Court Opinion

ID: 7920171
Source: CourtListenerOpinion
Date Created: 2022-09-08 22:20:43.868018+00
Date Added: 2024-06-11T16:32:59.266266
License: Public Domain

BELL, C.J.
The Majority, agreeing that the liquidated damages clause embodied in § 3 of the re-enrollment agreement (“the Agreement”) between the appellant, The Barrie School (“the School”), and the appellees, Mr. and Mrs. Patch (“the Patches”), and on which the trial courts relied, is valid, reverses the judgment of the Circuit Court for Montgomery County because it concludes that where the liquidated damages clause is valid, there is no duty to mitigate. Barrie School v. Patch, 401 Md. 497, 512-13, 933 A.2d 382, 391-92 (2007). I disagree. I am troubled by the result reached by the Majority, as it undermines basic principles of contract law pertaining to the equity and reasonableness of contract remedies.
It is a long-held, and well-settled, general principle of contract law that contract remedies are to be compensatory, not punitive. Restatement (Second) of Contracts § 356, comment a (1981) (stating that “the central objective behind the system of contract remedies is compensatory, not punitive”). See 24 Richard A. Lord, Williston On Contracts § 65:1, pp. 213-15 (4th ed.2002) (noting that agreements pertaining to “the amount of damages recoverable ... will generally [be] enforced ... so long as the amount is not unconscionable, is not determined to be an illegal penalty, and is not otherwise violative of public policy.”); 11 Joseph M. Perillo, Corbin on Contracts, § 58.1, p. 396 (2006) (recognizing “the traditional equitable doctrine of unconscionability ... as a foundation for the rule against the enforcement of contractual penalties”). Liquidated damages provisions are not immune to this general rule. John Cowan, Inc. v. Meyer, 125 Md. 450, 462-63, 94 A. 18, 21 (1915). See 8 Maryland Law Encyclopedia, Damages § 51, pp. 104-105 (2001) (“In determining the scope of a provision in a contract for liquidated damages, it will be *520interpreted according to the rules applicable to contracts generally”).
This Court has defined liquidated damages as 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.” Traylor v. Grafton, 273 Md. 649, 661, 332 A.2d 651, 660 (1975), citing Massachusetts Indem. Life Ins. Co. v. Dresser, 269 Md. 364, 368, 306 A.2d 213, 216 (1973); Board of Education of Talbot County v. Heister, 392 Md. 140, 156, 896 A.2d 342, 352 (2006). More particularly, we have held that a liquidated damages clause is “an agree[d] upon and name[d] sum ... in lieu of anticipated damages which are in their nature uncertain and incapable of exact ascertainment.” Baltimore Bridge Co. v. United Railways & Electric Co., 125 Md. 208, 214, 93 A. 420, 422 (1915). Accord Anne Arundel County v. Norair Eng’g Corp., 275 Md. 480, 492, 341 A.2d 287, 293 (1975). Accord United Cable Television of Baltimore Ltd. v. Burch, 354 Md. 658, 674, 732 A.2d 887, 896 (1999). Such a clause will be upheld “unless the amount so agreed upon and inserted in the agreement be grossly excessive and out of all proportion to the damages that might reasonably have been expected to result from such a breach of contract.” Id.1 Furthermore, *521“the surrounding facts and circumstances connected therewith with which the parties are confronted at the time of [a contract’s] execution” should be considered “in order to ascertain the intention of the parties, which is one of the essential factors in deciding whether the stipulation is for liquidated damages or is a penalty.” Id.
Thus, the purpose of a liquidated damages clause is to establish a fixed sum as the amount of damages for a breach of contract as to which damages cannot be ascertained easily. It does not follow, however, that merely because a contract contains a liquidated damages clause, which facially is not punitive, upon breach, damages in the amount stipulated automatically will be awarded to the nonbreaching party. Even the Majority recognizes and correctly points out, “that one of the most difficult and perplexing inquiries encountered in the construction of written agreements is determining whether a contractual clause should be regarded as a valid and enforceable liquidated damages provision or as a penalty[,] ... and that if there is doubt whether a contract provides for a liquidated damages or penalty, the provision will be construed as a penalty.” 401 Md. at 510, 933 A.2d at 390 (internal quotations and citations omitted). Before there will be an award of liquidated damages, then, it must be determined whether the clause is valid.
Integral to the inquiry into the validity of a liquidated damages clause is determining whether the clause is fair and reasonable. The vantage point from which that determination is made is critical to, and may be dispositive of, that inquiry. The Majority maintains that “the time of the contract formation is the appropriate point from which to judge the reasonableness of a liquidated damages provision.” 401 Md. 497, 509, 933 A.2d 382, 389. Focusing exclusively on this “prospective view”2 leads the Majority to the conclusion it reaches.
*522There is another “view,” however. Because the validity of a liquidated damages does not become an issue until one of the parties breaches the contract to which it relates, it follows, logically, that the review of a liquidated damages clause to determine whether it is a penalty should include the effect of the breach, at the least, whether actual damage have been incurred. Commenting on this “retrospective view,” the first Restatement of Contracts noted:
“If the parties [to an agreement] honestly but mistakenly suppose that a breach will cause harm that will be incapable or very difficult of accurate estimation, when in fact the breach causes no harm at all or none that is incapable of accurate estimation without difficulty, their advance agreement fixing the amount to be paid as damages for the breach ... is not enforceable.”
§ 339 at comment e (emphasis added). The second Restatement is to like effect, stating:
“[T]wo factors combine in determining whether an amount of money fixed as damages is so unreasonably large as to be a penalty. The first factor is the anticipated or actual loss caused by the breach____The second factor is the difficulty of proof of loss----If the difficulty of proof of loss is great, considerable latitude is allowed in that approximation of anticipated or actual harm. If, on the other hand, the difficulty of proof of loss is slight, less latitude if allowed in that approximation. If, to take an extreme case, it is clear *523that no loss at all has occurred, a provision fixing a substantial sum as damages is unenforceable.”
§ 356 at comment b (emphasis added). See Mattingly Bridge Co., Inc. v. Holloway & Son Const. Co., 694 S.W.2d 702, 705 (Ky.1985), in which the Supreme Court of Kentucky, adopting Restatement (Second) Contracts § 356(1) (1981) “as a reasonable expression of the rule applicable to liquidated damages”3 acknowledged that liquidated damages clauses are “useful commercial tool[s] to avoid litigation to determine actual damages,” subject, however, to two restrictions: “they should be used only (1) where the actual damages sustained from a breach of contract would be very difficult to ascertain and (2) where, after the breach occurs, it appears that the amount fixed as liquidated damages is not grossly disproportionate to the damages actually sustained.” (emphasis added). As articulated further by Professor Corbin:
“The probable injury that the parties had reason to foresee is a fact that largely determines the question whether they made a genuine pre-estimate of that injury, but the justice and equity of enforcement depend also upon the amount of injury that has actually occurred.... It is to be observed that hindsight is frequently better than foresight, and that, in passing judgment upon the honesty and genuineness of the pre-estimate made by the parties, the court cannot help but be influenced by its knowledge of subsequent events.”
*524Corbin on Contracts, Vol. 11, § 58.11 at pp. 457-58 (emphasis added).
The viability of a liquidated damages clause, thus, does not depend solely on the fixed amount for which the parties contracted; rather, all of the surrounding circumstances are important, those existing at the time of contracting, as well as those existing at the time of the breach, and they include consideration of the actual damages sustained. See Baybank Middlesex v. 1200 Beacon Props., Inc., 760 F.Supp. 957, 964 (D.Mass.1991) (“In order to determine whether the liquidated damages provision is valid, this Court must examine the reasonableness of the liquidated damages provision, both retrospectively, and at the time the parties agreed to it.”) (emphasis added); Independent Sch. Dist. v. Dudley, 195 Iowa 398, 192 N.W. 261, 263 (Iowa 1923) (“[T]he tendency of the courts in recent years has been to look into all the circumstances and give effect to such an agreement only so far as equity and good conscience will permit, and if the sum stipulated is out of reasonable proportion to the loss or injury actually sustained ... it will be treated as a penalty only.”); Lake Ridge Academy v. Carney, 66 Ohio St.3d 376, 613 N.E.2d 183, 188 (1993) (“[W]hen a stipulated damages provision is challenged, the court must step back and examine it in light of what the parties knew at the time the contract was formed and in light of an estimate of the actual damages caused by the breach.”) (emphasis added). This is, in my view, the only way in which to be completely fair to both parties.
In the case sub judice, there is no doubt that the Patches breached their Agreement with the School. On the other hand, the record indicates that the School did not suffer harm commensurate to the sum fixed as liquidated damages. While the Patches’ daughter did not attend the School, it is undisputed that the School met its enrollment projections for that year; there was “no empty desk” for which budgetary projections were made, yet not realized.4 Looking at the provision retro*525spectively, it is clear that the School should not be awarded a full year’s tuition, as this amount is grossly disproportionate to, and in excess of, the harm it actually suffered. See In re Dow Corning Corp., 419 F.3d 543, 549-50 (6th Cir.2005) (stating that “if the liquidated damages are disproportionate to actual damages, the [liquidated damages] clause will not be enforced and recovery will be limited to the actual damages proven”); Northwest Fixture Co. v. Kilbourne & Clark Co., 128 F. 256, 261 (9th Cir.1904) (noting that “where the sum named in the contract to be paid on a breach thereof is evidently wholly disproportionate to the damage actually sustained, or where it is shown that no actual damage has been sustained by the breach, the courts will deem the parties to have intended to stipulate for a mere penalty to secure performance.”); Days Inns Worldwide v. Mandir, Inc., 393 F.Supp.2d 1240, 1249 (W.D.Okla.2005) (asserting that a “liquidated damages provision in a contract will be considered a penalty, and therefore unenforceable, if the amount provided for in the provision is ‘manifestly disproportionate’ to the amount of actual damages suffered.”); Wirth & Hamid Fair Booking v. Wirth, 265 N.Y. 214, 192 N.E. 297, 301 (1934) (stating that liquidated damages “must bear reasonable proportion to the actual loss”).
This conclusion is not inconsistent with the holding in Lake Ridge Academy v. Carney, supra, on which the Majority relies. The Majority cites Lake Ridge for the proposition that “a year’s tuition constitutes a reasonable liquidated sum for breach of a school enrollment contract.” 401 Md. at 512, 933 *526A.2d at 391.5 Moreover, it states that the liquidated damage amount “was a reasonable forecast of just compensation for potential harm caused by a breach of the Agreement. The damages contemplated in the Agreement were neither grossly excessive nor out of all proportion to those which might have been expected at the time of contracting.” Id. While perhaps correct about the reasonableness of the School’s estimate when the contract was executed,6 the Majority does not consider, or even take into account, the actual damages sustained by the School. See Shallow Brook Associates v. Dube, 135 N.H. 40, 599 A.2d 132, 137-38 (1991) (recognizing that a liquidated damages clause will not be enforced if the actual damages which occurs at the time of breach can easily be established and are substantially lower than the amount stipu*527lated, even if the fixed sum was a reasonable estimate at the time of contract execution). See also, 24 Williston On Contracts § 65:17 at p. 304 (“[A] court may consider the damages actually sustained following the breach in evaluating the reasonableness of the estimate, reasoning that a substantial disparity between the amount agreed to as stipulated damages and the actual damages suffered may tend to show that the amount chosen was in fact unreasonable at the time of contracting.”).
In Lake Ridge, premised on the fact that “the school budget process is often an uncertain science [and that] Lake Ridge would be unable to calculate and prove the precise damages caused by the loss of one student’s tuition,” 613 N.E.2d at 188-89, the Ohio Supreme Court held that “the parent had breached the contract and the school was entitled to the full tuition as agreed upon in the contract.” 401 Md. 497, 515, 933 A.2d 382, 393. The Lake Ridge court elucidated:
“[T]he contract as a whole [is not] unreasonable. The headmaster testified that August 1 was chosen as the day before which notice of cancellation had to be given simply because the school had to know in order to meet its financial commitments. Carney had almost five months after he signed the contract to decide whether to cancel it. Because Lake Ridge’s financial commitments became more firm as the school year approached, it is reasonable to assume that by August 1 the school was relying on Carney’s full tuition payment.
“Finally, damages in the amount of the full tuition are not disproportionate to the actual damages suffered by Lake Ridge. Because by August 1 the Lake Ridge budget was nearly finalized and it assumed revenues which included Carney’s full tuition, it is not unreasonable to conclude that Lake Ridge’s actual damages were the equivalent of one full tuition. The headmaster testified that if Lake Ridge enjoyed any savings from Michael Carney’s withdrawal, they were ‘minuscule.’ While we cannot say that Lake Ridge’s actual damages were exactly equivalent to full tuition, we *528can say with conviction that full tuition is not disproportionate to the school’s actual damages.”
613 N.E.2d at 189 (emphasis in original). In Lake Ridge, the court focused on the actual damages the school suffered, in addition to the prospective damages on which the parties agreed as of the time of making the contract. Although it found the liquidated damages clause to be valid and, thus, compelled the parents to pay the agreed year’s tuition, it did so because the school, in the court’s view, suffered damages proportionate to the stipulated damages.
In the case sub judice, on the other hand and as stated earlier, the School had already met its enrollment projections when the 2004-2005 school year commenced. Thus, it logically follows, and in the instant case there is no evidence to the contrary,7 that the School, unlike Lake Ridge Academy, was not “relying” on, in the same way that Lake Ridge Academy was, the Patches’ tuition payment for any of its financial commitments.
Moreover, unlike the withdrawal of the student in Lake Ridge, which was just a week before commencement of the term, albeit after the specified deadline, the Patches withdrew their daughter five weeks prior to the beginning of the school term. Whether this difference matters really is the question that must be answered. To answer that question, we, like the Lake Ridge court, must examine the actual damages suffered by the School. When that is done, it is my opinion that this Court simply will not be able to say, with conviction, that the “liquidated damages,” the stipulated sum of a full year’s *529tuition, is in proportion to the actual damages suffered by the School. Indeed, the facts found by the District Court indicate that the School was not harmed by the Patches’ late withdrawal of their daughter. Therefore, I believe that giving the School the relief it seeks would result in a windfall for it, i.e,., the School would be doubly compensated. See JKC Holding Co. v. Washington Sports Ventures, Inc., 264 F.3d 459, 468 (4th Cir.2001) (“Liquidated damages provisions are based on the principle of just compensation and may not be used to reap a windfall or to secure performance by the compulsion of disproportion.”) (citation omitted); Lake River Corp. v. Carborundum Co., 769 F.2d 1284, 1290 (7th Cir.1985) (where damage formula was designed always to assure nonbreaching party more than its actual damages, the court, calling the effect of the clause “a huge windfall,” found the clause to be a penalty, rather than a liquidation of damages). See also Priebe & Sons v. U.S., 332 U.S. 407, 418, 68 S.Ct. 123, 129, 92 L.Ed. 32 (1947) (Frankfurter, J., dissenting) (“The essence of the law’s remedy for breach of contract is that he who has suffered from a breach should be duly compensated for the loss incurred by non-performance. But one man’s default should not lead to another man’s unjust enrichment.”). See e.g. Northwest Fixture Co. v. Kilbourne & Clark Co., 128 F. at 261 (stating that “no provision in a contract for the payment of a fixed sum as damages, whether stipulated for as a penalty or as liquidated damages, will be enforced in a case where the court can see that no damages have been sustained”); Norwalk Door Closer Co. v. Eagle Lock & Screw Co., 153 Conn. 681, 220 A.2d 263, 268 (1966), quoting The Colombia, 197 F. 661, 664 (S.D.Ala.1912) (same): Wood v. Niagara Falls Paper Co., 121 F. 818, 819(2d Cir.1903) (noting that “when it is made to appear in an action for [a] breach that no actual damages have arisen, notwithstanding the parties have agreed upon stipulated damages, the party in default is entitled to be relieved”); Radloff v. Haase, 196 Ill. 365, 63 N.E. 729, 730 (1902) (holding that, when the plaintiff suffered no injury, the stipulated damages are a penalty, not liquidated damages); Crawford v. Allen, 189 N.C. 434, 127 S.E. 521, 525 (1925) *530(stating that “[a] court of equity, which does not favor forfeitures, and will not enforce penalties, but seeks to do justice in accordance with the rights of both parties, as determined by an enlightened conscience, will not be swift to sustain an undertaking to pay liquidated damages, where there has been no injury and no loss.”).
The Majority rejects “no-actual-harm” as a defense. It argues that “[s]uch a defense negates the benefit of an agreed-upon or stipulated damages clause[.]” 401 Md. 497, 515, 933 A.2d 382, 393. The Majority also believes that “[i]t would also breed uncertainty in the calculation of damages, because if we were to accept the no-actual-harm defense, why would courts not then give greater damages than contemplated when the damages actually exceeded the stipulated amount?” Id. This view is not supported by the precedent on which the Majority itself relies. In Baltimore Bridge, this Court opined:
“It may afterwards be disclosed that the damages actually sustained are more or less than those anticipated at the time of the execution of the contract. If less, this fact would not characterize or stamp the stipulation as a penalty unless it was so exorbitant as to clearly show that such amount was not aimed at in a bona fide effort, made at or before the execution of the contract, to estimate the damages that might have been reasonably expected to result from a breach of it, and that it was named as a penalty for such breach. And, on the other hand, if the amount stipulated was found to be inadequate, a greater amount could not be recovered for such breach, because of the agreement between the parties that the amount so named should be in lieu of the damages resulting therefrom.”
125 Md. at 215, 93 A. at 422-23. This is consistent with my position and with principles of fairness and equity; liquidated damages clauses limit recovery where the actual damages suffered are greater, while yet allowing exorbitant, excessive sums to be challenged. This is not at all contrary to the purpose of such clauses.
*531To be sure, the School is entitled to compensation for any and all damages it suffered as a result of the contract breach. When, however, considered retrospectively, it is determined that the School’s recovery will be excessive, the liquidated damages clause that provides for that recovery is invalid and unenforceable. That simply means that the School will have to prove its actual damages as it would in any breach of contract action and will be required, moreover, to mitigate its damages, if the circumstances make that appropriate.
The purpose of imposing a duty to mitigate damages is to “encourag[e] the injured party to attempt to avoid loss.” Restatement (Second) of Contracts § 350 at comment a. This Court has held, in accordance with this general “avoidable consequences” rule of damages, that “the ordinary rule with respect to minimization of damages ... [is] that ‘damages are not recoverable if the consequences of a breach are avoidable. In other words, a plaintiff is not entitled to a judgment for damages for a loss that he could have avoided by a reasonable effort without risk of additional loss or injury.’ ” Sergeant Co. v. Pickett, 285 Md. 186, 191-92, 401 A.2d 651, 654 (1979) quoting M & R Contractors & Builders v. Michael, 215 Md. 340, 354-55, 138 A.2d 350, 358 (1958); Circuit City Stores, Inc. v. Rockville Pike Joint Venture Ltd. Partnership, 376 Md. 331, 355-56, 829 A.2d 976, 990 (2003).
I am aware of the relationship between the mitigation of damages and liquidated damages clauses, and, indeed, do not dispute that, as the Majority notes, “[liquidated damages differ fundamentally from mitigation of damages.” 401 Md. at 513, 933 A.2d at 392. As to “the difference” between these two concepts, the Majority states:
“While mitigation is part of a court’s determination of actual damages that have resulted from a breach of contract, liquidated damages is the remedy the parties to a contract have determined to be proper in the event of a breach. Where the parties to a contract have included a reasonable sum that stipulates damages in the event of breach, that sum replaces any determination of actual loss.... It follows naturally that once a court has determined that a liquidated *532damages clause is valid, it need not make further inquiries as to actual damages. This includes a determination of whether the parties attempted to mitigate damages resulting from breach.”
Id. (Internal quotations and citations omitted) (emphasis added). Thus, relying on Lake River Corp. v. Carborundum Co., 769 F.2d 1284 (7th Cir.1985), it reasons, relevant to the case sub judice:
“[T]he purpose of § 3 of the Agreement would be blunted if The Barrie School were required to mitigate damages. The parties to the contract determined that a certain sum would be paid in order to avoid the necessity of determining actual damages that might have resulted from breach. As a necessary conclusion, § 3 of the Agreement was a comprehensive sum that eliminated the need to calculate actual losses, including any mitigation of damages that might have occurred---- Because mitigation of damages is part of a post-breach calculation of actual damages, in the absence of [a] statute mandating mitigation of damages, there exists no duty to mitigate damages where a valid liquidation damages clause exists.”
401 Md. at 513-14, 933 A.2d at 392 (internal quotations and citations omitted).
I do not agree. The liquidation of damages and the mitigation of damages are, indeed, distinct and separate concepts, which must be treated as such, i.e., there is no exception to the general contractual duty to mitigate simply because a fixed sum has been agreed upon by the parties in advance. That is to say, whether mitigation of damages applies, or not, should be determined when, post-breach, a court considers whether there have been actual damages incurred at all.8
*533I do not disagree with the proposition, offered by the Majority, that once a clause is determined to be valid, no inquiry should be made into whether mitigation is appropriate, reasonable. It is the process of making the validity determination that is problematic. It is my position that, in order to determine that the clause is, in fact, valid, it must be examined in context, both at the time of contracting and at the time of trial, after the breach has occurred. If the clause is upheld as valid, i.e., not disproportionate or excessive to the actual damages sustained, then the breaching party may not challenge, or seek to reduce, the amount of damages due to the non-breaching party; however, if the clause is determined to be punitive, then mitigation, as a separate concept, must be considered. This is not contrary to the view that:
“[w]hen the parties have made a reasonable forecast as to the just compensation for an injury that later in fact occurs and that is very difficult to estimate accurately, the defendant should never be allowed to introduce evidence the purpose of which is to substitute the estimate of a jury for the prior reasonable estimate of the parties. But the *534defendant should be allowed to show that there has in fact been no injury at all, or that the injury is not the one that the parties in fact estimated in advance.”
Corbin on Contracts, Vol. 11, § 58.1 at p. 463. See O’Brian v. Langley, 256 Va. 547, 507 S.E.2d 363, 365 (1998) (holding that a “party opposing the imposition of liquidated damages is entitled to conduct discovery and present relevant evidence that the damages resulting from breach of the contract are susceptible of definite measurement or that the stipulated damages are grossly in excess of the actual damages suffered by the nonbreaching party. Upon proof of either of these elements, a liquidated damages clause becomes an unenforceable penalty.”) (citation omitted). Thus, viewing a liquidated damages provision in retrospect, the non-breaching party’s failure to mitigate renders the clause a penalty and, thus, invalid. The clause is likewise invalid where the non-breaching party’s damages, in effect, have been—because not excessive, or exorbitant—mitigated. That arguably is the situation in the instant matter.
As stated earlier, a liquidated damages clause should not be enforced simply because it exists. See American Car Rental, Inc. v. Comm’r of Consumer Prot, 273 Conn. 296, 869 A.2d 1198, 1209-10 (2005) (noting that “[t]he mere fact that expected damages resulting from breach are uncertain in amount or difficult to prove does not justify enforcement of whatever amount the contract includes as damages for breaeh[.]”); O’Brian, 507 S.E.2d at 365 (stating that “[t]he fact that a party enters into a contract containing a liquidated damages clause does not prevent that party from later litigating the validity of the clause.”). Efforts to mitigate damages should be made when it is reasonable to do so. Similarly, where the non-breaching party has suffered no damages, or relatively insignificant damages in comparison to the stipulated sum, due to the breach, or has taken steps that mitigated the damages, that fact must be taken into account. See, e.g., Perez v. Aerospace Academy, Inc., 546 So.2d 1139, 1141 (Fla.App.1989) (stating that “where the school actually fills the place of the absent student, the school’s damages will be mitigated to the *535extent of the new student’s payments. To conclude otherwise would create a dual recovery for the school and a penalty to the parent[.... Thus,] insofar as the liquidated damages clause fails to provide credit for sums received from a replacement student (if any), the clause operates as a penalty.”). I do not agree, in short, contrary to the Majority’s view, that a liquidated damages clause automatically eliminates the need to calculate actual losses and, as required, to consider mitigation.
To uphold the liquidated damages clause in the case sub judice would be unfair to the Patches. General contract principles make that clear. I would affirm the judgment of the Circuit Court.
For the foregoing reasons, I dissent.

. The Majority articulates the rule of liquidated damages as follows:
"There are three essential elements of a valid and enforceable liquidated damages clause. First, the clause must provide in clear and unambiguous terms for a certain sum. Secondly, the liquidated damages must reasonably be compensation for the damages anticipated by the breach. Thirdly, liquidated damages clauses are by their nature mandatory binding agreements before the fact which may not be altered to correspond to actual damages determined after the fact.”
401 Md. at 509, 933 A.2d at 389, quoting Board of Education of Talbot County v. Heister, 392 Md. 140, 156, 896 A.2d 342, 352 (2006) (emphasis added).
In Heister, we went on to state that, rather than the language of the clause, "the decisive element is the intention of the parties,” which is "to be gleaned from the subject matter, the language of the contract and the circumstances surrounding its execution.” Id. As will be seen, while I do not deny that the intention of the parties on the question is *521important, I do not agree that it is decisive. The effect of the clause is, in my view, just as, if not more, important.

. Addressing the issue of when a liquidated damages clause will be deemed invalid, the Majority quotes Williston on Contracts:
*522"[A] liquidated damages provision will be held to violate public policy, and hence will not be enforced, when it is intended to punish, or has the effect of punishing, a party for breaching the contract, or when there is a large disparity between the amount plausible under the provision and the actual damages likely to be caused by a breach; so that it in effect seeks to coerce performance of the underlying agreement by penalizing non-performance and making a breach prohibitively and unreasonably costly.”
401 Md. 497, 510, 933 A.2d 382, 390 (quoting 24 Williston on Contracts § 65:1, p. 215 (4th ed.2002)). By acknowledging that "effect” may render a clause invalid, Williston arguably also acknowledges the "retrospective view.” The Majority nevertheless does not address it in its reasoning.

. Restatement (Second) Contracts § 356(1) (1981) provided:
"Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.”
The court defined "anticipated and actual loss,” as used in the Restatement, stating
" 'Anticipated loss’ refers to the time of the making of the contract. 'Actual loss' refers to the circumstances upon occasion of the breach. These are two prongs, which apply alternately. If the award of liquidated damages exceeds any reasonable limitation by either one or the other, to such extent it is unenforceable.”
Mattingly Bridge Co., Inc. v. Holloway & Son Const. Co., 694 S.W.2d 702, 705 (Ky.1985) (emphasis added).

. The School maintains that there was no empty "kindergarten" seat, and, thus, that the Patches’ daughter was not replaced. This argument *525is not helpful to the School. The fact that there was no empty desk in the section in which the Patches’ daughter was to be enrolled did not change the overall enrollment of the School, which both parties agreed met, and even exceeded, budgetary expectations. On this issue, the District Court found that "[t]he Barrie School [had] already enrolled more students than its budget projections called for.” It is, thus, logical to expect that the overall enrollment projections would determine whether the School was damaged, i.e. actually lost money, due to the Patches' withdrawal of their daughter, not whether the number of a specific section or class projection was realized.

. Other cases cited by the Majority for this proposition, see 401 Md. at 512, 933 A.2d at 391, are distinguishable. Those cases involve students who have been either expelled or left school voluntarily. Those students, thus, all attended their subject respective institutions during the term. Therefore, the schools had allotted resources for those students, and presumably relied on their tuition payments.
In Wentworth Military Academy v. Marshall, the court reasoned:
'In several cases the right of a school to recover the full annual tuition charge when the pupil was expelled for proper cause, or left without reason before the close of the year has been allowed. The only justification for this can be the fact, if it is a fact, that one less pupil involves no saving of expense to the school.’ ”
225 Ark. 591, 283 S.W.2d 868, 870 (1955), quoting Williston on Contracts, Vol. 5, § 1352 (1937) (emphasis added). The Wentworth Court followed the "retrospective view,” noting that the standard of looking for a "savings,” would be impossible without taking into consideration the actual damages that may, or may not, have been incurred.

. What the School knew when the contract was executed is not particularly clear from the record; there is conflicting evidence pertaining to the precise moment at which the School was aware that its budgetary projections were met. For that reason, I agree with the District Court that there was "no fraudulent behavior on the part of the people at The Barrie School[;3” however, to the extent that it is possible that the School already knew that its budgetary projections had been met when it contracted with the Patches, would further illustrate that one year’s tuition is not only disproportionate to its actual damages, but that this sum was excessive at the time of contracting and was intended to be a penalty, rather than a valid estimation of the sum of the School's anticipated damages.

. As mentioned earlier, the School relies on the theory that there was "an empty seat” in the kindergarten class and the fact that the clause should be upheld because of the uncertainty of its budgeting process. The record, however, is devoid of any proof that the School actually suffered harm as a result of the Patches' withdrawal of their daughter. And, although the Circuit Court may have been correct in concluding that "it would be next to impossible to assign an exact amount as to the impact of losing one child for the school year[,]” if, or once, the enrollment projections for the School were met, whether or not an "empty seat” in a particular class was, in fact, filled, the provision became a penalty to the Patches.

. It is important to note that the language from Lake River, relied upon by the Majority, is taken out of context. In that case, holding that it was necessary to refigure each party's damages, the court found the liquidated damages clause, which was based on a “formula” that would invariably result in a disproportionate award of damages to the non-breaching party, to be a penalty. The mitigation of damages argument about which the Lake River court spoke, was aimed at validating the *533liquidated damages clause; it was an attempt by the non-breaching party to justify the liquidated damages clause itself. The non-breaching party, Lake River Corp., urged the court to uphold the clause as valid, arguing that, because it was required by general contract principles to mitigate its damages in the event of a breach, the "formula" would never result in the foreseen excessive amount. Lake River was, in effect, attempting to minimize the windfall which it knew it was getting by virtue of its damages formula.
On the issue, and directly following the excerpt upon which the Majority relies, the court commented:
"It would seem therefore that the clause in this case should be read to eliminate any duty of mitigation, that what Lake River is doing is attempting to rewrite the clause to make it more reasonable, and that since actually the clause is designed to give Lake River the full damages it would incur from breach (and more) even if it made no effort to find a substitute use for the equipment that it bought to perform the contract, this is just one more piece of evidence that it is a penalty clause rather than a liquidated clause."
Lake River, 769 F.2d at 1291. Thus, the Lake River court was not, as the Majority posits, rejecting mitigation as a factor to be considered when determining whether such a clause is valid. It is evident, moreover, that the Lake River court employed the retrospective view in its analysis.