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Can a Contract Allow the Non-Breaching Party to Decide Between Liquidated and Actual Damages?

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The Colorado Supreme Court decided the validity of the choice in Ravenstar v. One Ski Hill Place, (2017 CO 83).

In 2008, Petitioners, five Colorado companies, entered into separate contracts (“Agreements”) to buy to-be-built condominium units from Respondent, developer One Ski Hill Place, LLC (“OSHP”). Petitioners paid earnest money and construction deposits of fifteen percent of the purchase price of each unit. Each Agreement contains a provision governing default (“Damages Provision”), stating if a purchaser of a unit defaulted, then OSHP had the option to retain all or some of the paid deposits as liquidated damages or, to pursue actual damages and apply the deposits toward that award.

Petitioners defaulted and breached the Agreements, so OSHP chose to keep the full deposits as liquidated damages. Petitioners then filed this case against OSHP, for the return of their deposits. OSHP filed a motion for summary judgment. In response, Petitioners contended that the Damages Provision in the Agreements was unenforceable because the Provision gave OSHP the option to choose liquidated damages or actual damages. Petitioners argued the parties did not mutually intend to liquidate damages, as Colorado law requires. The trial court rejected this argument, ruling that the parties mutually intended to liquidate damages as a matter of law. The trial court entered judgment in favor of OSHP, and Petitioners appealed. A division of the court of appeals affirmed the trial court’s judgment.

The question before the Supreme Court is whether a liquidated damages clause in a contract is invalid because the contract gives the non-breaching party the option to choose between liquidated damages and actual damages. Petitioners argue that a liquidated damages clause in the contract is invalid as a matter of law because an option to select between remedies means that the parties did not intend to liquidate damages and is an invalid penalty.

The Court stated, a liquidated damages provision is valid and enforceable if the parties intended to liquidate damages, the amount of liquidated damages, at the time the contract was made, was a reasonable estimate of the presumed actual damages that the breach would cause, and that it was difficult to ascertain the amount of actual damages that would result from a breach. Here, the parties stipulated that the second and third elements of the test were satisfied. Thus, the only contested element is whether the parties intended to liquidate damages. The presence of a liquidated damages provision itself is evidence of the parties’ intention to liquidate damages in advance.

The second aspect examined by the Court was freedom of contract. The right of parties to contract freely is well developed in our jurisprudence–contracts between parties, voluntarily and fairly made, should be enforceable according to the terms to which they freely commit themselves. Applying these principles, the Court concluded that the parties here were free to bargain for liquidated damages as a sole and exclusive remedy, but they did not, and instead agreed on the options outlined in the Agreements. Striking the option to liquidate damages would require the Court restructure the contract, which it is reluctant to do.

The Court also noted the non-breaching party might choose liquidated damages even though actual damages may be higher. First, because liquidated damages are certain. Here, OSHP had to choose between remedies, the ultimate actual damages were difficult to ascertain because the real estate being sold was a condominium unit in a yet-to-be-constructed building. Choosing liquidated damages provided certainty of relief that may not have otherwise been available. Second, the non-breaching party may prefer to skip the litigation involved in seeking actual damages.

Because of the foregoing, the Supreme Court of Colorado affirms ruling of the Court of Appeals.

The Metier Law Firm is committed to assisting people with personal injury claims throughout Colorado, Wyoming and Nebraska, and we frequently serve as co-counsel to law firms nationwide. Tom Metier recently secured the largest personal injury verdict in Colorado.

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