O’BRIAN, et al.
November 6, 1998
Record No. 972717
WILLIAM E. O’BRIAN, JR., ET AL.
Benjamin N.A. Kendrick, Judge
PRESENT: All the Justices
OPINION BY JUSTICE CYNTHIA D. KINSER
FROM THE CIRCUIT COURT OF ARLINGTON COUNTY
This appeal concerns a liquidated damages
clause requiring parents to pay tuition for an entire academic
year to a school for failure to give timely notice of their
decision to withdraw their daughter from the school. Because the
circuit court entered summary judgment for the school before
permitting the parents to conduct discovery with regard to their
defense that the clause is an unenforceable penalty, we will
reverse the judgment of the circuit court.
William E. O’Brian, Jr., and Fern P. O’Brian
(the O’Brians) enrolled their daughter as a student at Langley
School (Langley) for the 1995-96 academic year. On February 29,
1996, the O’Brians executed the "Langley School 1996-97
Membership Agreement" (the Agreement) to enroll their
daughter in the second grade for the ensuing academic year.
Pursuant to the Agreement, they paid a deposit in the amount of
$1,055 to Langley. The O’Brians subsequently decided to withdraw
their daughter from Langley, and, in a letter dated June 13,
1996, they notified Langley of their decision.
In response, Langley informed the O’Brians in
two separate letters dated June 18 and June 20, 1996,
that they were obligated to pay the entire amount of the 1996-97
tuition because they had not timely notified Langley of their
decision to withdraw their daughter. Langley based its demand on
paragraphs D(1) and (4) of the Agreement. These paragraphs state:
D. WITHDRAWALS AND REFUNDS:
1. All withdrawals MUST BE made by June 1, 1996, as follows:
a. The withdrawal must be made in writing stating the name and
grade of the child(ren) to be withdrawn.
b. This notice must be received by an authorized administrative
employee of the School no later than 4:30 p.m. on June 1, 1996.
* * * *
4. IT IS UNDERSTOOD THAT THERE SHALL BE NO
REFUND OF OR RELIEF FROM ANY PORTION OF THE FULL TUITION OR ANY
OTHER OBLIGATION ACCEPTED HEREIN FOR ANY REASON IF WRITTEN NOTICE
OF WITHDRAWAL OF ANY CHILD IS NOT RECEIVED IN ACCORDANCE WITH THE
ABOVE PROCEDURE. SINCE DAMAGE TO THE SCHOOL DUE TO SUCH A
WITHDRAWAL WOULD BE DIFFICULT TO DETERMINE, MEMBER AGREES TO PAY
AGREED-UPON TUITION AS LIQUIDATED DAMAGES, TOGETHER WITH ANY
COURT COSTS AND/OR LEGAL FEES THE SCHOOL MAY BE OBLIGED TO INCUR
IN THE COLLECTION OF SUCH LIQUIDATED DAMAGES IN THE EVENT OF
WITHDRAWAL AFTER JUNE 1, 1996.
The O’Brians refused to pay the agreed-upon
tuition as liquidated damages. Consequently, Langley filed a
motion for judgment on September 4, 1996, alleging that the
O’Brians had breached the terms of the Agreement. Langley sought
judgment against the O’Brians for the tuition that was due under
the Agreement, plus late fees and attorney’s fees.
During pretrial proceedings, the O’Brians
submitted written interrogatories to Langley. In one of the
interrogatories, the O’Brians asked Langley whether it had made
reasonable efforts to fill the spot made available by the
withdrawal of the O’Brians’ daughter. In response, Langley stated
that it "does not so contend because it has no obligation to
do so by virtue of" the Agreement. Langley either partially
answered or objected to the remaining interrogatories. The
O’Brians then filed a motion to compel discovery, which the
circuit court denied. Thereafter, Langley moved for summary
judgment. After considering memorandum and oral argument from
both parties, the circuit court granted Langley’s motion and
entered judgment on October 3, 1997, against the O’Brians in the
amount of $9,745, plus late payment fees from June 1, 1996, and
an attorney’s fee in the amount of $8,900. The O’Brians appeal.
The dispositive issue in this case is whether
the circuit court erred by awarding summary judgment before
permitting the O’Brians to conduct discovery with regard to their
defense that paragraph D(4) of the Agreement is not a valid
liquidated damages clause. Langley asserts that the circuit court
did not err because the O’Brians were asserting a defense that is
not legally cognizable. We do not agree.
We have previously enunciated the test for
determining the validity of a liquidated damages clause:
[P]arties to a contract may agree in advance about the amount to
be paid as compensation for loss or injury which may result from
a breach of the contract "[w]hen the actual damages
contemplated at the time of the agreement are uncertain and
difficult to determine with exactness and when the amount fixed
is not out of all proportion to the probable loss."
301 Dahlgren Ltd. Partnership v. Bd. of
Supervisors of King George County, 240 Va. 200, 202-03, 396
S.E.2d 651, 653 (1990) (quoting Taylor v. Sanders, 233 Va.
73, 75, 353 S.E.2d 745, 746-47 (1987)). However, a liquidated
damages clause will be construed as an unenforceable penalty
"when the damage resulting from a breach of contract is
susceptible of definite measurement, or where the stipulated
amount would be grossly in excess of actual damages." Brooks
v. Bankson, 248 Va. 197, 208, 445 S.E.2d 473, 479 (1994)
(citing Taylor, 233 Va. at 75, 353 S.E.2d at 747); accord
301 Dahlgren, 240 Va. at 203, 396 S.E.2d at 653.
The fact that a party enters into a contract
containing a liquidated damages clause does not prevent that
party from later litigating the validity of the clause. The party
opposing the imposition of liquidated damages is entitled to
conduct discovery and present relevant evidence that the damages
resulting from breach of the contract are susceptible of definite
measurement or that the stipulated damages are grossly in excess
of the actual damages suffered by the nonbreaching party. Upon
proof of either of these elements, a liquidated damages clause
becomes an unenforceable penalty. Brooks, 248 Va. at 208,
445 S.E.2d at 479.
As the party challenging the validity of
paragraph D(4) of the Agreement, the O’Brians bear the burden of
proof on that issue. First Nat. Bank of Chicago v. Atlantic
Tele-Network Co., 946 F.2d 516, 522 (7th Cir.
1991); Little v. Rohauer, 707 P.2d 1015, 1017 (Colo. App.
1985); St. Margaret’s-McTernan School, Inc. v. Thompson,
627 A.2d 449, 451 (Conn. App. 1993); Joyce’s Submarine
Sandwiches, Inc. v. California Pub. Employees’ Retirement Sys.,
395 S.E.2d 257, 259 (Ga. App. 1990); Rodriguez v. Learjet,
Inc., 946 P.2d 1010, 1014 (Kan. App. 1997); Shallow Brook
Assoc. v. Dube, 599 A.2d 132, 138 (N.H. 1991); Metlife
Capital Fin. Corp. v. Washington Ave. Assoc., L.P., 713 A.2d
527, 534 (N.J. Super. A.D. 1998); P.J. Carlin Constr. Co. v.
City of New York, 399 N.Y.S.2d 13, 14 (N.Y.A.D. 1977); R.
Conrad Moore & Assoc., Inc. v. Lerma, 946 S.W.2d 90, 95
(Tex. App. 1997); Young Elec. Sign Co. v. United Standard
West, Inc., 755 P.2d 162, 164 (Utah 1988); but see AT&T
Info. Sys., Inc. v. Smith, 593 So.2d 673, 676 (La. App.
1991); Pacheco v. Scoblionko, 532 A.2d 1036, 1039 (Me.
1987); Story v. City of Bozeman, 856 P.2d 202, 215 (Mont.
1993); Fisher v. Schmeling, 520 N.W.2d 820, 822 (N.D.
1994); Patterson v. Anderson Motor Co., Inc., 319 S.W.2d
492, 501 (Tenn. App. 1958). We believe this allocation of the
burden of proof is appropriate since the O’Brians initially
assented to the clause when they signed the Agreement. Moreover,
the purpose of a liquidated damages provision is to obviate the
need for the nonbreaching party to prove actual damages. This
purpose would not be served if the nonbreaching party, instead of
proving actual damages, had to show that "the damage
resulting from a breach of contract is [not] susceptible of
definite measurement" and that "the stipulated amount
[is not] grossly in excess of actual damages." Brooks,
248 Va. at 208, 445 S.E.2d at 479. However, if the O’Brians are
successful in proving that paragraph D(4) is an unenforceable
penalty, Langley must then prove its actual damages as in any
breach of contract action where the contract does not contain a
liquidated damages provision. Stony Creek Lumber Co. v. Fields
& Co., 102 Va. 1, 7-8, 45 S.E. 797, 799 (1903); accord
Metlife, 713 A.2d at 537; Rodriquez, 946 P.2d at
In the present case, the circuit court
precluded any inquiry into the validity of the liquidated damages
clause by denying the O’Brians’ motion to compel and subsequently
awarding summary judgment before hearing any relevant evidence on
the issue. Generally, the granting or denying of discovery
is a matter within the discretion of the trial court and will not
be reversed on appeal unless "the action taken was
improvident and affected substantial rights." Rakes v.
Fulcher, 210 Va. 542, 546, 172 S.E.2d 751, 755 (1970).
However, the court’s actions here substantially affected the
O’Brians’ ability and right to litigate the validity of the
liquidated damages clause.
For these reasons, we will reverse the judgment
of the circuit court and remand this case for further proceedings
consistent with this opinion.
Reversed and remanded.