I own a child play center. I take a $50 deposit to hold dates for parties. When you book a party you must sign a contact that states your de...

Question

I own a child play center. I take a $50 deposit to hold dates for parties. When you book a party you must sign a contact that states your deposit is non-refundable, if you cancel with less than 14 days notice you are liable for half the party cost if you cancel with less than 7 days notice you are liable for the entire cost of the party.

Recently, I have read some things regarding deposits that make me believe this is not legal.

However, I am not the only shop in town that does this. There are several others including a national chain. This combined with the idea that if someone does cancel a party with limited notice they have prevented me from renting my party room as I was holding it for them and I would imagine I have the right to be compensated for that loss.

Which is correct, are deposits legal?

Answer

I can't give you a 100% certain answer, because I don't know every law affecting every kind of business. Nevertheless, I'd say the chance that taking deposits to hold dates is downright illegal, in the sense that some statute makes it an infraction or even a misdemeanor to do so, is about 1 in 1,000. In addition to this statement, however, I should point out that the law disfavors penalties in private contracts, based on the theory that it is the court's role, not the parties', to determine the damages for a breach of contract. Hence, some limitations are placed upon the parties' capacity to pre-set the forfeiture or penalty for a breach. If the penalty is excessive, that part of the contract will be unenforceable. Generally, a deposit forfeiture that is a reasonable 'a priori' guesstimate of a party's likely harm done by a breach by the other party will be upheld; if it looks like too much to the judge, you'd either get nothing at all or be limited to damages you could actually prove by admissible evidence.

So, you might want to put language in your agreement saying, "The parties agree that $50 is a reasonable estimate of Party A's loss if Party B cancels early, and that amount will not be refundable." or words to that effect.

May I suggest you try networking with others who are in the same business, but sufficiently far away that you aren't competitors? You can probably both teach and learn a lot about your business by communicating with other play center owners who are 50+ miles away but in California.