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.
One test which has been suggested is whether it is easy or difficult to prove the actual damages. Where this test is recognized it is held that if the actual damages can be proved with reasonable certainty, a stipulation in advance, fixing the amount thereof, is a penalty.1 This is in some states a statutory rule.2 The party who claims that it is difficult to prove the amount of damages and who is seeking to uphold the provision for the payment of money as an agreement for liquidated damages has the burden of showing that such damages are difficult to ascertain ;3 and the recital in the contract that such damages are difficult to prove is ineffectual.4 Under such statutes a provision for paying ten dollars a day for delay in completing a house,5 or for forfeiting twenty per cent of the invoice price on countermanding an order for personalty,6 or for paying a fixed sum per head in case of shortage in the number of cattle contracted for,7 or for returning the amount paid as rent in case of failure to furnish the amount of water agreed upon,8 is in each case held a penalty. If the actual damages are not easy to prove, a stipulation in advance therefor is to be treated prima facie as a stipulation for liquidated damages, and it is only when such stipulations have an excessive and unreasonable amount that the provisions are to be treated as a penalty.9 On this theory a contract to furnish public utilities such as electric lights,10 or a public bridge,11 or a contract whereby a telephone company is to pay a fixed sum if it merges with a competitor,12 is one for breach of which it is not easy to estimate damages; and hence covenants to pay fixed sums on breach are covenants for liquidated damages. Other examples of such covenants are agreements to pay money on breach of a contract not to publish libelous articles,13 to refund money if a dike should be destroyed exposing the promisee's land to high tides ;14 an agreement to pay a certain sum as liquidated damages in case of a sublessee's being ousted by lessee ;15 a provision that if a partner shall violate his promise to abstain from intoxicating liquors he shall forfeit all his interest in the business and receive a monthly salary ;16 an agreement to pay a certain sum of money on breach of a contract to form a partnership,17 or a contract to convey realty,18 or a contract to give two weeks' notice before quitting work,19 the work in other departments being dependent on the work in the department in which this employee was working; or a contract to deduct a fixed amount from the price of logs not delivered on time, and thus exposed to the weather ;20 or a contract to pay one thousand dollars in case of a breach by an employee of his covenant not to drink intoxicating liquor.21 This test, however, has been repudiated by the Supreme Court of the United States,22 and it has been held by them that even though the actual damages can be readily ascertained with certainty, a stipulation for damages in advance is not necessarily a penalty.
4 Wallis v. Smith, 21 Ch. D. 243, 257.
5 Wallis v. Smith, 21 Ch. D. 243, 258.
6 Wallis v. Smith, 21 Ch. D. 243, 258.
7 Sun, etc., Association v. Moore, 183 U. S. 642.
1 Hall v. Crowley, 5 All. (Mass.)
304; 81 Am. Dec. 745; Fasler v. Beard, 39 Minn. 32; 38 N. W. 755; Brennan v. Clark. 29 Neb. 385; 45 N. W. 472; Lansing v. Dodd, 45 N. J. L. 525; Caesar v. Rubinson, 174 N. Y. 492; 67 N. E. 58; Krutz v. Robbins, 12 Wash. 7; 50 Am. St. Rep. 871; 28 L. R. A. 676; 40 Pac 415.
2 Home, etc., Co. v. McNamara, 111 Fed. 822; 49 C. C. A. 642; Pacific Factor Co. v. Adler, 90 Cal. 110; 25 Am. St. Rep. 102; 27 Pac. 36; Drew v. Pedlar, 87 Cal. 443; 22 Am. St. Rep. 257; 25 Pac. 749; Mansur, etc., Implement Co. v. Wil-let, 10 Okla. 383; 61 Pac. 1066; Seim v. Krause, 13 S. D. 530; 83 N. W. 5.83.
3 Deuninck v. Irrigation Co., 28 Mont. 255; 72 Pac. 618.
4 Pacific Factor Co. v. Adler, 90 Cal. 110; 25 Am. St. Rep. 102; 27 Pac. 36.
5 Seim v. Krause, 13 S. D. 530; 83 N. W. 583.
6 Mansur, etc., Implement Co. v. Willet, 10 Okla. 383; 61 Pac. 1066. For similar case see Mansur, etc., Co. v. Hardware Co., 136 Ala. 597; 33 So. 818.
7 Home, etc., Co. v. McNamara, 111 Fed. 822; 49 C. C. A. 642.
8 Deuninck v. Irrigation Co., 28 Mont. 255; 72 Pac. 618.
9 Green v. Price, 13 M. & W. 695; Pressed Steel Car Co. v. Ry., 121 Fed. 609; 57 C. C. A. 635; Sanders v. Carter, 91 Ga. 450; 17 S. E. 345; Hennessy v. Metzger, 152 111. 505; 43 Am. St. Rep. 267; 38 N. E. 1058; Garst v. Harris. 177 Mass. 72; 58 N. E. 174; Chase v. Allen, 13 Gray (Mass.) 42; Brennan v. Clark, 29 Neb. 385; 45 N. W. 472; Ward v. Building Co., 125 N. Y. 230; 26 N. E. 256; Grasselli v. Lowden. 11 O. S. 349; Everett Land Co. v. Maney, 16 Wash. 552; 48 Pac. 243.
10 Brooks v. Wichita, 114 Fed. 297; 52 C. C. A. 209.
11 Malone v. Philadelphia. 147 Pa St. 416; 23 Atl. 628.
12 (City of) New Britain v. Telephone Co., 74 Conn. 326; 50 Atl. 881, 1015. For a similar contract by a railroad see Grand Trunk Ry. v. Halton County, 21 Can. S. C. 716.
13 Emery v. Boyle, 200 Pa. St 249; 49 Atl. 779.
14 Jennings v. McCormick, 25 Wash. 427; 65 Pac. 764.
15 Guerin v. Stacy, 175 Mass. 595; 56 N. E. 892.
16 Henderson v. Murphree, 109 Ma. 556; 20 So. 45.
17 Sanford v. National Bank. 94 Ia. 680; 63 N. W. 459.
18 Sanders v. Carter, 91 Ga. 450; 17 S. E. 345; Talkin v. Anderson (Tex.), 19 S. W. 852.
19 Tennessee Mfg. Co. v. James, 91 Tenn. 154; 30 Am. St. Rep. 865; 15 L. R. A. 211; 18 S. W. 262.
20 Kilbourne v. Lumber Co., 1ll Ky. 693; 64 S. W. 631.
21 Keeble v. Keeble, 85 Ala. 552; 5 So. 149.
22 Sun, etc., Association v. Moore, 183 U. S. 642.