Usually in contracts, no provision is made as to rights or remedies in event of breach, but not infrequently the possibility of breach is contemplated, and provisions made regarding it. The law supplies remedies in the event of breach - will the court permit the parties to make any stipulation changing the remedies that would otherwise exist? In the first place we must keep certain principles in mind. Breach of a contract is a civil, not criminal, wrong, and the law does not punish one for breaking a contract, but merely provides remedies for the compensation or protection of the parties injured by such breach. In awarding damages, it seeks only to award compensation whereby the breach may be amended, and the law will not permit these fundamental principles to be subverted by the parties by their stipulations in the contract.
Let us assume that we have a case in which it is provided that in the event of breach by one of the parties he shall pay the other the sum of $500.00, or that he shall forfeit $500 or that he puts up $500 as security for the performance of the contract. Now we have the courts saying that if the parties intend a provision of this sort to be one for the payment of damages, they will so enforce it, and call it a provision whereby the parties have in the contract itself liquidated the damages in the event of its breach; but if the parties do not so intend it the courts will not so enforce it and will call it a penalty. This language seems to put it within the power of the contracting parties to make the same sort of a provision either enforcible or unenforcible according as they express their intention in connection therewith. But this is not the true explanation, and the failure even by the courts themselves to appreciate the true meaning has led to confusion and erroneous results. The true rule is this: that where there is a provision for the payment of money in the event of a breach of a contract, and the parties have by language used by them made possible the construction that such provision is intended to liquidate the damages and it furthermore appears that they have made the provision as a real attempt to estimate the damages in some reasonable proportion to what they actually will be, then such a provision will be enforced, but if, no matter whether they call the provision liquidated damages or not, or even declare it to be their intention that such sum shall be considered as liquidated damages, they name a sum with apparent arbitrariness or which violates all rules of damages and despite their language is really a penalty in its nature, then their true intention is to provide for a penalty, and as penalties do not follow breach of contract, the courts will not enforce such provision.
The provision of a contract for liquidated damages is in many cases eminently wise and proper, as there are many cases in which without such a provision an injured party sustaining real and perhaps great damages finds them either immeasurable or at least very hard to measure by the very nature of his case.
If the provision is by way of liquidated damages, it determines the damages and therefore prohibits inquiry into the true damages whether greater or less. Its purpose has been to save that inquiry and the courts will so enforce it.
If the damages will be difficult to ascertain and the amount is reasonable, a provision in a contract stated to be by way of liquidated damages, will be so construed.
If the damages are difficult to ascertain and the sum is stated to be payable as damages, and is not unreasonable in amount, it will be so enforced.
Example 69. W agreed to complete a grand stand for a race course by a certain day, to cost $133,000.00, and to pay $100.00 for every day's delay as liquidated damages. Held, that the plaintiff could recover that amount for every day's delay, and proof of actual damages not requisite, the sum being apparently reasonable from the nature and extent of the work.152
Example 70. C agreed to remove a house a distance of three feet at a cost of about $100.00, and in the event of failure, to pay $500.00 "as liquidated and ascertained damages." In a suit against him for not removing the house, Held, that this sum was unreasonable and would be considered a penalty and therefore without force, and actual damages would have to be proved.153
152. Wallis Iron Works v. Monmouth Park Ass'n, 55 N. J. L. 132.
153. Condon v. Kemper, 13 L. R. A. (Kan.) 671.
If the parties prescribe that upon the failure to pay a debt a larger sum shall there upon accrue, this is unenforceable as being a penalty.
If $100.00 is to be due July 1st, and if not paid on that day, then $125.00, this is a penalty no matter how the parties describe it. This is to be carefully distinguished from a case of discount, as where $125.00 is due on July 1st, but if paid before that day, a ten per cent discount will be allowed. This is a common custom of merchants under the discount system. The distinction is that in the latter case $125.00 is the debt, while in the other, $100.00 is the debt, and a penalty is added for its non-payment.154
If a sura is stated to be payable for breach of any promise in a contract, whether relatively more or less important, the provision is a penalty.
Example 71. A leased a mine from B and agreed to indemnify B against all damages for injury to neighboring lands, to use the water in certain ways, to pay a certain royalty, to fill up excavations, to use a certain road and to keep gates shut and in repair, and for breach of any of these to pay B a certain amount. Held, a penalty.155
If sums are paid by way of deposit, or in part payment, and a provision is made that these are to be retained, in case of
154. Goodyear v. Selz, 157 111. 186.
155. Keck v. Bieber, 148 Pa. St. 645.
default, they constitute liquidated damages unless unreasonable.
Frequently where deposits are made, as on contracts to buy real estate, or on installment contracts, it is provided that the sum or sums paid may be retained as liquidated damages. These, if not unreasonable, are upheld ; if unreasonable they will be treated as penalties.136
156. Advance Amusement Co. v. Franke, 268 111. 579.