Mike contracted to buy Rita's house in a written contract that provided for a deposit of $10,000 to be forfeited in the event of Mike's failing to go through with the deal. This deposit was an honest estimate of the damages Rita would suffer. On these facts, which of the following is true?
A) If Mike breaches the contract, he will have to pay Rita all the damages that directly and naturally flow from the breach.
B) If Mike breaches the contract, he would have to pay $10,000 even if Rita's actual loss was $40,000.
C) A clause in a contract that provides for the forfeiture of a deposit is called an exemption clause.
D) If Mike breaches the contract, he would not have to pay $10,000 even if Rita suffered a substantial loss.
E) If the contract price agreed upon was $150,000 and Rita, after Mike breaches the contract, sells the house in one week for $138,000, she will still be able to recoup all her losses.

Question

Quizplus · Accepted Answer

The contract provides for a liquidated damages clause, which sets a fixed amount of damages to be paid in the event of a breach. In this case, the deposit of $10,000 serves as an estimate of Rita's damages. Therefore, if Mike breaches the contract, he would have to pay $10,000 even if Rita's actual loss was less than that. This is the purpose of a liquidated damages clause, to provide certainty and avoid litigation over the extent of damages.

Mike Contracted to Buy Rita's House in a Written Contract