Ps seek to recover earnest money for purchase of Ds property (entered agreement to buy house, then were unable to sell current home and backed out of deal – Ds accepted offer of other prospective buyers, selling for more than price agreed to with P) – SC granted motion for summary judgment of Ds concluding they were entitled to deposit because the liquidated damages clause (determines in advance damages in case of default) in their agreement was enforceable
•  AC reversed under “second-look” doctrine: examined circumstances at contract formation AND actual damages suffered by each party – concluded Ds not entitled to keep deposit because they suffered no actual damages and therefore
liquidated damages would serve as a penalty and not as compensation for a loss
Court’s analysis:
•  Reject the second look approach and conclude that a liquidated damages clause in a purchase and sale agreement will be enforced where, at time agreement was made, potential damages were difficult to determine and the clause was a
reasonable forecast of damages expected to occur in the event of a breach
•   Judge should examine only the circumstances at contract formation – liquidated damages should not be enforced only if sum is grossly disproportionate to an estimate of actual damages made at contract formation
•   Should enforce contracts according to their plain meaning
•   Therefore, Ps not entitled to the return of the deposit and liquidated damages were a reasonable estimate of the damage to the Ds – seller retains liquidated damages