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Liquidated Damages

Under Arizona law, where the terms of the contract provide the remedy on default, the contract generally controls. The parties may agree in advance, for example, that the seller will receive a certain sum of money in the event that the buyer breaches the contract. This is called a liquidated damages provision. As Arizona’s court of appeals advised in Pima Sav. and Loan Ass’n v. Rampello:

The traditional role of liquidated damages provisions is to serve as an economical alternative to the costly and lengthy litigation involved in a conventional breach of contract action, and efforts by the contracting parties to avoid litigation and to equitably resolve potential conflicts through the mechanism of liquidated damages should be encouraged.

168 Ariz. 297, 299-300, 812 P.2d 1115, 1117 – 1118 (App.1991). Thus, liquidated damages provisions are generally enforceable if, when all the facts are considered, the amount was reasonable at the time of the contract (not using hindsight) and, at the time of the contract, it was difficult to accurately estimate actual damages.

Our firm has handled many cases involving liquidated damages. For example, in Sanders v. Jesse, the Arizona Court of Appeals ruled in favor of the firm’s client, the seller, and awarded the full amount of liquidated damages specified in the contract as “earnest money,” even though the entire earnest money deposit had not been paid.