Contracts for liquidated damages are often entered into in connection with building contracts, wherein an amount is agreed upon as damages for failure to complete the work within the time fixed by the contract. Such collateral contracts are binding when properly drawn, but the owner's desire to make the amount agreed upon sufficiently large to induce the builder to complete the work within the specified time, has frequently defeated the purpose in view. When tested in court the disproportion between the amount stipulated and the actual or probable damage on account of the delay frequently proves the contract to have been not for liquidated damages, but for a penalty.

In Haliday v. United States,25 the contract provided for a penalty of $25 a day for failure to complete a house before a day named. The court held that this amount was not based upon damage for the delay, but was a mere penalty which would not be enforced. So where it was agreed that $20 a day should be forfeited by the contractor for every day's delay in the completion of a house, the amount to be deducted from that which might be found to be due him, it was held that the contract provided for a penalty.20 But in a similar contract where the amount stipulated to be paid for delay was $5 a day it was held to be a valid contract for liquidated damages.27 These cases illustrate the rule that where the amount of actual damages may be easily determined in

26

25 33 Ct. Cl. 453.

26 L. P. & J. A. Smith v. United States, 34 Ct. Cl. 472.

27 Young v. Gaut, 61 S. W. 372, 69 Ark. 114.

advance, and the amount stipulated is unreasonably large, it will generally be regarded as a penalty, whatever the parties in the contract have designated it to be.

11. Rules of construction.-Since the law favors indemnity rather than a penalty, where it is doubtful whether the sum named in a contract should be held to be liquidated damages or a penalty, it should be construed as a penalty. Courts are inclined to adopt that construction which will most nearly permit plaintiff to recover an amount equal to the damages he has sustained. So when there is nothing proven which requires the court to hold that the sum mentioned is liquidated damages, even though the parties have used those words in the contract, the court will hold it to be a penalty. The name by which the parties have designated the amount is of slight weight with the courts, if surrounding circumstances and the intention of the parties indicate an opposite meaning.28 Where from the nature of a contract the damages cannot be determined with any degree of certainty the amount stated in the contract will generally be held to be liquidated damages when so designated by the parties.29 Even the intention of the parties as gathered from the contract will sometimes be overturned by the court in cases of this kind. If the parties provided for greater damages than the law permits, such as usurious interest, or if they have

28 Willson v. Mayor, 83 Md. 203; Monmouth Park Assn. v. Wallis Iron Wks., 55 N. J. L. 132; Hennessy v. Metzger, 152 Ill. 505.

29 Hennessy v. Metzger, 152 Ill. 505; Lynde v. Thompson, 2 Allen 456; Wolf v. Des Moines, etc., Ry. Co., 64 Ia. 380.

named an excessive sum where the real damages are certain or may easily be ascertained, or if they have agreed upon an amount which would appear to be unconscionable, in all such cases the sum named will be construed to be a penalty, whatever the parties may have intended." In Carruthers v. Gay,31 the contract provided that the amount to be paid on its breach should be twice the actual damages sustained. This, of course, was held to be a penalty.32

30

12. Actual damages necessary.-In order to recover liquidated damages, not only there must be a breach of the contract but some actual damages must be sustained. In Hathway v. Lynn,33 defendant had contracted with plaintiff that he, defendant, would at certain times and places continue the running of a bus line which would be beneficial to plaintiff. In consideration of defendant's promise plaintiff agreed to refrain from running a bus line in that place. The parties agreed upon $200 in case of breach of the contract as the sum to be paid by the party breaking the contract. Plaintiff, contending that defendant had broken the contract, sought to recover the $200.

The court said it was not necessary to determine whether the amount agreed upon was a penalty or liquidated damages, for notwithstanding it was the latter, it was nevertheless clear that plaintiff had sustained only nominal damages by defendant's

30 Monmouth Park Assn. v. Wallis Iron Wks., 55 N. J. L. 132, LEADING ILLUSTRATIVE CASES.

31 Texas 91 S. W. 593.

32 Bradstreet v. Baker, 14 R. I. 546; Greenleaf v. Stockton C. H. and A. Works, 78 Cal. 606; Hurd v. Dunsmore, 63 N. H. 171.

33 75 Wis. 186.

breach, and that this would not justify the collection of liquidated damages. "In such a case," the court asserted, "before any liability to pay the liquidated damages can attach to the party in default, he must have been guilty of a substantial breach of his agreement—a breach which has resulted in something more than mere nominal damages to the other contracting party. This rule is so manifestly just that no discussion of it is necessary.”

The question has been but little discussed by the courts but it seems reasonable to hold that where only nominal damages have been sustained, the liquidated damages agreed upon by the parties may not be recovered. On the other hand, it has been frequently held that if plaintiff is entitled under his contract to liquidated damages, he is required only to prove this contract, and that it is not necessary in such case for him to prove actual damages.34

13. Alternative stipulations.-Contracts which contain stipulations by which one is to do a certain act or pay a definite amount of money, fall within the scope and discussion of liquidated damages although they differ somewhat from those contracts usually considered under this branch of the subject. The amount agreed to be paid can be regarded neither as a penalty nor liquidated damages, but a sum which the party may elect to pay instead of performing the act. It cannot be damages for breach of contract, because in paying it he is only fulfilling his contract. It cannot be a penalty be

84 Charleston Lumber Co. v. Friedman, 64 W. Va. 151; Howard v. Adkins, 167 Ind. 184.

cause it is not a sum imposed either to induce the party to perform a contract or to punish him for failure to perform it. The courts, therefore, finding that the parties have agreed the amount shall be paid as a condition for doing or having failed to do some particular thing, do not enter upon the discussion of whether the sum represents damages or a penalty, but having found the other alternative unperformed, enter judgment for the amount of money for which the parties stipulated.

The principle is illustrated in Smith v. Bergengren.35 The defendant agreed not to practice his profession in Gloucester so long as plaintiff was practicing there, provided he should have the right to do so at any time after a fixed period on paying the plaintiff $2,000, but not otherwise. Defendant began practice before the time had elapsed but refused to pay the $2,000. The court said the amount thus agreed upon was neither liquidated damages nor a penalty, but a price fixed for what the contract permitted defendant to do. Having begun the practice he must pay the $2,000. Many cases support this theory." It may be said, however, that if the form of alternative stipulations is used with a view and for the purpose of imposing a penalty on one of the parties to the contract, the court will disregard the form, and finding the sum named to be a penalty will refuse to enforce it.37 Where damages are stipulated both parties are

36

85 153 Mass. 236, LEADING ILLUSTRATIVE CASES.

36 Bane v. Gridley, 67 Ill. 388; United Shoe M. Co. v. Abbott, 158 Fed. 762; Beck v. Indianapolis L. & P. Co., 36 Ind. App. 600, 76 N. E. 312. 37 Bell v. Fruit, 9 Bush. 257; Burrage v. Crump, 48 N. C. 330.