Non-Refundable Deposits and Late Fees: Unenforceable Contract Penalty?

Are non-refundable deposits and late fees enforceable under Georgia contract law? The answer depends on whether they are liquidated damages or a penalty. Liquidated damages are enforceable. Penalties are not.

What are liquidated damages? Liquidated damages are damages resulting from a breach of contract which are specified as a stipulated sum.

Georgia courts err on the side of finding that a stipulated sum for damages in a contract is an unenforceable penalty rather than liquidated damages:

“[I]n cases of doubt the courts favor the construction which holds the stipulated sum to be a penalty.”

Mayor of Brunswick v. Aetna Indem. Co., 4 Ga. App. 722, 728 (62 SE 475) (1908)

Georgia courts use a three-factor test to determine whether a stipulated sum is liquidated damages:

“First, the injury caused by the breach must be difficult or impossible of accurate estimation; second, the parties must intend to provide for damages rather than for a penalty; and third, the sum stipulated must be a reasonable pre-estimate of the probable loss.”

Southeastern Land Fund v. Real Estate World, 237 Ga. 227, 230 (227 SE2d 340) (1976)

All three factors must be satisfied, otherwise, the stipulated sum is treated as an unenforceable penalty:

“The provision in a contract will be treated as enforceable liquidated damages rather than an unenforceable penalty only if all three of the factors are present.”

Broadcast Corp. of Ga. v. Subscription Television of Greater Atlanta, 177 Ga. App. 199 (338 SE2d 775) (1985)

Georgia case law shows that it can be difficult to argue that the first factor (breach injury that is difficult or impossible of accurate estimation) was not met.

The second factor hinges on intent.

“[w]here a designated sum is inserted into a contract for the purpose of deterring one or both of the parties from breaching it, it is [a] penalty.”

Florence Wagon Works v. Salmon, 8 Ga. App. 197 (2) (68 SE 866) (1910)

Some contracts make this factor easier to attack by foolishly calling the stipulated sum a penalty.

The third factor requires a fact-based analysis of what a “reasonable” pre-estimate of the probable loss would be, such as the other party’s incurred or expected costs, loss of income or forgone business, etc.