Question

The Trump Tower is a 72-story luxury condominium building constructed at Springfield Plaza in Manhattan, New York. Before the building was constructed, Smithers Limited Partnership (Smithers LP) began selling condominiums at the building. The condominium offering plan required a nonrefundable down payment of 25 percent of the purchase price. The purchase contract provided that if a purchaser defaulted and did not complete the purchase, Smithers LP could keep the 25 percent down payment as liquidated damages. Homer and Marge Simpson each contracted to purchase two condominium units on the top floors of the building. Both Marge and Homer were represented by attorneys. Over the course of two years, while the building was being constructed, the Simpsons paid the 25 percent nonrefundable down payment of $8 million.

On September 11, 2001, before the building was complete, terrorists attacked Manhattan by flying two planes into nearby landmarks, murdering thousands of people. Marge and Homer sent letters to Smithers LP, rescinding their purchase agreements because of the terrorist attack that occurred on September 11. Thus, Smithers LP terminated the four purchase agreements and kept the 25 percent down payments on the four condominiums as liquidated damages. Marge and Homer sued Smithers LP, alleging that the money should be returned to them. However, Smithers LP defended, arguing that the 25 percent nonrefundable down payment was an enforceable liquidated damages clause. Is the liquidated damage clause enforceable? Explain.

Answer 1

To be the liquidated damage clause enforceable, it should meet the criteria given below.

(a) Damages caused by the breach of contract are difficult to estimate.

(b) The amount is reasonable and is not intended to punish the buyer.

In the case, none of the criteria is met, because no financial damage was caused by the refusal of the parties to buy the condos. The amount of $8 Million is by no means reasonable and is intended to punish the buyer and an attempt to swindle his / her money. Considering above facts, the case is not liquidated damage clause enforceable.