Liquidated Damages

Division 3, Part 2, Title 4.5 of the Civil Code deals with liquidated damages for violations of contracts in California. Chapter 1 provides general provisions.

Section 1671 provides that this section does not apply in any case where another statute expressly applicable to the contract prescribes the rules or standard for determining the validity of a provision in the contract liquidating the damages for the breach of the contract. A provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.

The validity of a liquidated damages provision is determined under specified laws where the liquidated damages are sought to be recovered from either of two specified parties.

Chapter 2 deals with default on real property purchase contracts.

Section 1675 provides a definition of “residential property” and state that a provision in a contract to purchase and sell residential property that provides that all or any part of a payment made by the buyer constitutes liquidated damages to the seller upon the buyer’s failure to complete the purchase of the property is valid to the extent that payment in the form of cash or check, including a postdated check.

If the amount actually paid pursuant to the liquidated damages provision does not exceed 3 percent of the purchase price, the provision is valid to the extent that payment is actually made unless the buyer establishes that the amount is unreasonable as liquidated damages. If the amount actually paid pursuant to the liquidated damages provision exceeds 3 percent of the purchase price, the provision is invalid unless the party seeking to uphold the provision establishes that the amount actually paid is reasonable as liquidated damages.

Section 1676 states that a provision in a contract to purchase and sell real property liquidating the damages to the seller if the buyer fails to complete the purchase of the property is valid if it satisfies the requirements of Section 1677 and the requirements of Section 1671(b).

Section 1677 says that a provision in a contract to purchase and sell real property liquidating the damages to the seller if the buyer fails to complete the purchase of the property is invalid unless two specified conditions are met.

Section 1678 explains that, if more than one payment made by the buyer is to constitute liquidated damages, the amount of any payment after the first payment is valid as liquidated damages only if the total of all such payments satisfies the requirements of Section 1675 and a separate liquidated damages provision satisfying the requirements of Section 1677 is separately signed or initialed by each party to the contract for each such subsequent payment.

Section 1679 explains that this chapter applies only to a provision for liquidated damages to the seller if the buyer fails to complete the purchase of real property. The validity of any other provision for liquidated damages in a contract to purchase and sell real property is determined under Section 1671.

Section 1680 states that nothing in this chapter affects any right a party to a contract for the purchase and sale of real property may have to obtain specific performance.

Section 1681 says that this chapter does not apply to real property sales contracts as defined in Section 2985.