Davis v. Hendrie

Knowles, J. The plaintiff brought an action to foreclose a mortgage executed to secure the payment of a promissory note for the sum of $1,725. A copy of the note is not set forth in the record. Its substance is, however, presented in plaintiff’s complaint. From this we find that the defendants promised to pay the above sum in six months, with interest after maturity at the rate of four per cent per month. The court below held that an agreement for interest was invalid and void on contracts due, and refused to allow the same. To this ruling the plaintiff excepted, and appealed to this court, assigning this ruling as error. The question presented for determination in this case is the validity of a contract for interest on a sum of money after the same becomes due. Section 2 of our statute upon the subject of interest, reads as follows : “ Creditors shall be allowed to collect and receive interest, when there is no agreement as to the rate thereof, at the rate of ten per cent per annum after they become due on any bond, bill, promissory note, or other instrument in writing.” See Laws of 1864, 535. Section 3 of the same act reads thus : “ The parties to any bond, bill, promissory note, or other instrument of writing, may stipulate therein the payment of a greater or higher rate of interest than ten per cent per annum, and any such stipulation contained in any such instrument of writing may be enforced in any court of law or equity of competent jurisdiction in this Territory.” See Laws of 1864, 535. It will be seen by the section first referred to, that the law only allows interest in this Territory on a promissory note after the same has become due, in the absence of any agreement between the parties upon that subject. The second section referred to provides, that the parties to a promissory note may agree for the payment of a greater — 501 — rate of interest thereon than ten per cent. Taking these two sections together and the conclusion is inevitable that the legislative assembly intended to give parties to promissory notes, and other instruments of writing, the power to agree upon the amount of interest that might be collected by way of stipulated damages after the maturity of the contract, and I can see no reason why a different rule should be established in a case where the legislative assembly enacts what shall be the interest collected by way of damages, and where it authorizes the parties to make a stipulation as to what interest will be proper as such damages. Interest allowed by law on contracts due is treated and considered as damages for a breach of the same over and above the amount actually due. When the legislature, however, fails to enact what shall be the legal damages for a breach of a contract, over and above the demand due, there is no good reason why the parties may not agree as to what shall be proper damages, and if I have not given a wrong interpretation to section 3 above referred to, the statute gives them this authority. The rule claimed by the respondents makes that section read, “that parties to any bond, bill, promissory note, or other instrument of writing, may stipulate therein the payment before the same becomes due for a greater rate of interest than ten per cent per annum, but after they become due no stipulation of the kind can be made.” And section 2 must be so construed as to leave out the clause when there is no agreement as to the rate thereof, and be read as follows : “ Creditors shall be allowed to collect and receive interest at the rate of ten per cent per annum after they become due on any bond, promissory note, or other instrument in writing.” For, if parties cannot agree to any rate of interest after such an instrument becomes due, the clause “where there is no agreement as to the rate thereof,” can have nothing to do with an instrument in writing due ; and yet the whole section has reference to interest on contracts due and not to those to become due. It is claimed by the respondent that any agreement for interest on money after the sum becomes due is invalid, — 502 — and, in support of this, we are cited to the case of Talcott v. Marston, 3 Minn. 344. The court in that case uses the following language: “The promisor agrees to pay five per cent per month after due till paid. If this can be construed as a contract it is certainly not the same in kind as that embraced in the first part of the note. There is, in fact, no consideration for it. There is no time limited for the expiration of the contract. It is claimed that the parties have agreed to pay five per cent for such length of time as the payee may choose to forbear. But the fact that the parties have agreed in writing that the money should be paid at a day certain, excludes the idea that there could have been another understanding different from that expressed. This five per cent cannot be claimed as interest, for interest is the sum paid for the use, or, as is sometimes expressed, for the forbearance of money. In this case there is no agreement that the maker shall have the use of the money, or that the payee will forbear in collecting the money after six months. The last clause of the note is not, in terms, but in substance and effect, an attempt of the parties to liquidate the damages for a breach of the contract. This the law does not permit them to do. The reasoning upon which this rule of law has been established is entirely unsatisfactory to my mind, and I think an agreement of parties, deliberately entered into and fully understood, to liquidate the damages on breach of contract to pay money, ought to be enforced as much as any other contract. But the rule has long since been settled otherwise, both in England and this country, and the question is not open for discussion. And whether the five per cent clause be regarded as a penalty or liquidated damages the result is the same.” I have quoted this decision at such length because it is the one most in point cited by respondents, and it is the one upon which the decision of the court below was evidently based. We have not the Minnesota statute upon interest before us, and hence cannot tell to what extent it corresponds with that of this Territory. If the statute of that — 503 — State fixes the rate of interest on all moneys due, then there was nothing left for agreement, and I fully indorse that opinion; for parties by agreement cannot vary the law. If the statute of Minnesota on this subject is the same as ours, and the rate of interest on money due is fixed by law only in the absence of any agreement then I wholly dissent from the conclusion arrived at therein. The contract in this case was for four per cent per month after the note became due. This was in effect and substance an agreement between the parties to liquidate the damages for a breach of the contract. Interest is often treated as damages. When the law gives interest on money due, it is not in consideration of any forbearance by the payee, but as damages. Now, weihold that the rule laid down in the decision above referr'ed.'<to, that parties cannot agree and liquidate damages for a breach of a contract, is not correct. In Sedgwick, on the measure of damages, we find the following : “ It is competent for parties entering upon an agreement to avoid all future questions as to the amount of damages which may result from the violation of the contract, and to agree upon a definite sum as that which shall be paid to the party who alleges and establishes the violation of the agreement. In this case the damages so fixed are termed liquidated, stipulated or stated damages.” The author, in that work, discusses ; this question of liquidated damages, and refers to many cases both in England and America where contracts, fixing a sum as stipulated or liquidated damages, have been sustained, and holding that the courts will enforce such a contract when it is not in the nature of a penalty. We do not believe that the interest agreed upon by the parties in the note under consideration, can, by any fair construction, be considered as a.penalty. The rate of interest agreed upon was not in excess of the amount paid on very many contracts executed at the time of this one in this Territory. The agreement has none of the earmarks of a penalty. A note in Sedgwick, on the measure of damages, — 504 — in relation to the decisions of the courts of Minnesota, referred to by respondents, holds this language. “ But these rulings seem practically to conflict with the enlarged policy of the statute, and perhaps also tend to discourage that good faith in dealing which it should be the sedulous endeavor of the jurisprudence to promote. They allow the debtor by a breach of his cdntract to obtain for a time the use of his creditor’s money, at a rate less than he agreed to pay, and one which it may be far less than it could be had for in the market, and which no degree of good faith would have enabled him to obtain.” As we have said, however, we have no contest with the Minnesota decisions upon this point, if their statute fixes the rate of interest on money due and does not leave same open to contract. The case of Brewster v. Wakefield, 22 How. (U. S.) 118, cited by respondents, is not in point. In that case no agreement for the payment of interest after the note became due was made, and the court held that in the absence of an agreement between the parties as to interest after the maturity of the note, only legal interest could be collected. In the case of McLane v. Abrams et al., 2 Nev. 204, the court says: “As in the absence of express provisions it could not be presumed that the promise of a party extends beyond the limit of the written contract for payment, the statutes existing in all the States give the party a remedy which otherwise he probably would not have, by allowing him to recover legal interest on his debt from the time of its maturity until it is collected, as damages for the breach of contract. But it will not be denied that when not prohibited by usury laws, an agreement between parties fixing a higher rate of interest or damage after maturity would be enforced.” The statute upon the subject of interest in Nevada upon this point is the same as that of this Territory. In conclusion, we would add there is no doubt that the law allows parties to fix the damages that may be sustained for the breach of a contract. The only question to be determined by courts is, whether or not the parties have fixed — 505 — the same by agreement. Where interest is allowed by law on contracts due, and where the court awards interest for the breach of a contract, this interest is given as damages. When the law does not fix the rate of interest on contracts due, or specially provides, as I hold the statute of this Territory does, that parties may agree as to the rate of interest, this interest agreed upon is treated as damages ; and, if it is not fixed as a penalty for the breach of the contract, but as a just compensation therefor, the courts should enforce it. The contract for interest in this case cannot be treated as a penalty; the parties did not so understand it themselves; no fair interpretation of the contract can discover any such understanding. If the interest agreed upon is to be regarded as a penalty, then the court below erred in fixing the damages for the breach at the legal rate of interest, because the statute fixes the interest only in the absence of agreement; and in this case there was an agreement, and the question should have been determined on the testimony as to what were the actual damages, and the plaintiff might have recovered any amount he could have proved, not exceeding the four per cent per month stipulated for. This, however, I hold, was not fixed as a penalty. For these reasons the judgment of the court below is reversed and the cause remanded. Judgment reversed.