contracts

liquidated damages

An amount of money agreed upon in advance in a contract as compensation if one party breaches. In real estate purchase contracts, the buyer's earnest money is often designated as liquidated damages the seller may keep if the buyer defaults. The amount must be a reasonable estimate of probable loss, not a penalty, and choosing it may limit other remedies.

Exam tip: If a contract specifies liquidated damages, the seller generally keeps the agreed amount and cannot also sue for more. Contrast with compensatory damages proven in court.
Example: A buyer walks away without a valid reason; per the contract, the seller keeps the $15,000 earnest money as liquidated damages.

1. A contract provides that if the buyer defaults, the seller 'shall retain the earnest money as liquidated damages as the seller's sole and exclusive remedy.' The buyer defaults, and the seller's actual loss is far greater than the deposit. What may the seller recover?

Answer & explanation

Answer: C. An enforceable liquidated damages clause that is the exclusive remedy limits the seller to the agreed amount, even if actual losses are larger. It is enforceable when it was a reasonable forecast at signing and not a penalty. Recovering the deposit plus actual damages would contradict the 'sole and exclusive remedy' language.

Related terms & state variants

breach of contract compensatory damages earnest money specific performance

Sources

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Last verified: 2026-10-23