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 met with general favor is the following: If provision is made for breach of several different covenants of a contract, and a gross sum is fixed which is to be paid in case of the breach of any one of such covenants, and the covenants are of different degrees of importance so that the damage resulting from the breach of one would be much greater than those resulting from the breach of another, the stipulation is held to be a penalty.1
A promise to pay a fixed sum for failure to build a house or to pay off all liens thereon;2 or to pay a certain additional amount per ton for every ton of hay or straw sold off the premises, where the value of manure from hay is different from that from straw; 3 or a promise to pay a certain sum in case of any default in a contract to sell and deliver a certain number of sheep;4 or a promise to pay a fixed sum for breach of any one of a number of covenants, ranging from the payment of royalty to keeping gates closed;5 or a bond in the sum of ten thousand dollars, conditioned on the release of a number of debts varying in amount from eight thousand dollars to ten thousand dollars,6 have each been held to be provisions for penalties. A covenant by which an employe agrees to give his entire time to the business for a certain period, to treat business communications as confidential, to use his best exertions and abilities for his employer, to attempt to benefit by his employer's instructions as an apprentice, and to pay a fixed sum of money on proof of any breach, is a covenant for a penalty.7 A contract to sell an undivided interest in a business and a stock in trade and an automobile, to act as employe for the purchaser, and not to compete in business for a period of time, contains covenants of varying degrees of importance, and a stipulation for fifteen hundred dollars in case of breach of any of such covenants is a stipulation for a penalty.8 A contract for the exchange of a stock of hardware for certain land, which contains an agreement by one to lend money to the other, together with a guarantee that the stock of hardware shall invoice for a certain amount, contains covenants of such varying importance that - a covenant to pay twenty-five hundred dollars in case of any default is a covenant for a penalty.9 However, covenants by which one who undertakes an automobile agency agrees to act in a sober and gentleman-like manner, to use his best efforts to make sales, and to give his whole time and energy to the business, are not of varying degrees of importance, and a provision for the employer's retaining a specified sum of money in case of any breach may be a covenant for liquidated damages.10
1England. Willson v. Love , 1 Q. B. 626; Kemble v. Farren, 6 Bing 141.
United States. Home, etc, Go. v. McNamara, 111 Fed. 822, 49 C. C. A 642.
Arkansas. Montague v. Robinson, 122 Ark. 163, 182 S. W. 658.
Florida. Smith v. Newell, 37 Fla 147, 20 So. 249.
Georgia. George W. Muller Bank Fixture Co. v. Georgia Ry. & Electric Go., 145 Ga. 484, 89 S. E. 615.
Iowa. Elzey v. Winterset, 172 Ia. 643, 154 N. W. 901.
Kansas. Evans v. Moseley, 84 Kan. 322, 50 L. R. A. (N.S.) 889, 114 Pac. 374; Metz v. Clay, 101 Kan. 45, 165 Pac. 809.
Maryland. Mount Airy Milling & Grain Co. v. Runkles, 118 Md. 371, L R. A. 1915E, 373, 84 Atl. 533.
Minnesota. Carter v. Strom, 41 Minn. 522, 43 N. W. 394; State v. Larson, 83 Minn. 124, 54 L. R. A. 487, 86 N. W. 3; Johnson v. Dittes, 137 Minn. 175, 162 N. W. 1078.
Nebraska. Squires v. Elwood, 33 Neb. 126, 49 N. W. 939.
New Jersey. Summit v. Morris County Traction Co., 85 N. J. L. 193, L. R. A. 1915E, 385, 88 Atl. 1048.
Ohio. Berry v. Wisdom, 3 O. S. 241.
Oklahoma. El Reno v. Cullinane, 4 Okla. 457, 46 Pac. 510; City National Bank v. Kelly, 51 Okla. 445, 151 Pac. 1172.
Oregon. Wilhelm v. Eaves, 21 Or 194, 14 L. R. A. 297, 27 Pac. 1053.
Pennsylvania. Keck v. Bieber, 148 Pa. St. 645, 33 Am. St. Rep. 846, 24 Atl. 170.
Washington. Johnson v. Cook, 24 Wash. 474, 64 Pac. 729.
Wisconsin. Kerslake v. Mclnnis, 113 Wis. 659, 89 N. W. 895; Madison v. Engineering Co., 118 Wis. 480, 95 N. W. 1097.
2 Johnson v. Cook, 24 Wash. 474, 64 Pac. 729. (Amount agreed on $3,000 - value of house $2,000.)
3 Willson v. Love , 1 Q. B. 626.
4 Squires v. Elwood, 33 Neb. 126, 49 N. W. 939. See for a similar contract of a less marked type, Home, etc., Co. v. McNamara, 111 Fed. 822, 49 C. C. A. 642.
This test has proved so satisfactory in its operation that it is a matter of regret that so many cases present facts which do not admit of determination by it. Even this test, however, is not unanimously adopted. It has been repudiated in several courts, though often in obiter, as a decisive test;11 and it has been said that this principle has no application to cases where the damage from each breach, though not the same in each, is in each uncertain,12 but that it applies only where the damages are readily ascertainable, either on some,13 or all,14 of the breaches, as where one of the covenants is to pay money.15 Under a contract for constructing two buildings, a provision for paying two hundred dollars for each day of delay in performance, was held not to be a penalty, although such amount was to be paid whether the delay was in the construction of both buildings or of one.16
5Keck v. Bieber, 148 Pa. St. 645, 33 Am. St. Rep. 846, 24 Atl 170.
6 Bignall v. Gould, 119 U. S. 496, 30 L. ed. 491.
7 Berry v. Wisdom, 3 O. S. 241.
8 City National Bank v. Kelly, 61 Okla. 445, 151 Pac. 1172.
9Johnson v. Dittes, 137 Minn. 175, 162 N. W. 1078.
10 Bilz v. Powell, 50 Colo. 482, 38 L. R. A. (N.S.) 847, 117 Pac. 344.
11Wallis v. Smith, 21 Ch. P. 243; Sun, etc., Co. v. Moore, 183 U. S. 642,
A provision for paying a large sum in case of a breach of a minor covenant, but making no provision for payment in case of a total breach, is regarded as a provision for a penalty.17