In Lefemine v. Baron, 573 So. 2d 326 (Fla. 1991), Daniel Lefemine and Catherine Lefemine (the “Lefemines”) entered a real estate contract to purchase a property from Judith Baron (“Baron”) for $385,000 and put up a $38,500 escrow deposit. The Lefemines were unable to obtain financing and sued Baron for a return of their escrow deposit. Baron counterclaimed to retain the escrow deposit as liquidated damages for the Lefemines’ failure to close.
The trial court ruled against the Lefemines and found that (1) the Lefemines defaulted, (2) the liquidated damages provision was enforceable, and (3) the amount of damages, the escrow deposit ($38,500), was not unconscionable. The case was appealed to the Fourth District Court of Appeals and they affirmed the trial court’s judgment against the Lefemines.
The case was appealed to the Florida Supreme Court (the “Court”), which reversed the trial court’s decision and they found that the liquidated damages provision was an unenforceable penalty.
To arrive at its decision, the Supreme Court referred to its established test to determine whether a liquidated damages provision is a penalty. A liquidated damages provision would be a penalty clause if (1) the damages from the breach are readily ascertainable at the time the contract is entered and (2) the liquidated damages amount is grossly disproportionate to any damages that might reasonably be expected from the breach.
The Court found that the liquidated damages amount, $38,500, was a reasonable amount since it was only ten percent of the purchase price. Therefore, the escrow deposit was not unconscionable. However, the court took issue with the contract’s language that provided the seller the option to either retain the escrow deposit as liquidated damages or sue for actual damages.
The reason courts do not allow the option of liquidated damages and actual damages in a contract is because it defeats the purpose of liquidated damages. At the start of a contract, liquidated damages is an amount agreed to be the damages for a breach. If the non-breaching party has the option to forgo abiding by the liquidated damages provision and instead seek actual damages, then that defeats the purpose of liquidated damages and the liquidated damages provision becomes a penalty and unenforceable. Allowing liquidated and actual damages to both be remedies in a contract would defeat the purpose of liquidated damages as an amount agreed to be paid to the non-breaching party if there was a breach.
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