LIQUIDATED DAMAGES IN HAWAII REAL ESTATE PURCHASE

SEPTEMBER 2019 THE PRACTICAL REAL ESTATE LAWYER | 15

RAYMOND S. IWAMOTO is a transactional lawyer of Schlack Ito, LLLC, who handles complex

real estate and business transactions. He is a Fellow of the prestigious American College of Real

Estate Lawyers and served a three year term on its Board of Governors. He is listed in the Best

Lawyers in America, Chambers USA America’s Leading Lawyers for Business, Superlawyers, and

the International Who’s Who of Real Estate Lawyers. He was listed in the 14th Edition of Who’s Who

Legal: Real Estate 2017 as one of the leading real estate practitioners in the United States. He rep-

resents local, national and international developers, land owners, nancial institutions and individ-

uals engaging in diverse real estate and business acquisitions, development and real estate nancing in Hawaii. He has

been engaged as an expert witness in real estate litigation. Mr. Iwamoto was born and raised in Honolulu, Hawaii, and

graduated from McKinley High School. He is a former U.S. Army Captain, Medical Service Corps., a Vietnam war veteran

and a former State Judge Advocate General for the Hawaii Army National Guard.

This article is not intended to provide legal advice. The views expressed (which may vary depending on the context) are

not necessarily those of the author, Schlack Ito or ACREL or the Acquisitions Committee. Any errors are those of the author.

Members of the Acquisitions Committee of the Amer-

ican College of Real Estate Lawyers are examining

certain questions regarding the topic of “liquidated

damages” in their respective jurisdictions. The focus is

on commercial real estate contracts and the enforce-

ability of liquidated damage clauses (LDC) in com-

mercial real estate contracts that provide that, in the

event of default by the Buyer, the Seller is entitled to

retain a liquidated damage amount (LDA), usually the

deposit, as liquidated damages. The Hawaii appel-

late courts have not yet provided answers to many of

these questions. These questions are:

1. May the seller choose specic performance

instead of liquidated damages (so that liqui-

dated damages are not an exclusive remedy)?

2. May the seller choose actual damages instead

of liquidated damages (so that liquidated dam-

ages are not an exclusive damage remedy)?

3. If the seller may choose liquidated damages or

actual damages, may it have both?

4. If the seller may choose liquidated damages or

actual damages, but not both, when must it

decide?

5. Is there an applicable statute addressing liqui-

dated damages clauses?

6. What is the test for a valid liquidated damages

clause?

7. Who has the burden of proof?

8. As of when is “reasonableness” tested?

9. What percentage of the purchase price is likely

acceptable as liquidated damages?

10. Are actual damages relevant for liquidated dam-

ages and, in particular, will liquidated damages

be allowed when there are no actual damages?

11. Is mitigation relevant for liquidated damages?

12. Is a “Shotgun” liquidated damages clause

enforceable?

13. Does a liquidated damages clause preclude

recovery of attorneys’ fees by the seller?

1. May the seller choose specic performance

instead of liquidated damages (so that liquidated

damages are not an exclusive remedy)?

The case law in Hawaii has not addressed whether

a Seller may have an option to choose either liqui-

dated damages or specic performance. The Hawaii

LIQUIDATED DAMAGES IN HAWAII REAL ESTATE

PURCHASE AND SALE AGREEMENTS

16 | THE PRACTICAL REAL ESTATE LAWYER SEPTEMBER 2019

courts have not addressed whether specic perfor-

mance is a remedy that is available to a Seller.

2. May the seller choose actual damages instead

of liquidated damages (so that liquidated

damages are not an exclusive damage remedy)?

The case law in Hawaii has not addressed whether

a Seller may have an option to choose either liqui-

dated damages or actual damages. It may be that

so long as the contract did not provide for the LDC

to be the exclusive remedy (or even if it did), a Seller

may plead alternative remedies such as liquidated

damages, actual damages and/or specic perfor-

mance but, at some point before trial, has to elect

one of the alternative remedies. See answer to ques-

tion 4.

3. If the seller may choose liquidated damages

or actual damages, may it have both?

There is no case specically addressing whether a

Seller may elect between liquidated damages or

actual damages or whether it may have both. How-

ever, in Dias v. Vanek, 67 Haw. 114, 679 P.2d 133 (1984)

(“Dias”), the Hawaii Supreme Court cites Hawaii

cases on liquidated damages and the principle of

reasonable relationship to actual damages, but then

goes on to cite cases that hold that the determina-

tion of damages is the exclusive province of the jury

and orders a retrial because this jury had already

been discharged. The opinion says there is noth-

ing in the record to clarify the question of retention

or return of the down payment of $20,000 and the

damages for breach in the amount of $6,263. Dias,

67 Haw. at 118, 679 P.2d at 136. The Court could have

ruled that the Seller should refund the amount of

the liquidated amount in excess of the actual dam-

ages amount, i.e., $20,000 minus $6,263 or at least

some refund. So, we are left to wonder if it’s up to

the jury to say that or to say that the Seller can retain

the $20,000 liquidated amount and the Buyer still

has to pay the actual damages amount of $6,263.

We have found no other case law that comes any

closer in addressing the question whether a Seller

may choose between actual damages and either

an optional or exclusive LDC or whether the Seller

could obtain judgment for both.

In Gomez v. Pagaduan, 1 Haw. App. 70, 613 P.2d 658

(1980) (“Gomez”), an issue was whether the Seller

could retain the liquidated damages payment and

obtain a judgment for the rental value of the prop-

erty after the agreement was cancelled. The judg-

ment for rental in addition to the payments made

was armed without any discussion of the fact that

the liquidated damages clause at issue said that the

payments made may be retained as liquidated dam-

ages and rent.

In Kona Hawaiian Associates v. Pacic Group, 680

F. Supp. 1438 (D. Haw. 1988) (“Kona”), a federal dis-

trict court was faced with an argument that Gomez

stood for the proposition that where the amount

of the liquidated damages is too low, the provision

will not be deemed exclusive. The Court rejected

this argument by saying that it was clear in Gomez

that the additional damages awarded were not the

loss of bargain but for the rental value and were not

damages suered by reason of the Buyer’s failure to

close. As a federal district court case, this ruling is

not binding on the Hawaii state courts.

A recent arbitration involved an LDC. In the arbi-

tration, the Seller demanded the LDA but reserved

the right to demand a higher amount if the actual

damages were suciently in excess of the LDA. Sell-

er’s theory was that this meant that the LDA was

not a reasonable estimate of actual damages and

that therefore actual damages should take prece-

dence. Also, $800,000 of the $1,000,000 deposit had

previously been released from escrow and paid to

the Seller, and the Buyer argued that the $800,000

should be credited against the $1 million LDA. How-

ever, the arbitrator awarded the Seller $1,000,000,

ruling that the $800,000 paid was consideration for

an extension of time to close. The arbitrator further

ruled that in light of actual damages of $19.7 mil-

lion, $1,000,000 would not be a forfeiture and, citing

Shanghai Inv. Co., Inc. v. Alteka Co., Ltd., 92 Hawai‘i

482, 993 P.2d 516 (2000) (“Shanghai”), discussed

infra, ruled that the LDC was enforceable.

LIQUIDATED DAMAGES IN HAWAII REAL ESTATE PURCHASE AND SALE AGREEMENTS | 17

In its Order conrming the Arbitration award in

Young Men’s Christian Association of Honolulu

v. Aloha Kai Development, LLC (“YMCA”), Civ. No.

18-00086 ACK-KSC, 2018 U.S. Dist. LEXIS 94289, (D.

Haw. June 5, 2018), the Federal Court ruled that the

arbitrator’s interpretation of the contract was plausi-

ble and within his authority and conrmed the award

of damages in the amount of $1,000,000. Then the

Court, citing OWBR LLC v. Clear Channel Commu-

nications, Inc., 266 F. Supp. 2d 1214 (D. Haw. 2003),

ruled that the Seller had to establish that its actual

damages were reasonably related to the amount of

liquidated damages it was entitled to recover and

cited Shanghai for the proposition that liquidated

damages must be enforced if there is a reasona-

ble relation between the LDA and the amount of

actual damages. YMCA, 2018 U.S. Dist. LEXIS 94289,

at *22. Since the YMCA claimed actual damages in

the amount of $19.7 million, the $1,000,000 award

did not constitute a penalty. The Court then said

that the reason the LDA had to have a reasonable

relation to the actual damages is because otherwise

LDCs would be unenforceable if it functions as a

penalty or forfeiture. Id.

4. If the seller may choose liquidated

damages or actual damages, but not

both, when must it decide?

Once again there is no case law guidance, but in liti-

gation practice, it appears that the trial judge would

require the Seller to elect at some point to elect

one of the alternative remedies that the Seller had

included in his pleadings. If the LDC permits either

the LDA or actual damages or is silent as to whether

the LDC is the exclusive remedy and if actual dam-

ages exceeded the LDA, there would be no incen-

tive for the Seller to choose the LDC as its remedy.

5. Is there an applicable statute addressing

liquidated damages clauses?

Hawaii does not have a statute that addresses liqui-

dated damages in transactions involving real estate.

However, in connection with the sale of goods,

Article 2 of the Uniform Commercial Code (UCC)

addresses LDC.

Hawai‘i Revised Statutes (HRS) section 490:2-718

provides that damages for breach by either party

may be liquidated in the agreement but only at an

amount which is reasonable in the light of the antic-

ipated or actual harm caused by the breach, the dif-

culties of proof of loss, and the inconvenience or

nonfeasibility of otherwise obtaining an adequate

remedy.

The UCC provides that its purpose is to clarify the

law concerning commercial transactions and there-

fore addresses liquidated damages in such trans-

actions. HRS § 490:1-103. Thus, a Hawaii court may

nd the UCC informative in addressing commercial

real estate transactions. In Association of Apartment

Owners v. Walker-Moody Constr. Co., Ltd., 2 Haw.

App. 285, 630 P.2d 652 (1981) (“Walker-Moody”),

the Hawaii Intermediate Court of Appeals (the

“ICA”) said that it preferred to take a consistent and

enlightened approach by applying the UCC rule

even though the case is not specically under its

coverage. See also Am. Elec. Co., LLC v. Parsons RCI,

Inc., 90 F. Supp. 3d 1079, 1084 (D. Haw. 2015) (“Am.

Elec.”), discussed below.

6. What is the test for a valid

liquidated damages clause?

Gomez was the rst appellate case to address

enforceability of an LDC. Gomez stated that the

decision in Jenkins v. Wise, 58 Haw. 592, 574 P.2d

1337 (1978) (“Jenkins”) compels its decision and

went on to hold that where the Buyer’s breach did

not involve bad faith conduct, an LDC clause would

be enforced by the Seller if there was a reasona-

ble relationship between the amount of payments

retained and the amount of Seller’s actual damages.

Gomez, 1 Haw. App. at 75, 613 P.2d at 661-62. Gomez

was followed by Shanghai. In Shanghai, the Hawaii

Supreme Court mentioned that the jury found no

bad faith breach and stated that under Gomez, the

Seller was entitled to retain the deposit if it bore a

reasonable relationship to actual damages. Shang-

hai, 92 Hawai‘i at 494-95, 993 P.2d at 528-29. See

also Kaiman Realty, Inc. v. Carmichael, 65 Haw. 637,

655 P.2d 872 (1982) (“Kaiman”); Dias, 67 Haw. 114, 679

P. 2d 133 .

18 | THE PRACTICAL REAL ESTATE LAWYER SEPTEMBER 2019

Jenkins was an LDC case only in the sense that the

Seller wanted to cancel the agreement and keep

the LDA deposit. Since the Court held for the Buyer

and ordered specic performance in favor of the

Buyer, the enforceability of the LDC was no longer

at issue. When the LDC is at issue in a case, we only

know what the law is if the Buyer’s breach does not

involve bad faith.

Thus, case law in Hawaii for the enforceability of an

LDC has only addressed situations where the Buy-

er’s breach does not involve gross negligence or bad

faith. In Jenkins, the market value had appreciated

and the case was about a non-bad faith defaulting

Buyer’s rights to specic performance. In Gomez,

the market value had depreciated and the litigation

was over the LDC. Yet the ICA said that the Jenkins

principle applies to the Gomez situation. Gomez,

1 Haw. App. at 75, 613 P.2d at 661-62. Gomez then

established the law in Hawaii for the enforceability

of an LDC where the Buyer’s breach does not involve

bad faith.

Jenkins was a jury waived case and the trial judge

found that the Buyer defaulted the agreement of

sale by failing to pay interest and principal when

due, and that this warranted cancellation of the

agreement. Jenkins, 58 Haw. at 595, 574 P.2d at 1340.

However, there were other facts involved that inu-

enced the nding of no bad faith. There is no Hawaii

case law to assist us in determining when a Buyer’s

breach involves bad faith or even to tell us whether

the LDC is enforceable where the Buyer’s breach

does involve bad faith. Even if facts reveal that the

Buyer was grossly negligent in failing to close or

somehow acted in bad faith in failing to close or

refusing to close, it may be that a Seller should still

be able to enforce the LDC provided the reasonable

relationship test is met. We are also left to wonder

if the Buyer’s breach did involve bad faith that the

Seller could still enforce the LDC even if the reason-

able relationship test was not met. Other than dicta

in Gomez we have no case authority for the enforce-

ability of an LDC where the Buyer’s breach was in

bad faith. Gomez suggests that the Seller may be

entitled to forfeiture if there had been a bad faith

breach. Speaking about the Seller, the ICA said, “He

is not, absent purchaser’s bad faith, entitled to for-

feiture.” Gomez, 1 Haw. App. at 75, 613 P.2d at 661-62.

We can say that Hawaii law leaves it to the discre-

tion of the trial judge to answer these uncertainties.

In Scotella v. Osgood, 4 Haw. App. 20, 659 P.2d 73

(1983) (“Scotella”), the Buyer’s failure to close when

required was due to delays by an appraiser and it

is likely the Court thought that this breach did not

involve bad faith. So, the ICA remanded the case to

the trial court to determine the issue of bad faith

and whether the Sellers could be adequately com-

pensated for any injury and whether a forfeiture

would result, if specic performance was denied. Id.

at 25-26, 659 P.2d at 76-77.

In doing so, it stated that the trial court, in exer-

cising its discretion, and applying the reasonable

relationship test, could uphold cancellation of the

agreement while ordering a refund of that portion

of any moneys paid which would constitute a pen-

alty rather than reasonable liquidated damages. Id.

Several of the cases cited in this Article involve

installment land sale contract cases, called “agree-

ments of sale” where typically possession and

“equitable interests” are transferred to the buyer

at an initial closing followed by a subsequent title

conveyance closing when the balance owed under

the agreement of sale is paid. These include Jen-

kins, Kaiman, Dias and Gomez. In agreement of

sale cases, the Hawaii courts will note that they are

akin to nancing instruments and that forfeitures

include not only the payments made by the buyer

but forfeiture of the right of possession and the

equitable interest. Other cases cited involve exec-

utory contracts where possession as well as title

would not yet have passed. These include Shanghai,

Scotella and Kona. Despite the dierent considera-

tions between installment land sale contracts and

the ordinary executory contracts, this dierence has

not been a factor in the cited cases.

7. Who has the burden of proof?

In Hawaii, the party attempting to enforce the liq-

uidated damages clause has the burden of proof to

introduce evidence that the LDA bore a reasonable

LIQUIDATED DAMAGES IN HAWAII REAL ESTATE PURCHASE AND SALE AGREEMENTS | 19

relationship to actual damages. Customarily, the

Seller has to put on testimony regarding its actual

damages and, as the party enforcing the liquidated

damages clause, has the burden of proof of estab-

lishing the reasonable relationship between the

deposits and the Seller’s actual damages.

In Shanghai, the Court noted that, although the

Seller had a full and fair opportunity at trial to adduce

evidence that the $5 million in damages bore a rea-

sonable relationship to its actual damages, it did not

do so. Shanghai, 92 Hawai‘i at 495, 993 P.2d at 529.

One wonders if a Seller elects actual damages

instead of the LDA under an LDC, the Buyer might

raise the LDC as a defense and possibly could have

the burden of proof in trying to enforce the LDC.

8. As of when is “reasonableness” tested?

Note that the UCC permits reasonableness to be

tested either at the contracting stage or after dam-

ages have been incurred.

The UCC’s “consistent and enlightened” approach

recognizes that there may be diculties of proof of

loss and thus permits a liquidated damages amount

that is reasonable in the light of the anticipated

harm. HRS § 490:2-718. Thus, the UCC contemplates

a prospective look to compare the LDA with antici-

pated damages.

From the available case law, in the Gomez situation

it would appear that under Hawaii law, the reason-

ableness requirement is to be determined as of trial

and a court would not enforce the LDC based purely

on a prospective view and would require a retroac-

tive look in testing whether the liquidated damages

clause is reasonable and enforceable. Where there

are actual damages, the prospective test would

appear to be moot because even if it appeared rea-

sonable or unreasonable at the time of contracting,

the retrospective look at the actual damages would

probably be determinative. However, the following

federal cases that apply Hawaii law discusses when

reasonableness is to be tested, i.e., both the pro-

spective and retrospective tests. Since Hawaii case

law is sparse on the enforceability of LDC, these

federal court opinions could be used to argue that it

is possible under Hawaii law and under the right cir-

cumstances that either test could be used to deter-

mine enforceability of a liquidated damages clause.

Clear Channel was a Hawaii federal district court

case that was not a purchase and sale case. In that

case, the defendant cancelled a hotel conference

due to the September 11, 2001 World Trade Center

terrorist attacks. 266 F. Supp. 2d at 1216. Instead of a

xed liquidated damages amount, there was a can-

cellation fee based on a schedule. Id. at 1225. The

Court stated correctly that under Hawaii law, liqui-

dated damages must be enforced if there is a rea-

sonable relation between the liquidated damages

and the amount of the party’s actual damages and

that a clause that constituted a penalty would not

be enforced. Id. at 1226.

However, the Court also turned to the Restatement

(Second) of Contracts § 356 and found that two fac-

tors determined whether there was a penalty. The

rst factor is the reasonableness of the amount in

light of the anticipated or actual loss. (Both prospec-

tive and retrospective tests.) The second factor is

diculty of proof of loss. The Court stated that the

Plainti’s diculty in proving its loss weighs in favor

of a nding that the liquidated damages clause is

enforceable. Id.

This case was a motion for summary judgment case,

and due to conicting evidence of the amount of

anticipated and actual damages, the Court deter-

mined that there was a genuine issue of material fact

and denied the Plainti’s motion for summary judg-

ment as to the issue of damages with respect to the

actual loss part of the rst factor of the Restatement

(the retrospective reasonableness factor). Id. at 1227.

But the Court also granted the Plainti’s Motion for

Summary Judgment as to the issue of damages with

respect to the second prong (diculty of proof of

loss). Id. at 1226-27, 1229. This partial denial and

partial granting of summary judgment is subject to

interpretation. Was satisfying one of the tests su-

cient and was this an order for summary judgment

upholding the LDC or, since summary judgment on

the reasonableness test was denied, did it mean

20 | THE PRACTICAL REAL ESTATE LAWYER SEPTEMBER 2019

that there would have to be a trial on that issue. The

next federal district court case further discusses this

issue.

Am. Elec. was a construction delay case providing for

liquidated damages for delay. It is instructive in that

it provides that even if the parties used the required

“buzz” words for the test on a prospective basis,

the Court said it will not be divested of its ability to

review the reasonableness and enforceability of the

clause and the use of terminology such as penalty

or liquidated is not determinative. Am. Elec., 90 F.

Supp. 3d at 1084. Then the Court actually addressed

the question as to whether, under Hawaii law, the

test was a prospective or retrospective test or both

and even cited to Article 2 of the Uniform Commer-

cial Code. The Court determined that the retrospec-

tive actual damages test was only a preferred test

and that the Hawaii courts did not foreclose the use

of anticipated damages, noting that the prospective

test was the majority rule in the United States. Id. at

1088. The Court declared that it would apply both

prospective and retrospective tests. Id. at 1089. This

prospective test was pertinent in this case because

it appeared that there may not have been actual

damages as a result of the construction delay but

that it was reasonable to have anticipated that there

would be. Nevertheless, since this was a Motion for

Summary Judgment, the ultimate holding was that

there were genuine disputes of material fact pre-

cluding summary judgment.

So, if this federal judge accurately described Hawaii

law, if the amount of liquidated damages was rea-

sonable at the time of contracting, and if Hawaii

law did not “foreclose” the prospective test, and the

comparison to actual damages is only a “preferred”

test, then it may be that given the right case, a

non-defaulting party could recover liquidated dam-

ages based on a prospective test even if no actual

damages resulted. On the other hand, in a purchase

and sale case, if there has been market appreciation

and the Seller is retaining a property with a value in

excess of the purchase price yet seeks to keep the

Buyer’s deposits as liquidated damages, it would

appear unlikely that a court would enforce the LDC,

no matter what the majority rule is in this Country.

Both Clear Channel and Am. Elec. are federal dis-

trict court cases where proof of actual damages was

problematic. As federal district court cases, their

interpretation of Hawaii law is not binding. For pur-

poses of this article, which focuses on real estate

purchase and sale cases, diculty in measuring

actual damages would be rare as expert testimony

could establish fair market value for comparison to

the price and the LDA. In all likelihood, if these fed-

eral district court cases were to be interpreted that

under Hawaii law it would be sucient to satisfy

only the prospective test when actual damages was

dicult to determine, they would still not be good

precedent for real estate purchase and sale cases. In

those cases, the retrospective test looks to be the

test to be used. So, even if the LDA is deemed to be

a reasonable estimate of anticipated harm, if proven

later to be disproportionate to actual damages, the

LDC might not be enforced.

Perhaps the parties can contract around the uncer-

tainty as to whether the prospective test alone can

determine the enforceability of the LDC. The follow-

ing is a clause where the second section addresses

the prospective/retrospective issue:

The parties agree that, if the Buyer breaches the

Contract by failing to perform its obligations by the

deadline specied (as the same may be extended as

provided herein), the Seller’s damages will be di-

cult to calculate or measure with precision. The par-

ties have made a good faith eort at arriving at a

reasonable forecast of the Seller’s probable actual

damages and have considered the likely impact of

any default by Buyer and the various types of dam-

ages likely to be incurred. As a result, the parties

have agreed on the amount of the Deposit as liq-

uidated damages. The intention of the parties is to

approximate the potential actual damages and this

sum is not intended as a penalty. In other words, the

parties have not agreed on this sum as a disincen-

tive to prevent a breach of contract but instead as a

good faith estimate of the actual damages that the

Seller is likely to suer.

The parties further agree, that the market is complex

and that the Seller has complex commitments that

LIQUIDATED DAMAGES IN HAWAII REAL ESTATE PURCHASE AND SALE AGREEMENTS | 21

will be impacted by any default by Buyer and in con-

sideration of all of this, they have agreed on liqui-

dated damages in order to have an ecient remedy

in the event of such default without the necessity

of having to provide evidence of actual damages or

to attempt to prove actual damages and to avoid

disputes about direct damages, consequential dam-

ages and other such issues. The parties have agreed

that the amount of the Deposit bears a reasonable

relationship to the parties’ reasonable estimate at

this time of the damages the Seller is likely to suer

in the event of Buyer’s breach and that this reasona-

bleness is to be tested as of the date that the parties

enter into this agreement and have agreed that to

simplify procedures and to save costs, there is no

requirement to examine the actual consequences of

any default.

9. What percentage of the purchase price

is likely acceptable as liquidated damages?

In real estate purchase and sale transactions, typ-

ically at the time of contracting, the LDA is the

amount of the deposit with the Seller having the

right to keep the deposit as liquidated damages in

the event of the Buyer’s default. Deposits are usually

a small enough percentage of the purchase price to

appear to be reasonable. So in a prospective test,

the amount could pass muster. However, for the

retrospective test, actual damages would typically

depend on whether the market price had appreci-

ated or declined.

The following is from a trial level case and illustrates

the retrospective test. This was for the sale of sev-

eral resort condominium units where the deposits

totaled $497,000. The actual damages, a 17 percent

drop in market price, plus remarketing expenses

and commission added up to $515,450. The Judge

ruled that $497,000 bore a reasonable relationship

to $515,450 and ruled that the Seller was entitled to

keep the deposits as liquidated damages.

Since the determination of “reasonable relationship”

is left to the discretion of the trial judge, there will

always be a question as to whether you can have a

reasonable relationship if the deposits had exceeded

the actual damages and whether in the judgment of

the trial judge the excess amount would still have a

reasonable relationship to the actual damages.

Buyers will expend considerable funds in conduct-

ing due diligence and will not agree to limit its rem-

edies in the event of Seller default to termination of

the contract. So, the contract will typically provide

that Buyers will have all remedies available in law or

in equity, including specic performance as well as

damages. At times, the parties will cap the damages

by agreeing for Seller to pay Buyer’s costs subject

to a ceiling. There may be contracts where the cap

is described as a liquidated damages amount. While

there is no case law in Hawaii on such a provision in

favor of the Buyer, the same principles will probably

apply. The amount might have to bear a reasonable

relationship to the Buyer’s actual damages.

10. Are actual damages relevant for liquidated

damages and, in particular,

will liquidated damages be allowed

when there are no actual damages?

Gomez reviewed Jenkins and case law in other juris-

dictions and adopted the requirement that there

be a reasonable relationship between the LDA and

actual damages. 1 Haw. App. at 73-75, 613 P.2d at

661-62. The test of reasonable relationship to actual

damages requires evidence of actual damages or

loss. The Court in Shanghai ruled that the trial court

erred in allowing the Seller to retain a ve million

dollar deposit as liquidated damages because of

lack of evidence of actual damages. 92 Hawai‘i at

495, 993 P.2d at 529. The record in Shanghai did not

disclose the fair market value of the property, the

actual or estimated costs of resale and other costs,

and the Seller failed to present any substantial evi-

dence that the $5 million earnest money deposit

bore any relationship to the actual loss. Accordingly,

the Court ruled that the trial court erred in allowing

the Seller to retain the entire $5 million deposit as

liquidated damages.

Whether an LDA bears a reasonable relationship to

the amount of actual damages is left to the discre-

tion of the trial judge. An LDA that exceeds actual

22 | THE PRACTICAL REAL ESTATE LAWYER SEPTEMBER 2019

damages could be enforceable if still viewed as

having a reasonable relationship or unenforceable

if viewed as a penalty. This leaves open the ques-

tion as to whether a Hawaii court would enforce an

LDC with an LDA couched as a minimum or even as

a range of amounts. Would that allow for an award

over the minimum or within the range if the amount

of actual damages was such that a trial judge can

decide that an LDA over the minimum or within the

range bears the requisite reasonable relationship?

Therefore, under these cases, liquidated damages

will not be allowed when there are no actual dam-

ages or when the Seller fails to produce evidence of

actual damages. However, as described in section

8 above, since it is not clear under Hawaii law that

reasonableness has to be tested only after there are

actual damages, if the court were to test reasona-

bleness only against anticipated damages at the

time of contracting, liquidated damages could be

allowed when there are no actual damages.

11. Is mitigation relevant for

liquidated damages?

Since the test in Hawaii under Gomez is to deter-

mine the reasonableness of the liquidated damages

versus actual damages, actual damages are aected

by the need to mitigate. In Hawaii, as elsewhere, the

aggrieved party (the Seller) has a duty to make every

reasonable eort to mitigate his damages. While not

an active mitigation action, in Clear Channel there

is a discussion of post default revenues received by

the Seller which were to be used to oset and cal-

culate the Seller’s actual damages. 266 F. Supp. 2d

at 1228-29.

In Hawaii, failure to mitigate damages is a defense

and the burden would be on the Buyer to prove that

mitigation is possible. Malani v. Clapp, 56 Haw. 507,

542 P.2d 1265 (1975). In purchase and sale transac-

tions, the obvious mitigation would be to resell the

property. There are two potential problems here.

First, the resale price may not accurately reect the

value of the property, and second, if the parties are

litigating the enforceability of the Seller’s rights to

keep the deposit, theoretically the Seller’s ability to

market the property is constrained by the litigation

and the Buyer’s continuing rights under the contract

and mitigation through resale may not be possible

until the litigation with the Buyer is concluded.

12. Is a “shotgun” liquidated

damages clause enforceable?

To have an LDC for any default of any covenant does

not appear to be customary in real property pur-

chase and sale agreements, and we have found no

Hawaii appellate decision on whether such an LDC

would be enforceable.

13. Does a liquidated damages clause preclude

recovery of attorneys’ fees by the seller?

In cases where the liquidated damages clause is

upheld, under Gomez, it would be upheld because

the Court thought the amount had a reasonable

relationship to the actual damages and that con-

ceivably the Seller’s actual damages would have

included his out-of-pocket expenditures such as for

legal fees. This probably will depend on the liqui-

dated damages clause in question. It may state that

it is the exclusive remedy for all the Seller’s damages

and this would then include legal fees or it may state

that it is the exclusive remedy except for attorney’s

fees. In Gomez, the LDC simply stated that in the

event of the purchaser’s default, the Sellers may

elect to cancel the agreement and all payments

theretofore made shall be retained by the Seller and

shall be deemed to be liquidated damages and rent

for the use and occupation of the property and in

settlement of any depreciation of the same and not

as a penalty. In footnote 2, the ICA said that the trial

court may, if authorized by law, award attorney’s

fees and costs which were not included in the cal-

culation of actual damages. Gomez, 1 Haw. App. at

76 n.2, 613 P.2d at 662 n.2. Hawaii law authorizes the

award of attorney’s fees in cases concerning assump-

sit damages which is dened as for the recovery of

damages for non-performance of a contract. Schulz

v. Honsador, Inc., 67 Haw. 433, 690 P.2d 279 (1984).

Then too the trial court might consider the type

of attorney’s fees involved. Attorney’s fees incurred

in mitigation eorts could be considered part of

LIQUIDATED DAMAGES IN HAWAII REAL ESTATE PURCHASE AND SALE AGREEMENTS | 23

actual damages but attorney’s fees incurred in

enforcing the defaulted contract might be consid-

ered part of actual damages or might be considered

as separate damages.

CONCLUSION

Hawaii case law on liquidated damages is nowhere

settled and there are a lot of uncertainties. What we

can conclude is that the enforceability of an LDC is

left to the discretion of the trial court and if, in its

opinion, the amount of the liquidated damages is a

penalty, the clause will be unenforceable. It will be

enforceable if there is no bad faith breach and if, in

the trial court’s opinion, the LDA bears a reasona-

ble relationship to the actual damage. The retro-

spective test and determination of actual damages

appear to be required but the prospective test may

be applicable in a given case. One wonders whether

an LDC is even needed and whether in a contract

that provides for a non-refundable deposit, a Seller

may plead alternative remedies such as specic

performance, actual damages or retention of the

deposit and then elect the remedy of retention of

the deposit without the necessity of proving the

enforceability of a LDC.

As transactional lawyers, we have customarily taken

tips from case law throughout the nation in draft-

ing what we would consider required provisions for

the liquidated damages clause. These would include

statements of anticipated diculty of measuring

actual damages, no intent to penalize, and other

such “buzz” words. Sometimes we would negoti-

ate statements of “exclusive remedy”. Such drafting

and negotiating of the liquidated damages clause

is based on anticipating the need to satisfy a pro-

spective test. A federal magistrate reminds us that

our eorts may not be as important as we think and

that the language used will not prevent the Court

from reviewing the enforceability of the clause from

a retrospective view and the use of particular words

will not be determinative. Am. Elec., 90 F. Supp. 3d

at 1084. Furthermore, since, based on the uncer-

tainty created by Dias, it may be possible that given

the right circumstances, Hawaii law might permit

the award of both liquidated and actual damages,

or whichever is higher or allow the Seller to have

a choice and furthermore, since the trial court will

take a retrospective look at the case and apply its

discretion, it may be prudent to avoid providing

that the liquidated damages clause is the exclusive

remedy in lieu of actual damages. All of this creates

more negotiating issues as a Buyer’s perspective is

certainly dierent. Finally, as noted above, it may be

sucient to provide for a nonrefundable deposit in

lieu of an LDC. But until there is more certainty in

the case law, Sellers will probably still insist on a liq-

uidated damages clause.