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Morris v. McCoy.

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self unto the said John S. Morris in the sum of ten thousand dollars gold coin of the United States, as fixed, settled and liquidated damages to be paid to the said John S. Morris, if I make default in the performance of any of the said covenants and agreements. 'In witness whereof, I have hereunto set my hand and seal, this twenty-first day of July, 1869.

W. W. McCoy. [SEAL.] “ Witness: F. M. SMITH,

W. W. HOBART." The complaint alleged that defendant had made default in each of the covenants of the bond, and proceeded to set forth that plaintiff had been sued on one debt owing by him as a member of the firm of Morris, Monroe & Co., and compelled to pay thereon for damages, costs and attorney's fee the sum of $283.13, and that he had paid another debt so owing by him of $168. There was a prayer for $10,000 damages. The answer denied fully the allegations of the complaint. There was a judgment for defendant, from which plaintiff appealed.

The statement on appeal contained a series of offers of evidence by the plaintiff, adverse rulings thereon, and exceptions. The chief offers were to prove by parol that McCoy fully and explicitly understood and intended that he was to pay the stipulated sum of $10,000 as fixed, settled, and liquidated damages upon the breach by him of either of the conditions of the bond in the slightest particular, and expressly promised to do so without cavil. or dispute; and also that the value of the consideration expressed in the bond was largely in excess of all the debts of Morris undertaken to be paid by McCoy.

After stating the above offers, their exclusion and exceptions, the statement on appeal proceeded to set forth that the Court below refused to allow any testimony at all in relation to the above matters offered, or in relation to the situation of Morris and McCoy at the time of the execution and delivery of the bond, or the circumstances by which they were surrounded, together with plaintiff's exceptions thereto; and that then plaintiff introduced in evidence the bond, and that there was no other evidence produced by either party.

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Morris v. McCoy.

George S. Hupp, for Appellant.

I. It was competent for the parties to the bond in suit here to agree that, upon a breach by the obligor, the sum therein named should be considered and treated as liquidated damages, and not as a penalty. Sedgwick on Damages, 417–420; Goldsworthy v. Strutt, 1 Excheq. 659; Crisdee v. Bolton, 3 Car. & P. 240; 12 Barb. 147; 18 Barb. 338; 19 Barb. 109, 389; 25 Cal. 70,

et seq.

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II. The testimony offered by plaintiff was admissible. In an action on an agreement for the payment of a certain sum if the promisor should not do a certain act, where the question is, whether such sum is a penal one or liquidated damages, parol evidence is admissible concerning the subject matter of the agreement, so far as respects the situation of the parties and the facts relating to the agreement, and especially to the consideration thereof. Hodges v. King, 7 Met. 583; Perkins v. Lyman, 11 Mass. 81 ; Thomas v. Truscott, 53 Barb. 204; 1 Greenleaf on Ev. $$ 286, 7, 8.

When the purpose for which a writing was executed is not inconsistent with its terms, it may properly be proved by parol. Hutchins v. Hibbard, 34 N. Y. 26.

Hillhouse of Tilford, for Respondent.

I. So far as the testimony excluded tended to invalidate the bond sued upon, by showing that it was but a part of a system of fraud and oppression alleged to have been committed by the defendant on the plaintiff, it was clearly inadmissible. The plaintiff having introduced the instrument and made it a part of his case, claiming under its provisions $10,000 as liquidated damages; and the defendant having denied and put in issue all the allegations of the complaint, it was certainly not competent for the plaintiff to attack the very instrument on which this action was founded. All evidence must be pertinent to the issue made by the pleadings.

II. If a covenant is for the performance of, or for the abstaining from some act or acts, and the damages resulting from a violation of the covenant can be ascertained and measured by an exact pecuniary standard, then the sum stipulated for the violation of the

Morris v. McCoy.

covenant as damages is deemed a penalty, or in the nature of a . penal sum, whatever may be the language of the instrument. If the instrument provide for the payment of a larger sum, on the failure of the obligor to pay a less sum, in the manner prescribed, the larger sum is always, whatever may be the language employed in the instrument, considered a penalty. Kemble v. Farren, 6 Bing. 141 ; 3 Car. & Payne, 240 ; Sedgwick on Dam. 411; Merrill v. Merrill, 15 Mass. 488; 11 Mass. 76; Head v. Bowers, 23 Pick. 455; 3 Johns. Cases, 297; 17 Wend. 447; 22 Wend. 201; 24 Wend. 246; 18 Johns. 219; 12 Barb. 367; 18 Barb. 50; 5 Sandf. 192; 19 Barb. 106.

III. A sum named as liquidated damages must be construed a penalty in all cases where the agreement contains various stipulations differing in importance, and it is to each and all of them that the damages apply. See note to Sedgwick on Dam. 410; 1 Ind. 434; 3 Ohio St. 241.

IV. If the construction contended for by plaintiff's counsel be correct, then for a failure to pay the sum of $180, the amount of the promissory note specified in the second article, the defendant became liable to Morris for $10,000. But the damages resulting from a violation of any of the covenants specified in the bond were easily ascertainable, and capable of being measured by an exact pecuniary standard. This brings the case within the letter and reason of the rules, adopted by the courts for the construction of instruments of this character, for determining whether the sum named to secure the performance of their covenants shall be treated as a penalty or as liquidated damages.

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

Morris v. McCoy.

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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 that “ 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

a 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 case 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

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Morris v. McCoy.

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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. Rossman, 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; Mason 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 letter; and 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

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