Strode v. Smith

Mr. Justice Bean delivered the opinion of the court. The sole question for our determination is the ruling upon the demurrers. It is contended on behalf of defendants that the provisions in the bond, which are denominated liquidated damages, are as a matter of fact penalties. It will be noticed that tbe complaint shows a provision in tbe bond that if tbe lessee should fail to pay tbe 1910 taxes on tbe leased property on or prior to the 15th day of March, 1911, tbe obligors would on demand pay tbe lessors tbe amount of such taxes as and for fixed and stipulated and liquidated damages sustained by tbe lessors by reason of such failure. But that in no event should tbe surety be required to pay more than tbe sum of $2,000 by reason of that stipulation in tbe bond. As a first cause of action tbe complaint shows that defendant Smith failed to pay tbe taxes on or before tbe specified time, or at any time, and that by reason of such failure plaintiffs were compelled to, and did, after that date pay tbe same, wbicb amounted to $3,220.80. Tbe bond does not provide that defendants will pay $2,000 for tbe failure to pay taxes in any event, but only in case tbe taxes shall equal or exceed that amount. In other words, tbe bond stipulates tbe exact amount of the taxes as damages, limiting tbe amount, however, to $2,000. In Krausse v. Greenfield, 61 Or. 502, at page 512 (123 Pac. 392, at page 396), Mr. Justice Moore, speaking for this court, said: “In tbe case at bar, though tbe damages were liquidated, tbe compensation agreed upon was just and reasonable. * * Tbe amount awarded is less than tbe damages sustained, and, this being so, tbe stipulation in tbe contract cannot be construed as a — 174 — penalty.” In view of the fact that, in the case under consideration, it is shown by the complaint that by reason of the failure of defendant Smith to pay the 1910 taxes, the plaintiffs were required to pay the same and were actually damaged in a greater sum than stipulated in the bond, it is not a matter of consequence by what name we designate the damages provided for in such stipulation: Georgia Land Co. v. Flint, 35 Ga. 226; Atlantic Trust & Deposit Co. v. Town of Laurinburg, 163 Fed. 690, 692 (90 C. C. A. 274). The allegations in the first cause of action show a breach of the contract, and the damages sustained equal to the amount agreed upon in that provision of the contract. The demurrer was properly overruled. The second cause of action is for the recovery of $4,000 for the failure of defendant Smith to furnish the $50,000 bond, securing the erection of the building. It is claimed that the complaint is demurrable as to this cause of action, because the $4,000 denominated in the bond as liquidated damages is a penalty. The complaint discloses that the execution of the $50,000 bond was the preliminary step to be taken by the lessee for the construction of an eight-story steel frame building to cover an entire city lot in the center of the business district of the City of Portland. The building was to be valued at $100,000 for insurance purposes, and was to be a modem class A building, with the exposed walls on Third and Alder streets faced with pressed brick. Plaintiffs were to receive $1,500 rental per month for the term of 35 years, or $630,000. The building was to be the property of plaintiffs as part consideration of the lease. In addition to this, the defendants were to pay the taxes, insurance, and city assessments. Failure to give the building bond was in effect a failure to erect the building, for without the bond defendant Smith had no right — 175 — to remove the old building, nor to proceed to construct a new one, and the execution of the bond for $50,000 would practically insure the construction of the building. From these facts we are asked to declare as a matter of law from an inspection of the complaint that the damages stipulated in the bond are so excessive as to be a penalty. 1. Unless the court can declare as a matter of law from an inspection of the contract that the damages are so excessive as to. be a penalty, the demurrer should he overruled and the question determined after the answer is filed: Blunt v. Egeland, 104 Minn. 351 (116 N. W. 653); De Graff, Vrieling & Co. v. Wickham, 89 Iowa, 720 (52 N. W. 503, 57 N. W. 420); Hoxsey v. Patterson, 59 Ill. 522; Wilcox v. Walker (Tex. Civ. App.), 43 S. W. 579; 19 Am. & Eng. Ency. of Law (2 ed.), 423. It is usually a difficult question to determine whether stipulations of this kind are in the. nature of liquidated damages or penalties. Courts usually go no further in laying down fixed rules for determining in all cases whether the stipulation is liquidated damages or a penalty than is necessary for a decision of the particular case under consideration. 2, 3. The question must, therefore, he determined in each case upon the facts and circumstances of the given cause. The intention of the parties to the contract, however, must control, if that can be ascertained. In the construction of contracts, the end to be attained is to ascertain the intention of the parties; and the bond in question is no exception to the rule: Stratton v. Fike, 166 Ala. 203 (51 South. 874); Curtis v. Van Bergh, 161 N. Y. 47, 52 (55 N. E. 398). 4. This court and others have announced certain rules which in some cases afford a general guide in construing such stipulations in contracts. In Krausse v. Greenfield, 61 Or., at page 512 (123 Pac. 395), Mr. — 176 — Justice Moore says: “Compensation, and not penalty, affords the measure usually employed to determine the amount of damages to which a party is entitled by reason of a failure of the adverse party to keep or perform the terms of his agreement. The intention of the parties in this respect is controlling, however, when it satisfactorily appears that, when a written contract was effected, they anticipated the possible injury and fixed upon a just and reasonable sum of money as applicable to the entire consequence that might arise from a breach of the agreement, in which case the damages thus determined upon are recoverable.” In Salem v. Anson, 40 Or. 339, at page 345 (67 Pac. 190, at page 192, 91 Am. St. Rep. 485, 56 L. R. A. 169), Mr. Justice Bean says: “When the actual damages in case of a breach of the contract must necessarily be speculative, uncertain, and incapable of definite ascertainment, the stipulated sum will be regarded as liquidated damages, and may be recovered as such without proof of actual damages, unless the language of the contract shows, or the circumstances under which it was made, indicate a contrary intention of the parties, or it so manifestly exceeds the actual injury suffered as to be unconscionable.” The contract provided for the cancellation of a note and mortgage of $7,500 as liquidated damages for failure to purchase land valued at $24,000. In Hull v. Angus, 60 Or. 95, at page 107 (118 Pac. 284, at page 288), Mr. Justice Burnett says: “The principle seems to be from a consideration of all the authorities that, where the parties are competent to contract, are equally masters of the situation, and deal at arm’s length, the court of equity will not disturb the measure of damages established by the parties themselves, unless it is so grossly unconscionable and oppressive as to shock the conscience of the court and lead it to believe — 177 — that, although so nominated in the bond, in the letter it is not included within the spirit of the contract, or within the contemplation of the parties.” In Morse v. Rathburn, 42 Mo. 594 (97 Am. Dec. 359), there was an agreement to buy land for a purchase price of $9,000, and the contract provided that, if either party should fail to comply with the contract, he would forfeit and pay to the other the sum of $2,000. The court held that this was liquidated damages because it was not so disproportionate to the damages which might be sustained that the court ought to interfere with the expressed intention of the parties. In the case of Sun P. & P. Assn. v. Moore, 183 U. S. 642 (46 L. Ed. 366, 22 Sup. Ct. Rep. 240), it is plainly declared that the decisions of that court on the doctrine of liquidated damages and penalties lend no support to the contention that parties may not bona fide in a case where the damages are of an uncertain nature estimate and agree upon the measure of damages'which may be sustained from the breach of a contract: See, also Williams v. Pacific Surety Co., ante, p. 151 (127 Pac. 145); Commonwealth v. Ginn, 111 Ky. 110 (63 S. W. 467); Malone v. City of Philadelphia, 147 Pa. 416 (23 Atl. 628); 19 Am. & Eng. Ency. of Law (2 ed.), 402; 13 Cyc. 97; 1 Sutherland, Damages (3 ed.), 279. 5. The bond under.consideration in this case recites as a reason for stipulating as to amount of damages that at the time of the execution of the lease, and from then until the execution of the bond, the conditions in the City of Portland were favorable for the owners of real property to secure profitable leases; that by executing the lease to defendant Smith plaintiffs tied up their property in such a manner and for such a time as to lose many favorable opportunities of making advantageous leases thereof to other parties; that plaintiffs were induced to execute the lease by reason — 178 — of the provision therein for the execution to them of the $50,000 building bond; that on account of these circumstances, and because the damages would be uncertain and incapable of reasonable estimation or definite calculation, and because it might be claimed that the damages could not be estimated at all until after the expiration of the 35 years, the sum of $4,000 was agreed upon by the parties as fixed and liquidated damages that would accrue to the plaintiffs from the failure of the lessee to deliver the $50,000 bond. The instrument differs from many in which liquidated damages are stipulated, in that it gives the reasons for so doing. There is no showing in this case that the facts recited in the bond were not correct. In Blunt v. Egeland, 104 Minn. 351, at page 353 (116 N. W. 653, at page 654), it is said: “The further contention that the damages stipulated by the contract should be treated as a penalty, and hence not recoverable, and further that, inasmuch as the complaint alleges no general or special damages, the plaintiff cannot recover, is not well taken. Whether the damages stipulated by the terms of the contract should be treated as penalty can only be determined when issues are framed and the situation and surroundings of the parties are disclosed. The matter will adjust itself, either when defendants answer or upon the trial, when the court is called upon to pass upon the question. Of course, if the damages stipulated are out of all proportion to the actual injury suffered by plaintiff, the stipulation should be treated as a penalty, and plaintiff limited to the recovery of actual loss: Taylor v. Times Newspaper Co., 83 Minn. 523, 527 (86 N. W. 760, 85 Am. St. Rep. 473). But upon the face of the complaint plaintiff is entitled prima facie to recover, the amount stipulated by the contract. We cannot declare as a matter of law that the damages are so excessive — 179 — as to justify the conclusion that the stipulation should be treated as a penalty: Howard v. Adkins, 167 Ind. 184 (78 N. E. 665).” To the same effect is the case of De Graff, Vrieling & Co. v. Wickham, 89 Iowa, 720 (52 N. W. 503). In the case at bar the actual damages in the contemplation of the parties were necessarily speculative, uncertain, and perhaps incapable of definite ascertainment. The plaintiffs, by their contract of lease, practically said to the defendant Smith that they would grant him the privileges of the lease as specified on the conditions that he would make the agreed payments, execute the $50,000 bond, and construct the building provided for; and, in the event of his failure to furnish the $50,000 bond which was preliminary to the construction of the building, he would forfeit $4,000. The transaction was a plain contract which the parties apparently understood and clearly expressed in their writings. Their intention then being plain, there is no good reason for the court to say that the parties meant something other than that expressed in their agreement. The sum fixed does not appear to be, and is not shown to be, disproportionate to either the actual or presumed damages. It does not appear that one party to the contract was a victim of oppression. The loss naturally resulting from nonperformance of the stipulation was vague and uncertain, and as declared in the bond itself was a proper subject of contract between the parties. We cannot declare as a matter of law that the damages agreed upon are so excessive as to justify the court in declaring that the stipulation should be treated as a penalty. It is strongly urged by counsel for defendants that if a minor condition in the bond had been broken, and the plaintiffs had been damaged in the sum of $10, or had paid the taxes one day after the time due, according to the language thereof, the plaintiffs would — 180 — have claimed to be entitled to the $6,000 as liquidated damages. Suffice it to say that that is not the case under consideration. It is easy to assume that the amount stipulated would be unreasonable and unconscionable in case of the noncompliance with a minor condition of the obligation. Such an assumption, however, is unnecessary for the determination of this case. Each case must depend upon its own particular facts and not upon assumed facts. 6. It is also contended that the bond is indefinite as to the provision relating to the execution of the $50,000 bond not later than 65 days before the commencement of the removal of the old building now standing upon the leased property, which would necessarily be not less than 65 days before the commencement of the erection of the new building. But it will be noticed that the bond plainly provides for the commencement of the new building within one year from the date of the lease. 7. The complaint charges that, after the expiration of the year, the defendant Smith had wholly failed to execute such bond. It was agreed in the lease to execute the building bond with surety, conditioned that the lessee would construct and pay for a building on the leased premises as specified, “which bond shall be made to the lessors and in form and conditioned as they may desire and which must be satisfactory to them.” It is contended on behalf of defendants that this is too indefinite for enforcement. It therefore appears that the substance of the condition of the bond is specified in the contract. The plaintiffs, under these terms, would have the right to demand a bond so framed that the conditions would embrace those specified in the lease, and one so plain as to form that there woijld be no likelihood of nonenforcement on account of form. They would have been bound to be — 181 — satisfied with such a bond with a good, safe, and reliable surety. Defendant Smith was given possession of the premises and enjoyed the use thereof for a considerable time, receiving all the advantages from the covenants of the plaintiffs. In determining the question as to the certainty of this contract the court must treat the contract as having been partially performed by the plaintiffs. Defendants have obtained to some extent the advantages of the contract, and are now seeking to avoid the disadvantages. The construction of the building was the main condition of the bond. That condition was expressed with certainty. The plaintiffs could not have arbitrarily refused to accept a bond because it was not in the particular form that they might desire, nor have arbitrarily refused on the ground that it was not satisfactory to them, if, in fact, it did answer the requirements specified. In the case of Olympia Bottling Works v. Olympia Brewing Co., 56 Or. 87, at page 93 (107 Pac. 969, at page 971), the court said: “"While in the case at bar, taking the contract as a whole, it is manifest that the right to continue the agency for the additional five year period constituted a very important part of the consideration for the first five years’ service, and the contract having been fully executed, and the consi deration thereby fully paid for the first period, more latitude should be allowed in determining whether the provision in the contract, whereby the party paying such consideration was to receive the benefit thereof, than in a case where the option or contract is merely executory, or partly executory”: See, also, Livesley v. Johnston, 45 Or. 30, 46, 47 (76 Pac. 13, 946, 106 Am. St. Rep. 647, 65 L. R. A. 783); Hawkins v. Graham, 149 Mass. 284 (21 N. E. 312, 14 Am. St. Rep. 422). In 9 Cyc., p. 624, the rule is laid down as follows: “In the cases above referred to the promisor must act — 182 — honestly and in good faith. His dissatisfaction must be actual and not feigned; real and not merely pretended. He must, if a test is necessary to determine fitness, give that test or allow it to be made. ’ ’ The demurrers, therefore, were properly overruled. The judgment of the lower court will he affirmed. Affirmed.