITS ENFORCEMENT OF LIQUIDATED DAMAGES

On January 28, 2016, the Colorado Court of Appeals discussed the meaning of ‘having one’s cake and eating it too’ within the context of a contract clause which gave the non-defaulting party the option of being entitled to liquidated damages or alternatively recovering actual damages.

In Ravenstar LLC et al. v. One Ski Hill Place LLC, Plaintiffs entered into separate contracts to purchase to-be-built condominium units from the Defendant. The contracts contained a provision governing default, which gave the Defendant the option to either retain all or a portion of the deposits as liquidated damages or, alternatively, to seek an award of actual damages. When plaintiffs defaulted, the developer Defendant opted to retain the full deposits as liquidated damages.

Plaintiffs filed an action against Defendant, seeking the return of their deposits. They contended that the liquidated damages provision in their contracts was unenforceable. Plaintiff cited Colorado case law there was to be enforceable, there must be an expression of mutual intent to permit liquidated damages. They argued that because the provision in their contract gave the Defendant the option to elect between liquidated and actual damages, the mutual intent was absent. Thus, the argument went, the “option” language rendered the provision invalid as a matter of law, since it was contrary to Colorado law requiring the parties mutually intend to permit liquidated damages.

In making this argument, Plaintiffs relied on cases from other jurisdictions which invalidated those clauses based on the assumption that the optional liquidated damages provision would be exercised only when the liquidated amount exceeds the actual damages resulting from the breach, thereby indicating an intent to penalize the defaulting buyer – or more simply stated, ‘to have their cake and eat it too.’

The Court of Appeals was not persuaded. It held that the presence of an option to elect actual or liquidated damages does not negate the parties’ intent to provide for liquidated damages. More directly stated, the mere presence of an option to seek actual damages does not render the intent to alternatively seek liquidated damages invalid as a matter of law. The Court did leave open the possibility that such optional clauses might be invalid under a different set of facts, however.

In light of this holding, the Court declined to address whether the Defendant would be entitled to claim actual damages if the liquidated damages provision were held unenforceable.

What parties should take away from this case is that default clauses which give a party the option to pursue actual damages or alternatively liquidated damages are likely enforceable. A contract need not say that liquidated damages are the sole and exclusive remedy that will be pursued in the event of a default. However, when there is a clause giving a party an option of pursuing actual or liquidated damages, parties electing liquidated damage should take care to ensure that the election does not act as a penalty or that the election is otherwise unfair. In such an event, the option clause may not be enforceable and a trial court may reach a different conclusion than was reached in this case.