- Contract Purchaser Awarded Liquidated Damages Despite Mutual Mistake
- July 12, 2013
- Law Firm: Gordon Feinblatt LLC - Baltimore Office
In Cuesport Properties, LLC v. Critical Developments, LLC, 61 A.3d 91, 209 Md. App. 607 (2013), the Maryland Court of Special Appeals held that a liquidated damages clause in a contract for the purchase and sale of real property was enforceable, and the resulting damage award was not invalid despite a mutual mistake by the parties.
Cuesport Properties, LLC sold a condominium unit to Critical Developments, LLC, and in the purchase and sale agreement agreed to construct a new demising wall. The wall was to be built of the same type, materials, and specifications as another wall in the building. Cuesport did that, but it did not get a building permit. Critical Developments accepted that wall as built. Later, when Critical Developments was in the process of doing some other work, it found out that neither the new wall nor the sample wall complied with the county code. As a result of the need to rebuild the wall and to perform certain electrical work, Critical Developments was unable to use the premises for a period of time.
Critical Developments sued for damages under the liquidated damages clause in the purchase and sale agreement that set a per diem amount for delays, and it was successful before the Circuit Court for Anne Arundel County. On appeal, the Court of Special Appeals affirmed.
The Court of Special Appeals stated:
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 enter into a contract; and (2) the damages must have been incapable of estimation, or very difficult to estimate, at the time of contracting.
The Court further noted that the decisive element is the intention of the parties - whether they intended to compensate a party for its loss or to punish the other party for its failure to perform.
The Court of Special Appeals then considered the question of mutual mistake because Cuesport and Critical Developments both thought that it would be acceptable to build the new wall like the existing one. This was a mistake of law since both parties knew the applicable facts but they were unaware of the legal consequences of them. A mistake of law is not a basis to rescind a contract or a portion of one.
The Court went on to point out that even if the error were categorized as a mistake of fact, it would not provide relief to Cuesport. That is because under Restatement (Second) of Contracts §154 (1981) Cuesport was the party that was required to bear the risk of a mistake.