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Imagine this: You have signed on the dotted line to purchase a home for $500,000. You have put down an earnest money deposit of $25,000. Right before closing, you find out that your bank will not provide the financing you thought you had secured. You can no longer afford to purchase your dream home. You are coming to grips with the reality that you are going to lose $25,000, which comprises the bulk of your life savings. Then you hear from the seller, telling you that they are going to come after you for $100,000 in “actual damages”—the amount the house depreciated between the time you signed the purchase and sale agreement and the time you breached the contract. How is this possible? It is bad enough that you are going to lose $25,000. How can you be on the hook for even more? It is because of a little- known clause in your purchase and sale agreement that provides the seller with the option of retaining the deposit as liquidated damages or suing for actual damages instead. These clauses have a variety of names: election clauses, election of remedies clauses, optional liquidated damages clauses, or cake-and-eat-it-too clauses.

A surprising number of courts are prepared to give effect to these clauses, reasoning that they represent the parties’ intent, and that freedom of contract demands that they be enforced. This Article argues that courts are getting it wrong: liquidated damages clauses cannot be reconciled with election clauses. No amount of freedom of contract logic can get around the fact that the two clauses are legally incompatible. This Article examines the two different contexts in which liquidated damages clauses and election clauses intersect. First, a buyer may seek a return of his earnest money deposit, arguing that the presence of an election clause renders the liquidated damages a penalty. Second, a buyer may seek to foreclose a seller from pursuing actual damages under an election clause, reasoning that such a clause is fundamentally at odds with a liquidated damages clause. In the first scenario, the buyer seeks to invalidate the liquidated damages clause; in the second, he seeks to invalidate the election clause. This Article encourages courts to prohibit liquidated damages clauses and election clauses from coexisting in contracts. A seller who attempts to have his cake and eat it too should be relegated to the lesser of the two amounts.

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Wisconsin Law Review

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Copyright 2024 by The Board of Regents of the University of Wisconsin System; Reprinted by permission of the Wisconsin Law Review.

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