Opinion ID: 1234947
Heading Depth: 1
Heading Rank: 2

Heading: Enforceability of the Liquidated Damages Provision

Text: The purchase agreement entered into between the Loomises and Republic Financial Corporation contained a liquidated damages clause which provided that, in the event of breach by Republic, ten percent of the purchase price would be deemed liquidated damages payable to the Loomises. At trial, Republic contended that the liquidated damages provision resulted in a penalty and was thus unenforceable. The district court, rather than ruling on the issue, submitted the question of the validity of the liquidated damages provision to the jury. The jury answered the special verdict form as follows: 1) Republic breached its purchase agreement with the Loomises; 2) actual damages were ascertainable; 3) actual damages were assessed in the amount of $18,500.00; and 4) liquidated damages were disproportionate to actual damages and therefore a penalty. The Loomises contend that the district court erred in holding that the validity of the liquidated damages clause was a question of fact for the jury. Because each of this court's prior decisions regarding the validity of liquidated damages clauses have been in bench trials, the issue of whether in a jury case the judge or the jury is the proper decision-maker on this issue has never arisen. See, e.g., Joseph F. Sanson Investment v. 286 Limited, 106 Nev. 429, 795 P.2d 493 (1990). The vast weight of authority supports the conclusion that the [t]he non-enforceability of penalties and forfeitures is a limitation on the freedom of contract and is based upon the notions of public policy held by courts of equity. 5 Arthur L. Corbin, Corbin on Contracts § 1055 (1964). The essentially equitable nature of this limitation has been implicitly recognized in Nevada. See, e.g., Mosso v. Lee et al., 53 Nev. 176, 186, 295 P. 776, 780 (1931); Lucich v. Medin, 3 Nev. 93, 99 (1867); Cox v. Smith, 1 Nev. 161, 172 (1865). We conclude that the determination of whether a liquidated damages clause is enforceable is equitable in nature and is to be decided as a matter of law by the court and not the jury. Accordingly, the district court erred in allowing the jury to make that determination; we proceed to construe the liquidated damages provision in this case as a matter of law. The Loomises contend that the liquidated damages provision was put into the purchase agreement by Republic and that the percentage provided in the purchase was not believed by Republic to be, nor was it in fact, unfair, inequitable or disproportionate to the amount of actual damages suffered. This court has previously held that [a] liquidated damages clause is prima facie valid unless the challenging party proves its application amounts to an unenforceable penalty. Joseph F. Sanson Investment v. 286 Limited, 106 Nev. 429, 435, 795 P.2d 493, 497 (1990) ( citing Haromy v. Sawyer, 98 Nev. 544, 546-47, 654 P.2d 1022, 1023 (1982); Silver Dollar Club v. Cosgriff Neon, 80 Nev. 108, 389 P.2d 923 (1964)). Further, [i]n order to prove that a liquidated damages clause constitutes a penalty, the challenging party must persuade the court that the liquidated damages are disproportionate to the actual damages sustained by the injured party. [3] Id., 795 P.2d at 497 (quoting Haromy, 98 Nev. at 547, 654 P.2d at 1023 (citation omitted)). Thus, Republic has the burden of persuasion on this point. Id., 795 P.2d at 497. In Silver Dollar Club, this court affirmed the district court's finding that a liquidated damages clause in a lease/sale agreement was not a penalty, stating: If appellant [the party challenging the provision] had introduced evidence showing that the actual damages were considerably smaller than the amount stipulated, this could be regarded as an indication that the amount named was intended as a penalty, but no such evidence was introduced. 80 Nev. at 112, 389 P.2d at 925. In the instant case, neither party attempted to reconcile the $18,500.00 award with the evidence presented at trial. Although the Loomises vehemently contend that they have been damaged by Republic's breach of the purchase agreement, both sides admit that there was no evidence of actual damages. Thus, Republic has not borne its burden of showing that the amount of actual damages is disproportionate to the amount of damages recovered under the liquidated damages clause. The Loomises are therefore entitled to recover $275,000.00 in liquidated damages as provided for in the purchase agreement.