that a contract appears from its terms to belong to the third class, does not prove that it does not belong to the first. A contract that in consideration of $10,000 paid on January 1st, the promisor will at his option and as he may prefer, either repay that sum on or before July 1st, with 6% interest or convey an absolute title to Blackacre, may be as obnoxious to equity as any mortgage or penalty. Whether this is so depends simply on whether Blackacre was or was not on January 1 worth greatly in excess of $10,300. If a contract states that upon breach of an obligation, there shall be enforced, instead of the primary promise, a reasonable alternative mode of settlement the agreement for liquidation of the damages will be enforced.54 Thus a provision in a note that if it is not paid at maturity, it shall bear a specified high rate of interest, is enforceable if not in conflict with usury laws; 55 though it is obvious that if the rate were unconscionably high, the provision would be penal.56

§ 782. The form of a contract cannot make a penalty enforceable.

Numerous attempts have been made to achieve the desired discontinued the business, without resorting to the idea of damage at all. See Smith v. Bergengren, 153 Mass. 236, 26 N. E. 690." See also Pearson v. Williams' Admrs., 24 Wend. 244, 246, 26 Wend. 630.

54 The principle was applied in Hughes v. Hughes, 162 Ky. 505, 172 S. W. 960. In that case a husband and wife who had separated entered into a contract for the support of the wife.

The husband agreed to pay either $3,500 or to pay $35 monthly during his wife's life. There was a further provision that if six monthly payments were overdue and unpaid at that time, the wife might at her option demand $3,500 in full satisfaction of the contract. The husband elected to pay in monthly instalments, but becoming in default for more than six months, was held liable for the capital sum.

55 Linton v. National Life Ins. Co., 104 Fed. 584, 44 C. C. A. 54; Finger v. McCaughey, 114 Cal. 64, 45 Pac. 1004; Bane v. Gridley, 67 Ill. 388; Parker v. Plymell, 23 Kans. 402; Crump v. Berdan, 97 Mich. 293, 56 N. W. 559, 37 Am. St. Rep. 345; Hope v. Barker, 112 Mo. 338, 20 S. W. 567, 34 Am. St. Rep. 387; Havemeyer v. Paul, 45 Neb. 373, 389, 63 N. W. 932; Connecticut, etc., Ins. Co. v. Westerhoff, 58 Neb. 379, 78 N. W. 724, 79 N. W. 731, 76 Am. St. Rep. 101. But see Yndart v. Den, 116 Cal. 533, 48 Pac. 618, 58 Am. St. Rep. 200, 125 Cal. 85, 57 Pac. 761; Smith v. Crane, 33 Minn. 144, 22 N. W. 633, 53 Am. Rep. 20; Ward's Adm. v. Cornett, 91 Va. 676, 22 S. E. 494.

56 See In re Liberty Doll Co., 242 Fed. 695.

result of making a penal sum recoverable in case of the nonperformance of a contract. If the question were wholly one of construction such attempts would be successful. It is not difficult to make clear beyond dispute that recovery of any amount named was contemplated and was intended, if the promisor failed to fulfil his primary undertaking or any performance named as an alternative; but though the decisions are not wholly uniform, principle and authority both justify the statement at the head of this section. An alternative promise, as has been said, is ordinarily binding according to its terms. A promise to give either a horse on Oct. 1st, or a cow on Oct. 2d is unobjectionable; but an alternative promise, no more than any other form of bargain can be made successfully a vehicle for the enforcement of a penalty. A promise to give a horse of ordinary value on Oct. 1st, or to pay ten thousand dollars on Oct. 2d, contains presumably in the second alternative a provision for a penalty. Even though what is in fact a penal sum be stated as an absolute debt, its character may, nevertheless, appear from the nature of the contract and surrounding circumstances. If so, the bargain is unenforceable. Thus where a company leasing machines contracted for rental payable on the first day of each month, but the lease contained a further provision that if the rent thus due should be paid on or before the 15th day of the month, a discount of 50% should be allowed, it was held that the smaller sum was the actual debt, and that even though payment was not made before the 15th of the month, only the smaller sum could be recovered. 57 It is true that a contrary decision on a similar lease has been reached by the Circuit Court of Appeals, 58 Judge Sanborn saying: "The parties to this agreement were competent to contract and they expressly agreed to the con

"Goodyear Shoe Machinery Co. v. Selz, 157 Ill. 186, 41 N. E. 625. See also Longworth v. Askren, 15 Oh. St. 370. In this case an instalment note was payable in ten years with interest. It contained the proviso that if each instalment was paid when due, or not more than ten days thereafter, $200 should be remitted from the amount

of the note at the maturity of the last instalment. The note was held to provide for a penalty, and the maker held entitled to the deduction though he had not made prompt payments.

58 United Shoe Machinery Co. v. Abbott, 158 Fed. 762, 86 C. C. A. 118, Adams, J., diss.

trary. If agreements for discounts were vulnerable as penalties there could be but one criterion of their validity, and that would be their relation to lawful interest. If the parties were not free to contract for such discounts as they chose, then agreements for them in excess of lawful interest must be void, and those not so in excess alone valid. There could be no other standard by which to try them. And a rule of law to the effect that notwithstanding the express agreement of the parties the actual debt, when an unearned discount is agreed upon, is the agreed debt less the discount, would avoid every contract for a discount in excess of lawful interest, and would strike down thousands of commercial contracts that are now valid and enforceable." The battles of the law frequently have to be fought over the same ground; but it would seem that a contract, the strict enforcement of which was thought by courts of equity 400 years ago too harsh to be permitted, would be thought obnoxious to the same objection to-day. Every word which Judge Sanborn said in support of the provision before him is applicable to a money bond on condition with penalty.

In the case of the bond as in the case before the court, the obligor promises in terms that his debt shall be the larger sum; and there is a proviso that if half that sum is paid on a certain day, the obligation shall be void. So far as the language of the contract goes, there is no undertaking to pay the smaller sum, and it was only by a construction finding no justification in the language of the instrument but based only on the comparative values of the penalty and the performance of the condition that the courts finally decided that there was an implied promise to perform the condition of the bond.59 Nor does the argument seem valid that if the promise in question were held to involve a penalty, an agreement for discount of more than legal interest would be open to the same objection. Where no usury law is in force, parties may obviously bargain for whatever compensation they choose, whether by way of direct interest, or by way of discount, so long as the amount is not penal in character; and as interest is calculated from day to day, rather than given in a lump sum for any delay whatever, the case would necessarily be extreme where a reservation of interest 59 See supra, § 670.

or discount would be penal. In the case in question where a single day's delay over the permitted fifteen involves doubling the amount to be paid the case is very extreme indeed. If a usury law were in force, the question is one of construction of the statute. Does it apply to discounts for prompt payment or not? But merely because the discount is not obnoxious to the statute, it does not follow that it may not be objectionable as a penalty, if unreasonable in amount.60 There seems no reason to doubt a moderate discount, such as is common in case of electric light or gas contracts, would be enforceable.61

Similar in principle is a note for a fixed sum payable at a day certain, with a provision for a discount if paid before maturity. Such notes have been held enforceable.62 But if the amount of the discount were unconscionably large it would seem to indicate that the smaller sum was in truth the actual debt, and the larger sum the penalty. And if a contract were obviously framed to evade a usury law, which was in substance violated, the contract would be unenforceable."

See decisions infra on notes where the rate of interest is increased after maturity.

61 In Missouri Edison Electric Co. 1. Steinberg Hat & Fur Co., 94 Mo. App. 543, 68 S. W. 383, an electric lighting contract provided for discounts from the monthly bills if paid by the tenth of the month. The discount ranged from ten per cent to forty per cent, varying with the amount of the bill; the discount being greater, the larger the bill. The contract was upheld and it seems rightly; the large discount from the large bill being justified by the ordinary commercial practice of selling large quantities at lower rates than smaller quantities. Whether such a contract made by a public service company might not be obnoxious to the objection of being a device for improperly giving a lower rate to a large consumer than to a small one, is another question. The court relied on two earlier decisions: Missouri Electric Light &

63

Power Co. v. Carmody, 72 Mo. App. 534, 537; Missouri Edison Electric Co. v. Bry, 88 Mo. App. 135, 136. But these decisions do not involve the same question as the later case. In the two earlier decisions there were involved contracts providing for a discount, not for prompt payment but in consideration of an agreement by the consumer to take electric current from the plaintiff, in one case of five years and the other for three years.

62 Carter v. Corley, 23 Ala. 612, Waggoner v. Cox, 40 Oh. St. 539; Campbell v. Shields, 6 Leigh, 517. But see contra Moore v. Hylton, 1 Dev. Eq. 429.

63 Orr v. Churchill, 1 H. Bl. 227; Clark v. Kay, 26 Ga. 403; Brown v. Maulsby, 17 Ind. 10; Kurtz v. Sponable, 6 Kan. 395; Davis v. Freeman, 10 Mich. 188; Gray v. Crosby, 18 Johns. 219; Shelton v. Gill, 11 Ohio, 417; cf. Gould v. Bishop Hill Colony, 35 Ill. 324.

§ 783. Rules aiding the court in determining whether a sum is liquidated damage.

Whether the essential question to be determined is (1) the reasonableness of a sum named as liquidated damages or (2) the fact that the parties attempted to value in good faith, when the contract was made, the actual injury which would be caused by a breach, there cannot well be any other liquidated damages for a breach which causes an injury, the extent of which is mathematically certain, than the very sum thus mathematically determined; and if the amount of the injury, though not mathematically certain, can readily be valued, and a valuation must, as matter of obvious fact, fall within narrow limits, not only is a sum much beyond those limits unreasonable, but the parties must be regarded as chargeable with notice of that fact. Moreover, there is small reason to suppose that the parties will attempt in good faith to value the injury beforehand, if it can perfectly well be valued afterwards; so that not only are the parties more likely to make a bona fide attempt to liquidate their damage if from the nature of the contract the breach will cause damage uncertain in amount and not readily calculable, but the courts also are more ready to regard a provision as reasonable where ordinary principles of compensation cannot easily be applied, and will not afford certain relief.64 The amount of the sum named, however, even

64 Thus in Ponsonby v. Adams, 6 Brown Parl. Cas. 417. It was covenanted, that if the tenant failed to reside on an estate in Ireland leased to him, his rent should rise from 125l. to 150l. and it was decreed that the 251. additional rent was to be considered as liquidated damages. In Rolfe v. Peterson, 6 Brown Parl. Cas. 470, the same doctrine was laid down respecting a covenant that the tenant should pay 51. per annum for every acre broken up and converted into tillage. In Lowe v. Peers, 4 Burr. 2225, 2229, the same was held of a promise to pay 1000l. if the defendant married any woman except the plaintiff. In Clydebank Engineering, etc.,

Co. v. Castaneda, [1905] A. C. 6, 11, Lord Davey said of a stipulation for damages of £500 a week for delay in delivering torpedo boat destroyers: "The very reason why the parties do in fact agree to such a stipulation is that sometimes, although undoubtedly there is damage and undoubtedly damages ought to be recovered, the nature of the damage is such that proof of it is extremely complex, difficult, and expensive. If I wanted an example of what might or might not be said and done in controversies upon damages, unless the parties had agreed beforehand, I could not have a better example than that which the learned counsel has been entertaining us with