Liquidated damages

Key Takeaways

• Liquidated damages are a dollar figure the parties fix in the contract before any breach, not an amount a court calculates afterward.
• RCW 64.04.005 makes an earnest money forfeiture clause enforceable as the seller's sole and exclusive remedy even when the seller suffered no measurable loss.
• The amount forfeited may not exceed five percent of the purchase price for RCW 64.04.005 to apply, and the five percent is measured against the price, not the deposit.
• A clause written above five percent is not void. It falls outside the statute and is judged under common law instead.

What It Means

Liquidated damages are a sum the parties write into a contract before anything goes wrong, setting what one side owes if the other fails to perform. The point is certainty. Rather than argue later over what a broken deal cost, both sides know the number on the day they sign.

In a real estate sale the clause almost always points at the buyer's deposit. If the buyer walks away without a legal excuse, the seller keeps the Earnest Money and the deal is over. That is why the paragraph appears in nearly every Purchase And Sale Agreement, and why a buyer should read it before signing rather than after a contingency lapses. Our post on earnest money and contingencies in Washington walks through how the two interact.

Two limits keep the clause honest. It operates only on a breach, so a buyer who terminates under a contingency the contract gave them has not breached and forfeits nothing. And the figure has to appear in the written agreement, identified as liquidated damages or as earnest money to be forfeited. A loose promise to cover whatever the seller lost is not a liquidated damages clause at all.

How It Works in Washington

Washington puts this rule in statute rather than leaving it to the form. Under RCW 64.04.005, a provision in a written purchase and sale agreement forfeiting the earnest money to the seller as the seller's sole and exclusive remedy is valid and enforceable when a party fails, without legal excuse, to complete the purchase, and it works regardless of whether the seller incurs any actual damages. That clause is the whole value of the provision: the seller never has to open the books and prove a loss.

The statute then sets its own ceiling. The amount forfeited may not exceed five percent of the purchase price. Read that ceiling correctly, because it is not a ban on larger clauses. RCW 64.04.005 says it does not prohibit or supersede the common law for provisions above five percent, and a provision that misses the statute's requirements is interpreted and enforced without regard to the statute. Above five percent the seller keeps a clause but loses the automatic enforceability, and has to defend the number under ordinary contract law.

Two practical notes. The five percent is measured against the purchase price, not against the size of the deposit, so a large deposit on a small price is the case to watch. And a seller who wants the option of forcing the sale through is giving that up: sole and exclusive means the forfeited money instead of Specific Performance, not in addition to it.

Example

Dana offers $625,000 on a house in Everett and deposits $20,000 of Earnest Money. The agreement contains a liquidated damages paragraph naming the earnest money as the seller's sole and exclusive remedy. Five percent of $625,000 is $31,250, so the $20,000 deposit sits under the statutory ceiling.

Dana waives her financing contingency. Two weeks later she changes her mind about the neighborhood and refuses to close. The seller, Marcus, relists and sells three weeks after that for $631,000, so he ends up ahead of where he started. It makes no difference. Under RCW 64.04.005 Marcus keeps the $20,000 whether or not he lost a dime, and the $20,000 is all he gets, because the clause is his sole and exclusive remedy.

Now change one fact. Suppose the agreement had set liquidated damages at $50,000. That is 8 percent of the price, above the five percent line, so Marcus falls outside RCW 64.04.005. He does not lose the clause automatically, but he now has to defend the $50,000 figure under common law instead of pointing at the statute.

Common Mistakes and Exam Traps

• Liquidated damages are agreed before the breach. Compensatory damages are proved after it. Exam questions swap the two.
• The five percent in RCW 64.04.005 is a percentage of the purchase price, not of the earnest money deposit.
• A liquidated damages provision above five percent is not void in Washington. It simply loses the statute's protection and is judged under common law.
• Earnest money and liquidated damages are not the same thing. Liquidated damages is the remedy; the earnest money is the fund the payment usually comes out of.