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.
Agreements are frequently made that one or both parties to a contract shall deposit a certain sum of money which is to be the property of the other if the contract is not performed. Such agreements are, if fair and reasonable, treated as stipulations for liquidated damages, and enforced.1 Thus under a contract for the sale of realty a deposit of money,2 or a certified check,3 may be retained by the party not in default. If the check is lost, equity will give affirmative relief.4 So under a contract for the sale of personalty a deposit of a certified check,5 may be retained by the party not in default. Under this theory a provision in a contract of employment whereby the employer was to retain six days' wages until the end of the term of employment to secure performance was treated as a covenant for liquidated damages.6 If unreasonable, and intended merely to coerce performance, they are treated as penalties.7 Thus a provision in a contract for the sale of lumber whereby the vendee was to retain fifty cents per thousand to insure performance is treated as a penalty.8 Thus under a building contract, the retention of a certain percentage of the contract price to secure performance, and to be the property of the owner in case of breach by the contractor is a penalty.9 So if one thousand dollars is deposited by the lessee to become the property of the lessor in case of breach of the covenants of the lease, this is held to be a penalty if all the covenants of the lease have been performed except the payment of forty-five dollars of rent.10 So deposits made by a bidder to secure his making a formal contract in accordance with the terms under which he bids, if his bid is accepted, have been held to be penalties.11 A similar conflict of view exists where contracts are involved by the terms of which payments made thereunder are in case of default on the part of the one who makes them to become the property of the adversary party. In some cases such provisions are treated as valid, on the theory that they are for liquidated damages,12 while in others they are treated as agreements for penalties.13 Under statutory provisions forbidding contracts for liquidated damages unless it is impracticable to show actual damages, such provisions cannot be enforced.14 As in case of deposits, most of these cases can be reconciled on the theory that some of the contracts are for amount reasonably apportioned to the amount of actual damage, while others are for excessive and unreasonable amounts.
4 Morris v. Wilson, 114 Fed. 74; 52 C. C. A. 22.
5 See Sec. 1183.
1 Allison v. Dunwody, 100 Ga. 51;
28 S. E. 651; Sanders v. Carter, 91 Ga. 450; 17 S. E. 345; Sanford v. Bank, 94 Ia. 680; 63 N. W. 459; Woodbury v. Mfg. Co., 96 Ky. 459;
29 S. W. 295.
2 Womack v. Coleman, 89 Minn. 17; 93 N. W. 663.
3 Moore v. Durnam, 63 N. J. Eq. 96; 51 Atl. 449.
4 Moore v. Durnam, 63 N. J. Eq. 96; 51 Atl. 449.
5 Millar v. Smith. 28 Tex. Civ. App. 386; 67 S. W. 429.
6 Wilson v. Godkin, - Mich. -; 98 N. W. 985.
7 Sherburne v. Hirst, 121 Fed. 998; Kennedy v. United States, 24 Ct. 01. 122; Carson v. Arvantes, 10 Colo. App. 382; 50 Pac. 1080; Will-son v. Baltimore, 83 Md. 203; 55 Am. St. Rep. 339; 34 Atl. 774; Tinkham v. Satori, 44 Mo. App. 659; Monmouth Park Association v. Warren, 55 N. J. L. 598; 27 Atl. 932; Chaude v. Shepard, 122 N. Y. 397; 25 N. E. 358; Lindsey v. Rockwall County, 10 Tex. Civ. App. 225; 30 S. W. 380.
8 Stony Creek Lumber Co. v. Fields, - Va. - ; 45 S. E. 797. So under a logging contract. Kerslake v. McInnis, 113 Wis. 659; 89 N. W. 895.
9 Gleason v. United States, 33 Ct. CI. 65; Satterlee v. United States, 30 Ct. CI. 31; Kennedy v. United States, 24 Ct. C1. 122.
10 Caesar v. Rubinson, 174 N. Y. 492; 67 N. E. 58.
11 Willson v. Baltimore, 83 Md. 203; 55 Am. St. Rep. 339; 34 Atl. 774; Lindsey v. Rockwall County, 10 Tex. Civ. App. 225; 30 S. W. 380.
12 Wallis v. Smith, 21 Ch. D. 243; Glock v. Colony Co., 123 Cal. 1; 69 Am. St. Rep. 17; 43 L. R. A. 199; 55 Pac. 713; Havens v. Patterson, 43 N. Y. 218; Reddish v. Smith. 10 Wash. 178; 45 Am. St. Rep. 781; 38 Pac. 1003.
13 In re Dagenham Dock Co., L. R. 8 Ch. 1022.
Contract to forfeit payments for realty if vendee does not perform. Phelps v. Brown, 95 Cal. 572; 30 Pac. 774; Cleary v. Folger, 84 Cal. 316; 18 Am. St. Rep. 187; 24 Pac. 280; Barnes v. Clement, 12 S. D. 270; 81 N. W. 301.