Liquidated Damages In The Nation's Capital

Purchase agreements in the District of Columbia — particularly for residential properties — often purport to give the seller an option of remedies if the buyer fails to perform. For example:

[T]he deposit herein provided for may be forfeited at the option of the seller, in which event the purchaser shall be relieved from further liability hereunder, or, without forfeiting the said deposit, the seller may avail himself of any legal or equitable rights which he may have under this contract.

Sheffield v. Paul T. Stone, Inc., 98 F.2d 250, 251 (D.C. Cir. 1938). The plain text gives the seller the best of three worlds; the seller can either keep the buyer's earnest money deposit or pursue legal or equitable remedies.

It will shock you to learn that buyers and sellers over the years have disagreed on how these clauses should be enforced. On the one hand, some buyers have argued that sellers should not be allowed to retain the earnest money deposit at all (particularly where the seller went on to sell the property for the same price or more). Other buyers have argued that the seller must refund the deposit immediately if the seller intends to seek legal or equitable damages. On the other hand, sellers have argued that they should be allowed to "wait and see" whether they are able to resell the property, and for how much, before electing a remedy (i.e., electing the liquidated damages option only if it exceeds the amount of their actual damages).

Courts in the District have relied primarily on three basic principles to determine the seller's damages when a buyer walks away in breach of a purchase agreement:

Look to the plain text of the contract to determine the intent of the parties. Liquidated damages may be enforceable, particularly where traditional justifications exist. Penalty clauses are generally unenforceable. To help fill in the details of how these principles actually play out in the District, the ACREL Acquisitions Committee posed 13 questions about how D.C. courts approach remedy-options clauses. Here's what we found.

1. Are liquidated damages an exclusive remedy or may the seller also pursue specific performance?

   D.C. courts will attempt to enforce the intent of the contracting parties and will look to the terms of the contract to determine whether liquidated damages are intended to be an exclusive remedy. See Barnette v. Sayers, 289 F. 567, 569 (D.C. 1923) ("'The question always is, what did the parties intend by the language used?'...[I]f the intent of the parties can be ascertained from the contract, it should be enforced." (quoting United States v. Bethlehem Steel Co., 205 U.S. 105, 119 (1907)); accord Vicki Bagley Realty, Inc. v. Laufer, 482 A.2d 359, 367 (D.C. 1984). In the context of liquidated damages, this principle is generally consistent with Powell on Real Property, which would allow parties to contract for liquidated damages as a non-exclusive remedy. See § 81.04 ("The mere fact that there is a liquidated damages provision does not necessarily force a party to forego the specific performance remedy."). And while D.C. courts have not explicitly endorsed Powell on this point, sympathy for the Powell rule can nonetheless be inferred from several holdings. For example, the D.C. Circuit in Sheffield (one of the more frequently cited cases on the issue) observed that:

   When plaintiffs' breach [occurred] two alternative remedies, apart from a suit for specific performance, were open to defendants: (1) to "forfeit" the...