Same - Rules As To Penalties And Liquidated Damages

222. If the parties fix upon a certain sum to be paid on breach of the contract,

(a) It may be recovered if it was really fixed upon as liquidated damages for nonperformance. This is subject to the rules of construction stated below.

(b) But, if it was intended in the nature of a penalty in excess of any loss likely to be sustained, the recovery will be limited to the loss actually sustained.

223. In determining whether the sum named is a penalty or liquidated damages, these rules may be stated:

(a) The courts will not be guided by the name given to it by the parties.

(b) If the matter of the contract is of certain value, a sum in excess of that value is a penalty.

(c) If the matter is of uncertain value, the sum fixed is liquidated damages.

(d) If a debt is to be paid by installments, it is no penalty to make the whole debt due on nonpayment of an installment.

(e) If some terms of the contract are of certain value, and some are not, and the penalty is applied to a breach of any one of them, it is not recoverable as liquidated damages.18

Where the parties to a contract affix a sum certain to be paid on the nonperformance of his promise by one or each of them, they may have intended (1) to assess the damages at which they rated the nonperformance of the promise, or (2) to secure its performance by imposing a penalty in excess of the actual loss likely to be sustained. If the former can, according to the rules to be presently mentioned, reasonably be construed to have been their intention, the sum named is recoverable as "liquidated damages," on breach of the promise. If the latter was their actual or presumed intention, the amount recoverable is limited to the loss actually sustained. Formerly, this rule existed only in equity, but for a long time it has been also applied in the courts of law.17

16 Anson, Cont. (4th Ed.) 256.

17 Watts v. Camors, 115 U. S. 353, 6 Sup. Ct 01, 20 L. Ed. 406; Tayloe v. Sandiford, 7 Wheat. 13, 5 L. Ed. 3S4. See "Damage*," Dec. Dig. (Key. No.) § 76; Cent. Dig. §§ 154, 155.

Rules Of Construction

In construing contracts in which such a term is introduced, the courts will not be guided by the name given to the sum to be paid. If it is liquidated damages, they will enforce it, though erroneously called a "penalty," and, on the other hand, if it is in the nature of a penalty, they will not allow it to be enforced, although designated "liquidated damages." 18

(1) If the contract is for a matter of certain value, or value easily ascertainable, and a sum in excess of that value is fixed to be paid on breach of it, the sum so fixed is a penalty, and not liquidated damages.19

(2) If the contract is for a matter of uncertain value, and a sum is fixed to be paid on breach of it, and is not, on the face of the contract, so greatly in excess of the probable damage as to show that the parties could not have fixed upon it otherwise than as a penalty, the sum is recoverable as liquidated damages. There is "nothing illegal or unreasonable in the parties, by their mutual agreement, settling the amount of damages, uncertain in their nature, at any sum upon which they may agree." 20 If the stipulation is so construed, the plaintiff is limited to the amount named, though his actual- damages may be greater.21

18 Ward v. Building Co., 125 N. Y. 230, 26 N. E. 256; Bagley v. Peddle, 16 N. Y. 469, 69 Am. Dec. 713; Condon v. Kemper, 47 Kan. 126, 27 Pac. 829, 13 L. R. A. 671; Wallis v. Carpenter, 13 Allen (Mass.) 19; Cheddick's Ex'r v. Marsh, 21 N. J. Law, 463; Bignall v. Gould, 119 U. S. 495, 7 Sup. Ct 294, 30 L. Ed. 491; Sanford v. Bank, 94 Iowa, 680, 63 N. W. 459; J. G. Wagner Co. v. Cawker, 112 Wis. 532, 88 N. W. 599. See "Damages," Dec. Dig. (Key-No.) § 78; Cent. Dig. § 157.

19 Clements v. Railroad Co., 132 Pa. 445, 19 Atl. 274, 276; Brennan v. Clark, 29 Neb. 385, 45 N. W. 472; Willson v. City of Baltimore, 83 Md. 203, 34 Atl. 774, 55 Am. St. Rep. 339. See "Damages," Dec. Dig. (Key-No.) § 79; Cent. Dig. § 164.

20 JAQUITH v. HUDSON, 5 Mich. 123, Throckmorton Cas. Contracts, 355; Kemble v. Farren, 6 Bing. 147; Poppers v. Meagher, 148 111. 192, 35 N. E. 805; Maxwell v. Allen, 78 Me. 32, 2 Atl. 386, 57 Am. Rep. 783; Keeble v. Keeble, 85 Ala. 552, 5 South. 149; Cushing v. Drew, 97 Mass. 445; Tennessee Mfg. Co. v. James, 91 Tenn. 154, 18 S. W. 262, 15 L. R. A. 211, 30 Am. St Rep. 865; Fasler v. Beard, 39 Minn. 32, 38 N. W. 755; Lansing v. Dodd, 45 N. J. Law, 525; Trower v. Elder, 77 111. 452; Morse v. Rathburn, 42 Mo. 598, 97 Am. Dec. 359; Pennypacker v. Jones, 106 Pa. 237; May v. Crawford, 142 Mo. 390, 44 S. W. 260; City of New Britain v. Telephone Co., 74 Conn. 326, 50 Atl. 881, 1015; Pressed Steel Car Co. v. Railroad Co., 121 Fed. 609, 57 C. C. A. 635; Elizabethtown, etc., R. Co. v. Geoghegan, 9 Bush (Ky.) 57; Madler v. Silverstone, 55 Wash. 159, 104 Pac. 165, 34 L. R. A. (N. S.) 1 and note. Stipulation in building contract for payment by contractor of certain sum for each day that work remains uncompleted after certain day construed as liquidated damages. Legge v. Harlock, 12 Q. B. 1015; Fletch v. Dyche, 2 Term R. 32; Hall v. Crowley, 5 Allen (Mass.) 304, 81 Am. Dec. 745; Ward v. Building Co., 125 N. Y. 230, 26 N. E. 256; Monmouth Park Ass'n v. Iron Works, 55 N. J. Law, 132, 26 Atl. 140, 19 L. R. A. 456, 39 Am. St. Rep. 626;

Courts lean against forfeiture, and towards construing stipulations for liquidated damages as penalties, when the amount on the face of the contract is out of all proportion to the possible loss; and many courts declare that the parties, even if they intended to fix upon the amount stipulated as liquidated damages, will nevertheless be limited to the recovery of actual damages if the amount stipulated for is so greatly in excess of the actual damages that it is in effect a penalty. In other words, the real question is "not what the parties intended, but whether the sum is, in fact, in the nature of a penalty; and this is to be determined by the magnitude of the sum, in connection with the subject-matter, and not at all by the words or the understanding of the parties. The intention of the parties cannot alter it." 22 Other courts, on the other hand, maintain that in such cases the intention of the parties must govern, and that whether a stipulation to pay a sum of money is to be treated as a penalty or as an agreed ascertainment of damages is to be determined by the contract, fairly construed; it being the duty of the court always, where the damages are uncertain and have been liquidated by agreement, to enforce the contract.23 "It may, we think, fairly be stated,"