It’s black letter law in North Carolina that a liquidated damages provision is enforceable, so long as it is not a "penalty." The need to make that distinction typically comes up when the Defendant believes the liquidated amount is excessive when compared to the actual damages incurred by the Plaintiff.
In Azalea Garden Board & Care, Inc. v. Vanhoy, 2000 NCBC 8 (N.C. Super. Ct. March 17, 2009), the Business Court confronted the exact opposite of the usual penalty argument. The Plaintiff asserted that a provision in the contract severely limiting its recovery was a penalty because it would only allow damages it described as being "woefully inadequate."
The provision at issue, contained in a $3.6 million contract to buy a nursing facility, said that "Buyer agrees that if he should fail or refuse to complete this transaction after timely acceptance by the seller, then any funds or deposit with the Broker will be forfeited and shall be split 50% to the broker and 50% to the seller." That provision yielded damages to the Plaintiff of only $12,500.
The Court determined this was a liquidated damages provision as a matter of law, and that it did not constitute a penalty. The Court held "Plaintiff’s argument that the liquidated damages provision is unreasonable because it is too small in light of the damages actually suffered is not persuasive." Op. Par. 30. The Opinion referenced cases from other jurisdictions reaching the same result in a situation the Court described as "rare."
The other issue resolved in the Opinion was whether Tuttle could be liable for a breach of the agreement to purchase the nursing facility even though he had not signed it. Tuttle asserted the Statute of Frauds. The Plaintiff responded that the Tuttle was part of a joint venture, that the contract had been signed by an authorized agent of the joint venture, and that it was therefore binding on Tuttle.
Continue Reading A Liquidated Damages Provision Providing Inadequate Damages Isn’t A “Penalty”