Using Caution with Deposits and Liquidated Damages

Sometimes when people or businesses have a lot of bargaining power, they want to get everything they possibly can from a contract.  They try to squeeze everything out of the other party on every contract term.  This sort of strategy may not always be to their advantage. 

One place where an overly tough contract can get tricky is deposits and liquidated damages.  It is easy to think, “with a huge non-refundable deposit I can’t lose.”  But this may not be the case. 

The Virginia Code section on deposits and liquidated damages states that for liquidated damages to be enforceable they must be “reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy.”  § 8.2-718 (1).

Damages also cannot be too large.  As the Code further states, “[a] term fixing unreasonably large liquidated damages is void as a penalty.” § 8.2-718 (1).

Overly tough liquidated damages provisions are even riskier in consumer contracts.  It is a breach of the Virginia Consumer Protection Act when liquidated damages “are void or unenforceable under any otherwise applicable laws[.]” § 59.1-200 (13). 

The Consumer Protection Act also contains a fee shifting provision.  Violating the Consumer Protection Act can open a party to pay their opponent’s “reasonable attorneys' fees and court costs.” § 59.1-204.

As good as a tough liquidated damages or deposit provision may sound, it may also be risky.  It is worth consulting a knowledgeable lawyer before using one.