§ 1472. Where a certain gross sura of money is reserved, in an agreement, to be paid in case of the non-performance of such agreement, it is generally to be considered as a penalty,1 the legal operation of which is, not to create a forfeiture of that entire sum, but only to cover the actual damages occasioned by the breach of contract.2 It is not to be considered
1 Of course the reservation by a creditor of a right to have full payment of a sum, the whole of which is actually due under an existing contract, should there be a failure to pay a smaller sum on a fixed day, can in no case be treated as a penalty. Thompson v. Hudson, Law Rep. 4 H. L. 1 (1869).
2 The same rule also obtains in equity. Sloman v. Walter, 1 Bro. Ch. 418; Skinner v. Dayton, 2 Johns. Ch. 535; Sanders v. Pope, 12 Ves. 282; Davis v. West, 12 Ves. 475. Mr. Justice Story, in his treatise on Equity Jur. vol. ii. § 1314, says: " The general principle now adopted is, that, wherever a penalty is inserted merely to secure the performance or enjoyment of a collateral object, the latter is considered as the principal intent of the instrument, and the penalty is deemed only as accessory, and therefore, as intended only to secure the due performance thereof, or the damage really incurred by the non-performance. In every such case the true test (generally, if not universally) by which to ascertain whether relief can or cannot be had in equity, is to consider whether compensation can be made or not. If it cannot be made, then courts of equity will not interfere. If it can be made, then, if the penalty is to secure the mere payment of money, courts of equity will relieve the party upon paying the principal and interest. If it is to secure the performance of some collateral act or undertaking, then courts of equity will retain the bill, and will direct an issue of quantum damnificatut; and when the amount of damages is ascertained by a jury upon the trial of such an issue, they will grant relief upon the payment of such damages. Astley v. Weldon, 2 Bos. & Pul. 346, 350; Hardy v. Martin, 1 Cox, 26; Skinner v. Dayton, 2 Johns. Ch. 534, 535; Benson v. Gibson, 3 Atk. 395; Errington v. Aynesly, 2 Bro. Ch. 343; Com. Dig. Chancery, 4 D. 2."
The true foundation of the relief in equity in all these cases is, that, as liquidated damages, but, in order to give such a construction of it, the party claiming such a sum must show that it was so intended by both parties.1 Calling a sum liquidated damages will not change its character as a penalty, if upon the true construction of the instrument it must be deemed to be a penalty.2 Indeed, wherever the payment of a small sum is secured by the payment of a much larger sum, as the penalty is designed as a mere security, if the party obtains his money or his damages, he gets all that he expected, and all that in justice he is entitled to. And, notwithstanding the objections which have been sometimes urged against it, this seems a sufficient foundation for the jurisdiction. In reason, in conscience, in natural equity, there is no ground to say, because a man has stipulated for a penalty in case of his omission to do a particular act (the real object of the parties being the performance of the act), that, if he omits to do the act, he shall suffer an enormous loss, wholly disproportionate to the injury to the other party. If it be said that it is his own folly to have made such a stipulation, it may equally well be said that the folly of one man cannot authorize gross oppression on the other side. And law, as a science, would be unworthy of the name if it did not, to some extent, provide the means of preventing the mischiefs of improvidence, rashness, blind confidence, and credulity on one side, and of skill, avarice, cunning, and a gross violation of the principles of morals and conscience on the other. There are many cases in which courts of equity interfere upon mixed grounds of this sort. There is no more intrinsic sanctity in stipulations by contract than in other solemn acts of parties which are constantly interfered with by courts of equity upon the broad ground of public policy, or the pure principles of natural justice. Where a penalty or forfeiture is designed merely as a security to enforce the principal obligation, it is as much against conscience to allow any party to pervert it to a different and oppressive purpose, as it would be to allow him to substitute another for the principal obligation. The whole system of Equity Jurisprudence proceeds upon the ground that a party, having a legal right, shall not be permitted to avail himself of it for the purposes of injustice, or fraud, or oppression, or harsh and vindictive injury."
1 See Cheddick v. Marsh, 1 Zabr. 463; Bagley v. Peddie, 5 Sandf. 192; Shute v. Taylor, 5 Met. 61; Baird v. Tolliver, 6 Humph. 186; Lindsay v. Anesley, 6 Ired. 186.
2 2 Story, Eq. Jur. § 1318; Shiell v. M'Nitt, 9 Paige, 101. In Randal v. Everest, M. & M. 41, Abbott, Ch. J., says: " A great deal has been said about the different import of the words penalty and stipulated damages; but I am of opinion, and shall always hold so, until compelled by a higher authority to say otherwise, that whether the term penalty or liquidated damages be used in the agreement, the party shall only be: it must be considered as a penalty.1 This is especially the case where the sum is referred to as penal in its nature.2 In one case the court went very far in this direction. It appeared that the defendant engaged to act as a principal comedian at Covent Garden Theatre for four seasons, in consideration of which the plaintiff promised to pay him £3 6s. 8d. per night, whenever the theatre was open, and the agreement contained a clause that if either party should neglect or refuse to fulfil the said agreement, or any part thereof, or any stipulation therein contained, such party should pay to the other the sum of £1,000, which sum was declared in the agreement to be liquidated and ascertained damages, and not a penalty; it was held by Tindal, C. J., that the sum was to be considered as a penalty, inasmuch as it was not limited to breaches of an uncertain nature and amount, but to the breach of any stipulation, and that the payment of so large a sum for any trivial breach must be considered only as a penalty.3 For where a sum certain is stipulated to be paid for the breach of any one of several covenants, the sum, although called stipulated damages, shall be construed to be a penalty if damages for the breach of any one of the covenants are capable of being ascertained by a jury.4 allowed to recover what damages he has really sustained." See also Betts v. Burch, 4 H. & N. 506; Bonsall v. Byrne, Irish Rep. 1 Com. Law, 576 (1867).