Opinion ID: 687889
Heading Depth: 1
Heading Rank: 2

Heading: The $25,000 per month provision

Text: 20 The district court's findings regarding whether the $25,000 clause was a penalty is a question of law, Anne Arundel County v. Norair Engineering Corp., 275 Md. 480, 341 A.2d 287, 294 (1975); H.J. McGrath Co. v. Wisner, 189 Md. 260, 55 A.2d 793, 795 (1947), and the findings regarding whether the clause was agreed to by the parties is a question of fact. We review the former de novo, as we do all issues of contract construction, Nehi Bottling Co., Inc. v. All-America Bottling Corp., 8 F.3d 157, 162 (4th Cir.1993), and the latter for clear error, F.R.Civ.P. 52(a). 21 Turning first to the question as to whether the provision was agreed to by the parties, the Tomsco doctors have argued that Tomsco never agreed to the following clause in the November letter signed by both parties: If less than a full year of service is taken, the rate per month is $25,000. The magistrate judge's finding that the doctors were capable of reading all sentences in the November letter, and by their signatures agreed to the terms of the letter, including that clause, was not clearly erroneous. The magistrate judge was a fact finder and his judgment on credibility is to be deferred to. Here the magistrate judge stated that the Tomsco doctor's testimony that the doctor did not know about the $25,000 provision was not credible. 22 In the alternative, Tomsco has argued that [i]f less than a full year ... is taken should be construed as creating a $25,000 per month option in the contract, an option never exercised by Tomsco because Tomsco chose $7,500 per month on a month-to-month basis instead of $25,000 for a specific period of less than one year. The argument, in substance, is that the $25,000 was an alternative, unexercised option under the contract rather than a liquidated damages provision. Cf. Carlyle Apartments Joint Venture v. AIG Life Ins. Co., 333 Md. 265, 635 A.2d 366, 371 (1994) ( 'Sometimes parties attempt to disguise a provision for a penalty by using language that purports to make a payment of the amount an alternative performance under the contract ....'  (quoting Restatement (Second) of Contracts Sec. 356)). Construing the contract de novo, Nehi Bottling, 8 F.3d at 162, we, like the magistrate judge, reject such an improbable interpretation of the contract. 23 The next question is whether the $25,000 per month agreed-upon term was an enforceable liquidated damages clause or an unenforceable penalty clause. Under Maryland law, the situs of the instant contract, a liquidated damages clause is enforceable only if it is a reasonable estimate of just compensation at the time the agreement was made. Massachusetts Indemnity & Life Ins. Co. v. Dresser, 269 Md. 364, 306 A.2d 213, 216 (1973). Additionally, a liquidated damages clause is not valid and enforceable unless actual damages for breach can not be accurately calculated at the time the contract is executed. Goldman v. Connecticut General Life Ins. Co., 251 Md. 575, 248 A.2d 154, 158 (1968). If a clause does not meet those conditions, i.e., if it is unreasonable as a forecast of compensation at the time made, or if it is clear that actual damages will be easy to calculate, it is an unenforceable penalty clause. Whether a provision is a penalty or an enforceable liquidated damages clause is determined in light of the circumstances at the time of contracting, not after breach. Baltimore Bridge Co. v. United Railways & Electric Co., 125 Md. 208, 93 A. 420, 422 (1915), quoted with approval in Schrier v. Beltway Alarm Co., 73 Md.App. 281, 533 A.2d 1316, 1320 (1987). See also Traylor v. Grafton, 273 Md. 649, 332 A.2d 651, 659-65 (1975) (surveying the law regarding the distinction between penalties and liquidated damages). 24 In the circumstances present at the time of contracting here, the actual amount of damages were impossible to predict with any accuracy; Fonar had not yet inspected the MRI machine because Tomsco wanted a technician to repair the machine immediately, without waiting for an inspection. Whether the liquidated damages amount was a reasonable estimation of compensatory damages at the time of contracting, however, is a question to which the answer depends on the timing of the breach. The damages were fixed on a monthly basis, in that Tomsco by the contract terms had to pay the $25,000 only for those months in which it used the machine, and thus the damages were calculated more precisely than, for example, a lump sum for failure to maintain the contract for a year. Such lump sums have been declared invalid as penalties. See Louis Dreyfus Corp. v. 27,946 Long Tons of Corn, 830 F.2d 1321, 1331-32 (5th Cir.1987) (invalidating clause providing for a $30,000 per day charge for failure to vacate a loading berth for any period of time which was part of a day, even a single hour, when the berth was normally rented by the hour and $30,000 represented 24 hours of rental). However, the amount was estimated based on Fonar's estimate of start-up costs in getting the machine operating again, which would perhaps be, according to Fonar's own witness, $25,000 per month for several months. Looking at the contract at the time it was made, ex ante breach, the terms of the provision would allow Fonar to recover $25,000 from Tomsco even if Tomsco had not breached until the eleventh month, but had failed to maintain the contract the full year. A $275,000 liquidated damages provision for eleven months of servicing (even reduced by a set-off of $82,500, assuming Tomsco would have paid $7,500 for each of the eleven preceding months) would be unreasonable, even grossly excessive and all out of proportion see Baltimore Bridge Co., 93 A. at 422 (the amount will be found to be a penalty if grossly excessive and out of all proportion to the damages that might reasonably have been expected to result), and thus unenforceable as a penalty. 25 When the contract was formed, Fonar apparently was willing to accept as a reasonable forecast of its expenses $90,000, the amount Fonar would receive for servicing if the contract remained in force for twelve months as contemplated (12 months X $7500 per month). The willingness of Fonar to contract for a maximum aggregate payment of $90,000 if the contract were to run for a full year, the anticipated life of the agreement, in effect sets a cap on a reasonable payment for services rendered. Hence, we interpret the $25,000 clause to be an enforceable liquidated damages provision only up to $90,000. The $90,000 figure appears a reasonable estimate of the value of services projected to be rendered for a five month period, viewed from the time of contracting. Thus, the damage award here can be no more than $60,000 ($90,000 less $30,000 already paid by Tomsco to Fonar in the $7500 monthly payments).