Contract Law: California Court rules on non-refundable deposits

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I want to highlight a recent court case ruling that I came across here in California. Since what happens here in California seems to ripple to the rest of the 49 states, I would suggest you take a gander at the following.

Kuish vs. Smith, G040743 [PDF] [DOC]

Mr. Bradford Kuish entered into an agreement to purchase the Laguna Beach home of Mr. & Mrs. William W. Smith, Jr. for $14 Million, but later unilaterally canceled the escrow. Mr. & Mrs. Smith, Jr. then sold the property to someone that had submitted a backup offer for $15 Million but refused to return the $620,000 earnest money deposit to Mr. Kuish relying on the fact that they both signed counter offers stating that the deposit was “non-refundable.”

Mr. Kuish ended up winning his deposit back through the appellate court, but let me expand a bit.

The original court finding was in favor of the Smiths keeping all that deposit but the appellate court ended up ruling in favor of Mr Kuish, and this was the courts response;

Any provision by which money or property would be forfeited without regard to actual damage suffered would be an unenforceable penalty.  To construe the term ‘nonrefundable’ to establish [the sellers’]entitlement to the full deposit without regard to actual damages would essentially create a liquidated damages provision.”

The court ruled that since the Smiths ended up selling their property for $1 Million more after escrow was canceled they did not suffer $620,000 in actual damages because of Mr. Kuish canceling.

Our real estate purchase contracts here in California have a section called “liquidated damages.” This section of the contract stipulates what damages the seller may claim for breach of contract by the buyer, and is usually limited to the amount of the deposit, or is limited to 3% of the purchase price which they both did not agree to.

In my humble opinion I believe Mr. Kuish should never have signed such a clause to make his deposit “non-refundable.” I see where he might have been blinded because this was his dream home. He wanted to make major improvements to the property according to court transcripts and needed time to get local government approvals for his modifications to the beachfront property. This whole escrow lasted 9 months. It was Mr. Kuish who ended up canceling in the end.  My advice to the Smiths would have been to get Mr Kuish to sign the liquidated damages section of the contract, and they would have had an extra $420,000 (3% of the purchase price) in their bank account.

In conclusion, do not sign and do not try to get anyone to agree to a clause stipulating deposits to be “non-refundable”. They will just end up being “non-enforceable” in court. Time and time again this clause just does not hold up in court.

It’s sad that people don’t live up to their agreements nowadays.

Good luck in all you do America.

I welcome your comments.

Photo: JamesBrandon

About Author

Winston Westbrook is broker & owner of Westbrook National Real Estate Company servicing the cities of Victorville, Spring Valley Lake, Adelanto, Hesperia, Apple Valley & the surrounding Victor Valley High Desert communities of So. California. Specializing in short sale and distressed properties.


  1. I’m wondering what the next court will do, if there’s another appeal? I’ve seen this topic batted around for decades too. What’s always flummoxed me about any court ruling disallowing non-refundable deposits, is contract law itself. If the clause is mutually agreed upon, and both parties have given up something, why is it then unenforceable? I suspect it’s possible at some point for a higher court to reverse this ruling using the required elements of contract law as their hook.

    Make sense?

  2. All I can say is that this amount of earnest money makes me feel so … how should I put it?… small.
    I usually don’t put more the $1,000 in earnest money…
    Let me dream for a second… $620,000 could buy me 25 houses cash with a total gross income of $15,000 a month. I could gain back my investment in five years… Wow…

  3. Yea I am not so sure about this… it is agreed to and signed by both parties then I do not see why the court is overruling this. Contracts mean nothing when agreed to by both parties? There may be more to it, but based on what I see here I dont understand the judge

  4. I represented Mr Kuish in this case, so let me note a couple of things which may help explain this decision. There are those rare times when priniciples of law will trump contractual agreements, and this is one of them: Because Kuish terminated the escrow Smith was able to immediately turn around and sell the same property to a back-up offeror and he made an extra million dollars. The purpose of contract law is to compensate the non-breaching party for damages he or she has suffered, not to punish the breaching party. Here, there were no damages, so Kuish got his money back. Incidentally, the parties originally had signed a liquidated damages provision, but it was taken out at Smith’s request, we suspect because he wanted to protect his downside in the event that Kuish cancelled and the property was then re-sold for substantially less money. In that case he would not have been limited to recovering “only” 3% of the $14 million purchase price permiteed under a liquidated damages clause. But the mirror image of this is that if the property goes up you don’t get the benefit of the liquidated damages clause, and that’s what happened here. I am far from objective, but justice was served in this case.

  5. I think when LD is signed, and an escrow runs this long, the Seller should be able to keep 9 months of carrying costs (or loss of opportunity costs.) Not sure if that would have equaled 3% in this case, although the point is moot since LD wasn’t signed.

    This does become an interesting case for developers who go into a contract subject to Due Diligence. . . we will need to tighten those contracts up for our Sellers, and for now rely on attorneys to make sure they protect our clients as much as possible. At least until standards of practice around this point have been clarified.

    Cece Blase
    Paragon Real Estate Group
    San Francisco

  6. This might be a useful argument if my $50 deposit is not paid to me. Even though I will be incurring more than my deposit, it is the mere facts that the sales manager tries to con me on the item that I do not have on my possession and no work is even done.

    Hope they will refund my deposit, else onto small claim court 🙂

  7. After reading this, and dealing with my own situation, I sure don’t get WHY there is a contract, period! Our agreement to sell our home seems to mean little! Our Buyer is a Realtor.
    Although we are willing to work with the Buyer’s, get the sale done, they are doing it in their own time frame, with little regard to what it will cost us while we pay rent on new place, mortgage on old, soon to pass planned COE date. We are already hearing: “Just a few more days, the bank is really backed up, lost our paperwork”…..!
    From the beginning: Buyers provided us with a Pre-Approval letter for a 30 year conventional loan with their original Purchase Agreement. They removed all contingencies, including loan and appraisal, as required. A day after removing all contingencies, we are told the Buyer’s did not qualify for their loan and received a signed notice from Buyer’s, showing that they have assigned their purchase contract rights to another party. I was shocked to hear from our Realtor that the Buyers can do that, unilaterally, without our consent or written approval, despite not designating “assigns”, or anything but their names, as Purchasers on the RPA. Additionally, our RPA-(California) states: “Neither this agreement nor any provision in it may be extended, amaneded, modified, altered or changed, except IN WRITING SIGNED BY BUYER AND SELLER.”
    So, does this last statement have no merit? Are we without rights? Only the buyer has rights? I thought the contract was “legally binding”, requiring sign off to any changes by both sides!
    The only option our Realtor has given us is to accept deal or walk away, lose deposit. Our “new” Buyer’s, we are told, are getting hard money loan, awaiting COE of own residence, and may not close, as agreed. We should be entitled to liquidated damages, right? Our Realtor say’s we would most likely have to take the Buyer’s to Small Claims to recover that. So, what good is this agreement? Or, do we just have a bad Realtor?!?!?

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