A Tennessee purchase contract for a $250,000 property contains a liquidated damages clause designating the $7,500 earnest money as the seller's sole remedy for buyer default. The buyer defaults, and the seller discovers that her actual damages — including carrying costs, a reduced sale price on the eventual resale, and marketing expenses — total $22,000. The seller wants to sue for the full $22,000. What is the most likely outcome under Tennessee law?
Correct Answer
B) The seller may recover only the $7,500 earnest money, as the enforceable liquidated damages clause limits her recovery regardless of actual damages
Under Tennessee law, a valid and enforceable liquidated damages clause limits the non-breaching party's recovery to the agreed-upon amount, even if actual damages turn out to be higher. A liquidated damages clause is enforceable when (1) the actual damages were difficult to estimate at the time of contracting and (2) the specified amount was a reasonable pre-estimate of anticipated harm. Once the seller agrees to the liquidated damages provision, she generally cannot abandon it and sue for greater actual damages — the clause is her exclusive remedy.
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Related Topics & Key Terms
Key Terms:
Related Concepts
Offer and acceptance is the process by which one party proposes specific terms for a contract and the other party agrees to those exact terms, creating mutual assent. This mutual agreement, also called a meeting of the minds, is an essential element of every valid contract.
An option contract gives one party the exclusive right, but not the obligation, to purchase or lease a property at a specified price within a specified time period. The buyer pays option consideration to keep the option open.
A purchase agreement is a legally binding contract between a buyer and seller that outlines the terms and conditions for the sale of real property. It is also commonly called a sales contract, purchase and sale agreement, or earnest money agreement.
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