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.
At common law, a contract to pay a specified sum of money upon the happening of a certain event, was enforced according to its terms. The fact that the sum of money designated was agreed upon to punish breach or to coerce performance, did not have any effect in making such a contract unenforceable. If the contract was a simple one, a valuable consideration was, of course, necessary; and if the consideration for the promise was itself money, questions of adequacy of consideration might arise. If the contract was under seal, questions of this sort were not presented.1 Equity, however, looked at the intent and not the outward form of the contract, and relieved against penalties and forfeitures.2 The doctrine that equity relieved against forfeitures originally referred to cases of mistake, surprise, imposition, and the like; but this restriction was abandoned at a comparatively early time, and it became settled that equity could relieve against a penalty or a forfeiture for the non-payment of money, since the damages caused by the delay could be estimated exactly in the form of interest.3 It has been said that equity will not relieve against penalty or forfeiture, where the breach is anything other than the non-payment of money.4 In the majority of cases this distinction is practically sufficient, and further discussion of the accuracy of this statement will be omitted. The other principle, namely, that equity looked at the intent of the parties rather than the outward form, operated to give relief against penalties in many cases which would fall without the limits of the mere doctrine of relief against penalties as such. If, upon applying the ordinary rules of construction to a given contract, it appeared that the stipulation for the payment of the specified sum of money was intended as a security for the actual damages, caused by the breach, or to coerce performance, equity would relieve against the enforcement of the contract in its outward form and restrict the injured party to the recovery of his actual damages.5 By a statute in England, the injured party in an action for a penalty given by a contract, was restricted to the collection of the actual damages.6 In the United States, partly by the adoption of this English statute as a part of our common law, and partly by our own statutes, this power is very generally exercised by the courts of common law. The doctrine of equity as to what is a penalty and what is a stipulation for liquidated damages has been to this extent adopted into our common law.
(Decided by a divided court. For prior opinion, see Walshe Mfg. Co. v. W. T. Smith Lumber Co., 178 Ala. 472, 59
6 See ch. LXXX.
1 Watts v. Camors, 115 U. S. 353, 29
L. ed. 406; Sun, etc., Association v. Moore, 183 U. S. 642, 46 L. ed. 366.
2 Lowe v. Peers, 4 Burr. 2225.
3Wallis v. Smith, 21 Ch. D. 243.
4Wallis v. Smith, 21 Ch. D. 243.
5 Lowe v. Peers, 4 Burr. 2225.