## Facts

- On March 7, 1944, G. Herbert Wisner (plaintiff), a tomato grower, entered a written contract with H.J. McGrath Co. (defendant), a cannery company.
- Wisner agreed to sell and deliver to the Company his entire 1944 tomato crop grown on the designated acreage at a fixed price of $28 per ton.
- Clause 12 of the contract stated that if Wisner failed to deliver his entire crop, he would pay $300, which the contract labeled “liquidated damages.”
- Wisner did not deliver his entire tomato crop as required by the agreement.
- The Company deducted $300 from the amount otherwise payable to Wisner for tomatoes delivered, relying on Clause 12.
- Wisner sued in the Circuit Court for Baltimore County to recover the withheld $300 as the unpaid balance due under the contract.
- The Company filed a special plea of set-off based on Clause 12.
- Wisner demurred to the set-off plea; the trial court sustained the demurrer.
- The case was removed to the Superior Court of Baltimore City, where judgment was entered for Wisner for $300.
- The Company appealed, contending the $300 clause was enforceable liquidated damages and therefore could be asserted as a set-off.

## Issues

1. Whether Clause 12, requiring payment of $300 for any failure to deliver the entire tomato crop, was enforceable as liquidated damages or void as a penalty.
2. If the clause was unenforceable, whether the Company’s special plea of set-off based on Clause 12 was legally insufficient.

## Decision

- The Court of Appeals of Maryland held Clause 12 was an unenforceable penalty, not a valid liquidated-damages provision.
- Because the clause was a penalty, the Company had no enforceable claim for $300 and could not use Clause 12 as a set-off against the contract price owed to Wisner.
- The court affirmed the sustaining of Wisner’s demurrer to the Company’s special plea of set-off and left in place the judgment for Wisner for $300.

## Legal Principles

- A stipulated-sum damages clause is enforceable as liquidated damages only if (1) the amount is a reasonable forecast of probable loss from breach and (2) anticipated damages were difficult to ascertain at the time of contracting.
- A fixed sum that becomes payable upon breaches of varying degrees of seriousness—without regard to the extent of the shortfall—tends to show the provision is intended to secure performance by threat of forfeiture and therefore operates as a penalty.
- When damages from breach can be measured with reasonable certainty (for example, by reference to the quantity not delivered and the economic consequences of that shortfall), a large flat charge is less likely to qualify as liquidated damages.
- Contract labels (such as calling a sum “liquidated damages” and stating it is not a penalty) do not control; courts look to the provision’s operation and proportionality.
- A set-off must rest on a legally valid claim; if the underlying damages clause is unenforceable, a plea of set-off based solely on that clause fails as a matter of law.

## Conclusion

Because the contract imposed a single $300 charge for any failure to deliver the entire tomato crop—regardless of how small the shortfall might be—and because the Company’s loss from nondelivery was susceptible to reasonable calculation, the Maryland Court of Appeals treated Clause 12 as a penalty and refused to enforce it, leaving Wisner entitled to recover the $300 withheld.


H.J. McGrath Co. v. Wisner, 55 A.2d 793 (1947)