considered liquidated damages, or, as held by the Appellate Court, a penalty. Section II of the lease between the parties provided that said sum was 'to be held by the party of the first part as security for the faithful performance by the party of the second part of the covenants and agreements in this rider and in the indenture of lease to which this rider is attached contained, to be kept and performed by said party of the second part, which said sum of twenty-five hundred dollars ($2,500) shall be applied by said party of the first part as rental reserved for the said premises for each of the last seven and one-seventh months of the term herein demised, provided that prior to the application of each of said month's rental said second party shall not be in default in any of the terms, covenants and conditions in this rider or in the indenture of lease to which it is attached contained, to be kept and performed by said party of the second part. Party of the first part covenants and agrees to pay or cause to be paid to party of the second part, its successors or assigns, interest at the rate of five per cent (5%) annually on the said sum of twenty-five hundred dollars ($2,500), so long as said sum of $2,500 shall remain in the hands of the said party of the first part undisposed of, under the terms of this rider and the indenture of lease to which it is attached.' By section. 12 it was further covenanted and agreed that 'in the event that the indenture of lease to which this rider is attached shall be terminated by reason of a breach by party of the second part of any of the terms and conditions in said indenture of lease contained, by said party of the second part to be kept and performed, then and in such event the party of the first part may, at his option, retain as and for full liquidated damages the said sum of $2,500 or such portion thereof as may at such time be in the hands of the party of the first part under the terms hereof, and thereafter the party of the second part shall have no further right, claim or interest in and to the said sum of $2,500 or any part thereof.'

"As was said by this court in Gobble v. Linder, 76

Ill. 157, no branch of the law is involved in more obscurity by contradictory decisions than whether a sum named in an agreement to secure performance will be treated as liquidated damages or a penalty, and as each case must depend upon its own peculiar and attendant circumstances, general rules of law on this question are often of little practical utility. While the intention of the parties on this question must be taken into consideration, the language of the contract is not conclusive. The courts of this State, as well as in other jurisdictions, lean towards a construction which excludes the idea of liquidated damages and permits the parties to recover only damages actually sustained. (Scofield v. Tompkins, 95 Ill. 190; Radloff v. Haase, 196 id. 365; Bilz v. Powell, 38 L. R. A. (N. S.) 847, note.) This court has said that the rules deducible from the cases may be stated as follows: 'First, where by the terms of a contract a greater sum of money is to be paid upon default in the payment of a lesser sum at a given time, the provision for the payment of the greater sum will be held a penalty; second, where by the terms of a contract the damages are not difficult of ascertainment according to the terms of the contract and the stipulated damages are unconscionable, the stipulated damages will be regarded as a penalty; third, within these rules parties may agree upon any sum as compensation for a breach of contract.' (Poppers v. Meagher, 148 Ill. 192.) This and all other courts seem to agree upon the principle that a stipulated sum will not be allowed as liquidated damages unless it may be fairly allowed as compensation for the breach. (1 Sedgwick on Damages,-9th ed.-sec. 407, and cases cited.) We have frequently said that courts will look to see the nature and purpose of fixing the amount of damages to be paid, and if it appears to have been inserted to secure the prompt performance of the agreement it will be treated as a penalty and no more than actual damages proved can be recovered. (Westfall v. Albert, 212 Ill. 68, and case cited.) In general, a sum of money in gross, to be paid for the non-performance

of an agreement, is considered as a penalty. Tayloe v. Sandiford, 7 Wheat. 13; 1 Sedgwick on Damages, (9th ed.) sec. 402.

"No lease or contract precisely like the one here in question seems to have been passed on by this court. Decisions from other jurisdictions, especially of the courts of New York, have been cited by counsel on both sides. In none of them did the contracts present the same question as the one here. Even if they did, at the most such decisions would only be advisory and not controlling. If not in conflict with general rules, the court seeks to give effect to the real intent of the parties in determining whether a stipulation in a contract is a penalty or liquidated damages.

"The lease specifically states that this sum of $2,500 was deposited to be held by the party of the first part 'as security.' There is nothing in any other part of the contract that conflicts with this statement. On the contrary, the entire contract, read together, is in full harmony with the conclusion that said sum was held as security. There is nothing in the nature of this contract that would make it especially difficult to ascertain the amount of damages for its breach, as there is in that class of cases where one has agreed to give his personal services to another for a certain length of time and repudiates the contract, or where one has sold out the good will of a business with the agreement not to enter into the same kind of business in a specified number of years or within a limited territory. The proof in this record shows that there was no special difficulty in proving the actual damages. Furthermore, it seems quite clear from reading all the terms of this contract together, that the parties did not intend to agree that this sum was liquidated damages, for one of the provisions was that the first party might, 'at his option, retain' said sum. This provision is not consistent with the view that the parties. adjusted in advance the damages that might arise by any breach of contract. The argument of counsel for plaintiff in error would require the holding that the $2,500

should be retained as liquidated damages whether the lease was violated less than a year before it expired the same as if it were violated within a few months after it was entered into. Such a construction of the contract violates the great fundamental principle which underlies our whole system,-'that of compensation; the great object of this system is to place the plaintiff in as good a position as he would have had if his contract had not been broken.' (1 Sedgwick on Damages,-9th ed.-sec. 406, p. 779.) To put this construction upon it, under circumstances that might readily arise, would work great oppression and hardship. In the light of the circumstances in this case the Appellate Court rightly held this sum a penalty and not liquidated damages."”

Question 158: (1) In this case did the court consider that the $2,500 was a "penalty" or "liquidated damages" (2) what practical difference did it make in the case whether the court called it the one or the other? (3) What is the great fundamental principle underlying the law of damages in breach of contract cases? Are the parties permitted by their agreement to violate this principle?

§ 141. (Contracts, Sec. 109.) Larger sum than debt payable in event of default.

Case 159. Goodyear Co. v. Selz, Schwab & Co., 157 Ill. 186.

Facts: Suit on a contract for the monthly rental of certain machines to be computed on each month's output, payable on the first day of the month next following with a provision that if paid before the 15th of the month a discount of 50 per cent was to be allowed.

Point Involved: Whether the provision for the payment of a larger sum than the debt in the event the debt is not paid when due, is enforceable.

MR. CHIEF JUSTICE WILKIN: "The following proposi tions seem to be sustained by the authorities: 'Where a large sum, which is not the actual debt, is agreed to be paid in case of a default in the payment of a lesser

sum which is the actual debt, such larger sum is always a penalty. But the rule is otherwise where a less sum is to be taken for a greater if paid at a certain time.' (5 Am. & Eng. Ency. of Law, 26.) 'Where the larger sum mentioned is the actual debt, and a smaller sum has been agreed upon as a release if paid under stated conditions, the failure to comply with the easier terms gives the creditor the right to enforce payment of the larger sum.' In doubtful cases courts have inclined to treat the stipulation as a penalty. (Ibid 27.)

"The controlling question in the case then is, what did the parties intend should be the actual rental for the machines-which sum was to be the actual debt? Manifestly, the draftsman of the lease intended it to be susceptible of the construction placed upon it by appellant, but it by no means follows that the parties who executed it so understood it or should be bound by that construction. We cannot construe the fifth paragraph as providing for a discount for prepayment of the debt. That a discount of 50 per cent should be made on the debt for a prepayment of but fifteen days is contrary to all business experience, and most unreasonable. The rent accruing for one month became due and payable on the first day of the calendar month following. Certainly the parties did not intend that there should be then due and payable more than 50 per cent of the schedule rate. Only that amount was payable at any time between the first and fifteenth of the month. It is to be presumed that it was the intention of the parties to secure to the lessor the payment of reasonable compensation for the use of its machines, and no more. That compensation could not be one dollar if paid on the fifteenth, but double that amount if paid the next day. Therefore, to hold that it was intended, in a case like this, that the rent should be $599.27 one day and $1,198.53 the next, except as an inducement to prompt payment of the lesser sum, is unreasonable.

"Our conclusion is, that the fifty per cent clause of the instrument should be construed as requiring the pay