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
4 Wallis v. Smith, 21 Ch. D. 243, 267.
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, 46 L. ed. 366.
1 Arkansas. Montague v. Robinson, 122 Ark. 163, 182 S. W. 558.
Kansas. Evans v. Moseley, 84 Kan. 322, 50 L. R. A. (N.S.) 889, 114 Pac. 374.
Massachusetts. Hall v. Crowley, 87 Mass. (5 All.) 304, 81 Am. Dec. 745; Makletzova v. Diaghileff, 227 Mass. 100, 116 N. E. 231.
Minnesota. Fasler v. Beard, 39 Minn. 32, 38 N. W. 755.
Nebraska. Brennan v. Clark, 29 Neb. 385, 45 N. W. 472.
New Jersey. Lansing v. Dodd, 45 N. J. L. 525.
New York. Caesar v. Rubinson, 174 N. Y. 492, 67 N. E. 58.
Oregon. Rainier v. Masters, 79 Or. 534, 154 Pac. 426 (obiter).
Washington. Krutz v. Robbins, 12 Wash. 7, 50 Am. St. Rep. 871, 28 L. R. A. 676, 40 Pac. 415.
2Home, etc., Co. v. McNamara, 111 Fed. 822, 49 C. C. A. 642; Drew v. Pedlar, 87 Cal. 443, 22 Am. St. Rep.
In some jurisdictions, however, this test is not to be resorted to in the first instance, and it is to be used only as a means of solving doubts which are raised by the remaining provisions of the contract.3 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;4 and the recital in the contract that such damages are difficult to prove is ineffectual.5 In other jurisdictions it has been said that there is no presumption that the damages were certain in amount or readily susceptible of proof,6 and accordingly in the absence of evidence as to the amount of damages, a contract by which a contractor agrees to pay ten dollars per day for delay in the construction of a sewer, is to be regarded as a covenant for liquidated damages.7
Where this test is recognized a provision for paying ten dollars a day for delay in completing a house;8 or for forfeiting twenty per cent, of the invoice price on countermanding an order for personalty;9 or for paying a fixed sum per head in case of shortage in the number of cattle contracted for;10 or for returning the amount paid as rent in case of failure to furnish the amount of water agreed upon,11 is in each case held a penalty.
If the actual damages are not easy to prove, a stipulation in advance as to the amount of damages is to be treated prima facie as a stipulation for liquidated damages,12 and it is only when the amount which is fixed in such stipulation is evidently excessive and unreasonable that the amount agreed upon is to be regarded as a penalty.13
257, 25 Pac. 749; Pacific Factor Co. v Adler, 90 Cal. 110, 25 Am. St. Rep. 102, 27 Pac. 36; Mansur, etc., Implement Co. v. Willet, 10 Okla. 383, 61 Pac. 1066; Home Pattern Co. v. Mascho, 46 Okla. 55, 148 Pac. 131; Childs v. Moore, 57 Okla. 638, 157 Pac. 333; Seim v. Krause, 13 S. D. 530, 83 N. W. 583.
3 Grand Union Laundry Co. v. Carney, 88 Wash. 327, 153 Pac. 5.
4 Deuninck v. Irrigation Co., 28 Mont. 255, 72 Pac. 618.
5 Pacific Factor Co. v. Adler, 90 Cal. 110, 25 Am. St. Rep. 102, 27 Pac. 36.
6 Wood v. Ocean City, 85 N. J. Eq. 328, 96 Atl. 489.
7Wood v. Ocean City, 85 N. J. Eq. 328, 96 Atl. 489.
8 Seim v. Krause, 13 S. D. 530, 83 N. W. 583.
9 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.
10 Home, etc., Co. v. McNamara, 111 Fed. 822, 49 C. C. A. 642.
11 Deuninck v. Irrigation Co., 28 Mont. 255, 72 Pac. 618.
12 United States. Board of Commerce v. Security Trust Co., 225 Fed. 454, 140 C. C. A. 486; United States v. Rubin, 227 Fed. 938.
On this theory a contract to furnish public utilities, such as electric lights,14 or a public bridge,15 or a contract whereby a telephone company is to pay a fixed sum if it merges with a competitor,16 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;17 to refund money if a dike should be destroyed, exposing the promisee's land to high tides;18an agreement to pay a certain sum as liquidated damages in case of a sublessee 's being ousted by lessee;19 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;20 an agreement to pay a certain sum of money on breach of a contract to form a partnership;21 an agreement that the principal shall be authorized to retain a certain amount out of the agent's commissions in case of breach of contract by the agent;22 an agreement by one to whom exclusive territory was given for selling a certain product to give up his interest in a deposit in case he did not purchase a certain amount of such product;23 a contract to pay an agent, who is to sell upon commission, the amount of commissions upon the entire property which the principal agrees to forward to him for selling, whether it is forwarded or not;24 a contract to furnish a certain amount of laundry work and to pay for such amount, even if a less amount were actually furnished;25 or a contract to convey realty;26 or a contract to exchange property;27 or a contract to give two weeks' notice before quitting work,28 the work in other departments being dependent on the work in the department in which this employe 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;29 or a provision for deducting a certain amount in case of breach of a building contract,30 or a contract to pay one thousand dollars in case of a breach by an employe of his covenant not to drink intoxicating liquor.31 Under a contract by which a board of commerce agrees to spend a certain amount of money in securing a site for a manufacturing company, and the manufacturing company agrees to maintain a certain payroll for a certain period of time, a provision to the effect that the manufacturing company shall pay to the chamber of commerce a sum which is substantially that which the chamber of commerce has expended for the site for the manufacturing company in case the manufacturing company fails to maintain such payroll, is a stipulation for liquidated damages.32 A contract by which a married woman, who has instituted divorce proceedings against her husband, agrees to dismiss such proceedings and to resume marital relations with him, and he agrees to cease his illegal relations with his mistress and to convey a certain amount of realty to his wife in case he fails to comply with such covenant, provides for liquidated damages33 The actual damage which is sustained by reason of violation of a contract to keep an alien in custody while awaiting deportation, is so difficult to estimate, that a provision for paying a specified sum in the event of the breach of such contract, is held to be a provision for liquidated damages.34 A covenant in a contract of agency by which the principal is authorized to retain a certain amount out of the agent's commissions in the event of the agent's default, is not rendered a provision for a penalty by reason of the fact that under the provisions of the contract the amount to be retained will increase in proportion to the time that the performance of the contract has lasted, if from the circumstances it appears that the maximum amount to be retained would accrue early in the performance of the contract.35