No. The school did not have to try and find a replacement student. The contract had what's called a 'liquidated damages' clause, which is like a pre-agreed fee for breaking the contract. The whole point of this is to avoid arguments later about how much money was actually lost. Since the parents and the school already agreed on the price of breaking the contract (one year's tuition), the school didn't have to do anything to 'mitigate' or lessen its damages. The deal was the deal.

Yes. The school should have been required to show it tried to find another student, especially since it ended up with full enrollment anyway. The purpose of contract law is to be fair and compensate for actual losses, not to punish someone or let one side get a huge windfall. Making the family pay a full year's tuition when the school didn't actually lose any money is an unfair penalty.

The court said the school does not have to minimize losses because the contract had a valid liquidated damages clause. These clauses are allowed when the agreed payment is a fair estimate of potential harm and is not extremely high compared to expected damages. The court overturned the lower decisions that said the school had to minimize losses. It explained a valid clause must be a reasonable estimate made when the contract was signed, and the harm must have been hard to calculate then. Requiring the school to minimize losses would undo the point of agreeing to the amount ahead of time.

The dissent said these clauses should be looked at when made and after a breach to be fair and avoid windfalls or punishments. If actual losses are way less than the agreed amount, it's an unenforceable penalty. Here, the school didn't lose as much as a full year's tuition since it met enrollment goals, so making the Patches pay would be a windfall. The dissent argued minimizing losses is separate from liquidated damages and should be considered when deciding if the clause is valid and fair based on real losses.

A liquidated damages clause may be deemed an invalid penalty, however, where the stipulated amount is "grossly excessive and out of all proportion to the damages that might reasonably have been expected to result from such breach of the contract."

We have held that a liquidated damages clause is "a specific sum of money... expressly stipulated by the parties to a... contract as the amount of damages to be recovered by either party for a breach of the agreement by the other."

—liquidated damages clauses upheld if the stipulated amount is a "reasonable forecast of just compensation

—it had no duty to mitigate damages and that, thus, the lower court's damages award should be upheld.

—sum that stipulates damages in advance "replaces any determination of actual loss," so that if liquidated damages provision is enforceable, court need not consider mitigation

—defining an unconscionable contract as one that "involves extreme unfairness, made evident by (1) one party's lack of meaningful choice, and (2) contractual terms that unreasonably favor the other party

Consequently, "Maryland courts will uphold a liquidated damages clause as valid, and not a penalty, if it satisfies two primary requirements":(1) "the clause must provide a fair estimate of potential damages at the time the parties entered into the contract"; and (2) "the damages must have been incapable of estimation, or very difficult to estimate, at the time of contracting."

The Court reasoned that "[t] he sum [provided] in [Section] 3 was a reasonable forecast of just compensation for potential harm caused by a breach of the [a] greement. The damages contemplated in the [a] greement were neither grossly excessive nor out of all proportion to those which might have been expected at the time of contracting."

—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.

Liquidated damages are defined as "a specific sum stipulated to and agreed upon by the parties at the time they entered into a contract, to be paid to compensate for injuries in the event of a breach of that contract."

No. A non-breaching party has no duty to mitigate damages where the parties agree to a valid liquidated sum in the event of a breach. Mitigation of damages is a doctrine of court-assessed actual damages, which helps determine the proper amount of loss after a breach. A valid liquidated damages clause, by contrast, is a remedy the parties themselves have determined to be proper, and its purpose is to replace any determination of actual loss. Forcing a party to mitigate would blunt the purpose of the clause, which is to provide certainty and obviate the need for the nonbreaching party to prove actual damages. The validity of a liquidated damages clause is judged based on the circumstances at the time of contract formation, not by the actual damages that later occur; therefore, a 'no-actual-harm' defense is also inapplicable.

Yes. A court should consider the actual harm suffered when determining whether to enforce a liquidated damages clause, and a non-breaching party should have a duty to mitigate. Contract remedies are intended to be compensatory, not punitive. Enforcing a liquidated damages clause when the non-breaching party has suffered no actual harm, as was the case here since the school met its enrollment projections, amounts to an unenforceable penalty and provides an unjust windfall. The validity of a liquidated damages clause should be judged retrospectively, from the time of the breach, as well as prospectively. If it is clear that no loss occurred, a provision fixing a substantial sum as damages is an unenforceable penalty.

The court held that a non-breaching party is not required to mitigate damages where a contract contains a valid liquidated damages clause. The court emphasized that such clauses are enforceable when they represent a reasonable forecast of just compensation for the harm caused by a breach and are not grossly excessive or disproportionate to the damages that might reasonably have been expected. The court reversed the lower courts' decisions, which had imposed a duty to mitigate on The Barrie School, and clarified that the enforceability of a liquidated damages clause depends on whether it satisfies two primary requirements: it must provide a fair estimate of potential damages at the time of contracting, and the damages must have been difficult to estimate at that time. The court reasoned that requiring mitigation would negate the benefit of an agreed-upon liquidated damages sum and introduce uncertainty in calculating damages.

The dissent argued that liquidated damages clauses should be evaluated both prospectively and retrospectively to ensure fairness and prevent windfalls or penalties. The dissent contended that if actual damages are disproportionate to the liquidated sum, the clause operates as an unenforceable penalty. Here, the school did not suffer harm commensurate with a full year's tuition because it met its enrollment projections, so enforcing the liquidated damages would result in a windfall. The dissent maintained that mitigation is a separate concept from liquidated damages and should be considered when evaluating the validity and equity of such clauses based on actual losses.

Barrie School v. Patch

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