Watson v. Ingram, 29887-9-I

• Decision Date: 24 May 1993
• Docket Number: No. 29887-9-I,29887-9-I
• Citation: 851 P.2d 761,70 Wn.App. 45
• Court: Washington Court of Appeals
• Parties: Wayne WATSON, Appellant, v. James INGRAM, Respondent. Division 1

Page 45

70 Wn.App. 45

851 P.2d 761

Wayne WATSON, Appellant, v. James INGRAM, Respondent.

No. 29887-9-I.

Court of Appeals of Washington,

Division 1.

May 24, 1993.

Reconsideration Denied June 24, 1993.

William G. Knudsen, Bellingham, for appellant.

Ernest A. Bentley, Bentley, Uhrig & Gallery, Bellingham, for respondent.

AGID, Judge.

Wayne Watson appeals the findings of fact, conclusions of law, and judgment of $15,000 entered against him in favor of James Ingram. Watson argues that the trial court erred by concluding that the liquidated damages clause in the parties' purchase and sale agreement was valid and enforceable and that Ingram breached an implied duty of good faith by refusing to extend the scheduled closing date of the sale. We affirm.

On August 6, 1990, Wayne Watson and James Ingram entered into a purchase and sale agreement in which Watson agreed to buy Ingram's Bellingham house for $355,000 payable in cash on December 3, 1990. ¹ Watson also agreed to pay $15,000 into escrow as non-refundable earnest money to be applied to the purchase price.

Although Watson's original offer stipulated that the agreement would be contingent upon the sale of his Blaine, Washington condominium, Ingram would not agree to that contingency because he wanted to sell the house as soon as possible. Ingram made a counteroffer that had no contingencies except his promise to finish remodeling an office in the house, install a sprinkler system in the front yard, and paint the fence. Watson accepted that counteroffer. Two of the contract provisions read as follows:

2. BUYER'S REPRESENTATION: Buyer represents that Buyer has sufficient funds available to close this sale in accordance with this Agreement, and is not relying on any contingent source of funds unless otherwise set forth in this Agreement.

. . . . .

24. TERMINATION: In the event of termination of this Agreement, any costs authorized under this Agreement to be advanced from the earnest money deposit shall be deducted before the remaining earnest money is refunded to Buyer or forfeited to Seller. In the event of default by Buyer, earnest money shall be forfeited to Seller as liquidated damages, unless Seller elects to seek actual damages or specific performance.

(Italics ours.)

Shortly after Watson and Ingram signed the agreement, Skip Pixley, Ingram's real estate agent, asked Watson if he could list Watson's condominium, which had an underlying mortgage of $74,000. Watson agreed, and Pixley listed it for $187,500. However, the condominium did not sell by the closing date.

On September 11, 1990, Watson applied to Washington Mutual Savings Bank to assume Ingram's $210,000 outstanding mortgage on the house. On October 18, 1990, the bank approved Watson's application conditioned upon Watson's obtaining approximately $116,000 of his own money for closing. Watson, disappointed with those terms, decided not to pursue his plan to assume Ingram's mortgage.

On November 10, 1990, Watson sent a written proposal to Ingram asking him to modify the original agreement. The proposed modification would allow Watson to defer paying $54,000 of the $355,000 sale price for between 6 and 12 months after the scheduled December closing date. In exchange, Ingram would receive a second lien position on certain real estate Watson owned. Watson also indicated in his proposal that he had been attempting to assume Ingram's mortgage on the Bellingham property.

According to Ingram, the November 10 proposal was the first time he realized that Watson did not have the $355,000 readily available for the purchase of the house, and he became very concerned about whether the sale would close. Consequently, he notified Watson on November 12, 1990, that he would not agree to modify the original agreement and intended to strictly enforce its terms. On or about November 10, 1990, Ingram also accepted from Jamie and Sandro Catracchia a $380,000 "backup" offer for the purchase of the house.

On November 14, 1990, Watson contacted Brent Hamner, a mortgage broker at Security First Mortgage, to apply for a new loan to finance the purchase of the house. Hamner eventually obtained a commitment from an "unnamed source" to loan Watson $266,250. On December 3, 1990, the scheduled closing date, Hamner notified Pixley and Ingram of the loan commitment and, at Watson's request, asked for an extension of time to finalize the financing arrangements. However, according to the undisputed portion of finding of fact 7,

Hamner refused to tell Mr. Pixley or James Ingram the name of the person or institution that had allegedly committed for the $266,250.00 loan. The written document did set forth several contingencies that [had to] be met by Wayne Watson before the loan would actually be made. One of those contingencies was that Wayne Watson would "evidence receipt of funds from income reserve balance of $88,864.56." No written or oral evidence of the availability of this additional $88,864.56 was shown to Skip Pixley or to James Ingram on December 3, 1990.

Further, Hamner could not specify exactly when the loan process would be completed. Consequently, Ingram refused to grant Watson an extension.

On December 4, 1990 Ingram wrote to Kelstrup Realty, where Pixley worked, indicating that he was entitled to the $15,000 earnest money in escrow because Watson had defaulted. Ingram also asked Kelstrup Realty to "completely terminate the Wayne Watson offer to purchase and proceed to concentrate" on the Catracchias' backup offer. The sale to the Catracchias never closed. However, Ingram finally sold the house in September 1991 for $355,000, the same price that Watson had agreed to pay in December 1990.

Watson sued Ingram in January 1991 to recover the earnest money still in escrow with Kelstrup Realty, alleging that it amounted to a penalty and that Ingram had suffered no actual damages. Watson also alleged that, by refusing to extend the closing date, Ingram acted in bad faith and "thwarted the parties' contractual purpose."

The trial court found that the earnest money "was clearly intended by both parties to be non-refundable" if Watson defaulted and that $15,000 was "a reasonable forecast by [Ingram and Watson] of damages that would be incurred by [Ingram] if [Watson] failed to complete the purchase." It also noted that $15,000 was less than 5 percent of the total sale price. Consequently, the court denied Watson's claim for a refund of the earnest money plus interest and entered a judgment granting Ingram $15,000 as liquidated damages. The court also awarded Ingram his attorney fees pursuant to the parties' agreement. ² Watson now appeals that judgment.

We first consider whether the parties' contract provision requiring Watson to forfeit the $15,000 non-refundable earnest money is a valid provision for liquidated damages. Watson argues that the provision is a penalty for his failure to perform the contract and, thus, is unenforceable.

Generally, Washington courts favor liquidated damages clauses and uphold them if the sums involved do not amount to a penalty. Management, Inc. v. Schassberger, 39 Wash.2d 321, 326-27, 235 P.2d 293 (1951); Lind Bldg. Corp. v. Pacific Bellevue Devs., 55 Wash.App. 70, 73, 776 P.2d 977, review denied, 113 Wash.2d 1021, 781 P.2d 1322 (1989). In contrast to liquidated damages,

a penalty is a sum inserted in a contract, not as the measure of compensation for its breach, but rather as a punishment for default, or by way of security for actual damages which may be sustained by reason of nonperformance, and it involves the idea of punishment. It is the payment of a stipulated sum on breach of contract, irrespective of the damage sustained. Its essence is a payment of money stipulated as in terrorem of the offending party, while the essence of liquidated damages is a genuine covenanted pre-estimate of damages."

Management, Inc., 39 Wash.2d at 326, 235 P.2d 293 (quoting 15 Am.Jur. Damages § 241, at 672 (1938)).

In Management, Inc., our Supreme Court adopted the following rule to determine whether a liquidated damages clause in a noncompetition agreement is enforceable:

"(1) An agreement, made in advance of breach, fixing the damages therefor, is not enforceable as a contract and does not affect the damages recoverable for the breach, unless

"(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and

"(b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation."

39 Wash.2d at 327-28, 235 P.2d 293 (quoting 1 Restatement of the Law of Contracts § 339, at 552 (1932)). In that case, the sellers of a laundromat signed a covenant not to compete with the buyers, Management, Inc. A liquidated damages clause in the contract required the sellers to pay the buyers $10,000 if they breached the covenant. When one seller acquired an interest in a local laundromat, Management, Inc. sued to recover the $10,000 in liquidated damages. The trial court held that the seller had in fact breached the covenant but concluded that the liquidated damages clause was a penalty and refused to enforce it. 39 Wash.2d at 325, 235 P.2d 293.

In affirming the trial court, the Supreme Court focused its analysis entirely on the issue of whether $10,000 was a "reasonable forecast of just compensation for the harm that is caused by the breach". 39 Wash.2d at 328-331, 235 P.2d 293. As to the other prong of the analysis, the court held that there was no question that "in this type of case [breach of a covenant not to compete], the harm caused by the breach usually is incapable of accurate estimation." 39 Wash.2d at 328, 235 P.2d 293.

In Walter Implement, Inc. v. Focht, 107 Wash.2d 553, 559, 730 P.2d 1340 (1987), the court relied upon Management, Inc. to conclude that a liquidated damages clause in an agreement to lease farm equipment was unenforceable. The clause required the breaching lessee to pay 20 percent of...