Wallace Real Estate Inv., Inc. v. Groves

• Decision Date: 06 October 1994
• Docket Number: No. 61448-2,61448-2
• Citation: 881 P.2d 1010,124 Wn.2d 881
• Parties: WALLACE REAL ESTATE INVESTMENT, INC., a Washington Corporation, Appellant, v. Joanna C. GROVES and James Groves, husband and wife; Charles R. Siler and Jane Doe Siler, husband and wife; and James Siler and Jane Doe Siler, husband and wife, Respondents.
• Court: Washington Supreme Court

Page 881

124 Wn.2d 881

881 P.2d 1010

WALLACE REAL ESTATE INVESTMENT, INC., a Washington

Corporation, Appellant, v. Joanna C. GROVES and James Groves, husband and wife;

Charles R. Siler and Jane Doe Siler, husband and

wife; and James Siler and Jane Doe

Siler, husband and wife, Respondents.

No. 61448-2.

Supreme Court of Washington,

En Banc.

Oct. 6, 1994.

As Amended Oct. 21, 1994.

Mathews, Garlington-Mathews & Chesnin, Harold Chesnin, Seattle, for appellant.

Steven P. Michael, Everett, for respondents.

MADSEN, Justice.

The principal issue in this case is whether liquidated damages provisions in a commercial real estate purchase and sale agreement were properly upheld in the courts below.

Facts

Joanna Groves and her cousins, Charles and James Siler (the sellers), own 10 acres of undeveloped commercial property in Everett. Report of Proceedings (RP), at 27, 29. On August 1, 1989, the sellers entered into an agreement with Roddy Cox whereby Cox agreed to pay $1,520,000 for the property. Clerk's Papers (CP), at 24. Real estate prices were in flux at the time, and the sellers established the purchase price to encourage a quick, cash sale. CP, at 23. (The sellers also needed the funds that the sale would generate. CP, at 197; RP, at 339-40.)

Cox gave the sellers a $20,000 note as a down payment. The agreement gave Cox 30 days to conduct a feasibility study for the potential development of an apartment complex. CP, at 24; Ex. 7. After this 30-day period, Cox could either abandon the property and receive back its note, or exchange the note for cash. CP, at 24. If Cox went ahead with the sale, it would close within 60 to 90 days. CP, at 24. A standard form liquidated damages provision applied to the deposit, stating that "[i]n the event of default by Buyer, Seller shall have the election to retain the earnest money as liquidated damages." CP, at 167.

An addendum to the purchase and sale agreement added extension periods for closing. CP, at 24. For each additional 30-day delay, Cox agreed to pay $15,000. CP, at 24. This amount was suggested by Cox. The $15,000 amount represented the lost investment value of the purchase price, calculated at 12 percent simple interest on the investment value not realized. Findings of fact 8 and 9, CP, at 24-25. The interest component thus compensated the sellers for holding the property off the market. Finding of fact 9, CP, at 25. The addendum authorized up to 12 extensions of 30 days each, and stated that the deposit and extension payments were nonrefundable. Ex. 7.

Cox negotiated this agreement with the intention of assigning his interest to Wallace Real Estate Investment, Inc., which he did in September 1989. RP, at 95. During the negotiations, Cox consulted with William Wallace, president of Wallace Real Estate Investment, Inc., about the sellers' objectives and terms, including the purpose of the extension payments. RP, at 461-62.

After the last $15,000 extension payment permitted by the addendum, the parties negotiated a second addendum. CP, at 25. During the negotiations, Wallace and the sellers exchanged at least three versions of the second addendum before Cox and the sellers executed the final version on September 19, 1990. Ex. 8. Wallace countersigned the second addendum, which provided for $30,000 extension payments for October and November 1990 and established December 17, 1990, as the new closing date. Ex. 8.

The liquidated damages provision to the second addendum provided as follows:

Liquidated damages: The parties hereto agree that in the event Buyer or its assign fails to comply with the terms of this Agreement, as amended and compromised, Seller shall retain all payments made to date (earnest money and extension payments), as liquidated damages and not as penalty, in order to indemnify the Seller against loss as a result of breach of this agreement. It is agreed that damages that result to Seller include: freezing the purchase price at a time when real estate land values were escalating at unprecedented rates; compensating seller for holding the property off the market and losing the time value of its property were the property liquidated and funds invested; lost opportunity for larger profits; and related costs. Sellers and Buyer, and its assign, recognize a general measure of the damages to Seller is represented by the earnest money and extension payments. It is further agreed that the damages that may result from a breach of this agreement are uncertain and difficult to ascertain any more than Seller and Buyer have done, and that the agreed amount is a reasonable estimate of the probable damages to Seller.

Ex. 8, at 2.

On December 13, 1990, William Wallace wrote the sellers, stating that he could not close on December 17 and requesting "a new agreement with everyone to close on or about January 7, 1991." Ex. 49. The sellers refused and, in a December 14, 1990, letter, informed Wallace that they were prepared to close as scheduled on December 17, 1990. Ex. 10; RP, at 145.

On December 17, Joanna Groves and Charles Siler attended the closing. James Siler, who lived in Oregon, could not attend because of a back injury. CP, at 26. Wallace also did not attend, though he did fax a letter stating that closing could not take place as scheduled because of two problems with the title. Ex. 36. Despite Wallace's absence, Groves express mailed the deed and closing papers to James Siler. Siler signed and returned the documents to Groves, who delivered them to escrow on December 21, 1990. CP, at 27; RP, at 65-66; Exs. 11, 50. (The contract provided that if the sale could not be closed by the date provided because of the incapacitating illness of either party, the closing date would be extended no more than 14 days. Ex. 7, at 2.)

On December 24, 1990, the escrow agent received the sellers' notice of cancellation, which they had executed on December 21, 1990. RP, at 65-66. The sellers then retained the $260,000 in earnest money and extension payments as liquidated damages. Wallace filed suit seeking to recover the moneys paid. CP, at 139. His additional claims for specific performance and breach of contract were dismissed on summary judgment. CP, at 125. The sole issue at trial was the validity of the liquidated damages provisions.

The trial court ruled in favor of the sellers and awarded them reasonable attorneys' fees and costs. The Court of Appeals affirmed after applying the test for evaluating liquidated damages provisions set forth in Watson v. Ingram, 70 Wash.App. 45, 47, 851 P.2d 761 (1993), review granted, 123 Wash.2d 1001, 868 P.2d 872 (1994). Wallace Real Estate Inv., Inc. v. Groves, 72 Wash.App. 759, 767, 868 P.2d 149 (1994). The Court of Appeals found both the $15,000 and $30,000 extension payments reasonable forecasts of just compensation for the damages sustained from Wallace's breach. Wallace, at 769-70, 868 P.2d 149.

Wallace then sought review in this court on the ground that the Court of Appeals erred in applying the Watson test instead of that articulated in Lind Bldg. Corp. v. Pacific Bellevue Devs., 55 Wash.App. 70, 776 P.2d 977, review denied, 113 Wash.2d 1021, 781 P.2d 1322 (1989). This court accepted review of Wallace as well as Watson.

I

In Washington, a provision for liquidated damages will be upheld unless it is a penalty or otherwise unlawful. Walter Implement, Inc. v. Focht, 107 Wash.2d 553, 558, 730 P.2d 1340 (1987); Brower Co. v. Garrison, 2 Wash.App. 424, 432, 468 P.2d 469 (1970). This court follows the United States Supreme Court's view that liquidated damages agreements fairly and understandingly entered into by experienced, equal parties with a view to just compensation for the anticipated loss should be enforced. Walter Implement, 107 Wash.2d at 558, 730 P.2d 1340 (citing Wise v. United States, 249 U.S. 361, 39 S.Ct. 303, 63 L.Ed. 647 (1919)).

There are several advantages to stipulating in advance the amount of damages that will be awarded on breach:

For both parties, it may facilitate the calculation of risks and reduce the cost of proof. For the injured party, it may afford the only possibility of compensation for loss that is not susceptible of proof with sufficient certainty. For society as a whole, it may save the time of judges, juries, and witnesses, as well as the parties, and may cut the expense of litigation.

3 E. Allan Farnsworth, Contracts § 12.18, at 283 (1990); James A. Weisfield, Note, "Keep the Change!": A Critique of the No Actual Injury Defense to Liquidated Damages, 65 Wash.L.Rev. 977, 978-79 (1990).

At issue here are the discrepancies between two tests applied by the Court of Appeals to evaluate the validity of liquidated damages provisions in real estate contracts. The first test was set forth in Lind Bldg. Corp. v. Pacific Bellevue Devs., 55 Wash.App. 70, 776 P.2d 977, review denied, 113 Wash.2d 1021, 781 P.2d 1322 (1989). Lind involved a commercial real estate sales agreement that originally required Lind, the buyer, to pay a $20,000 deposit that would be retained as liquidated damages in case of Lind's default. The agreement further provided for payment of a $20,000 deposit for extending the contingency period and payment of a $50,000 deposit following the removal of two contingencies. When the sale did not close on January 15, the closing date specified, Lind requested an extension to February 6. The seller granted the extension on the condition that Lind pay $20,000 as consideration therefor. When the transaction did not close on February 6, Lind requested a second extension. The seller agreed to grant a 3-month extension, provided Lind paid an initial $10,000 to extend the closing and then $30,000 on February 20, $100,000 on March 6, and $500,000 on May 6, the date of closing. Lind, 55 Wash.App. at 71-72, 776 P.2d 977. Lind made all of the payments except the final $500,000, for a total of $250,000. When the transaction did not close on May 6, the seller refused to further extend the closing...