band, and annually thereafter during her natural life, the sum of the interest on $464 at the rate of seven per cent. per annum, the bond should be void, otherwise of force; and it was also provided in the condition that should any default be made in the payment of the said interest or any part thereof on any day wherein the same was made payable by the bond, and the same should remain unpaid and in arrear for thirty days, then and in that case the principal sum of $464, with arrearages of interest thereon, should at the option of the obligee become immediately payable; and that if the payments of said interest were promptly made, then at the obligee's death the debt and the mortgage given to secure the bond should cease and be null. A default occurred in the payment of the annuities of interest; and the obligee gave notice of her option to consider the principal with the arrears of interest presently due and payable. The question was what sum was due on the bond which the mortgage in suit was given to secure. A decree had been made adopting the sum of $464 mentioned in the condition as the principal that became due on its breach, and for that sum with the delinquent interest the judgment was rendered. The defendant contended that the sum the plaintiff was entitled to recover was not $464, but only the value of a life annuity of $32.48 at the time the plaintiff declared her option; at which time she was fifty-two or fifty-three years of age. Such value, computed by the Northampton tables, was then a little less than $300. Lyon, J., said: "The covenant was voluntarily [500] made by the obligor, and, so far as appears, he received therefor full value for the sum which he agreed to pay at the option of the obligee in case of default. The most that can be said against the justice of it is that the damages would be the same if default were made and the option declared at a much later period in the life of the obligee. But that is a contingency which may be fairly presumed the obligor took into consideration when he made his covenant; and it was always in his power to prevent the happening of such contingency by paying the annuity which he covenanted to pay." The learned judge added: "It follows that the sum named in the bond is to be regarded as stipulated damages unless the gross value of the life annuity can be ascertained by some exact pecuniary standard." He discusses this question and arrives at the conclusion that the value is uncertain. It may be observed that that method of determining whether the sum mentioned in the condition was penalty or not would be very proper if it be assumed that the annuity was the primary object of the arrangement, and that no sum was originally fixed which represented the value of the defendant's undertaking, or of the consideration received; and that the gross sum was stipulated as the valuation put by the parties on the annuity; and equally so if the case was that $464 was a sum arising in the transaction which they agreed might be withheld so long as the interest on it was promptly paid, and with the further benefit that the debt should cease at the creditor's death, otherwise to be paid at once; then the case stands on the principle of Thompson v. Hudson,' and the conditional method of discharge not having been strictly followed, the dispensation depending on it failed, and the original debt remained unsatisfied and absolute. Where a large sum is stipulated to be paid on [501] IL. R. 2 Eq. 612, stated supra. 2 Berrinkott v. Traphagen, 39 Wis. 219. Longworth v. Askren, 15 Ohio St. 370, does not appear to be consistent with these views. An action was brought to foreclose a mortgage made to secure a payment of this note: "For value received, I promise to pay N. L., or order, one thousand dollars, with interest yearly till paid, and payable as follows: In two, three, four, five, six, seven, eight, nine and ten years, equal instalments, with interest yearly, as aforesaid, being the contract price of a lot. But if each and every payment is made punctually as due, or before due, or within ten days after each is due, as an inducement to punctuality, two hundred dollars of the amount will be released. And eight hundred dollars and its yearly interest accepted in full payment, but not otherwise." Before the ten years expired full VOL. I-38 $800 and annual interest on that sum had been paid; but the payments had not been made according to the terms of the contract as to time and amount. The court held that the sum of $1,000 was penalty, and $800 the actual debt according to the face of the note. White, J., said: "This case presents the single legal question: whether, upon the true construction of the mortgage note sued on, the one thousand dollars therein mentioned is to be regarded as a penalty. If that be its character, the judgment of the superior court should be affirmed; otherwise, it should be reversed. This is not the case of an agreement for the composition of a subsisting, independent indebtedness. The instrument in question creates the only debt on which the plaintiff relies for a recovery. Nor can the claim made by the plaintiff's counsel be supported, that the stipulation for the discharge of the obligation by the non-payment of a less amount made payable by the same instrument, the former is prima facie a penalty. If the question is to be determined by construction of the instrument alone it would be deemed a penalty. May the real transaction be investigated, and upon proper facts a different interpretation and effect be given to the agreement? No the punctual payment of $800 in instalments is a privilege given to the payer, and inserted for his exclusive benefit. This claim is based on the assumption that the $1,000 was the sole consideration for the lot, and consequently is the amount of the actual debt. But it is fair to presume that the omission of the stipulation in regard to the $800 would have defeated the sale as that the insertion of the $1,000 secured it. The transaction was the sale of the lot; and the instrument in question contains the terms upon which it was made. All the stipulations, on the part of Ricords, are supported by the same identical consideration. It is not to be presumed that the sale would have been concluded had any of the terms actually agreed to been omitted; and, as the terms of the sale were satisfactory to the parties, the presumption is they were acquiesced in, not as a special favor to either, but for the mutual benefit of both. Nor, in our view, does the order in which the sums are stated change their character, or the legal effect of the instrument; for whether the amount to be paid is to be reduced upon compliance with the terms of payment, or to be increased as a default, is only a different mode of expressing the same thing. "All that the plaintiff, at the time of making the contract, had a right to expect was the payment of $800, with the interest, in the instalments and at the times stipulated. These payments Ricords had promised to as make punctually. A default occurred; and in such a contract, in our opinion, interest is to be regarded a compensation for the injury caused by the delay. All beyond must be regarded either as penalty or liquidated damages; but under neither form can the plaintiff be allowed to recover more than what the law deems adequate compensation for the breach. "It is to be noted that the only evidence of the terms of the sale is what appears from the instrument itself. There is nothing to show that the contract for the purchase of the lot was originally made, in fact, at $1,000; and that the remission of the contract price to $800 was the gratuitous act of the vendor. If the abatement stood on this footing, it would devolve on the party seeking its benefit to show that he had complied with the conditions upon which it was offered." This opinion bases the right of the debtor to discharge the bond by payment of $800 on its being reserved in the agreement of purchase; it, however, concedes that it was equally a part of the contract of sale that $1,000 should be paid if all the instalments should not be punctually paid. It would seem to be a reciprocal right to enforce the bond according to its terms; that there was as ample a consideration for the agreement in either alternative as in the cases of Lord Ashtown v. White, supra, and McNitt v. Clark, 7 Johns. 465. language of the contract can be adopted which will shelter a penalty so that inquiry may not be made into the sub- [502] ject-matter and surroundings to ascertain if it be such. The principle is often declared in terms that permits inquiry to go to the intrinsic nature of the transaction; and a large sum promised as a consequence of the non-payment of a small one will be held a penalty whatever may be the language describing it. Wright, C. J., said in an Iowa case: "From all, however, we may deduce one point as settled. Whether the sum mentioned shall be considered as a penalty or as liquidated damages is a question of construction, on which the court may be aided by circumstances existing extraneous to the writing. The subject-matter of the contract, the intention of the parties, as well as other facts and circumstances may be inquired into, although the words are to be taken as proved exclusively by the writing." 2 § 289. Stipulations where damages certain and easily proved. On general principles, an agreement to pay a [503] fixed sum as damages for non-performance of a contract, where the loss or injury might without it be easily determined by proof of market values, or by a precise pecuniary standard, is subject to nearly the same criticism as a contract to liquidate damages for non-payment of money. There are no peculiar reasons why a stipulated sum should be treated as a penalty for exceeding just compensation for a default in the 1 Bryton v. Marston, 33 Ill. App. 211; Bagley v. Peddie, 5 Sandf. 192; Niver v. Rossman, 18 Barb. 55; Morris v. McCoy, 7 Nev. 399. 2 Foley v. McKeegan, 4 Iowá, 1; Perkins v. Lynian, 11 Mass. 76; Hodges v. King, 7 Met. 583; Dennis v. Cummins, 3 Johns. Cas. 297. In Morris v. McCoy, 7 Nev. 399, Lewis, C. J., said: "Although, as a general rule, it is acknowledged that the intention of the parties as expressed in the contract should be enforced, still, it is clearly ignored in that class of cases where the parties stipulate for the payment of a large sum of money as damages for the non-payment of a smaller sum at a given day. In such cases, it is said. no matter what may be the language of the parties, the large sum will be deemed a penalty, and not liquidated damages." But upon an exception to the exclusion of parol testimony to affect the question where the agreement was apparently of this nature, and such extrinsic evidence was offered to rebut the inference that the larger sum was a penalty, the learned judge said “that was not admissible, because there was no ambiguity; and it must be supposed that the agreement was fully embodied in the written instrument. 1 Greenlf. Ev., § 275." payment of money, and not be so treated in case of a different agreement where the excess is capable of being made equally manifest. In money contracts any rate of interest not prohibited by statute may be contracted to be paid as interest proper; that is, during the period of credit; so any sum may be contracted to be paid for property or services in a contract of purchase or hiring. But when parties contract for the same thing in advance as damages for a considerable excess above the customary rate of interest, or the market value of property or other thing, the agreement will raise the inquiry whether such excessive sum was intended to be paid; or whether, even if it was, it is not a penalty. It would be such if not intended to be paid in case of default; it would be such if not fixed on the basis of compensation. In such cases courts generally arrive at harmonious conclusions by diverse modes of reasoning. One will say the sum fixed is so flagrantly excessive it was evidently not the intention of the parties that it should be paid or enforced, and therefore it is a penalty. Another will say the excess, per se, makes the stated sum a penalty, and the intention of the parties is simply immaterial. It generally occurs that where there is an agreement to pay a gross sum in the event of the non-performance of a contract, [504] and the case is such that a jury can ascertain with reasonable certainty how much damages the injured party has actually sustained by the non-performance, courts are strongly inclined to regard the gross sum as a penalty, and not as 1 Fisher v. Bidwell, 27 Conn. 363. Section 1670 of the Civil Code of California provides that "every contract by which the amount of damage to be paid, or other compensation to be made, for a breach of an obligation, is determined in anticipation thereof, is to that extent void, except as expressly provided" in section 1671, which says: "The parties to a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage." It has been ruled un der these provisions that a stipulation by a building contractor to pay the owner a specified sum for each day's delay in completing the building is not of itself sufficient to authorize a recovery. Patent Brick Co. v. Moore, 75 Cal. 205. There is no difficulty in fixing the actual damages which one sustains by being deprived of the use of land to which he is entitled. Eva v. McMahon, 77 Cal. 467. Nor in ascertaining the damage resulting from the breach of a warranty of the fitness of a harvesting machine. Greenleaf v. Stockton H. & A. Works, 78 Cal. 606. |