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Certiorari was granted in this case1 for this court to consider whether a provision in a real estate sales
contract, providing for the payment of earnest money, should be considered as a provision for liquidated damages.
The Court of Appeals concluded this provision was a penalty and could not be enforced.
The litigation began when the seller filed suit against the buyer who defaulted under the contract. The buyer had
paid $5,000 in cash as earnest money when the contract was signed. Thereafter, a promissory note for $45,000,
representing additional earnest money, was executed and delivered by the buyer to the seller pursuant to the
contract. The buyer defaulted at closing and the seller sued the buyer to collect the $45,000 note. The seller
obtained a summary judgment in the trial court and the buyer’s motion for summary judgment and counterclaim for
return of the $5,000 earnest money were denied.
On appeal to the Court of Appeals, that court reversed in a 6-3 decision and held the earnest money provision of
the contract amounted to a penalty. The Court of Appeals also ruled that the buyer’s motion for summary judgment
should have been granted by the trial court.
The contract provides: "In the event purchaser defaults hereunder after having paid the additional earnest
money [$45,000] . . . seller shall be entitled to retain all original earnest money [$5,000] paid hereunder as
partial liquidated damages occasioned by such default, to collect the proceeds of the indebtedness owed by
[237 Ga. 228]
purchaser as additional earnest money as further partial liquidated damages occasioned by such default, and to
pursue any and all remedies available to him at law or equity including, but not limited to, an action for
specific performance of this contract."
If, as the Court of Appeals found, this provision in the contract was a penalty, or is unenforceable as a
liquidated damages provision, then the buyer can prevail in asserting a defense to the enforcement of the $45,000
note. If, on the other hand, this is a proper provision for liquidated damages, then the seller can prevail in
enforcing the note. Of course, whether a provision represents liquidated damages or a penalty does not depend
upon the label the parties place on the payment but rather depends on the effect it was intended to have and
whether it was reasonable. See Lytle v. Scottish American Mortgage Co., 122 Ga. 458 (50 SE 402) (1905). Where the
parties do not undertake to estimate damages in advance of the breach and instead provide for both a forfeiture
(penalty) plus actual damages, the amount, even though called liquidated damages, is instead an unenforceable
penalty. See Foote & Davies Co. v. Malony, 115 Ga. 985 (42 SE 413) (1902).
The seller argues that a seller who is not in default may always retain the earnest money paid by the buyer and
sue for actual damages above the amount of earnest money received under the contract. We do not agree with this
argument and the seller cites no authority that supports it. While it is true that the earnest money feature of a
real estate contract distinguishes it to some extent from a wholly executory contract, the same basic contract
rules are used to determine available remedies for the breach of a real estate sales contract as for the breach
of other contracts. The general contract law of remedies for a breach, as well as the intent of the parties in
providing specific remedies in the contract, must be used in analyzing and deciding each particular case.
Depending on the language used in the contract and the discernible intent of the parties, the existence of an
earnest money provision in a real estate sales contract can have one of three effects in the case of a breach by
the buyer. First, the money could be considered as partial
[237 Ga. 229]
payment of any actual damages which can be proven as the result of the buyer’s breach.2 Second, the money could
be applied as part payment of the purchase price in the enforcement of the contract in a suit for specific
performance by the seller. Third, the money could be liquidated damages for breach of the contract by the buyer.
A provision for earnest money cannot, however, under Georgia law, be used for all three results as we shall see.
Of course, if the real estate sales contract is silent on the remedy to be provided, the non-breaching seller is
entitled to his proven actual damages. The ordinary measure of damages is the difference between the contract
price and the market value of the property at the time of the buyer’s breach. Chives v. Young, 81 Ga.App. 30 (57
S.E.2d 874) (1950). If the non-breaching seller sues for actual damages, the earnest money then becomes a fund
out of which those damages are partially paid if the proven damages exceed the amount of the earnest money.3
Even if the real estate contract is silent as to the remedy of specific performance, it is still available as a
remedy unless it is specifically excluded as a remedy. In the cases in which rescission has been used as a remedy
the parties are put as nearly as is possible back to the status quo ante. See Lightfoot v. Brower, 133 Ga. 766
(66
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SE 1094) (1909); Walter L. Tally, Inc. v. Council, 109 Ga.App. 100 (135 S.E.2d 515) (1964); Woodruff v. Camp, 101
Ga.App. 124 (112 S.E.2d 831) (1960). Cf. Higgins v. Kenney, 159 Ga. 736 (126 SE 827) (1924).
Of course, Georgia law also recognizes that the parties may agree in their contract to a sum to liquidate their
damages. Code Ann. § 20-1402 provides: "Damages are given as compensation for the injury sustained. If the
parties agree in their contract what the damages for a breach shall be, they are said to be liquidated, and
unless the agreement violates some principle of law, the parties are bound thereby." (Emphasis supplied.)
See also Code Ann. § 20-1403.
In deciding whether a contract provision is enforceable as liquidated damages, the court makes a tripartite
inquiry to determine if the following factors are present:
"First, the injury caused by the breach must be difficult or impossible of accurate estimation; second, the
parties must intend to provide for damages rather than for a penalty; and third, the sum stipulated must be a
reasonable pre-estimate of the probable loss." Calamari & Perillo, The Law of Contracts, 367 (1970). See
Tuten v. Morgan, 160 Ga. 90, 92 (127 SE 143) (1924), and Bernhardt v. Federal Terra Cotta Co., 24 Ga.App. 635
(101 SE 588) (1919). See also Martin v. Lott, 144 Ga. 660 (87 SE 902) (1915).
Another feature implicit in the concept of liquidated damages in addition to the above factors is that both
parties are bound by their agreement. See Code Ann. § 20-1402. See, e.g., Jarro Bldg. Indus. Corp. v. Schwartz,
54 Misc.2d 13 (281 N.Y.S.2d 420) (1967). A non-breaching party who has agreed to accept liquidated damages cannot
elect after a breach to take actual damages should they prove greater than the sum specified. The breaching party
cannot complain that the actual damages are less than those specified as liquidated damages. The liquidated
damages become the "maximum as well as the minimum sum that can be collected." Mayor &c. of
Brunswick v. Aetna Indemnity Co., 4 Ga.App. 722, 727 (62 SE 475) (1908).
The problem that this particular contract provision
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raises is whether the seller has tried to retain a right to elect to sue for actual damages rather than
liquidated damages and in so doing has rendered the purported liquidated damages provision unenforceable. This
particular paragraph in the contract provides for "partial" liquidated damages. This can be read that
the parties intended for the two "partial" liquidated damages provisions to comprise the whole.
However, it is also susceptible to the construction that these two partial liquidated damages were not intended
to be the sole damages remedy for this particular breach of contract.
The contract provision that included the retention of the right to elect specific performance as an alternative
remedy to damages poses no problem in our analysis as it does not render a valid liquidated damages provision
unenforceable. See, e.g., Wells v. First Nat. Exhibitors’ Circuit, 149 Ga. 200 (99 SE 615) (1919). "The law
is now well settled that a liquidated damages provision will not in and of itself be construed as barring the
remedy of specific performance." Rubinstein v. Rubinstein, 23 N.Y.2d 293 (244 N.E.2d 49) (1968). To bar
specific performance there should be explicit language in the liquidated damages provision that it is to be the
sole remedy. See also Restatement, Contracts, § 378. Thus the retention of the right to elect specific
performance in this contract does not render the purported liquidated damages provision invalid. The answer must
be found elsewhere in the construction of these contract provisions.
We think a correct resolution of this issue must be found in the doctrine that "in cases of doubt the courts
favor the construction which holds the stipulated sum to be a penalty, and limits the recovery to the amount of
damages actually shown, rather than a liquidation of the damages." Mayor &c. of Brunswick v. Aetna
Indemnity Co., supra, p. 728. If the parties intended for the $5,000 and the $45,000 to represent the
"maximum as well as the minimum sum that can be collected," from the buyer’s breach, the contract
should have made it clear that this was the effect intended by these provisions. It is the lingering ambiguity
inherent in these provisions of the contract that persuades us to affirm the result reached by
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the Court of Appeals in construing the contract.
In summary, we hold that these contract provisions are not enforceable under Georgia law as proper liquidated
damages provisions in this real estate sales contract. It follows that the trial court erred in granting summary
judgment in favor of the seller and we affirm the Court of Appeals reversal of that portion of the trial court’s
order. However, the existence of the actual damages, if any, to be proven by the non-breaching seller precludes
the grant of the buyer’s motion for summary judgment. Therefore, that portion of the Court of Appeals opinion
directing the grant of the buyer’s motion for summary judgment must be reversed.
Judgment affirmed in part; reversed in part. All the Justices concur, except Gunter and Jordan, JJ., who dissent.
FootNotes
1. The decision of the Court of Appeals is reported in 137 Ga.App. 771 (224 S.E.2d 747) (1976).
2. We do not decide in this case whether a breaching buyer may sue in the first instance for recovery of earnest
money if the seller suffers no actual damages.
3. Apparently, in many instances where real estate sales contracts provide that earnest money will be retained by
the seller to be applied toward seller’s damages, as a result of the buyer’s default, no suit is brought by the
seller to prove his actual damages and likewise the buyer does not contest whether the seller has actually
suffered damages or the extent of them. In these circumstances, the earnest money is really treated by the
parties as liquidated damages, after a breach by the buyer, even though the parties did not agree to liquidate
the damages in their contract.
HOW TO BRIEF A CASE
I. Distinctions
A. A case brief is a dissection of a judicial opinion — it contains a written summary of the basic components of
that decision.
B. Persuasive briefs (trial and appellate) are the formal documents a lawyer files with a court in support of his
or her client’s position.
II. Functions of case briefing
A. Case briefing helps you acquire the skills of case analysis and legal reasoning. Briefing a case helps you
understand it.
B. Case briefing aids your memory. Briefs help you remember the cases you read (1) for class discussion, (2) for
end-of-semester review for final examinations, and (3) for writing and analyzing legal problems.
Do not try to memorize case briefs. Learning law is a process of problem solving through legal reasoning. Cases
must be read in light of the series of cases with which they appear in your casebook or on the class syllabus.
III. Briefing a case: The steps
Although the exact form of your briefs may and can vary from case to case, the following parts should appear
somewhere in your brief in a way that helps you understand the case and recall the needed information.
1. Read through the opinion first so you will understand the overall story and identify important facts, etc.,
before beginning to brief the case on paper.
2. Heading:
a. Case name (to identify the parties) b. Court name c. Date of the decision d. Page number where the case
appears in the textbook
3. Statement of Facts
a. Identify the relationship/status of the parties (Note: Do not merely refer to the parties as the
plaintiff/defendant or appellant/appellee; be sure to also include more descriptive generic terms to identify the
relationship/status at issue, e.g., buyer/seller, employer/employee, landlord/tenant, etc.)
b. Identify legally relevant facts, that is, those facts that tend to prove or disprove an issue before the
court. The relevant facts tell what happened before the parties entered the judicial system.
c. Identify procedurally significant facts. You should set out (1) the cause of action (C/A) (the law the
plaintiff claimed was broken), (2) relief the plaintiff requested, (3) defenses, if any, the defendant raised.
4. Procedural History (PH): This is the disposition of the case in the lower court(s) that explains how the case
got to the court whose opinion you are reading. Include the following:
a. The decision(s) of the lower court(s).
NOTE: If the case was decided by a trial court and reviewed by an intermediate appellate court before reaching
the court whose decision you are now reading, be sure to note what each court decided.
b. The damages awarded, if relevant.
c. Who appealed and why.
5. Issues:
a. Substantive issue: A substantive statement of the issue consists of two parts —
i. the point of law in dispute ii. the key facts of the case relating to that point of law in dispute (legally
relevant facts)
You must include the key facts from the case so that the issue is specific to that case. Typically, the disputed
issue involves how the court applied some element of the pertinent rule to the facts of the specific case.
Resolving the issue will determine the court’s disposition of the case.
b. Procedural issue: What is the appealing party claiming the lower court did wrong (e.g., ruling on evidence,
jury instructions, granting of summary judgment, etc.)?
6. Judgment: This is the court’s final decision as to the rights of the parties, the court’s response to a
party’s request for relief. Generally, the appellate court will either affirm, reverse, or reverse with
instructions. The judgment is usually found at the end of the opinion.
7. Holding: This is a statement of law that is the court’s answer to the issue. If you have written the issue
statement(s) correctly, the holding is often the positive or negative statement of the issue statement.
8. Rule of Law or Legal Principle Applied: This is the rule of law that the court applies to determine the
substantive rights of the parties. The rule of law could derive from a statute, case rule, regulation, or may be
a synthesis of prior holdings in similar cases (common law). The rule or legal principle may be expressly stated
in the opinion or it may be implied.
9. Reasoning: This is the court’s analysis of the issues and the heart of the case brief. Reasoning is the way in
which the court applied the rules/ legal principles to the particular facts in the case to reach its decision.
This includes syllogistic application of rules as well as policy arguments the court used to justify its holding
(why the decision was socially desirable).
10. Concurring/Dissenting Opinions: A judge who hears a case may not agree with the majority’s decision and will
write a separate dissenting opinion. Another judge may agree with the decision but not with the majority’s
reasoning and will write a separate concurring opinion. Note the concurring/dissenting judge(s)’ reasons for
refusing to join in the majority opinion.
11. Additional Comments/Personal Impressions: What are your reactions to and critique of the opinion? Anything
you like? Dislike? How does this case fall in line with the other cases you have read? Do not accept the court’s
opinion blindly. Assess the reasoning in each case. Is it sound? Is it contradictory? What are the political,
economic or social impacts of this decision?
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