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.
Another test which has been suggested is whether the amount stipulated for is greatly in excess of the actual damages or not. Where this test is applied, it is held that if the amount stipulated for is no greater than the actual damages,1 or if the amount which is stipulated for is greater than the actual damages, but such excess is comparatively slight,2 the stipulation will be treated as one for liquidated damages.3 Thus an agreement to pay for the use of a button-sewing machine at a certain rate per thousand buttons, and if the lessee does not keep account of the number of buttons sewed, the lessor to have the option to charge five dollars a day for its use, is held to be a rough estimate of the value of the machine and not a penalty.4 A contract for the payment of a certain sum per day for delay in delivering gun carriages is to be regarded as a covenant for liquidated damages if it is shown that the United States accepted the bid which was for the greatest amount, because of the fact that it provided for the minimum time of performance.5
If the amount stipulated for is excessive, the stipulation is for a penalty.6 Thus a provision for paying in case of breach of a contract for work and labor a sum greatly in excess of the cost of completing the contract;7 or for paying a fine for wrongful use of electrotypes "equal to tenfold the price of the wrongfully used electrotypes";8 or for paying in case of breach "five hundred dollars besides .all damages,"9 have each been held to be agreements for penalties. A provision for the forfeiture of an advance payment in addition to liability for damages caused by a failure to perform, shows that the provision for forfeiture is a provision for a penalty.10 A provision by which an employer is to retain one dollar a week from his employes' wages, which is not to be repaid to the employe in case he fails to perform his contract for the entire period of employment, is not an attempt to provide for actual compensation, since the longer the employe works the less will be his employer's damages and the greater will be the amount which the employe is to pay in case of breach.11
1 United States. United States v Rubin, 233 Fed. 125.
Illinois. Bartholomae & Roesing Brewing & Malting Co. v. Modzelewski, 280 111. 530, 100 N. E. 1058.
Iowa. Joeckel v. Johnson, 178 Ia. 231, 150 N. W. 672.
Massachusetts. Standard Button-Fastening Co. v. Breed, 163 Mass. 10, 39 N. E. 346.
New Jersey. Whitfield v. Levy, 35 N. J. L. 140; Hoagland v. Segur, 38 N. J. L. 230; Lansing v. Dodd, 45 N. J. L. 525; Monmouth Park Association v. Iron Works, 55 N. J. L. 132, 39 Am. St. Rep. 626, 10 L. R. A. 456, 26 Atl. 140.
Tennessee. Illinois Central By. v. Cabinet Co., 104 Tenn. 568, 78 Am St. Rep. 033, 50 L. R. A. 720, 58 S. W. 303. .
2 United States v. Bethlehem Steel Company, 205 U. S. 105, 51 L. ed. 731; Summit v. Morris County Traction Co.,
85 N. J. L. 103, L. R. A. 1015E, 385, 88 Atl. 1048 (obiter).
3 Board of Commerce v. Security Trust Co., 225 Fed. 454, 140 C. C. A. 486; Southern Menhaden Co. v. How, 71 Fla. 128, 70 So. 1000; Joeckel v. Johnson, 178 Ia. 231, 159 N. W. 672; Doan v. Rogan, 70 O. S. 372, 87 N. E. 263.
4 Standard Button-Fastening Co. v. Breed, 163 Mass. 10, 39 N. E. 346.
5 United States v. Bethlehem Steel Company, 205 U. S. 105, 51 L. ed. 731.
6 United States. Gay Mfg. Co. v. Camp, 65 Fed. 704, 13 C. C. A. 137.
Arkansas. Glasscock v. Rosengrant, 55 Ark. 376, 18 S. W. 379.
Illinois. Heisen v. Westfall, 86 111. App. 576.
Iowa. Elzey v. Winteraet, 172 Ia. 643, 154 N. W. 001; Joeckel v. Johnson, 178 Ia. 231, 150 N. W. 672.
Kansas. Condon v. Kemper, 47 Kan. 126, 13 L. R. A. 671, 27 Pac. 829;
Where this test is applied, it is the facts as they exist when the contract is made, and not those in existence when the contract was broken, which determine whether the amount stipulated for is reasonable or unreasonable.12 If the provision which is inserted as liquidated damages is an amount which would appear to be reasonable when the contract was made, it will not be turned into a penalty by the fact that it may subsequently prove to be in excess of the amount of actual damages.13 The question is as to the amount of damage which reasonably might have followed a breach as compared with the amount for the payment of which provision is made, and not the amount of actual damage as compared with the amount thus provided for.14 A covenant for liquidated damages for failure to deliver material necessary for military purposes during a war, does not become a covenant for a penalty because of the fact that the war terminated soon after the contract was entered into.15 A provision for a deposit of rent for two months in advance and for loss of such deposit in case of default by the lessee as liquidated damages, is not turned into a provision for a penalty by reason of the fact that the lessor acts as soon as the lessee makes default, and accordingly the amount of such deposit is in excess of the amount of rent which is not paid.16 In some cases, however, it seems to be assumed that the actual damage which is sustained and not the damage which might have been sustained is the test for determining whether a provision is a penalty or a covenant for liquidated damages; and accordingly where performance has progressed so far that the actual damage is much less than the amount for which provision is made, such' provision will be treated as a penalty.17 A provision for repaying one-half of the purchase price which was paid for property, a business and a covenant not to compete, in case of a breach of the covenant not to compete, was treated as a penalty where such breach took place shortly before the expiration of the period during which the promisor had agreed not to compete.18 A result of this sort may be justified where, as in some of these cases, the covenant is to pay the same penalty for breaches of a number of different covenants of different degrees of importance.19 In some cases it may be justified under a fair construction of contract by regarding the covenant to make such payment as a covenant to make such payment in case of a total breach, and not in case of a comparatively minor breach.20 Apart from cases of this sort, however, the validity of the covenant should depend upon the facts as they exist when the contract is made and not upon the facts as they exist when the contract is performed.
Evans v. Moseley, 84 Kan. 322, 50 L. R. A. (N.S.) 889, 114 Pac. 374.
Massachusetts. Meyer v. Estes, 164 Mass. 457, 32 L. R. A. 283, 41 N. E. 683.
Michigan. Decker v. Pierce, 191 Mich. 64, 157 N. W. 384.
Minnesota. Carter v. Strom, 41 Minn. 522, 43 N. W. 394; Schommer v. Flour City Ornamental Iron Works, 129 Minn. 244, 152 N. W. 535.
North Carolina. Wheedon v. Trust Co., 128 N. Car. 69, 38 S. E. 255.
Ohio. Sheffield-King Milling Co. v Domestic Science Baking Co., 95 O. S. 180, 115 N. E. 1014.
Pennsylvania. Clements v. Ry., 132 Pa. St. 445, 19 Atl. 274, 276.
Tennessee. Baird v. Tolliver, 25 Tenn. (6 Humph.) 186, 44 Am. Dec. 298.
Utah. Mcintosh v. Johnson, 8 Utah 359, 31 Pac. 450.
Wisconsin. Gates v. Parmly, 93 Wis. 294, 66 N. W. 253 [affirmed on rehearing, 93 Wis. 321, 67 N. W. 739]; J. G. Wagner Co. v. Cawker, 112 Wis. 532, 88 N. W. 599.
7Heisen v. Westfall, 86 111. App. 576; Condon v. Kemper, 47 Kan. 126, 13 L. R. A. 671, 27 Pac. 829. (Cost of work $100; amount to be paid $500.)
8 Meyer v. Estes, 164 Mass. 457, 32 L. R. A. 283, 41 N. E. 683.
9 Foote & Davies Co. v. Malony, 115 Ga. 985, 42 S. E. 413.
10 Evans v. Moseley, 84 Kan. 322, 50 L. R. A. (N.S.) 889, 114 Pac. 374.
11 Schommer v. Flour City Ornamental Iron Works, 129 Minn. 244, 152 N. W. 535.
12 United States v. Bethlehem Steel Company, 205 U. S. 105, 51 L. ed. 731; Rabinowitz v. Apter, 90 Conn. 1, 96 Atl. 157; Cowan v. Meyer, 125 Md. 450, 94 Atl. 18; Gibson v. Oliver, 158 Pa St. 277, 27 Atl. 961.
13 Cowan v. Meyer, 125 Md. 450, 94 Atl. 18.
14Rabinowitz v. Apter, 90 Conn. 1, 96 Atl. 157.
15 United States v. Bethlehem Steel Company, 205 U. S. 105, 51 L. ed. 731.
16 Barrett v. Monro, 69 Wash. 229, 40 L. R. A. (N.S.) 763, 124 Pac. 369.
17 Mount Airy Milling & Grain Co. v.
Runkles, 118 Md. 371, L. R. A. 1915E, 373, 84 Atl. 533; Shute v. Taylor, 46 Mass. (5 Met.) 61; Caesar v. Robinson, 174 N. Y. 492, 67 N. E. 58.
18 Mount Airy Milling & Grain Co. v. Runkles, 118 Md. 371, L. R. A. 1915E, 373, 84 Atl. 533.
19 See 2125.
20See Sec. 12126.