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.
In a contract for the sale of personal property, a provision for the payment of a reasonable sum in case of breach, has been held to be liquidated damages.1 A provision for paying a reasonable sum per day for delay in delivery of the property sold,2 as a provision for a certain reasonable amount per day for failure to place an engine and boiler in a barge;3 or a provision for paying ten dollars a day for delay in delivering church pews;4 or a provision for paying fifty dollars a day for delay in delivering turbines; 5 or a provision for deducting fifteen cents a hundred feet for delay in delivering logs, thereby exposing them to the weather for a longer time,6 have each been held to be a provision for liquidated damages. So a covenant to pay five dollars a day for delay in delivering an engine is held to be a provision for liquidated damages.7 A promise contained in a note, by which the prospective purchasers of the business agree to pay five hundred dollars as liquidated damages, if they do not perform the contract for the purchase of business and by which such note is to be regarded as a part payment in case they perform, is regarded as a covenant for liquidated damages.8 A contract by which a purchaser of wheat agrees that in case of default on his part he will settle upon the basis of actual difference between the highest closing price of such wheat on the date of sale and on the date of cancellation, and that he will pay the seller one cent a bushel from the date of the sale and date of cancellation for carrying the wheat, and that he will pay two cents a bushel for buying and reselling the wheat, and two cents a bushel to cover the loss or profits, if any, has been held to provide for liquidated damages.9 A covenant in a contract between a company which manufactures and sells patterns and one who purchases them, by which the purchaser agrees to pay one-third of the purchase price as liquidated damages in case he fails to accept and pay. for the amount agreed upon, is a covenant for liquidated damages.10 On the other hand, a provision that the purchaser shall make a test to see whether the article conforms to the provision of the contract, and that within a certain time after such test he shall return the article if unsatisfactory, or pay the purchase price if he does not so return it, has been held to be a provision for a penalty.11
30 Chicago House Wrecking Co. v. United States, 106 Fed. 385, 53 L. R. A. 122.
31 Madison v. Engineering Co., 118 Wis. 480, 95 N. W. 1097.
32 Lennon v. Smith, 124 N. Y. 578, 27 N. E. 243.
1 Delaware. In re Ross, - Del. - , 95 Atl. 311.
Kentucky. Kilbourne v. Lumber Co., 111 Ky. 693, 64 8. W. 631.
Massachusetts. Lynde v. Thompson, 84 Mass. (2 All.) 456.
Ohio. Sheffield-King Milling Co. v. Domestic Science Baking Co., 95 O. S. 180, 115 N. E. 1014.
Vermont. Knight v. McNeil, 91 Vt.
214, 99 Atl. 728 (question, however, not raised properly).
2 Pressed Steel Car Co. v. Ry., 121 Fed. 609, 57 C. C. A. 635; American, etc., Works v. Malting Co., 30 Wash. 178, 70 Pac. 236
3Manistee Iron Works Co. v. Lumber Co., 92 Wis. 21, 65 N. W. 863.
4 Illinois Central Ry. v. Cabinet Co., 104 Tenn. 568, 78 Am. St. Rep. 933, 50 L. R. A. 729, 58 S. W. 303.
5 Wood v. Paper Co., 121 Fed. 818, 58 C. C. A. 256.
6Kilbourne v. Lumber Co., 111 Ky. 693, 64 S. W. 631.
7 Hardie, etc., Co. v. Oil Mill, 84 Miss. 250, 36 So. 262.
If the amount contracted for is unreasonable, it will be treated as a penalty.12 Thus a contract to pay fifty dollars a day for delay in delivering an engine, was held to be a contract for a penalty.13 A provision in a contract for the special manufacture and delivery of ornamental terra cotta, to the effect that the seller should pay fifty dollars as liquidated damages for each day for which delivery was delayed, was held to impose a penalty.14 If a gross sum is to be paid for breach of the contract, the provision is more likely to be treated as a penalty. Thus under a contract for purchasing a crop of oranges while on the trees for a lump sum, a provision that the purchaser is to pay the vendor fifteen hundred dollars as part payment, and that if the purchaser fails or refuses to comply with the provision of the contract, such payment shall be forfeited, was held to be a penalty.15 A provision for payment by the vendee of twenty per cent, of the invoice price in case of his countermanding the order, has been held to be a penalty.16
8 Knight v. McNeil, 01 Vt. 214, 99 Atl. 728 (question, however, not rained properly).
9 Sheffield-King Milling Co. v. Domestic Science Baking Co., 97 O. S. 180, 115 N. E. 1014.
10 In re Ross, - Del. - , 95 Atl. 311.
11Walsh Mfg. Co. v. W. T. Smith
Lumber Co., 196 Ala. 371, 72 So. 73.
12 Northwestern Terra Cotta Co. v. Caldwell, 234 Fed. 491, 148 C. C. A. 257; Glasscock v. Rosengrant, 55 Ark. 376. 18 S. W. 379.
13Troqnois Furnace Co. v. Mfg. Co., 181 111. 582. 54 N. E. 987.
14 Northwestern Terra Cotta Co. v. Caldwell, 234 Fed. 491, 148 C. C. A. 257.