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.
Agreements are frequently made that one or both parties to a contract shall deposit a certain sum of money which is to be the property of the other if the contract is not performed. Such agreements are, if fair and reasonable, treated as stipulations for liquidated damages and enforced1 Thus under a contract for the sale of realty, a deposit of money,2 or a certified.check,3 may be retained by the party not in default. If the check is lost, equity will give affirmative relief.4 So under a contract for the sale of personalty, a deposit of a certified check may be retained by the party not in default.5 A provision for the forfeiture of the first payment for stock in case the subscriber does not perform his contract, is treated as a covenant for liquidated damages.6 Under this theory a provision in a contract of employment whereby the employer was to retain six days' wages until the end of the term of employment to secure performance, was treated as a covenant for liquidated damages.7 A contract by which an automobile manufacturer gives exclusive rights in certain territory to a so-called agent, and the agent deposits a certain amount of money for each of the total number of automobiles which the so-called agent agrees to accept and pay for, and by which the seller is to retain the amount deposited for the cars which the purchaser does not take, is regarded as a contract for liquidated damages.8 A provision by which an employer is to retain a certain amount of money in case his agent violates his covenants, to behave in a sober and gentleman-like manner, to use his best efforts to make sales and to give his entire time and energy to the business, has been treated as a covenant for liquidated damages.9
4 Morris v. Wilson, 114 Fed. 74, 52 C. C. A. 22.
5 See Sec. 2131.
6 Camden Iron Works v. Sewerage and Water Board, 141 La. 453, 75 So. 204.
1 Georgia. Sanders v. Carter, 01 Ga. 460. 17 S. E. 345; Allison v. Dunwody, 100 Ga. 51, 28 S. E. 651.
Kentucky. Woodbury v. Mfg. Co., 96 Ky. 469, 29 S. W. 295.
Iowa. Sanford v. Bank, 94 la. 680, 63 N. W. 459.
North Dakota. Gile v. Interstate Motor Car Co' 27 N. D. 108, L. R. A. 1915B, 109, 145 N. W. 732.
Wyoming. Edwards v. Johnston, 23 Wyora. 384, 152 Pac. 273.
See also, Riley v. Aetna Insurance Co., 80 W. Va. 236, L. R. A. 1917E, 983, 92 S. E. 417.
2 Womack v. Coleman, 89 Minn. 17, 93 N. W. 663.
3 Moore v. Durnam, 63 N. J. Eq. 96, 51 Atl. 449.
4 Moore v. Durnam, 63 N. J. Eq. 96, 51 Atl. 449.
5 Millar v. Smith, 28 Tex. Civ. App. 386, 67 S. W. 429.
6 Edwards v. Johnston, 23 Wyom. 384, 152 Pac. 273.
7 Wilson v. Godkin, 136 Mich. 106, 98 N. W. 985.
If unreasonable, and intended merely to coerce performance, they are treated as penalties.10 Thus a provision in a contract for the sale of lumber, whereby the vendee was to retain fifty cents per thousand to insure performance, is treated as a penalty.11 Thus under a building contract, the retention of a certain percentage of the contract price to secure performance, and to be the property of the owner in case of breach by the contractor, is a penalty.12 So if one thousand dollars is deposited by the lessee to become the property of the lessor in case of breach of the covenants of the lease, this is held to be a penalty if all the covenants of the lease have been performed except the payment of forty-five dollars of rent.13 A provision for a deposit of five hundred dollars which the lessor is to retain in case the lessee fails to comply with the covenants of his lease, is a provision for a penalty.14 On the other hand, a provision for retaining a deposit of two months rent in case of breach by the lessee, has been treated as a provision for liquidated damages.15 Deposits made by a bidder to secure his making a formal contract in accordance with the terms under which he bids, if his bid is accepted, have been held to be penalties.16 A provision that a bidder must deposit a bond or a certified check "as surety for the making and execution of a contract," does not show that such bond or check was intended by the parties as liquidated damages.17
8 Gile v. Interstate Motor Car Co., 27 N. D. 108, L. R. A. 1915B, 109, 145 N. W. 732.
9 Bilz v. Powell, 50 Colo. 482, 38 L. R. A. (N.S.) 847, 117 Pac. 344.
10 United States. Sherburne v. Hirst, 121 Fed. 998; Kennedy v. United States, 24 Ct. Cl. 122.
Colorado. Carson v. Arvantes, 10 Colo. App. 382, 50 Pac. 1080.
Illinois. Advance Amusement Co. v. Franke, 268 111. 579, 109 N. E. 471.
Maryland. Willson v. Baltimore, 83 Md. 203, 55 Am. St. Rep. 339, 34 Atl. 774.
Missouri. Tinkham v. Satori, 44 Mo. App. 659.
New Jersey. Monmouth Park Association v. Warren, 55 N. J. L. 598, 27 Atl. 932.
New York. Chaude v. Shepard, 122 N. Y. 397, 25 N. E. 358.
Oklahoma. Hargrove v. Bourne, 47 Okla. 484, 150 Pac. 121.
Texas. Lindsey v. Rockwall County, 10 Tex. Civ. App. 225, 30 S. W. 380.
11 Stony Creek Lumber Co. v. Fields. 102 Va. 1, 45 S. E. 797. So under a logging contract. Kerslake v. Mclnnis, 113 Wis. 659, 89 N. W. 895.
12 Gleason v. United States, 33 Ct. Cl. 65; Satterlee v. United States, 30 Ct. Cl. 31; Kennedy v. United States, 24 a. Cl. 122.
13 Caesar v. Rubinson, 174 N. Y. 492, 67 N. E. 58.
14 Hargrove v. Bourne, 47 Okla. 484, 150 Pac. 121.
A similar conflict of view exists where contracts are involved by the terms of which payments made thereunder are in case of default on the part of the one who makes them to become the property of the adversary party. In some cases such provisions are treated as valid, on the theory that they are for liquidated damages,18 while in others they are treated as agreements for penalties.19 Under statutory provisions forbidding contracts for liquidated damages unless it is impracticable to show actual damages, such provisions can not be enforced.20 As in case of deposits, most of these cases can be reconciled on the theory that some of the contracts are for amount reasonably apportioned to the amount of actual damage, while others are for excessive and unreasonable amounts.