Barrie School v. Patch

In Barrie School v. Patch, 401 Md. 497, 509, 933 A.2d 382 (2007), a private school (The Barrie School) required the parents of prospective students to enter into an enrollment agreement, which provided that they pay a non-refundable tuition deposit, as well as promise to pay, in two installments, the remainder of tuition due for the upcoming school year. Parents could cancel that agreement upon written notice by a specified date; in which event, they would forfeit only the deposit. Id. at 501. But, on the other hand, if they withdrew their child after that specified date, they were obligated to pay tuition and expenses for the entire year as liquidated damages. Id. The Patches enrolled their daughter in the Barrie School, but then withdrew her after the specified deadline, whereupon The Barrie School brought a breach of contract action against them, in the District Court of Maryland, to recover the tuition and expenses, as well as attorneys' fees. Id. at 502. Among the defenses raised by the Patches were that the liquidated damages provision in the enrollment agreement was an unenforceable penalty and that the school was under a duty to mitigate damages but had not done so. Id. Although the District Court held that the liquidated damages provision in the enrollment agreement was valid and not a penalty, it found that the school had done "absolutely nothing" to try to find another student to enroll in place of the Patches' daughter, despite having been informed of her withdrawal in the July preceding the start of the school year. Id. at 503-04. Then, concluding that the school's "failure to mitigate damages was fatal to its claim," id. at 503, the District Court declined to enforce the liquidated damages provision of the enrollment agreement and entered judgment in favor of the Patches. On appeal, the Circuit Court for Montgomery County "agreed with the District Court" and affirmed, stating that, "even though the liquidated damages clause was valid and not a penalty, The Barrie School had a duty to mitigate damages." Id. at 505. But the Court of Appeals disagreed. Although it upheld the liquidated damages clause, as the two lower courts had, it, unlike those two courts, found that the Patches were liable for the entire amount of liquidated damages specified by the enrollment agreement. In so doing, it opined that liquidated damages are the remedy that the parties agreed to in case of a breach, "'obviating the need for the nonbreaching party to prove actual damages.'" Id. at 513. Mitigation, on the other hand, is "part of a court's determination of actual damages that have resulted from a breach," a determination rendered unnecessary once the parties "have included a reasonable sum that stipulates damages in the event of breach." Id. Thus, in the Court's view, the purpose of the liquidated damages provision in that case would be "blunted" if the non-breaching party were required to mitigate damages. Id. at 514. In Barrie School v. Patch, a private, non-profit Montessori school entered into a re-enrollment agreement with the parents of one of the school's attendees (hereinafter collectively referred to as "the Patches"). Id. at 501. Pursuant to that agreement, if the parents of an attendee chose to withdraw their child from the school after a specified date, the parents would be required to pay the school tuition for the entire academic year as liquidated damages. Id. Specifically, Section 3 of the agreement provided: "I understand that unless the Student is withdrawn by written notice given by certified letter, return receipt requested, and received by the Head of School prior to May 31, 2004, I am liable for and agree to pay the entire year's charges for the academic year, including expenses, as later defined, incurred by the School for collection. Withdrawal, dismissal, absences or illness of a Student during the year do not release me from any portion of this obligation." Barrie School, 401 Md. at 501-02 (quoting Section 3 of the re-enrollment agreement). The Patches failed to cancel the agreement with the school prior to the May 31, 2004, deadline. Id. at 502. Indeed, the Patches did not provide notice to the school until forty-five days after the May 31, 2004 deadline, on July 14, 2004. Id. After the Patches refused to pay the remaining balance for their child's tuition and demanded reimbursement of the $1,000 non-refundable deposit, the school filed a breach of contract action against the Patches in the District Court of Maryland, sitting in Montgomery County. Id. The school sought the remaining tuition balance for the 2004-2005 academic year, plus twelve percent interest, and attorney's fees. Id. In response, the Patches filed a notice of intent to defend, stating, in part, that their agreement with the school was procured by fraud, that it was a contract of adhesion, that the liquidated damages constituted a penalty, and that the school was required to mitigate any and all damages prior to seeking recovery. Id. The District Court found that "there was a valid contract between the parties, including a valid liquidated damages clause, that there was no fraud in the inducement to enter into the agreement, and that the agreement was not a contract of adhesion," and additionally dismissed the Patches counterclaim. Id. at 502-03. Nonetheless, the court ultimately concluded that the school's failure to mitigate its damages was fatal to its claim. Id. at 503. As a consequence, the District Court entered judgment in favor of the Patches against the school. Id. at 504. On appeal pursuant to Maryland Rules 7-101 and 7-102(b)(1), the Circuit Court for Montgomery County affirmed, stating as follows: "The question is presented as to whether a party who is protected by a liquidated damages clause in a contract is excused of the normal contractual duty to mitigate its damages as a prerequisite to recovery. The court finds that such a duty does exist, notwithstanding the existence of a liquidated damages clause, and, thus, the District Court did not err as a matter of law in so finding. It is interesting to note that while no evidence of mitigation was presented, it would appear that mitigation had, in effect, already occurred when the . . . school already enrolled more students that its budget projections called for." Barrie School, 401 Md. at 505. In reaching its decision, the Court of Appeals preliminarily assessed the validity of a liquidated damages clause and observed that Maryland law explicitly recognizes that it is the challenger of a liquidated damages clause that bears the burden of proving the clause should not be enforced. 401 Md. at 507-08. Judge Irma S. Raker, writing for the Court, reasoned that "because the defendant seeks to set aside the bargained for contractual provision in the Agreement stipulating damages in the event of a breach, the defendant has the burden of proving that the clause should not be enforced. Placing the burden of proof on the challenger is consistent with giving the non-breaching party the advantage inherent in stipulated damages clauses, that of eliminating the need to prove damages, and with the general principle of Maryland law that assumes that bargains are enforceable and that the party asking the court to invalidate a bargain should demonstrate the justice of his or her view." Barrie School, 401 Md. at 507-08 (citing Dashiell v. Meeks, 396 Md. 149, 167, 913 A.2d 10 (2006)).