Question

Carnack contracts to sell his house and lot to Willard for $100,000. The terms of the contract call for Willard to make a deposit of 10 percent of the purchase price as a down payment. The terms further stipulate that if the buyer breaches the contract, Carnack will retain the deposit as liquidated damages. Willard makes the deposit, but because her expected financing of the $90,000 balance falls through, she breaches the contract. Two weeks later, Carnack sells the house and lot to Balkova for $105,000. Willard demands her $10,000 back, but Carnack refuses, claiming that Willard’s breach and the contract terms entitle him to keep the deposit. Discuss who is correct

Answer 1

Liquidated damages acts as an insurance towards the seller for any defult/ breach of fulfilling a contract. However Liquidated damages are not a punishment to the purchaser of the contract. The purpose of liquidated damages is to ensure that the default of one party does not affect the other party. Also, both the parties agree mutually with an estimate of a potential damage due to breach to fulfill the contract. In the mentioned case, Willard failed to purchase the house by paying the balance of $90, 000 as agreed. Hence Carnack retains the deposit of $ 10,000 (10% of $ 100,000) which Willard paid in advance. Hence retention of $ 10,000 by Carnack is correct since it is in the nature of liquidated damages for non payment of contract price.