Liquidated Damages
The parents understand that the obligation to pay the fees and tuition for the full year is not conditional and that no portion of such fees and tuition paid or outstanding will be refunded or cancelled in the event of absence, withdrawal, or dismissal from ABC Christian School.
This clause is in nearly every Christian school’s enrollment packet. Such clauses are known as liquidated damages. The school is naming the set amount of damages if the parents violate the agreement. As a rule, these are allowed when the actual amount of damages for a breach would be hard or impossible to know at the time the contract is made and the liquidated damages amount is not higher than the actual loss if the contract is violated. It is generally recognized that it is difficult to determine the school’s actual financial harm when a student is withdrawn early.
The intent is to avoid abuse of liquidated damages clauses, such as the party with the most leverage inserting huge penalties for violation into the contract. Contract law theory attempts to make both parties whole as if there was no breakdown of the agreement; generally, there is no desire to punish one side or the other unless bad faith has been shown. Court after court has upheld the year’s tuition as a reasonable liquidated damages amount. However, courts have taken note of additional fees or costs associated with a student attending that the school would save when the student is no longer there, and yet those fees are included in the liquidated damages clause. Some courts have taken out the additional fees, but we have not seen a case where the school lost because of the fees.
Takeaway: If a school has a clause that requires parents to pay the full year’s tuition regardless of the reason the child is no longer attending, then it needs to ensure that any additional fees or costs the school would save are passed to the parents. This is especially true for boarding programs. Courts have taken issue with boarding schools that include room and boarding cost in their liquidated damages clause. Lower or take out such fees where the school will save money (such as not having to provide food for that child). For traditional day schools, that might mean book, supply, or technology fees. This does not mean a school cannot include any of these fees, but it will want to make sure it is prorating them or justifying how it is still a cost to the school whether the child is there or not. While we are not aware of a court ruling against a school for having such costs lumped into their liquidated damages clause, too many courts have pointed them out to ignore it. Eventually, someone will lose a close case based on these additional fees.
Duty to Mitigate
It is a general principle in contract law that the party being breached upon still has a duty to mitigate its losses in a reasonable manner—see Restatement (Second) of Contracts § 350 (1981). Think of a banana shipment where the shipper violates the agreement by not shipping the farmer’s bananas. The farmer has a duty to find another shipper and then sue for the higher shipping cost and potential lost profits of the delay, but the farmer cannot let the whole load of bananas rot and then sue for the value of the bananas.
Courts have looked at similar issues with schools, particularly when the contract is broken early on. Some courts have ruled the school has a duty to try to mitigate the loss of the student by finding another one (note that the requirement is for an effort to find one, not that one has to be found). This can sometimes hinge on whether the spot was reserved just for that student or whether the school had additional seats it could have filled either way. The majority of states have said that if there is a valid liquidated damages clause, then there is no duty for the school to mitigate.
Takeaway: In a majority of states, there is no duty to mitigate if the school has a valid liquidated damages clause. In the remainder of states where there is such a duty, the school needs to show it had made a good faith effort to fill the slot by advertising or reaching out to families that earlier showed interest or were wait-listed.
Impossibility
There is some ambiguity as to whether a serious illness preventing a student from attending a given school is a valid excuse for not fulfilling the contract. It appears the majority of courts have found it a valid defense of impossibility; the contract could not be fulfilled. A minority of states have enforced the contract and required tuition to be paid if illness is listed as one of the qualifications that do not allow excuse.
Takeaway: We would suggest letting the family out of the agreement for serious illness of the student if for no other reason than brotherly love—although the strong likelihood is the law requires it anyway.
Editor’s Note: WEB EXCLUSIVE CONTENT. This article will be posted on the ACSI website and will include additional sample policy language for a liquidated damages clause.
© 2016 by the Association of Christian Schools International
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