Smelkinson SYSCO v. Harrell

RAYMOND G. THIEME, JR., Judge, Retired, Specially Assigned. Appellant Smelkinson SYSCO, Inc. (SYSCO), 1 asks us to enforce the stipulated damages provision of a Settlement Agreement and General Release that the company entered into with former employee James E. Harrell, appellee. The parties agreed, inter alia, that, if Harrell breached the agreement, SYSCO’s damages would include the $185,000 the company paid to settle pending and future disputes with Harrell. Challenging the trial court’s ruling that this clause is an unenforceable penalty for Harrell’s breach of that agreement, SYSCO raises two issues for our review, which we rephrase as follows: I. Did the trial court err in refusing to enforce the stipulated damages provision in the Settlement Agreement?

II

Did the trial court err in refusing to let the jury decide what SYSCO’s actual damages were? ⁴⁴² We hold that, although the clause in question is not a liquidated damages provision, it is a reasonable and enforceable stipulated damages remedy. Accordingly, we shall vacate the $1.00 award by the Circuit Court for Howard County and remand for entry of a damage award consistent with the Settlement Agreement. FACTS AND LEGAL PROCEEDINGS Harrell, a SYSCO truck driver for IB years, filed race discrimination, labor complaints, and workers’ compensation claims against the company. After consulting with counsel, Harrell and SYSCO settled those claims in a confidential “global” settlement covering all pending and potential claims involving Harrell and SYSCO. 2 The parties executed a Settlement Agreement and General Release (the Settlement Agreement) dated July 2, 2001, and submitted it to the Workers’ Compensation Commission for approval.

The terms of that agreement became effective upon the Commission’s August 31, 2001 approval of it as an “Agreement of Final Compromise and Settlement.” Under the Settlement Agreement, Harrell resigned his employment and promised never to seek re-employment with ⁴⁴³ SYSCO. In addition, he covenanted that he would not “disparage” SYSCO and that he would “neither voluntarily aid nor voluntarily assist in any way third party claims made or pursued against the Company.” SYSCO, in turn, agreed not to challenge Harrell’s unemployment compensation appeal and to pay Harrell a total of $185,000. 3 At issue in this appeal is the parties’ agreement regarding damages. With independent counsel advising him, Harrell agreed to the following stipulated damages provision in Paragraph 7 of the Settlement Agreement: Mr. Harrell agrees not to disparage the Company and the Company agrees not to disparage Mr. Harrell.... It is expressly understood that this paragraph is a substantial and material provision of the Agreement and a breach of this paragraph will support a cause of action for breach of contract and will entitle the aggrieved parties to recover damages flowing from such breach specifically, including, but not limited to, the recovery of any payments made pursuant to paragraph numbers 1 and 2 above as well as payments made pursuant to the Agreement of Final Compromise and Settlement pending before the Maryland Workers’ Compensation Commission.

It is expressly agreed that the non-exclusive damages set forth in this paragraph in the event of a breach are not a penalty but are fair and reasonable in light of the difficulty of proving prejudice to the Company in the event of such a breach. ... (Emphasis added.) Shortly after executing the Settlement Agreement and accepting full payment under it, Harrell breached his promises not to disparage SYSCO and not to assist third-party claimants. In a letter dated December 11, 2001, Harrell wrote to Mike Cutchember, a SYSCO shop steward, on behalf of John ⁴⁴⁴ Womack, a SYSCO employee with whom Harrell worked. In its entirety, the letter states: John Womack called me on 12/14/01, about a problem with [J.B.] a white female supervisor at Sysco.

He had said to me weeks before I left Sysco: she tried to get him fired, by blaming him for an accident, that happened two months earlier by someone else. We’ve talked off and on and he often said, that she has been harassing him at work. John Womack is one of the drivers I daily talked with for years while working at Sysco. I would make several drivers know what was going on in my affairs for my protection, and witness.

I had also told him about [J.B.] hugging me and I didn’t know if it was a plan they had against me. [J.B.] hugged me twice while in the warehouse at the docks; after she and [A.A.] came to a stop trying to get something on me. I told [P.M.] a shopsteward about [J.B.] hugging me; he said, that is sexual harassment. And I should file a complaint on her about that, but I didn’t. This was a time when Sysco was doing everything they could to frame me for anything so they could fire me; but [there] was no legal reason, but the charges I filed against them concerning racial discrimination.

A District Sales Manager rode with me on a route one day, and he was harassing the customers about me, and asking them “do I do my work”. He also watched everything I did, how fast I drove, and came into the back room when I was talking to a customer and wrote notes as we talked. One salesperson tried to get a customer to write a bad letter against me to get me fired, but they refused. Three of the employees at that stop told me about this, this is the same place where [J.B.] and [A.A.] came harassing me and the customer for over an hour.

If I can be of any more help let me know. The next day, on December 12, 2002, Womack initiated race discrimination charges against SYSCO at the Maryland Commission on Human Relations. Like Harrell, Womack complained that he was the victim of racial discrimination by J.B., a white female safety supervisor. ⁴⁴⁵ In support of Womack’s claim, Cutchember gave SYSCO a copy of Harrell’s letter. SYSCO then filed suit against Harrell for breach of contract and specific performance.

In its January 31, 2002 complaint, SYSCO alleged that Harrell violated his covenants not to disparage the company and not to aid third parties in their grievances against the company. Following discovery, SYSCO moved for summary judgment, arguing that it was entitled to recover as liquidated damages the $185,000 it paid to settle Harrell’s claims. Harrell filed a cross-motion for summary judgment, arguing that the damage remedy in Paragraph 7 was an unenforceable penalty. The Circuit Court for Howard County held that there was no dispute that Harrell breached his obligations under Paragraphs 7 and 16 of the Settlement Agreement. “[U]nder any definition of the word ‘disparage!,]’ the letter repeatedly disparaged [SYSCO] in regard to some of the same matters that were at the core of [Harrell’s] prior disputes with [SYSCO].” In addition, the court found, Harrell “was aiding and assisting third-party claims against [SYSCO.]” Harrell was ordered to “specifically perform each and every obligation imposed upon him by the [Settlement Agreement] from this date forward unless and until otherwise released from such obligation(s) by this Court.” The court nonetheless concluded that SYSCO’s “damages raise other issues.” It held that the stipulated damages applied only to the “disparagement” breach under Paragraph 7, so that actual damages arising from the breach of Paragraph 16 would have to be proven.

The court then ordered briefing on the issue of whether the stipulated damage remedy in Paragraph 7 is a valid liquidated damages clause or an unenforceable penalty. After reviewing the “test for the validity of a liquidated damages clause,” the court resolved that issue in Harrell’s favor. The court “ha[d] no doubt that the parties intended this paragraph to operate as a liquidated damage provision.” Given “the express language of Paragraph 7,” however, it held that $185,000 in liquidated damages “smacks directly of a ⁴⁴⁶ penalty for breaching the agreement.” The court noted the “long history of trouble between [SYSCO] and Mr. Harrell” and that SYSCO “was clearly seeking an end to it fully and finally.” But the court ultimately found it “hard to see how a simple disparagement ... could in any reasonable way be equated to a damage amount of $185,000.” In the court’s view, “[t]he trouble” with that figure is that there is simply no reasonable connection between the anticipated damage and the amount selected. It is the whole amount of the settlement which seems to be based primarily on the value and weight attributed to the various Workers!’] Compensation cases being settled.

(Emphasis added.) The court refused to enforce the provision. The parties proceeded to trial on the question of whether SYSCO sustained any actual damages. SYSCO was not permitted to “argue as a basis for [actual] damages the liquidated damage amount” of $185,000, given the court’s determination “that that’s invalid.” After taking testimony and evidence regarding SYSCO’s damages, the trial court refused to submit the case to the jury. Instead, it granted Harrell’s motion for judgment on the ground that SYSCO failed to present sufficient evidence to support anything but a nominal damage award.

Judgment was entered in favor of SYSCO in the amount of $1.00 plus costs. After the court denied its motion to alter or amend the judgment, or for a new trial, SYSCO noted this timely appeal. DISCUSSION I. Stipulated Damages SYSCO challenges the trial court’s decision not to enforce the parties’ agreement that SYSCO could recover the $185,000 it paid to Harrell if Harrell breached his non-disparagement covenant. We find merit in SYSCO’s challenge, even though, ⁴⁴⁷ for the reasons set forth below, we do not view the clause in question as a liquidated damages agreement.

A. Liquidated Damages 4 The term “liquidated damages” means 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). 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 ⁴⁴⁸ 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). Based on the language in the Settlement Agreement and the circumstances in which it was executed, the trial court found that Harrell and SYSCO intended to create an enforceable liquidated damages clause.

The court concluded, however, that the clause does not satisfy the second requirement that it be reasonable compensation for expected damages. Specifically, the court ruled that Paragraph 7 operates as a penalty because there is “no reasonable connection between the anticipated damage and the amount selected.” By including an agreed damages provision in the contract, contracting parties reduce the cost of contract breakdown by eliminating the expense of calculating damages and by reducing the likelihood of litigation. Either or both parties to a contract, therefore, commonly enjoy the right to terminate at some cost. “Treating settlement agreements ... as ⁴⁴⁹ any other binding contract ‘is consistent with the public policy dictating that courts should look with favor upon the compromise or settlement of law suits in the interest of efficiency and economical administration of justice and the lessening of friction and acrimony.’ ” Long v. State, 371 Md. 72, 84-85 , 807 A.2d 1 (2002) (citation omitted). Thus, as we do when examining the construction of any contract, we begin by examining the language in Paragraph 7 of the Settlement Agreement.

See, e.g., Langston v. Langston, 366 Md. 490, 506 , 784 A.2d 1086 (2001) (interpretation of settlement agreement “begins with the plain meaning of the contractual terms”). 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 ⁴⁵⁰ 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,