This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
To lay down a general test, or set of tests, for determining whether a stipulation is for a penalty or liquidated damages, is even more difficult than the general attempt to lay down an arbitrary rule for determining in advance what the parties to a contract mean by the use of certain language. These "artificial rules"1 are liable to fail of application in any particular contract by reason of the context and subject-matter which may show an intent different from that which the rule indicates. The difficulty is intensified in this case by the fact that on many elementary questions as to the application of specific tests, the courts are absolutely at variance. A summary of the English cases on this subject is given in Wallis v. Smith,2 in which the following classes are enumerated: "Where a sum of money is stated to be payable either by way of liquidated damages, or by way of penalty for breach of stipulations, all or some of which are, or one of which is, for the payment of a sum of money of less amount, that is really as penalty, and you can only recover the actual damage, and the court will not sever the stipulations."3 Cases "in which the amount of damages is not ascertainable per se, but in which the amount of damages for a breach of one or more of the stipulations, either must be small, or will, in all human probability, be small - that is, where it is not absolutely necessary that they should be small; but it is so near to a necessity, having regard to the probabilities of the case, that the court will presume it to be so."4 This class of cases the court says is in part open for discussion and in part included in another class, i. e., the one following. "The class of cases to which I refer is that in which the damages for the breach of each stipulation are unascertainable, or not readily ascertainable, but the stipulations may be of greater or less importance, or they may be of equal importance. There are dicta there which seem to say that if they vary much in importance the principle of which I have been speaking applies, but there is no decision. On the contrary, all the reported cases are decisions the other way; although the stipulations have varied in importance the sum has always been treated as liquidated damages."5 "A class of cases relating to deposits. Where a deposit is to be forfeited for the breach of a number of stipulations, some of which may be trifling, some of which may be for the payment of money on a given day, in all those cases the judges have held that this rule does apply and that the bargain of the parties is to be carried out. I think that exhausts the substance of the cases."6 This classification is apparently, approved by the Supreme Court of the United States,7 and in the same case more of these "artificial rules" are suggested.
3 Sanford v. National Bank, 94 Ia. 680; 63 N. W. 459; Cushing v. Drew, 97 Mass. 445; May v. Crawford, 142 Mo. 390; 44 S. W. 260; Streeper v. Williams, 48 Pa. St. 450.
4 Amanda, etc., Co. v. Mill Co., 28 Colo. 251; 64 Pac. 218; Hennes-sy v. Metzger, 152 111. 505; 43 Am. St. Rep. 267; 38 N, E. 1058; Day Bros. Lumber Co. v. Ison (Ky.),
62 S. W. 516; Wallis v. Carpenter, 13 All. (Mass.) 19; O'Keefe v. Dyer, 20 Mont. 477; 52 Pac. 196; Baird v. Tolliver. 6 Humph. (Tenn.) 186; 44 Am. Dec. 298.
1 Bagley v. Peddie, 16 N. Y. 469, 471; 69 Am. Dec. 713; quoted Sun, etc., Co. v. Moore, 183 U. S. 642.
2 21 Ch. D. 243.
3 Wallis v. Smith, 21 Ch. D. 243, 256.