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H. J. McGrath Co. v. Wisner - 189 Md. 260, 55 A.2d 793 (1947)

Rule:

Whether a particular clause in a contract should be construed as liquidated damages or a penalty is a question of law. Clauses fixing damages per diem for delay in the performance of building contracts are frequently sustained, where not out of proportion to the damages that might reasonably be anticipated. The tendency of the more recent cases is to sustain agreements for liquidated damages where actual damages are difficult of ascertainment. But where the sum fixed is the same for a total as for a partial breach, such a clause is generally construed as a penalty. Where the agreement has been partially performed, it is the policy of the courts to regard the damages as a penalty, and allow the plaintiff to recover only such damages as he has actually sustained.

Facts:

Defendant G. Herbert Wisner, a farmer, and plaintiff H.J. McGrath Co., a Maryland corporation operating a cannery, entered into a written contract whereby Wisner agreed to grow tomatoes on six acres of his farm, and to sell and deliver all the tomatoes grown thereon during the season of 1944 to the cannery of McGrath at a price of $28 per ton. Clause 12 of the contract provided that in case of any failure on Wisner’s part, he shall pay to the Company the sum of $300.00 as liquidated damages and not as a penalty. Wisner was able to deliver two loads aggregating 10.99 tons of tomatoes to McGrath. During the third picking, he sold 14 tons of the tomatoes to the Baltimore market at a price of $33.33 per ton. McGrath learned of Wisner’s act and filed suit against Wisner, alleging that the farmer did not deliver his whole crop to McGrath as required under the contract and, therefore, he was liable for $300 as liquidated damages. According to Wisner, McGrath paid him $7.70 on account of the tomatoes he delivered to it, claiming the right to deduct liquidated damages of $300 from the contract price. The Superior Court for Baltimore entered judgment in favor of Wisner in the sum of $300. McGrath appealed.

Issue:

Under the terms of the contract, was Clause 12 a penalty?

Answer:

Yes.

Conclusion:

The Court noted that the specified damages in the contract were in no way proportionate to the prospective breach, nor was it found that the prospective damages for failure to deliver tomatoes were in capable or difficult of ascertainment, and hence, such clause of the contract was a penalty and unenforceable. However, the Court noted that it did not follow that McGrath was precluded from showing damages by way of recoupment. Upon his own showing, Wisner received $275 in excess of the contract price for the tomatoes he sold on the open market. Presumably, McGrath was obliged to purchase an equivalent amount in the open market to replace those Wisner diverted. Thus, the Court was entitled to deduct the amount of its loss from its payment to Wisner for the delivered tomatoes. The Court held that the verdict should have been for Wisner in the amount of $25.

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