Court Weighs In On Validity of Liquidated Damages Clauses

It is not uncommon for business contracts to contain a liquidated damages clause that provides a set amount to be paid in the event a party breaches the contract. However, a recent decision from the Fairfax County Circuit Court could significantly impact how companies structure liquidated damages provisions in their contracts. In Sagatov Builders LLC v. Christian Hunt, the Seller (Sagatov Builders) and Buyer (Christian Hunt) entered into a contract for the purchase of real property.  As part of the contract, the Buyer was obligated to deliver a deposit of $50,000. The Seller subsequently filed a lawsuit alleging that the Buyer breached the contract and sought to retain the deposit as liquidated damages based upon a damages provision in the contract. The damages provision provided that—in the event of the Buyer’s default—the Seller would have the option to either retain the deposit as liquidated damages or pursue actual damages against the Buyer. The Buyer sought to dismiss the lawsuit arguing that an optional liquidated damages clause is a penalty as a matter of law, and the Seller was required to prove actual damages.

In considering the enforceability of the option clause, the Fairfax Circuit Court noted that to be enforceable, the liquidated amount must (1) be a reasonable estimation of actual damages which by their nature are difficult to ascertain, effectively avoiding all future questions of damage, and (2) not function as a penalty.
The court determined that the damage provision clearly did not avoid all future questions of damage and therefore the arrangement “fails to achieve the fundamental purpose of a stipulated damage provision.”  The provision also functioned as a penalty since it was intended only to be operative where the deposit exceeded the actual damages incurred, “establishing the implication that the parties intended to punish the defaulting party.”

As a result of this holding, parties must now show caution in designing a liquidated damages provision.  Since liquidated damages are intended to reflect future harm that is inherently difficult to calculate, contracting parties are now in the awkward position of needing to accurately determine a stipulated amount beforehand, or relying on litigation to prove actual damages. If parties decide upon a liquidated damages provision, this case should serve as guidance to no longer include the option to pursue actual damages if damages end up amounting to far more than the amount stipulated in the contract. This case should also serve as a good reminder to business owners and executives to revisit your commonly used boilerplate language that may be found in your contracts to ensure they are compliant and up-to-date with existing case law.

Nick Johnson is an attorney with Washington, DC business law firm Berenzweig Leonard. He can be reached at njohnson@BerenzweigLaw.com. 

Is an Unsigned Contract Still Enforceable?

Actions must speak louder than unsigned contract, says Virginia Federal Court.

The failure to obtain a fully signed agreement is not always fatal to a breach of contract claim. However, a recent Virginia federal court case reminds us of the need to ensure signed written agreements are in place as early as possible in a business relationship. At the same time, businesses should be aware that their conduct may demonstrate that they have waived the need to execute a written contract.

Musical artist Cameron Jibril Thomaz, who performs under the name "Wiz Khalifa" (“Mr. Thomaz”), sued concert promoter It’s My Party, Inc. (“IMP”) for breach of a contract that was never signed. Mr. Thomaz engaged The Agency Group to serve as his booking agent for a new tour which would have included a concert at The Patriot Center at George Mason University (“GMU”). The Agency Group then asked IMP to promote the concert, and represented to IMP that Mr. Thomaz would be releasing a new album soon. The Agency Group emailed a contract to IMP and requested that IMP sign and return it to The Agency Group for Mr. Thomaz’s approval and signature, which IMP never did. The contract stated that it would not be binding unless signed by all parties.

George Mason University Patriot Center

Mr. Thomaz argued that the parties entered into a contract for him to perform at GMU and that he turned down an opportunity to perform at a different venue in reliance on IMP’s representations. Moreover, he argued that despite the fact that IMP partially performed the contract by advertising the concert, and that he partially performed by preparing for the concert, IMP refused to pay him and canceled the concert after fans already had purchased tickets. On the other hand, IMP asserted that its interest in promoting Mr. Thomaz’s concert was dependent upon the release of his new album because it did not believe he could otherwise attract a sufficient number of fans to warrant his appearance at the venue. The parties had agreed to sell concert tickets before finalizing the agreement, but as IMP had predicted, advance tickets had sold poorly in the absence of the album release. While IMP agreed to reschedule the concert, the parties were unable to come to mutually agreeable terms and IMP ultimately canceled the concert and withdrew its offer to promote it.

Under Virginia law, a contract can exist despite the absence of a signature if the parties' actions evidence an intention to enter into an agreement. However, if the parties intended to sign a formal agreement but did not, this creates a presumption that no contract exists, which can only be overcome with strong evidence. Since the terms of the alleged contract were unambiguous in that the parties did not intend the agreement to be binding unless signed by all parties, the court presumed that no contract existed. As such, Mr. Thomaz was required to demonstrate strong evidence that the actions of the parties showed otherwise.

However, the court dismissed the complaint after Mr. Thomaz presented little evidence of the parties' conduct during negotiations and almost wholly relied on the unsigned contract itself. The fact that tickets were sold was not enough to prove that IMP intended to enter into a contract given the countervailing evidence, including IMP’s failure to pay the deposit required by the contract and Mr. Thomaz’s failure to contemporaneously object. Finally, the court noted that the contact had an arbitration clause requiring the parties to submit any dispute to arbitration and that if Mr. Thomaz considered the contract to be binding, he would have submitted the matter to arbitration.

Sara Dajani is an associate attorney at the Washington, DC business law firm, Berenzweig Leonard, LLP.   She can be reached at sdajani@berenzweiglaw.com.