to the act of August 28, 1937, 50 Stat. 874, 43 U.S.C. § 1181a (1958), and retaining his bid deposit of $1,300.

Gibby bid in response to a timber sale notice dated October 19, 1962, which invited written bids of not less than the advertised appraised price of $12,830.50. The notice of sale required that each bid be accompanied by a deposit of $1,300. The bid form contained a statement that:

IT IS AGREED That the bid deposit shall be retained by the United States as liquidated damages if the bid is accepted and the undersigned fails to execute the sale contract and furnish a satisfactory performance bond within 30 days after the bid is accepted. * * *

By a letter dated December 3, 1962, Gibby was informed that his bid of $14,029.75, submitted on November 26, 1962, was accepted. He was requested to execute the proper contract forms for the sale of timber and the performance bond forms and to return all copies to the district office within 30 days after receipt of the letter. On January 3, 1963, Gibby requested and was granted a 30-day extension of time to complete execution of the contract, the record indicating that he had been unable to secure the necessary performance bond. On February 6, 1963, he requested an additional 10-day extension of time to complete the contract.

A decision dated February 12, 1963, advised Gibby that the contract and bond forms had not been received and all of his rights in and to the timber were thereby terminated. It further stated that in accordance with the timber sale regulations (43 CFR, 1964 rev., 285.11 (b), formerly 43 CFR 115.25 (b), 23 F.R. 1928, now 43 CFR, 1964 Supp., 5433.4 (b)) and the language of the Bid for Timber the bid deposit would be retained as liquidated damages.

In affirming the district manager's decision, the Division of Appeals held that the second extension requested by Gibby could not be granted because Bureau personnel are not authorized to grant any extensions of time beyond the one 30-day period allowed by the Department's regulations (43 CFR 5433.4(b)) and the retention of the bid deposit as liquidated damages complies with departmental regulations and is consistent with the legal principles established by the courts.

In his appeal to the Secretary, the appellant does not question the denial of the request for a second extension of time for completing the contract. He contends, however, that the forfeiture of the bid deposit is a penalty rather than liquidated damages because there is no reasonable relationship between the damages sustained by the United States and the sum forfeited. He alleges that the Bureau of Land Management sustained actual damages of $31 (the difference between the appellant's bid of $14,029.75 and the $13,998.75 bid of the second highest bidder, to whom the contract was awarded), that it would not be difficult for a court to ascertain the actual damages, and it is highly

June 30, 1964

inequitable and unjust to permit the retention of $1,300 in view of the actual damages of $31.

Although difficulties frequently arise in the application of the principles distinguishing penalties from liquidated damages, and although the decisions of the courts are not entirely consistent in their conclusions or clear in their statements, the fundamental principles that govern are quite clear and understandable. A penalty is a sum named, which is disproportionate to the damage which could have been anticipated from breach of the contract, and which is agreed upon to enforce performance of the contract by the compulsion of this very disproportion. Liquidated damage, on the other hand, is a sum fixed as an estimate made by the parties at the time when the contract is entered into of the extent of the injury which a breach of the contract will cause. A provision for a penalty is invalid, but a provision for liquidated damages is enforceable. Williston on Contracts § 776 (3d ed. 1961); 25 C.J.S. Damages § 101c.

In general, provided it is in fact compensation for damages, a contract may fix the sum to be paid in the event of a breach, where the damages are uncertain in nature or amount or are difficult of ascertainment and the amount agreed on is not extravagant and unreasonably disproportionate to the damages that would actually result from a breach of the contract, or such as to imply fraud, mistake, circumvention or oppression, and the agreement for such amount does not violate some principle of law. 25 C.J.S. Damages § 101a.

It is sufficient if the sum named appears to bear some reasonable proportion to the damage contemplated. It is not necessary that the actual damages sustained exceed the amount stipulated, and the fact that no damages have actually resulted from the breach does not affect the right to recover the stipulated damages. 15 Am. Jur. Damages § 251.

The certainty or uncertainty of the actual damages which a breach of contract will occasion and the ease or difficulty of ascertaining or proving them are important matters to be considered in the determination of whether the sum named is liquidated damages or a penalty. Whether the damages are difficult of ascertainment is to be determined by a consideration of the status of the parties at the time the contract is entered into, and not at the time it is broken. 15 Am. Jur. Damages $252.

An actual deposit by a party to a contract, pursuant to a provision therefor and a stipulation that the amount shall be paid to or retained by the other party in case of default, is held, as a rule, to import an intent to liquidate the damages, and will be so enforced. 25 C.J.S. Damages § 109.

Today the law does not look with disfavor upon "liquidated damages" provisions in contracts. When they are fair and reasonable

attempts to fix just compensation for anticipated loss caused by breach of contract, they are enforced. They serve a particularly useful function when damages are uncertain in nature or are unmeasurable, as in many Government contracts. And the fact that the damages suffered are shown to be less than the damages contracted for is not fatal. These provisions are to be judged as of the time of making the contract. Sun Printing & Publishing Assn. v. Moore, 183 U.S. 642, 672-674 (1902); United States v. Bethlehem Steel Co., 205 U.S. 105, 121 (1907); Wise v. United States, 249 U.S. 361, 365 (1919); Priebe & Sons v. United States, 332 U.S. 407, 411 (1947).

Upon the basis of the foregoing principles, I find that the stipulation in this case is a valid and enforceable stipulation for liquidated damages rather than a penalty.

The wording of the stipulation leaves no question as to the expressed intention of the parties that the $1,300 deposit was to be regarded as liquidated damages in the event of failure of the appellant to execute the sale contract and obtain a performance bond within the required time. When the parties to a contract, in which the damages to be ascertained, growing out of a breach, are uncertain in amount, mutually agree that a certain sum shall be the damages, in case of a failure to perform, in language plainly expressive of such agreement, I know of no sound principle or rule applicable to the construction of contracts that will enable a court of law to say that they intended something else. Sun Printing & Publishing Assn. v. Moore, supra, citing Clement v. Cash, 21 N.Y. 253, 257.

The only questions that remain are whether the amount of the probable damages could be reasonably ascertained at the time the agreement was made and whether the amount of the deposit bore some reasonable relationship to the probable damages.

Although the actual damages to the Government in this case may have been only $31, it cannot be said that such amount or any other definite sum could have been ascertained at the time of submission of the appellant's bid. Upon the appellant's default, more than 60 days after the auction, neither the second highest bidder nor any other party was under any obligation to purchase the offered timber. It was, therefore, quite possible that the timber might be sold for a substantially smaller sum or not sold at all. Had it been sold at the appraised price (and the amount of the second highest bidder's original written offer), the difference in the price would have been $1,199.25, a sum not wholly unrelated to the amount of the bid deposit. Moreover, the delay in the termination of the contract negotiations and the awarding of the contract to another party, although not subject to precise monetary evaluation, were administratively burdensome and were proper elements to be considered in stipulating liqui

June 30, 1964

dated damages. These are factors of the very nature that warrant the stipulation of liquidated damages in a contract.

The deposit was accepted in accordance with the conditions upon which it was made, and the record reasonably establishes that, at the time the appellant's bid was submitted, both parties to the transaction regarded the stipulation as measuring the extent of the bidder's obligation in the matter without inquiring into the question of actual damages, and no proof of actual damages is necessary. 29 Comp. Gen. 530 (1950); Refer Construction Company, 68 I.D. 140 (1961). Accordingly, the Bureau acted properly in retaining the appellant's deposit as liquidated damages.

The cases cited by the appellant, as well as numerous other cases in which liquidated damages clauses have been construed as penalties, have been carefully examined and compared. All of the cases examined are factually distinguishable from the present case.

Therefore, pursuant to the authority delegated to the Solictor by the Secretary of the Interior (210 DM 2.2A (4) (a); 24 F.R. 1348), the decision appealed from is affirmed.

ERNEST F. HOM,

Assistant Solicitor.