pig iron at a certain time, both the amount of iron and the time of shipment are essential terms of the agreement, the seller does not perform his agreement by shipping part of the amount at the time appointed and the rest from time to time afterwards, and the buyer is not bound to accept any part of the iron so shipped. The necessary conclusion is that the defendant was justified in refusing to accept any of the iron shipped in 1881."

*

Question 155: What do we mean by the words "time is of the essence"? Is it of the essence in contracts? Illustrate by above case.

§ 138. (Contracts, Sec. 106.) Time of performance in a court of equity.

Case 156. Smith v. Brown, 10 Ill. 309.

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TREAT, C. J.: The general rule in equity is, that time is not necessarily deemed of the essence of the contract, unless the parties have expressly so regarded it, or it necessarily results from the nature and circumstances of the contract. The parties may make time of the essence of their agreement, and when this clearly appears to have been their intention, and no peculiar circumstance has intervened to prevent or excuse a strict performance, it must be so considered and treated in equity. The right to make such agreements cannot be denied, and it is the duty of the courts to enforce them, as made, and not to make new contracts for the parties. The real intention of the parties must govern and that is to be determined from the contract and surrounding circumstances."

Question 156: Is time of the essence in a court of equity?

(Note: See Sec. 106 in Vol. 1, Commercial Law Series.)

CHAPTER 15

INTERPRETATION OF PROVISIONS AS TO PENAL

TIES OR LIQUIDATED DAMAGES

$139. In explanation.

§140. Damages difficult to ascertain and amount reasonable.

§141. Larger sum than debt payable in event of default..

§ 142. Certain sum payable for breach of any of several covenants of varying importance.

§ 143. Forfeiture of amounts paid.

§ 139. (Contracts, Sec. 107.) In explanation.

(Note: A word of explanation seems necessary as an introduction to this somewhat confusing subject. We are to consider whether a sum which is named in a contract as payable in the event of non-performance, is named as "liquidated damages" or as a "penalty." What do these terms mean? For instance, suppose that A contracts with B that B shall work for him for one certain week for a compensation of twenty-five dollars, and in the event of his failure to carry out the contract, that he shall pay A, $100. B defaults. Can A recover the $100? We will find that if the courts would say that A could recover, they would call the $100 "liquidated damages," but if they would decide he could not recover the $100, but must prove his actual damages they would call the $100 a "penalty." Now we may notice, first, that the $100 may or may not have any reference to A's actual damages, according to circumstances, and that A's damages may or may not be readily ascertainable according to eircumstances.

What is the purpose of the law in awarding damages? It is to put the injured party as near as may be in the position in which he would have been had the other party carried out his contract. Ordinarily there is no provision in the contract as to the measure of damages and the court will apply the rules of law established to the end of giving the injured party the damages he has actually sustained. Suppose, however, the parties do mention a sum as payable in the event of breach. The enforce

ment of that sum may give damages that are out of all proportion to the damages actually sustained. On the other hand, it may be a reasonable agreement entered into by the parties for the purpose of obviating the necessity of proving damages which may be very difficult if not impossible of ascertainment. Where such a provision is made, the law favors its construction as a penalty, that is, not enforceable as damages, but it also recognizes that the provision is a wise one and enforceable, where the nature of the contract makes the proof of damages difficult and the sum named is reasonable, that is, appears to have been put in, not arbitrarily, but with some reference to the damages that would be actually suffered.

At common law a provision as to an amount payable in a bond or other contract was enforceable without respect to the damages actually sustained. In the case of bonds, courts of equity established a jurisdiction to relieve against the penalty thereof and to inquire into the damages, by providing that the amount of the penalty of the bond should stand as security, but that execution should not issue except for the damages caused by breach. By an English statute (8 and 9 Wm. III) the law courts were directed to follow the rule of the equity courts, and today the penalty of the bond is never considered as recoverable except in so far as it represents actual damages.

Now it is apparent that even in the extreme case of a penal bond, the law court regarded the provision as to the penalty as expressing the intention of the parties that such sum was to be recoverable, and allowed such sum to be recovered, yet that sum is not now recoverable, and today, knowing, as we do, the legal effect of a penal bond, the obligor never intends to pay nor the obligee to receive the penalty named. It provides merely a means of security. The actual damages must be proved.

In other contracts the difficulties appear. Shall a sum that is stated as payable if the contract is not performed, be regarded as a penalty and not enforceable, or shall it be taken as the agreed damages of the party injured? The courts often say that the intention of the parties will control. But we are met with two difficulties; first, how to ascertain the intention of the parties, and, second, suppose that the intention, when ascertained, violates all rules of damages and defeats justice. As a matter of fact, it is a good deal of a fiction to say that the courts will apply the intention of the parties. There are certain rules that help us

to arrive at the solution whether to allow the sum mentioned to represent the damages, or not to represent the damages. And in arriving at that solution we are often violating the intention that is expressed as plain as words can express anything. But in a more fundamental way, it is their intention which controls. That is to say, was their real intention (no matter what they say) to impose a punishment for breach of contract, or to really forecast probable damages in event of breach. If the former, the sum mentioned is not binding and is called a penalty. If the latter, it is enforced and is called liquidated damages.

A few illustrations out of the great number that are reported in the books are given below under several headings and will serve to throw light on this subject.)

§ 140. (Contracts, Sec. 108.) Damages difficult to ascertain and amount reasonable.

Case 157. Wallis Iron Wks. v. Monmouth Park Assn., 55 N. J. L. 132.

Facts: The W. I. W. agreed to complete a grandstand for a race course by a certain day or pay $100 a day for every day thereafter that it remained incomplete, "which said sum is hereby agreed upon and not by way of

as the damages penalty." When plaintiff sued, defendant claimed a right to reduce the sum recoverable by $100 for every day's delay.

for

Point Involved: That an amount named as payable

every day's delay in a building construction contract, is enforceable if the damages agreed upon are reasonable in respect to all the circumstances.

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DIXON, J.: In the present case the default consists of a breach of a single covenant. It is plain that the loss to result from such a breach is not easily ascertainable. The magnitude and importance of the grandstand may be inferred from its cost, $133,000. It formed a necessary part of a very extensive enterprise. Its worth depended upon the success of the entire venture. How far the non-completion of this edifice

might affect that success were topics for conjecture only. The conditions therefore seem to have been such as to justify the parties in settling for themselves the measure of compensation. The stipulations of parties for specified damages on a breach of a contract to build have frequently been enforced by the Courts.

"In the case at bar we have no data for saying that $100 a day was unconscionable.

Question 157: (1) Were damages of an easily determined sort in this case, if not agreed upon? (2) What elements were considered to determine the reasonableness of the sum agreed upon? Was the sum of $100 a day in this case a penalty or liquidated damages?

Case 158. Advance Amusement Co. v. Franke, 268 Ill. 519.

MR. JUSTICE CARTER delivered the opinion of the court: "Defendant in error [Advance Amusement Company] brought suit in the municipal court of Chicago to recover $2,500 deposited by it with plaintiff in error [Franke] pursuant to certain provisions of a lease between said parties entered into March 11, 1912, as to a theater building in Chicago for a term ending February 28, 1917, at a rental of $350 per month. By reason of default and failure to pay rent for December and a portion of that for November, 1912, the lessor [Franke] after giving the statutory five days' notice, brought suit for the possession of the premises and obtained judgment therefor December 17, 1912. On a trial in the municipal court without a jury, a judgment was entered in that court against said landlord [Franke] and in favor of said amusement company, for the sum of $2,500 so deposited, less the amount of rent that had accrued and remained unpaid at the date of the termination of the lease. That judgment, on appeal to the Appellate Court, was affirmed. The case has been brought here on petition for certiorari.

"The first question urged here is whether the $2,500 deposited with plaintiff in error [defendant] should be