THE TRUTH ABOUT NON-REFUNDABLE DEPOSITS
Most people in the wedding business know you have to protect your time and resources. For vendors, damages from a cancellation can range from losses on food that spoils, to alteration costs on gowns, to lost opportunities for booking another wedding. It can be particularly difficult for many vendors to prove monetary loss for missed opportunity because a certain weekend was popular or you didn’t have time to hire adequate help. A non-refundable deposit is one of the best tools to ensure you’re compensated by a fickle bride. But, are non-refundable deposits legal?
Yes and no.
Let’s back up first. Let’s talk about lawsuits and the general purpose of lawsuits: collecting damages (i.e., money, i.e., dolla dolla bills, i.e., the mean green).
For most people who end up suing, damages are the most important part – getting your money back. Generally, the law compensates plaintiffs for the actual amount of harm suffered, so that the plaintiff would be in the same position that she would have been had the defendant not breached. These are called “expectation damages.”
For example, a bride cancels her $5,000.00 contract with a caterer. The caterer may sue the bride for breach of contract. Let’s say that the caterer’s costs (food and employees) totaled $2,000. The expectation damages are $3,000, or the value of the contract less the expenses ($5,000 – $2,000). This will place the caterer in the position that she would have been had the wedding not been cancelled.
But wait! The law requires that the caterer must “mitigate” her damages. This means that the caterer must make reasonable attempts to book another event or sell any food to someone else. If the caterer does not attempt to mitigate, her damages could be reduced or even lost. Often, the cost, both in time and money (greedy attorneys!), outweighs the value of chasing the bride down and recovering expectation damages.
ENTER: THE NON-REFUNDABLE DEPOSIT
So, you, the wedding business professional, have learned to get at least some money up front. That way, should the bride cancel, there is less need to go through the time intensive and costly litigation process: proving your case, proving your damages, showing the court that you mitigated the damages, etc.
The non-refundable deposit(s) (retainer, installment, etc) is basically the vendor’s way of saying, “These are my damages if you cancel, and I am entitled to them without having to do anything else….punk.”
The law refers to the non-refundable deposit as a Liquidated Damages Clause (the “LDC”). As stated, the LDC must reflect a good faith effort to estimate the damages suffered from a breach, or should represent a value amount of the contract that you would be happy with if the bride bailed at a particular point in time prior to the wedding.
Courts typically require the amount to be reasonable and that the harm suffered (your damages if the bride cancels) be difficult to accurately quantify at the time of the breach. For wedding industry professionals, harm at the time of breach is difficult to assess mainly because (1) booking an equivalent wedding on the same date is almost always a difficult proposition and (2) expenses incurred vary depending on how close the breach occurs to the wedding.
To put it another way, the purpose is compensation, not punishment or trying to deter the bride from breaching. Where the purpose is punishment, an LDC becomes a penalty and is no longer enforceable. Often, courts find sums that are too large or unrelated to the loss suffered to be penalties, but the burden will be on the challenging party to prove the unreasonableness. States differ on how stringently they interpret the terms of a contract. For instance, New York considers an LDC for the entire value of the contract a penalty, and where there is any doubt at all, considers an LDC a penalty. California actually has two different standards for personal contracts and consumer contracts. So, the jurisdiction in which a contract is executed may play a crucial role in whether the LDC is enforced (gotta love Federalism!).
For the rest of Rob’s article, check out the online edition of Mobile Beat.
Don’t miss Rob’s informative seminar “The Law for DJs” at MBLV18.
Filed Under: Business, Exclusive Online News and Content, Issue #153
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