Maryland Court of Special Appeals Finds Per Diem Liquidated Damages Award Appropriate

In Cuesport Properties, LLC v. Critical Developments, LLC, 209 Md. App. 607, 61 A.3d 91 (2013), the Maryland Court of Special Appeals examined and affirmed the Anne Arundel Circuit Court’s decision awarding Critical Developments liquidated damages in the amount of $32,760 for the failure of Cuesport Properties to construct a demising wall per the terms of the parties’ contract for the sale of a commercial condominium unit. This case is representative of several other recent decisions by courts in the Mid-Atlantic region enforcing liquidated damages clauses.

Under the terms of the parties’ sales contract, within thirty days of closing on the sale of a condominium unit by Cuesport to Critical Developments, Cuesport was to build a demising wall that would separate Critical Developments’ unit from an adjacent unit. The wall was to be built of the same type, materials, and specifications as a recently installed wall that Cuesport had built in an adjacent unit. The sales contract also contained a clause titled “Late Performance,” which stated that if Cuesport failed to complete the wall within thirty days of closing, Cuesport would be liable for liquidated damages in the amount of $126 per day until completion.

Although Cuesport built the wall on time and of the same type, materials, and specifications as the adjacent unit’s wall, the wall did not comply with the county code, a fact which neither party learned of until five months later when Critical Developments began making additional improvements to the unit. By the time Critical Developers brought the wall into compliance with the county code, at least 260 days had elapsed from the date of the contractual deadline for completing the wall. Critical Developments then sued Cuesport for breach of contract, seeking damages for loss rental and use of the property.

Following a bench trial, the Anne Arundel Circuit Court entered judgment in Critical Developments’ favor and awarded liquidated damages in the amount of $32,760 ($126 per day multiplied by 260 days). Cuesport appealed, raising three grounds of error: (1) the circuit court’s construction of the per diem damages provision in the contract resulted in the imposition of an unlawful penalty; (2) the circuit court erred in awarding damages; and (3) the circuit court should have taken equitable considerations into account when awarding damages for 260 days of delay. The Court of Special Appeals rejected each of Cuesport’s grounds of appeal.

First, the Court of Special Appeals explained that a liquidated damages clause will be valid if the clause satisfies two 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.” Therefore, liquidated damages will be invalid as a penalty where the amount agreed upon is “grossly excessive and out of proportion to the damages that might reasonably have been expected to result from a breach of contract.”

Finding that the per diem provision was indeed a fair estimation of Critical Developments’ damages, the Court of Special Appeals took the monthly loss rental cost that the parties estimated that Critical Developments would incur for the unit ($3,800 per month), and divided that number by 30 days, the average number of days in a month, to arrive at $126.67 – a figure within one dollar of the $126 per day liquidated damages amount in the contract. The Court of Appeals then explained that actual damages would have been nearly incapable to calculate, because it would have required the parties to guess whether Critical Developments would have been able to find a tenant, when the tenancy would have commenced, and whether the property would have been used profitably. In light of that speculation, along with its conclusion that the amount of the daily rate was reasonable, the Court of Special Appeals affirmed the circuit court’s per diem award.

Next, Cuesport argued that it should have been excused from performing because a mutual mistake existed in the contract, which would have required the wall to be built in violation of the county code. In rejecting that argument, the Court of Special Appeals explained that two sophisticated business entities, who were both aware of the facts, but were ignorant of the legal consequences, did not rise to the level of a mutual mistake. Additionally, Cuesport was responsible for building the wall, and it was therefore Cuesport’s implied responsibility to ensure that the wall be built in accordance with the county code.

Finally, the Court of Special Appeals rejected Cuesport’s third argument, that the circuit court failed to take into account equitable considerations. Cuesport argued that because the circuit court did not make any factual findings about the reasonableness of the delay between when the wall was required to have been completed (within 30 days of closing) and when the wall was finally made code-compliant (260 days later), the damages award could not stand. However, Cuesport failed to show that the delay was indeed unreasonable. Although having never been previously addressed by a Maryland appellate court, the Court of Special Appeals endorsed the view that liquidated damages “may be limited by the court to whatever time is reasonably necessary to comply with contractual demands or, more specifically, as in this case, to complete the work by a substitute contractor or by the non-breaching party’s own efforts.” Because Cuesport failed to show that Critical Developments’ efforts to repair the wall were not performed within a reasonable time, the Court of Special Appeals rejected this third argument, and affirmed the circuit court’s judgment in its entirety.

This case should serve as a caution to contractors to not only be aware of contractual terms, especially liquidated damages clauses, but to also be aware that they will be required to comply with all state, county, and local building codes, even where such compliance is not expressly set forth in the contract.