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.
The intention of the parties is said to be paramount and controlling.1 The fact that the provision for so-called liquidated damages was inserted by the purchaser after the contract was prepared for execution, is said to impose upon him the burden of showing that the parties intended such provision as one for liquidated damages.2
18Tayloe v. Sandiford, 20 U. S. (7 Wheat.) 13, 17, 5 L. ed. 384. 19 See Sec. 2403.
20 Board of Commerce v. Security Trust Co., 225 Fed. 454, 140 G. C. A. 486.
21 Barber Asphalt Paving Co. v. St. Paul, 136 Minn. 396, L. R. A. 1917E, 370, 162 N. W. 470.
22 Montague v. Robinson, 122 Ark. 163, 182 S. W. 558.
1 Connecticut. Rabinowitz v. Apter, 90 Conn. 1, 96 Atl. 157.
Illinois. Advance Amusement Co. v. Franke, 268 111. 579, 109 N. E. 471.
Iowa. Kelly v. Fejervary, 111 Ia. 693, 83 N. W. 791; Joeckel v. Johnson, 178 Ia. 231, 159 N. W. 672.
Kansas. Heatwole v. Gorrell, 35 Ken. 692, 12 Pac. 135.
Massachusetts. Perkins v. Lyman, 11 Mass. 76, 6 Am. Dec. 158.
Minnesota. Taylor v. Newspaper Co., 83 Minn. 523, 86 N. W. 760.
Hew York. Cotheal v. Talmage, 9 N. Y. 651, 61 Am. Dec. 716.
Ohio. Sheffield-King Milling Co. v. Domestic Science Baking Co., 95 O. S 180, 115 N. E. 1014.
North Carolina. Bradshaw v. Mill-ikin, 173 N. Car. 432, 92 S. E. 161.
"The courts at one time seemed to be quite strong in their views and would scarcely admit that there ever was a valid contract providing for liquidated damages. Their tendency was to construe the language as a penalty, so that nothing but the actual damages sustained by the party aggrieved could be recovered. Subsequently the courts became more tolerant of such provisions, and have now become strongly inclined to allow parties to make their own contracts, and to carry out their intentions, even when it would result in the recovery of an amount stated as liquidated damages, upon proof of the violation of the contract, and without proof of the damages actually sustained." United States v. Bethlehem Steel Company, 205 U. S. 105, 51 L. ed. 731.
This means, however, not what they have agreed to call it, nor even what they may in good faith think it is, for this involves their opinion upon the law.3 When their intent is said to be paramount, what is meant is that if from the surrounding facts and circumstances it appears that they are in good faith contracting for the actual amount of the loss as estimated in advance, the contract is one for liquidated damages; while, if they are contracting for an arbitrary sum, intended to coerce performance or punish default, they are contracting for a penalty.4
In determining whether the parties are stipulating for a penalty or for liquidated damages, the surrounding circumstances,5 including the prior negotiations of the parties,6 and the circumstances which surround the execution of the contract,7 may be considered. The fact that the government seeks for bids on time as well as on price, and that it accepted the bid which was highest in price and shortest in time, may be considered in determining that a provision for deducting a certain amount for each day of delay is intended as liquidated damages.8
In case of doubt, the courts prefer to treat the stipulation as one for a penalty, since this construction makes the actual amount of the damages the amount of recovery.9 The opposite view, however, has been expressed and it has been said that effect should be given to the intention of the parties unless it appears that the stipulation is for a penalty.10 In view of the difficulty in ascertaining the damages which arise from a breach of a valid covenant not to compete in business, it is said that a provision for the payment of money in case of breach of such a covenant will be regarded as a covenant for liquidated damages rather than as a covenant for a penalty.11 Whether a provision for the payment of a certain amount in case of default is a penalty or a stipulation for liquidated damages, is a question for the court.12
2 Mount Airy Milling & Grain Co. v. Runkles, 118 Md. 371, L. R. A. 1915E, 373, 84 Atl. 533.
3Willson v. Mayor of Baltimore, 83 Md. 203, 55 Am. St. Rep. 330, 34 Atl. 774.
4 Iowa. Sanford v. National Bank, 04 Ia. 680, 63 N. W. 459; Elzey v. Win-terset, 172 Ia. 643, 154 N. W. 901.
Massachusetts. Cushing v. Drew, 97 Mass. 445.
Missouri. May v. Crawford, 142 Mo. 390, 44 S. W. 260.
North Carolina. Bradshaw v. Milli kin, 173 N. Car. 432, 92 S. E. 161.
Pennsylvania. Streeper v. William?, 48 Pa. St. 450.
West Virginia. Wilkes v. Bierne, 68 W. Va. 82, 31 L. R. A. (N.S.) 937, 69 's. E. 366.
5 United States v. Bethlehem Steel Company, 205 U. S. 105, 51 L. ed. 731.
6 United States v. Bethlehem Steel Company, 205 U. S. 105, 51 L. ed. 731; Mount Airy Milling & Grain Co. v. Runkles, 118 Md. 371, L. R. A. 1915E, 373, 84 Atl. 533.
7 Mount Airy Milling & Grain Co. v. Runkles, 118 Md. 371, L. R. A. 1915E, 373, 84 Atl. 533.
8 United States v. Bethlehem Steel Company, 205 U. S. 105, 51 L. ed. 731
9 Colorado. Amanda, etc., Co. v. Mill Co., 28 Colo. 251, 64 P, 218.