Present: Hassell, C.J., Keenan, Koontz, Kinser, and Agee, JJ.,
and Carrico and Lacy1, S.JJ.
BOOTS, INC.
OPINION BY
v. Record No. 062430 SENIOR JUSTICE HARRY L. CARRICO
September 14, 2007
PREMPAL SINGH
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Theodore J. Markow, Judge
This is an appeal in an interpleader action involving a
provision in a real estate contract that makes a cash deposit
non-refundable in certain circumstances. The question presented
is whether the provision is a valid liquidated damages clause or
an impermissible penalty or forfeiture. The circuit court
construed the provision as a penalty or forfeiture and ordered
the deposit refunded. Finding the circuit court erred, we will
reverse its judgment.
The evidence shows that on September 3, 2003, Boots, Inc.
(Boots), the owner of Denny’s Restaurant in Hopewell, entered
into a contract for the sale of the restaurant to Prempal Singh
(Singh) for $1,500,000.00, with a $50,000.00 deposit to be held
in escrow by the closing attorneys. The contract contained the
following provision:
This Agreement is contingent on Purchaser obtaining
financing for 80% of the purchase price with terms and
conditions satisfactory to Purchaser. Purchaser shall have
1
Justice Lacy participated in the hearing and decision of
this case prior to the effective date of her retirement on
August 16, 2007.
40 days from the date of this Agreement to remove the
financing contingency. If the Purchaser does not terminate
this Agreement in writing by the 40th day the deposit shall
be non-refundable. Closing shall occur on or before
November 17, 2003.
On September 18, 2003, Singh deposited two checks totaling
$50,000.00 with the closing attorneys. On October 5, 2003,
Singh sent a registered letter to the closing attorneys asking
that the forty-day period specified in the contract begin to run
from September 25, 2003, the date the deposit checks were
cashed, rather than September 3, 2003, the date of the contract.
The letter stated that “[i]f this is not possible then treat
this letter as the termination of this agreement and we request
you to refund us our $50,000.00.”
One of the closing attorneys secured the oral agreement of
Jagdish Patel, Boots’ president, to extend the forty-day period
by 22 days until November 4, 2003. The attorney “immediately
called [Singh] and told him that the timeframe had been
extended.”2 Singh continued his effort to obtain financing but
by the time the forty-day-plus-extension period expired on
November 4, 2003, he had not obtained financing or terminated
the sales contract. Nor did Singh obtain financing before
November 17, 2003, the closing date fixed by the contract.
2
Singh complains that he did not receive “written
confirmation that his request for extension of the forty day
financing provision had been accepted.” However, as the circuit
2
On February 25, 2004, in a letter to the closing attorneys,
Boots declared “the contract to be in default” and demanded
payment of the $50,000.00 deposit. On March 20, 2004, Boots
entered into a contract to sell Denny’s Restaurant to DEN OF
HOPEWELL, LLC, a Florida corporation, for $1,300,000.00.
Five days later, on March 25, 2004, a bank issued a
commitment letter agreeing to provide financing for Singh’s
purchase of Denny’s Restaurant.3 When Singh learned Boots had
sold the restaurant to someone else, he demanded that the
$50,000.00 deposit be refunded to him. The closing attorneys
then filed this interpleader action and placed the $50,000.00
deposit with the clerk of the circuit court.
The circuit court held that Singh did not terminate the
contract with his letter of October 5, 2003 which contained the
language that the letter should be treated as terminating the
contract if the forty-day period could not be extended. The
court said “the attempted termination was based on [Singh’s]
attempt to have the contract amended [and he] had no such right
court noted, Singh proceeded “as if he were attempting to obtain
financing and closing on the property.”
3
The circuit court found that Singh had not breached the
contract because “he was in a position to close on the
transaction at the time Boots contracted with another party.”
This finding, of course, was incorrect. Boots contracted with
another party on March 20, 2004, and the bank did not agree to
provide financing for Singh’s purchase until March 25, 2004,
five days later.
3
under the Agreement.” Singh does not question this holding on
appeal.
The circuit court proceeded to hold, however, that the
provision making the deposit non-refundable was an impermissible
penalty or forfeiture and not a valid liquidated damages clause.
It is this holding that Boots challenges on appeal.
In O’Brian v. Langley School, 256 Va. 547, 507 S.E.2d 363
(1998), we said that we had previously enunciated the test for
determining the validity of a liquidated damages clause, as
follows:
"[P]arties to a contract may agree in advance about the
amount to be paid as compensation for loss or injury which
may result from a breach of the contract ‘[w]hen the actual
damages contemplated at the time of the agreement are
uncertain and difficult to determine with exactness and
when the amount fixed is not out of all proportion to the
probable loss.’ ”
Id. at 551, 507 S.E.2d at 365. (quoting 301 Dahlgren Ltd.
Partnership v. Bd. of Supervisors of King George County, 240 Va.
200, 202-03, 396 S.E.2d 651, 653 (1990) and Taylor v. Sanders,
233 Va. 73, 75, 353 S.E.2d 745, 746-47 (1987)). We further
reiterated our prior conclusion that "a liquidated damages
clause will be construed as an unenforceable penalty 'when the
damage resulting from a breach of contract is susceptible of
definite measurement, or where the stipulated amount would be
grossly in excess of actual damages.'” Id. (quoting Brooks v.
4
Bankson, 248 Va. 197, 208, 445 S.E.2d 473, 479 (1994)); accord
301 Dahlgren Ltd. P'ship, 240 Va. at 203, 396 S.E.2d at 653.
The party challenging the validity of a liquidated damages
clause has the burden of proof on the issue of whether the
opposing party’s “damages . . . are susceptible of definite
measurement or . . . the stipulated damages are grossly in
excess of the actual damages suffered by the non-breaching
party.” O’Brian, 256 Va. at 551, 507 S.E.2d at 365. Here, when
Singh failed to terminate the sales contract in writing within
the forty-day period as extended, the deposit became non-
refundable, entitling Boots to payment of the deposit unless
Singh could prove that Boots’ damages were susceptible of
definite measurement or the deposit amount was grossly in excess
of actual damages.
Singh contends he carried this burden, and he relies solely
upon testimony given by Jagdish Patel, Boots’ president, during
his direct examination as a witness for Boots. Patel said the
$1,300,000.00 contract with DEN OF HOPEWELL was “[r]oughly, the
same” as the $1,500,000.00 contract with Singh because Boots
would have had to pay a sales commission of $239,000.00 on the
Singh sale but no commission on the sale to DEN OF HOPEWELL.
Singh maintains that this testimony shows Boots suffered no
damage but actually “received an increase of profit in the
amount of $39,000.00.”
5
However, under the rule recognized in our cases, a
liquidated damages clause is invalid only when the actual
damages contemplated at the time of the agreement are shown to
be certain and not difficult to determine or the stipulated
amount is out of all proportion to the actual damages. O’Brian,
256 Va. at 551, 507 S.E.2d at 365; Brooks, 248 Va. at 208, 445
S.E.2d at 479; 301 Dahlgren, 240 Va. at 202-03, 396 S.E.2d at
653; Taylor, 233 Va. at 75, 353 S.E.2d at 746-47.
Singh presented no evidence at all relating to damages
contemplated at the time of the sales contract, and he does not
explain how one could conclude that, at that time, Boots’
damages in event of default were certain and not difficult to
determine. Indeed, it would be pure speculation to say it was
certain at the time the Singh contract was signed that Boots
would be able to obtain a sale of the restaurant more than six
months later for “[r]oughly, the same” amount.
And Singh offered nothing to show that the amount of the
deposit would be out of all proportion to any probable loss. In
any event, we upheld as enforceable liquidated damages a deposit
of 4.6% of the purchase price of real property in Taylor, 233
Va. at 76, 353 S.E.2d at 747, and a deposit of 10% in Brooks,
248 Va. at 209, 445 S.E.2d at 480. Here, the deposit was only
3.3% of the purchase price, an amount certainly not
disproportionate in comparison.
6
Accordingly, we conclude that Singh failed to present
evidence to establish that the liquidated damages clause was an
unenforceable penalty. We will reverse the judgment of the
circuit court and remand the case for the entry of an order
directing payment of the $50,000.00 deposit to Boots.
Reversed and remanded.
7