Miller v. United States Naval Institute

MacDaniel, J., delivered the opinion of the Court. This is an appeal from an Order of the Circuit Court for Anne Arundel County sustaining a demurrer. In September ⁴²⁷ 1979, appellants Philip Miller and Rita Miller, his wife, filed a bill in equity for specific performance of a contract made by appellee, the United States Naval Institute, to purchase certain land. The precise issue of appellee’s breach, vel non, is not before us.

Rather, the appellee demurred, and the demurrer was sustained, upon the ground that, even assuming appellee’s breach, specific performance was precluded since the contract contained a liquidated damages clause designed to constitute appellants’ sole remedy. As related in their Bill of Complaint, appellants owned an improved parcel of land, 6.33 acres more or less, on Ritchie Highway in Arnold, Maryland. By contract of sale dated August 24, 1978, appellee agreed to purchase this property for $315,000. Appellee paid appellants a deposit of $10,000 against the purchase price, and Paragraph 14 of the contract of sale provided, in part, that: "... the Sellers and Purchaser are required and agree to make full settlement in accordance with the terms hereof.

If the Purchaser shall fail to do so, the deposit herein provided shall be forfeited and the Purchaser shall thereby be relieved from further liability hereunder.” Appellants alleged that appellee failed to proceed to settlement in accordance with the terms of the contract, and so prayed for specific performance. Appellee asserted that, by the terms of their contract, the parties had specifically agreed that in the event of appellee’s breach appellants’ remedy would be limited to retention of the deposit as liquidated damages. Appellee suggested that "the law of this State holds that in light of the language of the contract specific performance is not available as a remedy to the [appellants] for three reasons: First, the parties have fixed a specific sum as liquidated damages; Second, the contract language clearly expresses the rights of the parties upon default; Third, the liquidated damage clause is self executing.” The chancellor agreed with appellee. We quote from his Memorandum of Opinion and Order: ⁴²⁸ "In the present proceedings, the parties executed an agreement which not only provides for liquidated damages but states expressly that 'the Purchaser shall (by payment of the liquidated damages) be relieved from further liability hereunder’.

In ruling of [sic] any Demurrer, it is the duty of the Court to look only to the Bill of Complaint, to accept as true all well pleaded facts and to draw any reasonable inferences. Hooke v. Equitable Credit Corp., 42 Md. App. 610 (1979). It is the holding of this Court that the Plaintiffs’ Bill of Complaint does not state a valid cause of action inasmuch as the contract clearly demonstrates that it was the intention of the parties to limit the available remedy on default by the purchaser to liquidated damages.” On the other hand, appellants maintain that the contract demonstrates no such thing. Paragraph 14, they argue, does not grant appellee an alternative to performance, but rather grants appellants, alone, the option of accepting the penalty (thereby relieving appellee of further liability) or of rejecting it in order to pursue their equitable remedies.

Thus, the issue for decision here is whether the inclusion of the liquidated damages clause, supra, in a contract of sale forecloses a real estate vendor’s right to seek specific performance in the event of the vendee’s default. We begin by noting the following general propositions, found in 71 Am. Jur. 2d Specific Performance, §§ 57-59, at pp. 83-87: "Parties to contracts frequently stipulate and agree in advance as to the amount to be paid by one party to the other in the event of the former’s breach of agreement;.... Questions frequently arise as to the effect of such provisions upon the right of the party in whose favor they run, to a decree of specific performance of the contract.... [T]he view taken by ⁴²⁹ the great preponderance of authority among the cases is that the right to specific performance is not to be determined by the character of the provision as one for a penalty or for liquidated damages, but by whether the provision was intended merely as security for performance of the contract or as an alternative to the main obligation, giving the party against whom the relief is sought the option either to perform the main obligation or to pay or forfeit the penalty or liquidated sum.

Whenever it appears that the intention of the parties was that the contract should be performed and that a stipulation for liquidated damages or a penalty was inserted merely as a security for such performance, then the contract will be specifically enforced notwithstanding the contract is alternative in form. Generally speaking, it is only where the contract stipulates for one of two things in the alternative — the performance of certain acts or the payment of a certain amount of money in lieu thereof — that equity will not decree a specifíc performance of the first alternative. The basis of the general rule which allows specific performance of a contract containing a stipulation for a pecuniary forfeiture or penalty or for liquidated damages in the event of default if the obligation to pay such forfeiture or damages is not an alternative to the main obligation, but is security for the performance thereof, is the intention of the parties; this intention is to be derived from the instrument or contract according to the ordinary and usual rules of construction, taking into consideration the terms of the contract, the subject matter, and the surrounding circumstances. When it is the intention that a stipulation is to be regarded as security for the performance of a contract by the vendee, specific performance may be had, but when the stipulation ⁴³⁰ is intended as a substitute for performance and the vendee may comply with the contract or pay liquidated damages in lieu thereof, specific performance is not available.. ..

The question ... must in the last analysis be determined from a consideration of the terms and language of the particular contract in question. . .. The cases are almost unanimous in support of the rule that a mere provision in a land contract that in case of default the vendee shall forfeit, as liquidated damages, the deposit made on the contract, does not preclude the vendor from maintaining a suit for specific performance. And the vendor’s retention of an earnest-money payment, in accordance with the contract, is not an acceptance of liquidated damages under a provision therefor, and does not bar his right to specific performance; in such case the provision for liquidated damages is irrelevant, since the vendor is not seeking damages but rather the purchase price. In this respect, it has been said: 'It would be highly inconsistent to require the seller to yield up the earnest money which was intended as part payment and then sue at equity to get the same funds back also as part payment.’ ” 1 (Emphasis added; citations omitted.) The law in Maryland has been well settled, and in accord with these views, since the Court of Appeals’ decision in Rogers v. Dorrance, 140 Md. 419 (1922).

In Rogers the vendor appealed a circuit court order sustaining a demurrer to his bill of complaint for the specific performance of a real estate contract of sale. The parties’ contract contained a "forfeiture clause” which provided that: ⁴³¹ " 'If, for any reason, the vendee shall fail in any particular to perform the covenants, conditions and stipulations herein expressed, on his part to be performed, within the time specified, ... then all sums paid on account of the purchase money and all buildings erected on the above-described property and all crops planted thereon shall be forfeited and retained by the vendors as liquidated damages for the breach thereof, and this contract shall be void.’ ” The vendee argued that this clause limited the vendor’s remedy to the retention of the amount fixed as liquidated damages, and that it precluded the vendor from resorting to a court of equity for specific performance; upon this ground the demurrer was sustained. The Court of Appeals reversed. We quote the Court’s opinion, at 140 Md. 424 -25: "Whatever may be the decisions elsewhere, the rule is well established in this country that a provision, in a contract for the sale of land, such as is contained in the contract in this case, and termed a forfeiture clause, is a provision for the exclusive benefit of the vendor, and the vendee cannot, by his own