Catherine agreed to purchase franchise rights from a hamburger restaurant chain to open her own restaurant. Her deposit on the transaction was $10,000 against a final price of the rights at $750,000. The contract contained a term, of which Catherine was aware, that the deposit would be forfeited if she did not follow through on the deal. Early on in the process, Catherine could not obtain ownership of the site upon which she intended to construct her restaurant and was forced to back out. The hamburger chain refused to return her deposit. The most correct statement below is:

A) Catherine, as plaintiff, will succeed in arguing that the $10,000 deposit is a penalty.
B) Catherine, as defendant, will argue return of the $10,000 on the doctrine of part-performance.
C) Catherine, as plaintiff, will fail in arguing that the $10,000 is a penalty.
D) The chain, as plaintiff, will successfully argue that the $10,000 is liquidated damages.
E) Catherine, as plaintiff, will fail in arguing that the $10,000 is liquidated damages.

Question

Coral Tucker · Accepted Answer

Final Answer : C, Explanation :  Catherine, as plaintiff, will likely fail in arguing that the $10,000 is a penalty because the contract explicitly stated that the deposit would be forfeited if she did not follow through on the deal, and she agreed to this term. Liquidated damages clauses, which specify a predetermined amount of damages in case of breach, are generally enforceable if they are a reasonable estimate of the damages that would be incurred and not punitive in nature. Since Catherine was aware of this term and it was agreed upon as part of the contract, it is unlikely to be considered a penalty by a court.

Definitions

Learning Objectives

Learning Objectives

Related questions