By: Timothy Gordon
The Supreme Court of Colorado has held that a contractual provision that gives a non-breaching party the option of choosing between recovery of liquidated damages and pursuing actual damages is enforceable so long as the two remedies are exclusive. Ravenstar v. One Ski Hill Place, 2017 CO 83. The dispute in Ravenstar was over the failure of certain buyers to close on the purchase of condominium units. After the buyers breached, the developer/seller, kept their deposits as liquidated damages as permitted by the purchase and sale agreements.
The buyers sued for the return of their deposits, arguing that the liquidated damages provision in the agreements was unenforceable because it gave the developer/seller the option of pursuing actual damages. The agreements provided in relevant part as follows:
If Purchaser defaults in the performance of any obligations under this Agreement . . . Seller shall have the right to terminate this Agreement and shall be entitled to retain all or a portion of the Earnest Money and Construction Deposit . . . as liquidated damages (“Seller’s Liquidated Damages”). Alternatively and in lieu of Seller’s Liquidated Damages, Seller may elect to terminate this Agreement and recover its actual damages resulting from Purchaser’s default calculated in accordance with Colorado law, in which case Seller may seek an award of such actual damages and may retain an amount equal to the Earnest Money and Construction Deposit and apply such funds towards satisfaction of any such award. If Seller elects to seek actual damages, Seller must provide Purchaser with written notice of such election within 30 days after the end of Purchaser’s cure period, and if Seller fails to provide such notice, then Seller will only be entitled to Seller’s Liquidated Damages.
The Supreme Court of Colorado held that the above provision, which gave the non-breaching party the option to choose between liquidated damages and actual damages, was enforceable. But the Court emphasized that choosing an option must be exclusive. “In other words, a provision that allows a non-breaching party to pursue liquidated or actual damages must only allow the non-breaching party to pursue one of those options.” Id. at ¶ 16. Otherwise the liquidated damages provision would be an invalid penalty.
In arriving at its holding, the Court focused mainly on the general freedom to contract in Colorado and reasoning in decisions from other states. But the Court’s holding is not surprising given Colorado’s prior decisions regarding liquidated damages. First, although not mentioned by the Court in Ravenstar, over twenty five years ago a division of the Colorado Court of Appeals held that a non-breaching party to a purchase and sale agreement could pursue recovery of the remaining purchase price notwithstanding the liquidated damages provision in the contract, since the liquidated damages provision was a “permissive” and not an exclusive remedy. See Steinhoff v. Fisch, 847 P.2d 191, 193-94 (Colo. App. 1992). This was essentially the opposite scenario faced by the Court in Ravenstar. Second, “[t]he rule in Colorado is that if there is a liquidated damages clause and the liquidated amount is paid and accepted, it constitutes the total amount of damages allowable.” Memorial Gardens, Inc. v. Olympian Sales & Mgt. Consultants, Inc., 690 P.2d 207, 211 (Colo. 1984). So once the remedy of liquidated damages is chosen and accepted, the non-breaching party can no longer seek recovery of any additional damages.
Under Ravenstar, parties entering into contracts in Colorado, including construction contracts and purchase and sale agreements, are free to write liquidated damages provisions in such a way as to allow for the recovery of either liquidated or actual damages. But any party seeking to exercise such rights must be mindful that there may be no going back once a remedy is chosen.