H.J. McGrath Co. v. Wisner

Brief Fact Summary.

Plaintiff sued in the Circuit Court for Baltimore County, seeking the balance of $300 when Defendant deducted $300 from its payment to Plaintiff because Plaintiff did not deliver his entire crop of tomatoes as required. Defendant made a special plea of set-off. Plaintiff filed a demurrer to the special plea, which was sustained. The case was then removed to the Superior Court for Baltimore City, and a judgment was entered for Plaintiff in the amount of $300. Defendant appealed.

Synopsis of Rule of Law.

A provision for liquidated damages that penalizes a breaching party cannot be enforced.

Facts.

On March 7, 1944, G. Herbert Wisner (Plaintiff) agreed to sell to H.J. McGrath Co. (Defendant) his entire tomato crop grown during the season of 1944 at $28 per ton. Clause 12 of the agreement provided that, if Plaintiff failed to deliver the entirety of his tomato crop, he would be required to pay $300 in liquidated damages. Plaintiff did not deliver his entire crop of tomatoes as required. In response, Defendant deducted $300 from its payment to Plaintiff. Plaintiff sued in the Circuit Court for Baltimore County, seeking the balance of $300. Defendant made a special plea of set-off. Plaintiff filed a demurrer to the special plea, which was sustained. The case was then removed to the Superior Court for Baltimore City, and a judgment was entered for Plaintiff in the amount of $300. Defendant appealed, arguing that its plea of set-off was proper because Clause 12 of the agreement provided for liquidated damages and did not constitute a penalty.

Issue.

Whether a provision for liquidated damages that penalizes a breaching party can be enforced.

Held.

No. The Superior Court’s ruling is reversed. A provision for liquidated damages that penalizes a breaching party cannot be enforced.

Discussion.

A provision fixing the amount of damages prior to a breach will not constitute a penalty if: (1) the amount fixed is a reasonable estimate of just compensation for the harm caused by the breach, and (2) the harm caused by the breach is not susceptible to accurate calculation. Where the same amount of fixed damages is set for both important and trivial breaches, the parties have not sought to reasonably estimate just compensation. Here, the fixed damages are not proportionate to the possible extent of a future breach. Moreover, it is not difficult or impossible to ascertain prospective damages for Plaintiff’s failure to deliver his tomato crop. Therefore, this court finds that Clause 12 constitutes a penalty and is unenforceable.