According to the Court of Appeals, a condition in a real estate sales contract allowing for the payment of earnest money should not be regarded as a provision for liquidated damages. In this case1, the court granted certiorari to determine whether this condition should be included in a house buyer’s compensation package. The seller sued the buyer in this case after the buyer failed on a $45,000 promissory note (Supreme Court of Georgia, 1976). The buyer paid $5,000 in cash as earnest money when the contract was signed. The buyer’s request for summary judgment and counterclaim were refused, and the seller received a summary judgment in the trial court.
The trial court should have granted the buyer’s move for summary judgment, according to the Court of Appeals. In a 6-3 ruling, the court overturned and concluded that the contract’s earnest money clause amounted to a penalty. “In the case purchaser defaults hereunder after having paid the additional earnest money in the amount of $45,000,” the contract states (Supreme Court of Georgia, 1976). Even if the contract specifies liquidated damages rather than actual losses, the buyer can win in presenting a defense to enforce a $45,000 note, according to the Court of Appeals (Supreme Court of Georgia, 1976). If the parties fail to estimate damages before the breach and provide for both a forfeiture (penalty) and actual damages, the sum becomes an unenforceable penalty. The seller claims that a seller not in default has the right to keep the earnest money and sue for actual damages. The court disagrees with this viewpoint, and the vendor provides no evidence to back it up. In deciding each issue, the general contract law of breach remedies must be applied.
The existence of an earnest money provision in a real estate sales contract might result in one of three results in the case of a buyer’s violation. For starters, the funds may be considered as a partial payment of any damages incurred due to the buyer’s infringement. It might be used as part of the purchase price in a suit for specific performance to enforce the contract against the seller. Suppose actual losses prove to be more than the sum stipulated. In that case, a non-breaching party that agreed to accept liquidated damages cannot decide to take actual damages after a breach. The party that has violated the contract cannot claim that the actual damages are less than those indicated.
Contract clause *231 provides for “partial” liquidated damages in the event of a breach of contract. In the case of a breach of contract, contract clause *231 allows for “partial” liquidated damages. However, it is possible to infer that this was not meant to be the entire remedy for this specific violation (Supreme Court of Georgia, 1976). The question is whether the seller attempted to maintain the right to sue for actual losses, rendering the ostensibly “liquidated damages provision” unlawful. However, it is open to interpretation that this was not intended as the exclusive remedy for this violation. The question is whether the seller attempted to maintain the right to sue for tangible losses, rendering the ostensibly “liquidated damages provision” unlawful. Finally, the court believes that the $5,000 and $45,000 figures were intended to represent the maximum and lowest sums that can be recovered from a breach of contract (Supreme Court of Georgia, 1976). Because of the lingering ambiguity in these contract terms, some lawyers were convinced to uphold the Court of Appeals’ conclusion.
Reference
Supreme Court of Georgia. (1976). Southeastern Land Fund, Inc. V. Real Estate World, Inc. (31136 237 Ga. 227). Web.