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Nohe v. Roblyn Development Corp.

296 N.J. Super. 172, 686 A.2d 382 (App. Div. 1997)

CONTRACTS; DAMAGES—In a contract for new construction of a house, a seller who has suffered no harm cannot retain a deposit even in the face of a liquidated damages clause.

This is a decision made on a motion for summary judgment. Buyer and seller each agreed that, for the purposes of the motion, the buyer had breached the contract but the seller had suffered no damages. A contract for sale of residential property between a corporate developer and a consumer contained a liquidated damages provision representing 10% of the purchase price and 50% of the cost of extras. After the alleged breach, the developer resold the house at a substantial additional profit. The original buyer demanded return of its entire deposit, but the defendant refused, relying upon the liquidated damages clause and its own contention that the lack of actual damages was irrelevant.

The Court reviewed the law of liquidated damages in New Jersey and, although it claimed not to consider the enforceability of the liquidated damages clauses in this particular contract, it did recite Professor Corbin’s warning: “[p]enalties and forfeitures are not favored; and calling an outrageous penalty by the more kindly name of liquidated damages does not absolve it from its sin.” Recognizing that the classic approach to liquidated damages is to determine the enforceability of such a provision as of the time of the making of the contract, the Appellate Division went on to opine that the modern trend is toward assessing reasonableness either at that time or at the time of the breach. Stated another way, the Court recited case law to the effect that if the damages provided for in the contract are grossly disproportionate to the actual harm, the party’s original expectations were unreasonable. Notwithstanding several cases to the contrary, including some decisions of the New Jersey Supreme Court, the Appellate Division ruled that the present state of law throughout the United States totally supports the proposition that a seller who has suffered no harm cannot retain a deposit even in the face of a liquidated damages clause. Consequently, the Court ruled that, under these circumstances, the entire deposit was to be returned to the buyer. [Note: Certification has been denied.]


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