Are Nonrefundable Deposits Enforceable in Ohio?

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Sarah K. Simon, Blog Editor, University of Cincinnati Law Review

I. Introduction

In contracts, liquidated damages provisions plan for the worst. These provisions stipulate what the nonbreaching party is entitled to if the other party breaches. In purchase agreements, the seller may stipulate that the buyer pay a nonrefundable deposit, which counts as part of the seller’s liquidated damages. Thus, if the buyer breaches the agreement by not purchasing the goods or not paying for the goods, the seller keeps the buyer’s deposit. Although both parties may agree to the liquidated damages, will a court uphold their agreement? Typically, yes, but the law becomes more complex if the agreement stipulates a nonrefundable deposit as the liquidated damages.

Would an Ohio court uphold the seller’s nonrefundable deposit if the buyer breaches the agreement? This article will explore Ohio case law regarding nonrefundable deposits. Part II will lay out Ohio law, and Part III will examine how Ohio courts have treated nonrefundable deposits. Part IV uses a hypothetical ten percent nonrefundable deposit to analyze Ohio caselaw. Part V concludes with implications of enforcing nonrefundable deposits.

II. Applicable Law

Ohio Revised Code § 1302.92 covers liquidated damages.[1] The relevant provision reads:

(A) Damages for breach by either party may be liquidated in the agreement but only at an amount which is (1) reasonable in the light of the anticipated or actual harm caused by the breach, (2) the difficulties of proof of loss, and (3) the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large, liquidated damages is void as a penalty.[2]

Therefore, if the damages are unreasonable compared to the harm caused or the amount loss is simple to calculate or there is a feasible remedy, then a court will not enforce a liquidated damages provision.[3]

III. Relevant Ohio Cases

Ohio courts have formulated § 1302.92 requirements into the Samson Sales test to analyze whether a liquidated damages provision is enforceable.[4] This test stipulates, if the parties have unequivocally agreed on the damages amount, this amount will constitute the liquidated damages, provided that:

(1) the damages would be uncertain and hard to prove,

(2) the contract is not “unconscionable, unreasonable, and disproportionate,” and

(3) the contract is consistent with the “parties’ intent.”[5]

All three conditions of the Samson Sales test must be met for a court to enforce the liquidated damages provision.[6] For a liquidated damages provision to pass the first prong of the Samson Sales test, the damages must be difficult to calculate.[7]

In Kurtz v. West Property, a seller sued to enforce the buyer’s agreement to purchase 164 acres (over the course of one year).[8] The seller’s damages were a five percent security deposit, equal to $111,349.30, and the total purchase price for the deal was over $2.2 million.[9] The Ohio District Court applied the first prong of the Samson Sales test and found that the seller’s damages were uncertain, reasoning that “although the contract price is easily ascertainable, the fair market value of real estate fluctuates…these fluctuations, based upon numerous independent variables, are unpredictable.”[10] The court relied on an Ohio Supreme Court case, Knox Rock Blasting Co. v. Grafton Stone Co, which held if it is “impossible for the parties to fix with any degree of certainty what the values of the property might be at a later period…[then] they were legally permitted to stipulate the damages in advance.”[11]

Conversely, if damages are ascertainable, a court will not uphold a liquidated damages provision.[12] In K & A Cleaning, Inc. v. Materni, an independent contractor violated the non-solicitation provision in her employment contract with Cleaning Genie.[13] The amount that the independent contractor was paid (by the customers she had agreed not to work for) constituted the actual damages under the contract.[14] The provision read, “Cleaning Genie will be entitled to damages equal to the total amount of the billing to the customer for one year.”[15] The Ohio Court of Appeals declined to enforce the liquidated damages provision because the damages as a result of the breach were “readily ascertainable” and clearly laid out in the contract.[16]

For a liquidated damages provision to pass the second and third prong of the Samson Sales test, the contract must be fair to both parties and consistent with the parties’ intent.[17] Otherwise, the court will void the provision as a penalty.[18] In Sheffield-King Milling Company v. Domestic Science Baking Company, the seller sued to enforce a liquidated damages provision.[19] The buyer breached by purchasing only 750 out of the agreed upon 4,000 barrels of flour that would be delivered over six months.[20] The liquidated damages provision allowed the seller to recover the difference between the highest price of wheat “on the date of sale and [on the] date of cancellation” based on the market. Ultimately, the buyer would repay the seller for transporting the wheat, purchasing and reselling the wheat, loss of profit (if any), and inconvenience to seller.[21]

In deciding whether the liquidated damages provision was fair to both parties, the Ohio Supreme Court reasoned that there was no evidence of deception or circumvention (during agreement negotiations) to invalidate the provision.[22] Further, since the seller had not yet produced the flour when the contract was executed, the parties had agreed that the typical measure of damages (difference between the price agreed upon and the market price at the time of breach) would not adequately reimburse the seller. Therefore, the contract was consistent with the parties’ intent and the Court upheld the liquidated damages.[23]

IV. Discussion

This section will use the hypothetical nonrefundable deposit below to analyze whether Ohio courts would enforce the provision in a steel purchase contract.

Non-Refundable Deposit. Upon execution of this Agreement, Buyer will immediately pay Seller via wire transfer a non-refundable deposit in cash or other immediately available funds in the amount $10,000 (the “Deposit”). In no event shall the Deposit be refundable to Buyer. The Deposit shall be credited against the cash portion of the Purchase Price at Closing.[24]

Under the Samson Sales test, an Ohio court would most likely enforce the $10,000 liquidated damages provision, provided that the damages are uncertain and hard to prove, the contract is not unfair or unreasonable, and the contract represents the parties’ intent.[25]

First, the damages must be difficult to prove. Circumstances that indicate “difficulties of proof of loss” include unpredictable damages, meaning costs that cannot be accurately estimated at the execution of an agreement.[26] The market for the good must fluctuate, such as the real estate market in Kurtz v. West Property.[27] A fluctuating market prevents the parties from being able to calculate the future damages. If the market for the good is stable, an Ohio court would be less likely to find that the damages are hard to estimate and refuse to enforce the provision.[28] In our hypothetical, since the market for steel fluctuates, the provision passes the first prong of the Samson Sales test.

Second, the purchase contract must meet the second and third prongs of the Samson Sales test by being reasonable and representing the parties’ intent. If both parties are represented by attorneys and negotiate at arm’s length, then the agreement can likely meet both prongs. But, if one party is significantly more sophisticated than the other, then an Ohio court could find that the agreement is unfair to the lesser experienced party. Since there are no facts to imply that the steel purchase agreement is unreasonable or does not reflect the parties’ intent, an Ohio court would likely enforce the $10,000 nonrefundable deposit.

What if the good is worth over one million dollars and the nonrefundable deposit amounts to over one hundred thousand dollars, is this amount still reasonable? In Kurtz v. West Property, the court did not focus on the percentage of the security deposit (5%). Instead, the court emphasized the unpredictability of the market. In Sheffield-King Milling Company v. Domestic Science Baking Company, the court acquiesced to what the parties had agreed upon. Therefore, a court would likely not question the monetary amount, but instead focus on whether the parties had agreed on that amount.

V. Conclusion

Before negotiating with the buyer for a nonrefundable deposit, the seller should assess the provision using the Samson Sales test to determine if a court would enforce the nonrefundable deposit. This includes learning about the market for the good when the agreement is executed to ensure that a court would enforce the provision. If an Ohio court refuses to enforce the provision, then the provision is meaningless.

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[1] Ohio Rev. Code Ann. § 1302.92 (West).

[2] Id.

[3] Id.

[4] Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St. 3d 27, 29 (1984).

[5] Id.

[6] Id.                                

[7] Id.

[8] Kurtz v. W. Prop., L.L.C., No. 10AP-1099, 2011 WL 6916196, at 7 (Ohio Ct. App. Dec. 27, 2011).

[9] Id. at 2.

[10] Id. at 7.

[11] Id. (quoting Knox Rock Blasting Co. v. Grafton Stone Co., 64 Ohio St. 361, 366(1901)).

[12] K & A Cleaning, Inc. v. Materni, No. L-05-1293, 2006 WL 1047477, at 2 (Ohio Ct. App. Apr. 21, 2006).

[13] Id.

[14] Id.

[15] Id. at 1.

[16] Id.

[17] Sheffield-King Milling Co. v. Domestic Sci. Baking Co., 95 Ohio St. 180 (1917).

[18]  Id.

[19] Id.

[20] Id.

[21] Id. at 182.

[22] Id. at 184.

[23] Id. at 190.

[24] Law Insider, Non-Refundable Deposit Sample Clauses, https://www.lawinsider.com/clause/non-refundable-deposit.

[25] Samson Sales, Inc. v. Honeywell, Inc., 12 Ohio St. 3d 27, 29 (1984).

[26] Kurtz v. W. Prop., L.L.C., No. 10AP-1099, 2011 WL 6916196, at 7 (Ohio Ct. App. Dec. 27, 2011).

[27] Id.

[28] Knox Rock Blasting Co. v. Grafton Stone Co., 64 Ohio St. 361, 366 (1901); Id.