Are liquidated damages clauses enforceable in Maryland?

There are three essential elements of a valid and enforceable liquidated damages clause. "First, such a clause must provide `in clear and unambiguous terms' for `a certain sum'[.]" Mass. Indem. & Life Ins., supra, 269 Md. at 368, 306 A.2d at 216 (Citation omitted). "Secondly, the liquidated damages must reasonably be compensation for the damages anticipated by the breach[.]" Mass. Indem. & Life Ins., supra, 269 Md. at 369, 306 A.2d at 216 (Citations omitted). "Thirdly, liquidated damage 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[.]" Id. (Citations omitted). While the language used by the parties is instructive in determining the validity of a liquidated damages clause, "[t]he decisive element is the intention of the parties — whether they intended that the sum be a penalty or an agreed-upon amount as damages in case of a breach and this is to be gleaned from the subject matter, the language of the contract and the circumstances surrounding its execution." Traylor, 273 Md. at 661, 332 A.2d at 660 (Citations omitted).

Like in Holloway v. Faw, Casson & Co., 319 Md. 324, 354, 572 A.2d 510, 525 (1990), where we determined that the contractual language "`the prior year's fee for any clients' ... [could] be calculated with reasonable certainty as a specific sum," we conclude in the present case that the forfeiture provision in the employment contracts establishes a certain sum because "salary already accrued" may be calculated readily and with certainty as a definite amount. In contrast to the conclusion reached in Massachusetts Indemnity & Life Insurance Company v. Dresser, supra, 269 Md. at 368, 306 A.2d at 216, where the amount in question was "not capable of calculation until three years after termination of employment as it [wa]s contingent upon the continued payment of premiums on policies sold," the specific forfeited amount here was ascertainable and ascertained immediately upon the breach.

Next, we conclude that the record in the present case supports the position that the forfeiture provision compensates reasonably the school system for damages anticipated by the nature of an untimely resignation breach. As this Court noted in Goldman v. Connecticut General Life Insurance Company, supra, 251 Md. at 582, 248 A.2d at 158, the contractual provision "will not be regarded as a penalty if the amount is a reasonable forecast of just compensation at the time the contract was made, and if actual damages are incapable or very difficult [to] accurate[ly] estimat[e]." (Internal citations omitted). As the State Board noted in its written opinion rendered on 21 July 2004, "the provision attempts to reasonably compensate the local board for damages incurred in recruiting and training a replacement teacher at the last moment and the additional costs of using substitute teachers."¹⁴

Page 353

Moreover, as the State Board noted also, the actual losses are incapable to predict with reasonable certainty. We have stated, "the determination of whether the amount specified is a penalty or liquidated damages is to be determined as of the time of execution of the contract. The damages in this instance that would be suffered by the County by delay obviously would be difficult of ascertainment." Anne Arundel Co. v. Norair Engineering Corp., 275 Md. 480, 494, 341 A.2d 287, 294 (1975). See also Priebe & Sons, 332 U.S. at 412, 68 S.Ct. at 126, 92 L.Ed. at 38 ("[T]he fact that the damages suffered are shown to be less than the damages contracted for is not fatal. These provisions are to be judged as of the time of making the contract.").

Finally, the forfeiture provision in the present case is binding and may not be altered to correspond to actual damages. The forfeiture provision provides: "If any of the conditions of this contract shall be violated by the certified employee named herein, salary already accrued will be forfeited, in the discretion of the Local Board of Education." The Circuit Court construed this provision to mean that the "salary forfeitures are not set forth as a penalty that will be imposed. The notice going out to the employees does not state, it says it may be." (Emphasis added). The Circuit Court therefore concluded that the decision of the superintendent, acting on behalf of the State Board, to withhold the accrued, but unpaid, portions of the salaries of Mr. Heister and Ms. Marvel was "discretionary and the exercise of that discretion is arbitrary." We disagree. The discretion in the contractual clause provided to the local board does not present a choice between pursuing accrued salary or actual damages; rather, it enables the local board to decide whether to enforce the forfeiture provision, as its sole monetary recovery, for a breach of the contract. In the present case, there is no evidence in the record that the decision to enforce the forfeiture provision by the superintendent was arbitrary. Furthermore, with regard to issues pertaining to administrative decisions affecting the proper operation of the public school system in Maryland (e.g., whether to enforce the forfeiture provision based on a case-by-case analysis), we shall afford the State Board very broad discretion, consistent with its grant of statutory authority. Accordingly, we conclude that the forfeiture provision is a valid and enforceable liquidated damages clause. The Circuit Court erred in reversing the State Board's action.

Liquidated damages have been 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. Board of Education v. Heister, 392 Md. 140, 155, 896 A.2d 342, 351 (2006) (stating 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"). Whether a contract provision is a penalty or a valid liquidated damages clause is a question of law, reviewed de novo by this Court. Id. See also Hammaker v. Schleigh, 157 Md. 652, 667, 147 A. 790, 796 (1929).

Because respondents seek to set aside the bargained for contractual provision in the Agreement stipulating damages in the event of breach, respondents have the burden of proving that the clause should not be enforced. Placing the burden of proof on the challenger is consistent with giving the non-breaching party the advantage inherent in stipulated damages clauses, that of eliminating the need to prove damages, and with the general principle of Maryland law that assumes that bargains are enforceable and that the party asking the court to invalidate a bargain should demonstrate the justice of his or her view. See Dashiell v. Meeks, 396 Md. 149, 167, 913 A.2d 10, 20 (2006).

It has long been the rule in Maryland that valid liquidated damages provisions are enforceable. Our predecessors stated "the settled rule of law" with respect to liquidated damages as follows:

"[W]here the parties, at or before the time of the execution of the contract, agree upon and name a sum therein to be paid as liquidated damages, in lieu of

[933 A.2d 389]

anticipated damages which are in their nature uncertain and incapable of exact ascertainment, that the amount so named in the agreement will be regarded as liquidated damages and not as a penalty, 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 breach of the contract. And whether it is excessive or whether the damages are incapable of exact ascertainment should be determined from the subject-matter of the contract considered in the light of all the surrounding facts and circumstances connected therewith and known to the parties at the time of its execution. That these questions should be considered and determined from the contract itself, its subject-matter and the surrounding facts and circumstances connected therewith with which the parties are confronted at the time of its execution, is made necessary 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. 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 more, 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 arrived 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."

Balto. Bridge Co. v. United Rys. & Electric Co., 125 Md. 208, 214-15, 93 A. 420, 422-23 (1915). This Court has not strayed from the notion that, absent specific statutory provisions, the time of contract formation is the appropriate point from which to judge the reasonableness of a liquidated damages provision.

Writing for this Court, Judge Harrell elucidated more recently the elements of a liquidated damages provision, stating as follows:

"There are three essential elements of a valid and enforceable liquidated damages clause. First, such a 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 damage 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. While the language used by the parties is instructive in determining the validity of a liquidated damages clause, the decisive element is the intention of the parties—whether they intended that the sum be a penalty or an agreed-upon amount as damages in case of a breach and this is to be gleaned from the subject matter, the language of the contract and the circumstances surrounding its execution."

Heister, 392 Md. at 156, 896 A.2d at 352 (internal citations and quotations omitted).

Despite their general propriety, a clause purporting to provide liquidated damages will be deemed invalid as a penalty where the amount agreed upon is "grossly excessive and out of all proportion

[933 A.2d 390]

to the damages that might reasonably have been expected to result from such breach of the contract." Balto. Bridge Co., 125 Md. at 215, 93 A. at 422. As Professor Williston has noted, "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 payable 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." 24 RICHARD A. LORD, WILLISTON ON CONTRACTS § 65:1, at 216-23 (4th ed.2002) (internal citations and footnotes omitted).

We have long recognized 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. Willson v. M. & C.C. of Baltimore, 83 Md. 203, 211, 34 A. 774, 775 (1896). Thus, "if there is doubt whether a contract provides for liquidated damages or a penalty, the provision will be construed as a penalty." Goldman v. Conn. Gen. Life Ins. Co., 251 Md. 575, 581, 248 A.2d 154, 158 (1968).

Maryland courts will uphold a liquidated damages clause as valid, and not a penalty, if it satisfies two primary requirements. First, the clause must provide a fair estimate of potential damages at the time the parties entered into the contract. See Heister, 392 Md. at 157, 896 A.2d at 352; Goldman, 251 Md. at 582, 248 A.2d at 158; H.J. McGrath Co. v. Wisner, 189 Md. 260, 265, 55 A.2d 793, 795 (1947); Hammaker, 157 Md. at 667, 147 A. at 796; Balto. Bridge Co., 125 Md. at 214, 93 A. at 422. Second, the damages must have been incapable of estimation, or very difficult to estimate, at the time of contracting. See Heister, 392 Md. at 157, 896 A.2d at 352; Goldman, 251 Md. at 582, 248 A.2d at 158; Wisner, 189 Md. at 265, 55 A.2d at 795; Hammaker, 157 Md. at 667, 147 A. at 796; Balto. Bridge Co., 125 Md. at 214, 93 A. at 422.

As we have indicated, in the absence of a statute providing otherwise, Maryland courts determine the validity of a liquidated damages clause by looking to the stipulated loss at the time of the contract's formation, and not actual losses resulting from breach.⁵ See Heister, 392 Md. at 158, 896 A.2d at 353 (stating that

[933 A.2d 391]

"whether the amount specified is a penalty or liquidated damages is to be determined as of the time of execution of the contract" (quoting Anne Arundel Co. v. Norair Engineering Corp., 275 Md. 480, 494, 341 A.2d 287, 294 (1975))); Hammaker, 157 Md. at 667, 147 A. at 796 (stating that in order for a "declared forfeit to become liquidated damages by interpretation, it must clearly appear that the amount named was reasonable compensation in fact at the time when the contract was made").

In the case sub judice, the lower courts found correctly that § 3 of the Agreement was a valid liquidated damages clause and not a penalty. The sum in § 3 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.⁶ See Lake Ridge Academy v. Carney, 66 Ohio St.3d 376, 613 N.E.2d 183 (1993) (finding that a year's tuition constitutes a reasonable liquidated sum for breach of a school enrollment contract); Wentworth Military Academy v. Marshall 225 Ark. 591, 283 S.W.2d 868 (1955) (same); Kentucky Military Institute v. Bramblet 158 Ky. 205, 164 S.W. 808 (1914) (same); Teeter v. Horner Military School 165 N.C. 564, 81 S.E. 767 (1914) (same).

The actual damages resulting from breach would have been very difficult to estimate at the time of contracting as well. The Barrie School's Chief Financial Officer testified to this effect before the District Court, stating as follows:

"The budget's developed in November and December of the preceding year, and reviewed and approved in January of the preceding year. We determine the total number of expenses, faculty and otherwise, to instruct our students, and we then, because we're a non-profit and we try to have a balanced budget, we then determine what tuition level needs to be set, and the number of students to meet the revenue goal. So to parse out of that the effect of one student is very difficult."

As the Circuit Court noted, "it would be next to impossible to assign an exact amount as to the impact of losing one child for the school year." Section 3 of the Agreement constitutes a valid liquidated damages clause.

We observe that “ ‘[w]hen reviewing a trial court's construction or interpretation of a written contract, we do so as a matter of law.’” Willard Packaging Company, Inc. v. Javier (“Willard”), 169 Md.App. 109, 120, 899 A.2d 940 (2006) (quoting Nationwide Ins. Cos. v. Rhodes, 127 Md.App. 231, 235, 732 A.2d 388 (1999).) “ ‘[T]he determination of whether a particular clause in a contract is to be construed as providing for liquidated damages, or as a penalty, depends on the facts and circumstances in each case and is ordinarily a question of law for the court.’ ” Id. at 120–21, 899 A.2d 940 (quoting Traylor v. Grafton, 273 Md. 649, 667, 332 A.2d 651 (1975) (citing H.J. McGrath Co. v. Wisner, 189 Md. 260, 264, 55 A.2d 793 (1947))). Thus, the issue of whether a contract's liquidated damages provision is valid or a penalty is a question of law which we review de novo. Barrie School v. Patch, 401 Md. 497, 507, 933 A.2d 382 (2007) (citing Bd. of Educ. v. Heister (“Heister”), 392 Md. 140, 155, 896 A.2d 342 (2006), and [213 Md.App. 693] Hammaker v. Schleigh, 157 Md. 652, 667, 147 A. 790 (1929)). It is through this lens that we address the arguments presented before us.

It is well-settled that “[u]nder the principles of freedom of contract, parties have broad right to construct the terms of the contracts they enter into as they wish, providing the contract is neither illegal nor contrary to public policy.” Willard, 169 Md.App. at 122, 899 A.2d 940. Generally, “courts will not inquire into any inherent disparity in the utility of a given exchange between the parties, but solely into its voluntariness.” Id. (citations omitted). As a consequence, the law of compensatory damages applies to most actions brought in contract and “provid[es] a standard measure of compensation limited to the amount of injury incurred under a breach of contract.” Id. (citations omitted). In some instances, however, liquidated damages provisions “allow private parties to reform that fixed concept of injury providing relief in excess, or in lieu, of compensatory damages.” Id.

[213 Md.App. 694] In that regard, “[l]iquidated damages have been 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 contract.” Barrie School, 401 Md. at 507, 933 A.2d 382 (citing Heister, 392 Md. at 155, 896 A.2d 342). The fundamental purpose of liquidated damages is “to provide a reasonable measure of compensation in the event of a breach where, at the time the provision is agreed to the damages are indeterminable or will be otherwise difficult to prove.” 24 Williston on Contracts § 65:3, p. 250 (4th ed. 2002). Therefore, when a reviewing court is called to determine the validity of a liquidated damages provision, the court conducts “a more searching inquiry into the propriety and reasonableness of the agreement itself, under the auspices of the so-called penalty doctrine, than would be conducted in any more typical contract case.” Willard, 169 Md.App. at 123, 899 A.2d 940 (footnote and citations omitted). A court must examine the reasonableness of the amount fixed as liquidated damages “from the standpoint of the parties at the time the contract was made.” Traylor v. Grafton, 273 Md. 649, 663, 332 A.2d 651 (1975). Additionally, the court is required to determine the enforceability of a liquidated damages clause through an evaluation of three essential elements that ensure the clause's validity:

... “First, such a clause must provide ‘in clear and unambiguous terms' for a ‘certain sum’[.]” Mass. Indem. & Life Ins., [v. Dresser], 269 Md. [364], 368, 306 A.2d [213] at 216 [ (1973) ] ( [c]itation omitted). “Secondly, the liquidated damages must reasonably be compensation for the damages anticipated by the breach[.]” [Id.] at 369, 306 A.2d at 216 ( [c]itations omitted). “Thirdly, liquidated damage 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[.]” Id. (citations omitted). While the language used by the parties is instructive in determining the validity of a liquidated damages clause “[t]he decisive element is the intention of

[75 A.3d 389]

the parties—whether they intended that the sum be a penalty or an [213 Md.App. 695]agreed-upon amount as damages in case of a breach and this is to be gleaned from the subject matter, the language of the contract and the circumstances surrounding its execution.” Traylor [v. Grafton], 273 Md. [649], 661, 332 A.2d [651] at 660 [(1975)] ([c]itations omitted).

Heister, 392 Md. at 156, 896 A.2d 342 (emphasis added), quoted in Barrie School, 401 Md. at 509, 933 A.2d 382 (internal citations and quotations omitted in Barrie).

Finally, it was Awalt's burden to demonstrate that the liquidated damages clause within Section 9 of the PSA was unreasonable, invalid, and unenforceable. Awalt, however, failed to present evidence that the liquidated damages clause was unreasonable in any respect. Rather, he summarily argued that the provision was a prima facie penalty simply [213 Md.App. 703]because CAS did not introduce evidence of any actual damage, notwithstanding clear precedent acknowledging that no requirement exists. See Barrie School, 401 Md. at 513–14, 933 A.2d 382. Accordingly, we find the grant of Awalt's motion in limine clearly erroneous and reverse the judgment of the circuit court.

We now turn to the merits of Cuesport's claim. In so doing, we observe that the term “liquidated damages” has been defined by the Court of Appeals 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 (1975) (citation and quotation omitted). But, “a clause purporting to provide liquidated damages will be deemed invalid as a penalty where [209 Md.App. 617]the amount agreed upon 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.” Barrie School v. Patch, 401 Md. 497, 509, 933 A.2d 382 (2007) (citation and quotation omitted). 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.” Id. at 510, 933 A.2d 382.

In applying that test, the “nomenclature used by the parties, although a circumstance, is not,” the Court of Appeals has cautioned, “determinative in passing upon whether or not the payment of the designated sum is in fact a penalty.” Traylor, 273 Md. at 661, 332 A.2d 651. Rather, the “decisive element,” according to Maryland's highest Court, is the intention of the parties, that is, “whether they intended that the sum be a penalty or an agreed-upon amount as damages in case of a breach,” and this is “to be gleaned from the subject matter, the language of the contract and the circumstances surrounding its execution.” Id. But “if there is doubt whether a contract provides for liquidated damages or a penalty, the provision,” we are told, “will be construed as a penalty.” Barrie School, 401 Md. at 510, 933 A.2d 382 (citation and quotation omitted).

[209 Md.App. 618]In any event, it is clear that the “Late Performance” clause is, indeed, a valid and enforceable liquidated damages clause. Although the “Late Performance” clause employs the term “penalty,” at one point, that factor, alone, though relevant, is hardly conclusive, Traylor, 273 Md. at 661, 332 A.2d 651, as the purpose of that provision was to compensate the party owed the duty of prompt performance for anticipated losses, not to penalize the party that failed to fulfill that duty. The monthly cost that the parties estimated that Critical Developments would incur for Unit 4, at the time of the execution of the contract, was approximately $3,800 per month. When that figure is divided by 30, the average number of days in a month, the daily cost is $126.67, a figure which differs from the stipulated per diem “penalty” by less than a dollar. Thus, the amount of liquidated damages—$126 per diem—was not “grossly excessive and out of all proportion to the damages that might reasonably have been expected to result from” such a breach. Barrie School, 401 Md. at 509, 933 A.2d 382. On the contrary, the “Late Performance” clause provided “a fair estimate of potential damages at the time the parties entered into the contract.” Id. at 510, 933 A.2d 382.

Moreover, the actual damages in the instant case would have been “very difficult to estimate, at the time of contracting.” Id. To perform such calculations, at the time of contract execution, required that the parties be able to accurately predict whether Critical Developments would have succeeded in finding a suitable tenant and on what date that tenancy would have commenced or, in the alternative, whether Critical Developments itself would, in fact, have been able to use the property profitably. Neither of these outcomes could have been predicted, at the time of contract execution, with any degree of certainty. See Richard A. Lord, 24 Williston on Contracts § 65:18 (4th ed.2002), at 311 (observing that, in building and construction contracts, “each day's delay, while unquestionably injurious, is injurious frequently in ways that are difficult to estimate”).

Finally, the “decisive element” in determining whether a provision is a liquidated damages clause, and not a penalty, is [209 Md.App. 619]the intention of the parties, that is, “whether they intended that the sum be a penalty or an agreed-upon amount as damages in case of a breach.” Traylor, supra, 273 Md. at 661, 332 A.2d 651. That the parties, in the instant case, clearly intended that the provision at issue be a liquidated damages clause is supported by testimony and stipulations into which the parties entered at trial.

During Critical Developments' direct examination of Kurt Ziem, the managing member of Cuesport Properties, LLC, the following exchange took place:

[Critical Developments' counsel]: Okay. Now the second amendment to the agreement of sale, which is an exhibit in this case, provided liquidated damages in the amount of $126 a day beyond the 30 days if the wall was not built correct. Is that right?

[Mr. Ziem]: Yes, it was.

[61 A.3d 98]

Gregory Lilly, president of Critical Developments, LLC, gave testimony of a similar nature:

[Critical Developments' counsel]: With respect to the demising wall portion of the work, to your recollection, and the contract is in front of you, but did the contract call for liquidated damages in the event that the demising wall was not constructed within the 30 days?

[Mr. Lilly]: Yes.

[Critical Developments' counsel]: And do you recall what the amount was?

[Mr. Lilly]: I want to say $126 a day.

And, among the facts stipulated to by the parties, at trial, was that, pursuant to the agreement of sale, an escrow agent was entrusted, by the parties, with $20,000 provided by Cuesport Properties, “for the payment of costs for various improvements to the property as described in such Second Amendment and for the payment of any liquidated damages incurred by Plaintiff as specified in the Second Amendment.”

In light of that testimony, the stipulation of facts, the purpose of the provision, and the prospective reasonableness [209 Md.App. 620]of the per diem award, we conclude that the per diem damages provision is a liquidated damages clause and not a penalty provision, and the circuit court correctly upheld it as such.

The term "liquidated damages" means a "specific sum of money ... expressly

[875 A.2d 194]

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 (1975). As a general rule, "a liquidated damage clause is within the substantive law of contracts, and — if not a `penalty' — is an enforceable provision as a sum agreed upon by the parties to be paid in the event of a breach, enforceable as any other provision or valid promise in the contract." Id.

The principle of freedom of contract dictates that express contract clauses are presumed to be enforceable. Parties are held to the express terms of their contract. The burden of proving that a particular damage stipulation is not enforceable is "on the party seeking to invalidate" it. See Mattvidi Assocs. Ltd. P'ship v. NationsBank of Va., 100 Md.App. 71, 92, 639 A.2d 228, cert. denied, 336 Md. 277, 647 A.2d 1216 (1994). Maryland courts generally consider the following three factors as the defining characteristics of an enforceable liquidated damages clause:

(1) clear and unambiguous language providing for "a certain sum";

(2) stipulated damages that represent reasonable compensation for the damages anticipated from the breach, measured prospectively at the time of the contract rather than in hindsight at the time of the breach; and

(3) a "mandatory binding agreement[] before the fact which may not be altered to correspond to actual damages determined after the fact."

See Holloway v. Faw, Casson & Co., 319 Md. 324, 354, 572 A.2d 510 (1990); Traylor, 273 Md. at 668, 332 A.2d 651.

Determining whether a particular clause in a contract satisfies these criteria "ordinarily is a question of law for the court." Traylor, 273 Md. at 667, 332 A.2d 651. Using the same record and deferring to the trial court's resolution of credibility issues and factual disputes, we reach our own independent conclusion regarding that question of law. See id. at 667-68, 332 A.2d 651; Energy Plus Consulting, LLC v. Illinois Fuel Co., LLC, 371 F.3d 907, 909 (7th Cir.2004).

The trial court, Harrell, and SYSCO premised their debate over the enforcement of Paragraph 7 on the conclusion that this is a liquidated damages provision. As a threshold matter, we point out that this characterization is not dictated by the parties' use of the label "liquidated damages." Although courts certainly consider "[t]he nomenclature used by the parties," we are not bound by it when other language and circumstances support a different conclusion. See Traylor, 273 Md. at 661, 332 A.2d 651. For example, the parties' description of their damage agreement as liquidated damages "is not determinative in passing upon whether or not the payment of the designated sum is in fact a penalty." Id. Instead, "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[,]" taken as a whole. Id. We follow the same approach in determining whether a stipulated damages remedy is a liquidated damages clause.

Although the trial court focused on the second feature of a valid liquidated damage agreement, we shall set aside, for the moment, the question of whether the amount of stipulated damages in Paragraph 7 is reasonable. This is because we conclude that the agreement lacks both the first and third characteristics of a liquidated damages clause, in that it does not clearly identify a "certain sum" and does not create a "binding agreement before the fact that may not be altered to correspond to actual damages." See Holloway, 319 Md. at 354, 572 A.2d 510. By agreeing that the non-breaching party is "entitle[d]... to recover damages flowing from such breach" (emphasis added), Harrell and SYSCO selected the same type of post hoc yardstick that traditionally has been used to measure actual or "unliquidated" damages. See, e.g., Abbott v. Gatch, 13 Md. 314, 333 (1859) ("unliquidated damages" include "such damages as are incidental to and caused by the breach, and may be said to flow reasonably and naturally from such breach, and are not accidental or contingent losses"). Instead of agreeing to either a pre-determined amount of damages, or to a formula for damage, in the event of a breach, the parties more broadly agreed that the recoverable damages "flowing from such breach" would include the settlement payments. Significantly, they also agreed that SYSCO's damages would not be "not limited to" that amount if the company also could show other actual damages from Harrell's breach. The parties' understanding that this agreement was not a mandatory and binding stipulation fixing the amount of damages at the $185,000 paid to Harrell is underscored by their explicit agreement that the stipulated "damages set forth in this paragraph in the event of a breach" are "non-exclusive." (Emphasis added.) Because Paragraph 7 does not contain a pre-determined "ceiling" on the amount of "damages flowing from" Harrell's breach of the non-disparagement covenant, we conclude that it is an unliquidated damage stipulation rather than a liquidated damages clause. See, e.g., Traylor, 273 Md. at 662, 332 A.2d 651 (nature of stipulated damages "remove[d]

[875 A.2d 196]

it from the ambit of liquidated damages").