Lynch v. Andrew – Case Brief
Lynch v. Andrew, 20 Mass. App. Ct. 623, 481 N.E.2d 1383 (Mass. App. Ct. 1985).
Facts: Lynch (P) contracted to purchase real estate from Andrew (D). The sales contract was contingent upon Lynch obtaining a mortgage for $155,000 and required him to make a diligent effort. The contract provided that Lynch’s $25,400 purchase deposit was to be returned if he could not secure the loan by a certain date. The contract also contained a liquidated damages clause whereby Andrew was to retain the entire deposit if Lynch failed to make a diligent effort to secure the loan.
The plaintiff failed to obtain the necessary loan and demanded return of his deposit. Defendant refused to return the deposit, alleging that plaintiff had not made a diligent effort to secure the loan.
Lynch sued Andrew and the court held that, while Lynch had failed to make a diligent effort, the liquidated damages clause was punitive and therefore unenforceable. The court found that the actual damages were $8,400 and both parties appealed.
Issues: 1) What is the standard for determining whether a party has satisfied an obligation to use diligent efforts to obtain a loan? 2) Is a liquidated damages clause that allows the seller to retain the entire deposit in the event of default by the buyer a per se penalty and therefore unenforceable?
Holding and Rule: 1) A determination of whether a party has satisfied an obligation to use diligent efforts to obtain a loan is subject to an objective standard of reasonableness. 2) No. A liquidated damages clause that allows the seller to retain the entire deposit in the event of default by the buyer is not a per se penalty and therefore unenforceable.
Lynch did not use diligence in his efforts to obtain the loan under an objective standard of reasonableness. Lynch’s claim that various loan propositions made by the bank were too complicated does not satisfy any objective analysis.
Liquidated Damages: A liquidated damages clause is valid if it is not disproportionate to the losses and expenses caused by the breach. In this case, Andrew was obligated to pay half of the deposit to the real estate broker, her property ultimately sold for $5,000 less than contract price in the instant case, and Andrew lost the opportunity to buy another house. The liquidated damages clause in this case was not a penalty.
Disposition: Judgment for Andrew.
See also City of Rye v. Public Service Mutual Insurance Co. for another contracts case involving a liquidated damages issue.