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).
Damages 101
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!).
So let’s look at a real life example, shall we?
(Morroco v. Limetree Enterprises, Inc., 2008 N.J. Super. Unpub. LEXIS 840 (2008))
In June 2003, Vincent Morrocco, through Barry Herman, hired the Cashmere Thirteen to play his daughter’s wedding August 2004. He paid a $3,300 deposit. Less than a month before the date, the wedding was postponed until October 2005. Morrocco signed another contract, and paid a $4,000 deposit. Both contracts contained LDCs. When his daughter canceled again, Morrocco sued to recover the $7,300 he paid in deposits, challenging the clause as a penalty.
Morrocco lost. Not only did he lose in New Jersey superior court, Morocco lost again on appeal.
The LDC in the contract was captioned “NON-REFUNDABLE DEPOSIT: BALANCE DUE.” Below the caption, the contract read: “Once you sign the contract the deposits are not refundable for any reason.” Another caption explicitly labeled the LDC: “CANCELLATION OF CONTRACT: LIQUIDATED DAMAGES.” Below, the contract read:
“In addition, You understand that the service provided by the Orchestra/Performers is unique and that the Orchestra/Performers makes arrangements to provide music a substantial time before the Date of the Engagement. You understand that the Orchestra/Performers will engage musicians to appear on the Date of Engagement. If you cancel this contract, the Orchestra/Performers will suffer damages because of its obligation to those musicians. These damages are difficult to measure. Therefore, if You cancel this contract at any time up to thirty-one (31) days before the Date of Engagement, the Orchestra/Performers has the right to keep the deposits as liquidated damages to compensate the Orchestra/Performers for expenses and losses which result from cancellation of Contract by You.”
The court held this LDC was reasonable. Herman could never account for the number of potential clients he turned away while Morrocco had the Cashmere Thirteen booked. Further, Herman immediately utilized part of the deposit to reserve the band and part to pay the salesman who booked the gig. As such, Herman would suffer immediate actual damage if he had to return the deposit.
Indeed, the deposit represented a dollar figure that would leave any already incurred expenses paid, along with an appropriate amount of revenue representing lost profit. Thus, the LDC was enforceable as compensation to Herman in the event of a breach, rather than being a penalty for Morroco to prevent a breach.
One Final Word on Non-Refundable Deposits (LDCs)
While LDCs are immensely useful, they may be potentially damaging for a vendor. Generally, the vendor is only entitled to the value of the LDC in the event of the breach. This means that if a bride cancels, and you retain the LDC amount, you cannot go after the bride for more.