Morris v. McCoy

By the Court, Lewis, C. J.: Whether a sum of money agreed upon by the parties to a contract to be paid in case of a breach shall be held liquidated damages, and so literally enforced, or a penalty, in which case the actual damage resulting from the breach and not the amount stipulated is allowed to be recovered, has ever been a perplexing question to the courts. Although, as a general rule, it is acknowledged that the intention of the parties as expressed in the contract should [404] 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 failure or nonpayment of a smaller sum at a given time. In such cases it is said, no matter what may be the language of the parties, the large sum agreed upon will be deemed a penalty, and not liquidated damages. In Astley v. Weldon, 2 Bos. & Pull. 346, Chambre, J., said thaf “ There is one case in which the sum agreed for must always be considered as a penalty; and that is, where the payment of a smaller sum is secured by a larger.” And this language has been frequently quoted and adopted by the American courts as a correct exposition of the law. In Kimball v. Farren, 6 Bing. 141, Tindel, C. J., said: “That a very large sum should become immediately payable in consequence of the nonpayment of a very "small sum, and that the former should not be considered as a penalty, appears to be a contradiction in terms'; the case being precisely that in which courts of equity have always relieved, and against which courts of law have in modern times endeavored to relieve, by directing juries to assess the real damages sustained by breach of agreement.” ' ' • The Supreme Court of New Hampshire, in Mead v. Wheeler, 13 N. H. 353, after adopting the remarks of Chambre,' J., supra, go on to say; “ Although in fact a creditor may suffer the most serious injury from the want of punctual payment of his debt, and the payment of the principal and interest may very inadequately compensate him for his disappointment, still the payment of more than the legal interest cannot be enforced under the denomination of a penalty, although if the agreement to pay a penalty be in ac-. cordance with the general usage and practice of a particular trade, it has been held that it might be enforced, even if it should exceed the legal interest.” The ease of Spear v. Smith, 1 Denio, 464, was an action upon a submission to arbitration, providing that the arbitrators should determine what damages either party should pay to the other, and containing a clause that the party who should refuse to abide the award should pay to the other one hundred dollars “ as the ascertained and liquidated damages.” The arbitrators having awarded to the plaintiff $10.40, it was held that the one [405] hundred dollars was a penalty, and that only the ten dollars and forty cents could be recovered. 3 Leading Cases in Equity, note to Peachy v. Duke of Somerset, where it is said: “ Whenever, therefore, the damages resulting from a breach of agreement are susceptible of being estimated by calculation, they cannot be liquidated by the parties themselves, who must be content to abide by the rule of compensation established by law.” And it is said in Niver v. Bossman, 18 Barb. 55, “It may now be regarded as well settled that no damages can ever be so liquidated between the parties for the mere nonpayment of money, as to secure the payment of a greater sum than that named in the covenant, with interest.” And Parsons states this to be the established rule. 3 Parsons on Contracts, 159; see also 5 Sanford; Bagley v. Peddle, 192; Marson v. Flint, 2 Minn. 350. The reason given for the rule is, that-the object of the contract is its fulfillment — that is, the doing of the thing, the performance of which is sought to be secured by the penalty or liquidated damages, and not the infliction of an injury on the one side, nor the acquisition of a collateral advantage on the other. Chancellor Kent, in Skinner v. Dayton, 2 Johns. Ch. 535, says: “ The true foundation of relief is, that when penalties are designed to secure money or damages really incurred, if the party obtains his money or damages he gets all that he expected or required.” Consequently, when the covenant or contract is broken, the intention of the parties is best carried out by substituting a compensation in damages, which the law fixes at the legal rate of interest. Now it is very evident in this case, that the chief object of the 'contract was the payment by McCoy of certain debts owing by Morris. Had he paid them, the object of the contract would have been accomplished, and it would have been executed in its very letterand the plaintiff would have received all he expected to. But they were not paid, and for the failure to do so he claims the recovery of the ten thousand dollars stipulated as the damage in case of such failure. But by the rule of law suggested, the recovery must be limited to the actual damage, with legal interest. The case comes squarely within the rule that a large sum, stipulated to be paid in default of the payment of a smaller sum, must always be deemed a penalty, no matter what [406] may be the language of the parties. There is another covenant in this case, it is true — that is, that the obligor McCoy will save the plaintiff harmless from all suits instituted for the recovery of the debts agreed to be paid. However, taking the whole agreement together, it is simply an agreement to pay certain debts of Morris. But should it be considered an independent covenant, and that the damage resulting from a breach of it would be uncertain, the plaintiff is in no better condition, for it is well settled that the sum agreed upon between the parties 'will always be held a penalty, where the agreement is such that it secures the performance or omission of various acts, some of which are not readily measurable by any exact pecuniary standard, together with others in respect of which damages on the breach of the covenant are certain, or readily ascertainable by a jury. Such was the case in Kimball v. Farren, 6 Bing. 141, supra, and is the rule uniformly adopted in this country. Leading Cases in Equity, note to Peachy v. Puke of Somerset. Hence, if the covenant to save the plaintiff from suits for the recovery of the debts in question be a covenant, the breach of which could not be readily measured by any exact pecuniary standard, as it is united with one that is so — that is, the payment of the debts— and as the whole sum stipulated to be paid as damages is payable upon the breach of either covenant, the case comes within the rule of Kimball v. Farren ; and if, on the other hand, it be a covenant, the damage for the breach of which can be so readily measured, then it comes within the first rule. With this general statement of the law before us, we are prepared to inquire whether the assignment of error relied on in this case is tenable. We think not. It was proposed by counsel for appellant to show, by parol testimony, the agreement and understanding between the parties at the time the contract in question was executed. That was not admissible, because there was no ambiguity; and it must be supposed the agreement was fully embodied in the written instrument. 1 Greenleaf on Evidence, § 275. The evidence offered for the purpose of showing that the consideration for the agreement was in fact of greater value than the money to be paid by McCoy, certainly could not help the appellant, if the [407] law be correctly stated in the authorities referred to. If- it be a fact that in no case will the amount designated by the parties be held to be liquidated damages, when it is simply security for the payment of a lesser sum, then certainly it was of no consequence what may have been the consideration moving from Morris to McCoy ; for the contract is one of that character, and comes directly within the rule announced by Chambre, J., in Astley v. Walden. The evidence, then, offered for the purpose of showing the consideration, would not aid the plaintiff. Any evidencctending to show that the failure to fulfill a contract will result in such damage or injury to a party that cannot be readily ascertained by any pecuniary standard, is undoubtedly admissible ; for such evidence goes to show it to be a case in which the parties have a right to fix the measure of damage. This is clearly what is meant by the cases holding that parol evidence is admissible concerning 'the subject matter of the contract, so far as the situation of the parties is concerned, in cases of this kind. This could not, however, possibly" be the result here. But there is another answer to this point. It is stated only, in the bill of exceptions, that the plaintiff, offered proof of the situation of the parties, and circumstances surrounding them. What particular situation or circumstances it was proposed to prove, does not appear. It was certainly necessary to show that the situation or circumstances offered to be proved had some bearing on the contract. This was not done — the specific offer of evidence which preceded this general offer was clearly only of evidence which could in no wise aid the plaintiff, or tend to show that the case does not come within the rule respecting an agreement to pay a greater sum upon failure to pay a less, or that the amount agreed upon between the parties should not be held tó be a penalty. The judgment below must be affirmed.