Brief Fact Summary. The contention of the Barrie School (P) was that it was not required to lessen damages where the liquidated damages provisions of its enrollment contract were valid and did not constitute a penalty, so that the Patches (D), who had breached the enrollment contract were asked to settle the liquidated damages.
Synopsis of Rule of Law. Where parties concur to a valid liquidated sum in the event of a breach, a non-breaching party has no duty to mitigate damages.
Facts. The Barrie School (P), a private school, accepted the enrollment of the Patches (D) daughter, and in the following academic year, both parties entered into a re-enrollment agreement (Agreement). The Agreement included some provisions such as the payment of a non-refundable deposit of $1,000, payment of the tuition balance of $13,490 in two installments and an escape clause which permitted unilateral cancellation provided that the head of the school was notified officially by certified letter before the 31st of May, 2004. Stipulated also under S 3 of the Agreement was the provision that the Patches (D) were obligated to pay the total tuition if they defaulted in meeting the withdrawal deadline. The Agreement was not cancelled by the Patches (D) on or before the 31st of May 2004 but they attempted to cancel by faxing and notifying the school 44 days later. In their notice to the school, the Patches (D) requested for the return of the deposit they had made to the school, but in accordance with the contract, the school requested for the payment of the balance of the full amount of the tuition which the Patches (D) refused to do. This led to the school’s action against the Patches (D) on the grounds that Patches (D) breached the contract. In addition to these allegations, the school demanded a 12% interest and the settling of its attorney fees. On the part of the Patches (D), they alleged that the Agreement was fraudulent, and that it was a contract of adhesion. They also asserted that the damages constituted a penalty, that the Barrie School (P) had the duty to lessen any damages and that the Agreement was not binding because it contravened the state’s anti-competition laws and public policy. The defendants also counterclaimed for a refund of their deposit, interest and attorney’s fee. However, it was discovered that the number of students enrolled for the academic year at issue exceeded the school’s initial budget projections but there was no evidence of mitigation was presented at trial. The trial court held that the contract was not fraudulent and adhesive, that the Patches (D) had breached the contract they entered into with the school. Pertaining to liquidated damages provision, the court ruled that it was valid but held that the failure of the Barrie School (P) to lessen its damages was fatal to its claim. Hence, the court gave judgment in favor of the Patches (D) which the state’s intermediate appellate court also affirmed, but the state’s highest court granted review.
Issue. Where parties concur to a valid liquidated sum in the event of a breach, does a non-breaching party have duty to mitigate damages?
Held. (Raker, J.) No. Where parties concur to a valid liquidated sum in the event of a breach, a non-breaching party has no duty to mitigate damages. The court rejected Patches (D) arguments that the contract was adhesive and unconscionable, and that the lower court rightly ruled in concluding that the Agreement was neither fraudulent nor adhesive. First, the Patches (D) were not forced to enroll their daughter in the Barrie School (P) and the agreement was fair. But the Patches (D) were given the free hand to cancel the entire Agreement upon notification and to receive the full refund of their deposit. Hence, the ruling was reversed and remanded because the business transaction between Patches (D) and Barrie School (P) was conducted at arm’s-length
Dissent. (Bell, C.J.) The conclusion of majority that where a liquidated damages clause is valid, there is no need for the non-binding party to mitigate its damages is wrong. It is clear that the contract was breached by Patches (D) but the evidence before the court shows that the school did not suffer harm commensurate to the sum fixed as liquidated damages.
Discussion. the penalty limitation on liquidated damages clauses under a “freedom of contract” approach should be cancelled and such clauses should be enforced unless they are the product of some defect in the bargaining process, such as fraud or coercion. This position is being advocated by some commentators but others create a presumption that a liquidated damages clause is valid absent a showing that the clause is unconscionable. Still, penalty limitation may be applied to situations where an opportunity and incentive to induce a breach, but otherwise would not enforce the penalty limitation.