In an interesting matter of first impression in Colorado, the Colorado Court of Appeals recently determined that a liquidated damages provision with an option to choose between liquated damages and actual damages is enforceable.
The case, Ravenstar LLC v. One Ski Hill Place LLC, 2016 COA 11, concerned contracts that five Colorado companies, who were the plaintiffs, entered into with the defendant, One Ski Hill Place LLC (OSHP), to buy and build condominium units. Each plaintiff paid fifteen percent of the purchase price as an earnest money and construction deposit, but then failed to obtain financing by the contracted deadline. Relying on the contracts, OSHP retained their deposits as liquidated damages. The contracts gave OSHP the option to choose between keeping the deposits as liquidated damages, or, alternately, seeking an award of actual damages. The plaintiffs challenged OSHP’s retention of the deposits, asserted that OSHP had breached the contracts, and argued that the liquidated damages provisions were unenforceable because they permitted OSHP to choose between liquidated damages and actual damages.
The Court of Appeals began its analysis by noting that, under Colorado law, a liquidated damages provision is valid and enforceable if: (1) the parties intend to liquidate damages; (2) the amount of the liquidated damages is a reasonable estimate of actual damages at the time the contract is made; and, (3) it is difficult to ascertain at the time of the contract the amount of actual damages that would result from a breach. Id. at ¶ 15 (citing Klinger v. Adams Cty. Sch. Dist. No. 50, 130 P.3d 1027, 1034 (Colo. 2006)). Plaintiffs argued that OSHP’s option to choose between actual and liquidated damages demonstrated a lack of intent to liquidate, and rendered the provision invalid.
The Court of Appeals analyzed other states’ decisions regarding “optional” liquidated damages provisions, and noted that those decisions were split regarding whether the provisions were enforceable. Id. at ¶ 24. Some courts viewed the option to choose as allowing a seller to “have his cake and eat it too.” Those courts generally allowed only the recovery of actual damages. Other states, however, upheld the parties’ contracted determination of the liquidated damages issue.
In Ravenstar, the parties clearly agreed in their contracts that OSHP had the option to choose between liquidated or actual damages, and they stipulated during the lawsuit that the liquidated damages were reasonable. Id. at ¶ 33. Given the parties’ explicit agreement and Colorado law that a liquidated damages provision does not prevent a party from pursuing alternative remedies, the Court of Appeals rejected the “have his cake and eat it too” adage, and upheld the liquidated damages provision and award. Id. at ¶¶ 35 and 37.
In light of Ravenstar, contracting parties in Colorado can, in appropriate circumstances, include optional liquidated damages provisions in their contracts. The mere presence of an option to choose between liquidated and actual damages will not invalidate a liquidated damages provision.