Opinion ID: 204058
Heading Depth: 2
Heading Rank: 2

Heading: Validity of the Liquidated Damages Provision

Text: Having determined that the liquidated damages provision of Kunelius's contract with Cohousing formed a part of her relationship with the Town and the Trust, we turn to her argument that the provision is nevertheless invalid. In Massachusetts, whether a liquidated damages clause is valid and enforceable is a question of law, and therefore we review the issue de novo. NPS LLC v. Minihane, 886 N.E.2d 670, 673 & n.5 (Mass. 2008). Although it was once unsettled, it is now clear that in Massachusetts, the party resisting the enforcement of the liquidated damages provision bears the burden of persuasion. Id. (citing TAL Fin. Corp. v. CSC Consulting, Inc., 844 N.E.2d 1085, 1092 (Mass. 2006)); see also Honey Dew Assocs., Inc. v. M&K Food Corp., 241 F.3d 23, 27 (1st Cir. 2001). Massachusetts courts have long accepted contracts with liquidated damages provisions, particularly those involved in the purchase and sale of real estate. Kelly v. Marx, 705 N.E.2d 1114, 1116 (Mass. 1999). Generally, a contract containing a provision awarding liquidated damages to the seller of real property in the event of a buyer's breach will be enforced so long as at the time the agreement was made, potential damages were difficult to determine and the [liquidated damages provision] was a reasonable forecast of damages expected to occur. Perroncello v. Donahue, 859 N.E.2d 827, 831 (Mass. 2007) (quoting Kelly, 705 N.E.2d at 1115). Under this rubric, Massachusetts courts have specifically eschewed the second look approach and evaluate both of these factors only at the time of contract formation. Kelly, 705 N.E.2d at 1116. Nevertheless, liquidated damages clauses will not be enforced if they provide for an amount that is `grossly disproportionate to a reasonable estimate of actual damages' made at the time of contract formation. Id. (quoting Lynch v. Andrew, 481 N.E.2d 1383, 1386 (Mass. App. Ct. 1985). Interestingly, most cases challenging liquidated damages provisions do so on the theory that overly large liquidated damage awards impermissibly function as a penalty. [10] See, e.g., NPS LLC, 886 N.E.2d at 673. In this case, the appellant complains that the liquidated damages provision was inadequate because it vastly underestimated her damages and therefore functions as a penalty against her. [11] This theory is relatively novel, and the weight of authority is against it. E.g., Margaret H. Wayne Trust v. Lipsky, 846 P.2d 904, 910 (Idaho 1993); Mahoney v. Tingley, 529 P.2d 1068, 1070-71 (Wash. 1975) (Except where extraordinary circumstances are involved such as fraud or serious overreaching by the purchaser, a seller who chooses to utilize the device of liquidated damages in an earnest money agreement . . . cannot avoid the effect of that agreement.); see also Nasco Inc. v. Pub. Storage, Inc., No. 92-CV-12731-RCL, 1995 WL 337072 (D. Mass. May 20, 1995). Nevertheless, it appears that in Kelly, and the cases decided thereafter, the SJC has left open the possibility that a liquidated damages clause will be set aside if it grossly overestimated or underestimated a party's damages at the time of contract formation. See Kelly, 705 N.E.2d at 1116 (liquidated damages provision will not be enforced if it provides for an amount grossly disproportionate to a reasonable damages made at the time of contract formation); Howard v. Wee, 811 N.E.2d 1050, 1052 (Mass. App. Ct. 2004) (noting that $1,000 in liquidated damages was not unreasonably low, but not questioning that unreasonably low liquidated damages can be set aside under Kelly). We must therefore determine whether the liquidated damages provision at issue in this case was, as a matter of law, grossly disproportionate to a reasonable estimate of the damages Kunelius would incur in the event that the sale of her $1.16 million property was not successful. [12] Massachusetts courts have held that an earnest money deposit of 5% of the purchase price in a contract for the purchase and sale of real estate is reasonable as a matter law. Kelly, 705 N.E.2d at 1117; see also NRT New England, Inc. v. Moncure, 24 Mass. L. Rptr. 599, 2008 WL 4739794, at  (Mass. Super. 2008); Old Oxford Realty Partners LLC v. Shea, No. 305754, 2005 WL 1323110, at  (Mass Land Ct. 2005). Although we have found one reported decision in which a Massachusetts court blessed a lower amount of liquidated damages, it was in a factual circumstance that differs materially from this case. In Howard, the court of appeals found that liquidated damages in the amount of $1000 was not unreasonably low considering that this amount was to cover damages incurred over a period of about eleven days. 811 N.E.2d at 1052. Here, Kunelius was to receive $19,000 in liquidated damages. [13] This amount is approximately 2% of the total purchase price of $1.16 million, obviously less than the 5% that Massachusetts courts have upheld. But Kunelius failed to produce evidence or argue in the district court that the 2% liquidated damages clause was grossly disproportionate to a reasonable estimate of her actual damages at the time of contract formation, and therefore, this argument has been waived. CoxCom, Inc., 536 F.3d at 110 n.11. As a result, like the district court we too must conclude that the liquidated damages provision is enforceable in this case.