Liquidated Damages versus Penalties. The Ivanovs, who were of Russian origin, agreed to purchase the Sobels' home for $300,000. A $30,000 earnest money deposit was placed in the trust account of Kotler Realty, Inc, the broker facilitating the

Question

transaction. Tiasia Buliak, one of Kotler's salespersons, negotiated the sale because she spoke fluent Russian. To facilitate the closing without the Ivanovs' having to be present, Buliak suggested they form a Florida corporation, place the cash necessary to close the sale in a corporate account, and give her authority to draw checks against it. The Ivanovs did as Buliak had suggested. Before the closing date of the sale, Buliak absconded with all of the closing money, which caused the transaction to collapse. Subsequently, because the Ivanovs had defaulted, Kotler Realty delivered the $30,000 earnest money deposit in its trust account to the Sobels. The Ivanovs then sued the Sobels, seeking to recover the $30,000. Was the clause providing that the seller could retain the earnest money if the buyer defaulted an enforceable liquidated damages clause or an unenforceable penalty clause? Discuss.

Answer 1

Liquidated damages versus penalties
The court granted summary judgment to the Sobels, validating the clause as an enforceable liquidated damages provision. The Ivanovs appealed. The state appellate court affirmed, also holding that the liquidated damages clause was not an unenforceable penalty. The court reasoned that "[t]he $30,000 deposit was ten percent of the purchase price, and was not grossly disproportionate to any damages that the Sobels might reasonably expect to incur as a result of a default on a $300,000 dollar sale, and the Sobels could have intended only to induce full performance through the deposit amount."