Richardson, TX asked in Contracts for Maryland

Q: At what point are cancellation fees in a contract unreasonable?

I am involved with a greek organization chapter currently facing a contractual dilemma and am seeking legal advice on how to navigate this situation. Three years ago, an officer, who has since left the chapter, signed a perpetual service agreement with a greek organization management platform. The full implications of this perpetual agreement and its associated cancellation fee have become a concern.

Recently, we discovered that the management platform has been making unauthorized payments on behalf of our chapter, actions not stipulated in the original agreement. This raises questions about a potential breach of contract.

The agreement includes a cancellation fee equal to one year's worth of services, which seems excessive for services not rendered.

How can we challenge or renegotiate this agreement in light of the unauthorized payments? What legal grounds might we have to contest the cancellation fee or terminate the agreement?

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2 Lawyer Answers
Kenesha A Raeford
Kenesha A Raeford

A: This is a great question that I think hinges on the contractual defense of unconscionability. This is not the easiest contractual defense to prove, but it appears to be in the ballpark of what you're asking about which is the reasonableness of the contractual terms.

Here's what Maryland law says about unconscionability:

An unconscionable contract involves extreme unfairness, "made evident by (1) one party's lack of meaningful choice, and (2) contractual terms that unreasonably favor the other party." Meaningful choice is usually the most difficult of the two requirements to prove, but the reasonableness of the terms may also provide challenges. Typically the court looks for contractual terms that are " so egregious

that [they] give most or all the benefits of the agreement to only one party." "Agreements do not need to

be equal to be valid." (citations omitted). In this instance, if you are receiving at least some of the benefits of the agreement, it would be difficult to show that the contract is unreasonable. Additionally, regarding meaningful choice, there would need to be evidence of unreasonable influence, impairment, or other detriment that frustrated that signor's ability to fully understand what he or she was signing at the time of the agreement.

Maryland has several other contractual defenses, that based upon additional facts, could also apply to your contractual dispute. However, what is most important to highlight is the apparent violations of the contract by the management company (making unauthorized payments not stipulated within the contract). Of course, a full review of the contract would need to be conducted to ensure that they truly have no contractual power to make those payments, but if it is absolutely the case that they operated in a manner not authorized by the contract, that would constitute a breach. If they are found to be in breach of the agreement, then any cancellation fee clause is unlikely to be enforced. Perhaps the payments were a mistake, and they simply need a chance to refund the payments and remedy the issue, then that could absolve them of this breach. However, if they refuse refunds or reversals of the payments, the possibility of breach would remain. In all honestly, it is quite challenging to provide clear advice on a contractual dispute such as this one without seeing the entire document, because there may be terms or clauses that create exceptions and carve-outs that could provide a cleaner answer to your question.

Best of Luck!

Mark Oakley
Mark Oakley
  • Rockville, MD
  • Licensed in Maryland

A: There is caselaw on this issue in Maryland, and as always, every case and contract turns on its peculiar facts and contract terms. If the cancellation fee (called “liquidated damages” in the law) exceeds a reasonable estimate of actual damages incurred, then it may be deemed an unenforceable penalty. Breach of the contract by the management company may forfeit the right to this cancellation fee as well. Whether a breach of contract is substantive enough to justify cancellation of the contract is another matter. Take the contract to a lawyer for review.

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