fications, in every case the amount of the penalty, 20 with the possible addition of interest,21 furnishes the outside limit of possible recovery. § 775. Early history of the jurisdiction of equity to relieve from forfeiture and penalties. A learned writer 22 says of the early history of the development of the rules of law referred to in the preceding section: "The meagreness of the early equity reports makes it difficult to fix accurately the time when this policy was finally adopted (Spence says 22 in the reign of Charles I), and, logically, it could not long be delayed when the mortgagor's right to redeem was established. Certainly by the time of the Restoration it could be said: 'It is a common case to give relief against the penalty of such bonds to perform covenants, etc., and to send it to a trial at law to ascertain the damages in a quantum damnificatus.' So, also, it became the common course to relieve against forfeitures for non-payment of rent, and upon payment of arrears to compel the landlord to make a new lease. 24 Richard Francis summarizes the principle in his twelfth maxim: 'Equity suffers not advantage to be taken of a penalty or forfeiture where compensation can be made.' While text-writers have shown an inclination to consider this as a branch of equity jurisdiction to relieve against accidents, the decisions cannot 123 Hale v. Thomas, 1 Vern. 349 (1685); 24 Baker v. Olibeare, 2 Freem. 92 (1685); Anonymous, 2 Freem. 116 (1690); Bowen v. Whitmore, 2 Freem. 192 (1693). See Poore v. Oxenbridge, Toth. 104 (1602). The Act of 4 Geo. II, ch. 28, limited the time within which the tenant might file a bill to six months after ejectment and dispensed with the necessity for a new lease. See Common Law Procedure Act of 1852 (15 & 16 Vict.), ch. 76, §§ 210212; Bowser v. Colby, 1 Hare, 109 (1841), at p. 130; Howard v. Fanshawe, [1895] 2 Ch. 581; Dendy v. Evans, [1910] 1 K. B. 263. be so limited, the facts, in many instances, showing default pure and simple. Relief was given in chancery as the principal agency of law reform and was justified by public opinion, hostile to catching bargains, which had become proportionately odious as wealth had become more widely distributed and capital more secure. Lord Eldon, characteristically, took pains to express his disapproval of the doctrine of equitable relief against penalties and forfeitures a principle,' he said, 'long acknowledged in this court but utterly without foundation.' 25 But, as Mr. Justice Story put it: "There is no more intrinsic sanctity in stipulations by contract than in other solemn acts of the parties which are constantly interfered with by courts of equity upon the broad grounds of public policy on the pure principles of natural justice.' 26 And, having adopted the rule, it was only common sense to permit it to be administered at law, as was accomplished by the Acts of 8 & 9 William III and 4 Anne, which, in effect, provided that the plaintiff in actions on penal bonds should state the breaches of the condition, and, although entitled to judgment for the amount of the penalty, should be limited in his recovery to the damages proved, the judgment merely remaining as security for further breaches. Payment, also, of principal and interest due by the condition might be pleaded at law, although not made in strict accordance with the terms of the obligation, thus bringing law and equity into accord, at least as to bonds intended to secure money payments." 27 25 Hill v. Barclay, 18 Ves. 56 (1811). See also Wallis v. Smith, 21 Ch. D. 243, 257 (1882) where Jessel, M. R., said: "It has always appeared to me that the doctrine of the English law as to non-payment of money-the general rule being that you cannot recover damages because it is not paid by a certain day-is not quite consistent with reason. A man may be utterly ruined by the non-payment of a sum of money on a given day, the damages may be enormous, and the other party may be wealthy. However, that is our law. If, however, it were not our law the absurdity would be apparent." 26 2 Story, Equity Jurisprudence, 13th ed., § 1316. See also the remarks of Lord Mansfield in Bonafous v. Rybot, 3 Burr. 1370 (1763). 27 8 & 9 Wm. III (1697), ch. II, § 8; 4 Anne (1705), ch. 16, §§ 12, 13; 1 Wms. Saunders, 58, n.; Roles v. Rosewell, 5 T. R. 538 (1794); Hardy v. Bern, 5 T. R. 636 (1794); Mackworth v. Thomas, 5 Ves. 329 (1800); Walcot v. Goulding, 8 T. R. 126 (1799); Keating v. Peddrick, 240 Pa. St. 590, 88 Atl. 11 (1913); Jennings v. Wall, 217 Mass. 278, 104 N. E. 738 (1914). § 776. Provisions for penalty are invalid in any contract. The principles first developed in actions upon bonds were subsequently extended to all contracts and applied by courts of law as well as by courts of equity.28 The difficulty which has vexed modern courts, and which has caused much litigation, is to distinguish between a provision for a penalty and one for liquidated damages. Though difficulties frequently arise in the application of the principle distinguishing one from the other, and though the statements in the cases have not always been clear, the fundamental basis of the distinction at least is evident. 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 in order to enforce performance of the main purpose of the contract by the compulsion of this very disproportion. It is held in terrorem over the promisor to deter him from breaking his promise. 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.29 A provision for a penalty is, therefore, necessarily invalid, though the fact that parties do or do not call a provision a penalty is not conclusive of its character.30 A provision for a forfeiture, on the other hand, though not favored by the law, is not necessarily invalid. The nature of a contract may make a provision for a specific forfeiture in case of a breach only a legitimate agreement for liquidated damages;31 28 The leading case is Astley v. Weldon, 2 B. & P. 346. The contract there involved bound the defendant to perform at the plaintiff's theatre, and provided that if either of the parties broke the contract, he should pay the other £200. The provision was held to be penal and not recoverable. 29 "Compensation for damages sustained is the legitimate object of such provisions, and where that object is lost sight of and a penalty imposed they will not be given effect by the courts. Equity will enjoin the enforcement of inequitable and unjust provisions of this nature and courts of law will refuse to enforce them." 30 See infra, § 778. 31 In Stennick v. Jones, 252 Fed. 345, 352, 164 C. C. A. 269, the court said: "There are also many decisions where the measure of damages for the breach of a contract by a vendor being ascertainable without difficulty, forfeiture will not be enforced. But these equitable doctrines do not override the principle that parties may make a contract to run for years, and of a character where, actual damages being and even though what is forfeited by one who breaks a contract is disproportionate to the damage suffered by the injured party, if the latter has already acquired the forfeiture by the partial performance of the contract he is in many cases not deprived of any part of it or of its value.32 § 777. How far the question of penalty or liquidated damages is one of construction. It is commonly said in the cases that the decision of the question whether a certain provision is penal or not, is one of construction; 33 yet it is evident that the question is at least not wholly one of construction. If the matter were fully summed up by saying that the duty of the courts is "to give effect to the plainly expressed will of the contracting parties," 34 the recovery of penalties would generally if not universally be allowed. To be sure, in the case of a bond, it is no doubt generally understood to-day that the penalty is not intended or expected to be enforced; that performance of the condition. is the purpose which the parties have exclusively in mind; but this is not the meaning of the language of the bond, and indeed is not only in direct contradition of plain language but in contradiction of what was undoubtedly the intention of the parties when equity first gave relief. There can be no doubt that our forefathers when they provided in a bond that a penalty should be paid if a certain condition were not performed, meant exactly what they said; and even to-day though this may no longer be true in regard to bonds, there can be no doubt that in other penal contracts it is generally the clearly expressed will of the parties that the penalty shall be paid if uncertain of estimation, there may be provision for a forfeiture or transfer of ownership in case of a substantial breach, which the courts, after inquiry will enforce. Edmunds v. Spanish R. P. & P. Co., 206 Fed. 92." "See infra, §§ 790, 791, 14731477. "See for instance Sun Printing & Publishing Association v. Moore, 183 U. S. 642, 662, 46 L. Ed. 366; Dunlop Pneumatic Tyre Co. v. New Garage and Motor Co., [1915] A. C. 79, 87. 34 As said in Sun Printing & Publishing Assoc. v. Moore, 183 U. S. 642, 662, 46 L. Ed. 366. Cf. Wise v. United States, (U. S. Oct. Term 1918), 39 Sup. Ct. 303, where the court upholds the provision because it is a "genuine pre-estimate," and Northwestern Terra Cotta Co. v. Caldwell, 234 Fed. 491, 148 C. C. A. 257; In re Liberty Doll Co., Inc., 242 Fed. 695. the main agreement is not performed, and their expressed will represents their actual intention if that is of any importance. Therefore, the first step towards a clear understanding of the matter is to recognize that the determination of whether a particular provision is penal or merely provides for liquidated damages only, does not depend on the natural meaning of the language used by the parties. The legal effect of an instrument depends on rules of law which sometimes contradict the meaning of the instrument and the intention of the parties. 35 Probably all that most courts mean-at any rate all that can be defended-is to say that the validity of the stipulation is to be "judged of as at the time of the making of the contract, not as at the time of the breach," 36 and this is undoubtedly true. 37 The question whether a sum is liquidated damages or a penalty, also, is not a question of the law of damages. It is a question of the legal validity of a stipulation in a contract. If the contract which the parties have made is enforceable according to its terms, no troublesome problem of damages is presented; the real problem is whether the bargain of the parties is enforceable or not. § 778. Intention of the parties. It is not unnatural that the question under consideration should be ordinarily classified as one of construction because it is very commonly said that whether a stipulation involves a penalty or liquidated damages depends wholly or largely upon the intention of the parties. As shown in the preceding section, the statement is misleading. Where intention of the parties is spoken of in the law of contracts it normally means their expressed intention that something shall or shall not be done. 35 See criticism of the use of the terminology which ascribes to construction or interpretation all legal effects which the law gives to a writing, supra, § 601. This, however, is a question of terminology, and when, e. g., Smith, J., says in Northwestern Terra Cotta Co. v. Caldwell, 234 Fed. 491, 496, 148 C. C. A. 257, that the question is one of "construction rather than interpretation" he is taking the same view as that suggested in the text. 36 Dunlop Pneumatic Tyre Co. v. New Garage Motor Co., [1915] A. C. 79, 87. 37 Learned v. Holbrook, 87 Oreg. 576, 170 Pac. 530, 171 Pac. 222. |