## Facts

- The Kellys agreed to buy the Marxes’ residential property for $355,000 and paid a total deposit of $17,750 (5% of the purchase price).
- The purchase and sale agreement stated that if the buyer failed to perform, all deposits would be retained by the seller as liquidated damages.
- The closing date was set for September 1, 1994, but the Kellys notified the Marxes they could not proceed because they were unable to sell their existing home.
- The Marxes resold the property to a new buyer for $360,000, $5,000 more than the Kellys’ contract price.
- The Kellys sued to recover the $17,750 deposit; the trial court enforced the clause for the Marxes, the intermediate appellate court reversed, and the Supreme Judicial Court granted further review.

## Issues

1. Whether a liquidated-damages clause allowing a seller to retain a 5% deposit upon the buyer’s default is enforceable when the seller later resells for a higher price and shows no actual loss at breach.
2. Whether enforceability turns solely on reasonableness at contract formation (“single look”) or also on actual damages at breach (“second look”).

## Decision

- The Supreme Judicial Court affirmed judgment for the Marxes, allowing retention of the $17,750 deposit as liquidated damages.
- The court applied a “single-look” approach, evaluating the clause only as of the time of contracting.
- The court rejected an ex post inquiry into actual damages that would invalidate an otherwise reasonable liquidated-damages provision as a penalty.

## Legal Principles

- A liquidated-damages clause is enforceable if, at the time of contracting, (1) anticipated damages are difficult to ascertain and (2) the stated amount is a reasonable forecast of expected harm.
- Subsequent events, including a resale at a higher price and minimal or no provable loss at breach, do not render a valid liquidated-damages clause an unenforceable penalty.
- In residential real-estate transactions, a 5% deposit may constitute a reasonable estimate of anticipated damages given risks such as market changes, delay, carrying costs, and the uncertainty and expense of finding another buyer.

## Conclusion

Massachusetts enforced a residential purchase-and-sale liquidated-damages clause permitting the seller to retain a 5% deposit after the buyer’s default, holding that validity is determined ex ante based on difficulty of estimating damages and the reasonableness of the forecast, not on actual damages measured at breach.


Kelly v. Marx, 705 N.E.2d 1114 (Mass. 1999)