Parties to a contract may agree upon an amount presumed to be the damage for breach in cases where it would be impracticable or extremely difficult to fix actual damage. S.D. Code § 10.0704. The effect of a clause for stipulated damages in a contract is to substitute the amount agreed upon as liquidated damages for the actual damages resulting from breach of the contract, and thereby prevents a controversy between the parties as to the amount of damages. If a provision is construed to be one for liquidated damages, the sum stipulated forms, in general, the measure of damages in case of a breach, and the recovery must be for that amount. No larger or smaller sum can be awarded even though the actual loss may be greater or less. In such case, evidence of the actual loss or harm suffered is immaterial and irrelevant.
Plaintiff contractor entered into a contract with the defendant State Highway Commission for the construction of a new public highway. PPlaintiff failed to complete the new highway on the date fixed. There was a delay of 67 working days for which there was no extension of time requested or granted. Therefore the state withheld $ 14,070.00 as liquidated damages from the amount due plaintiff computed according to the contract scale of daily damage for delay in construction. As this project totaled $ 530,742.14, the per diem daily damage was $ 210. According to an interrogatory answered by the state any damage, loss, or expense incurred by reason of the delay was "unknown." The lower court ruled that a provision in a state highway construction contract with defendant Highway Commission was one for liquidated damages, and not an illegal penalty. Plaintiff appealed and the court affirmed the decision in favor of the state based on its finding that the liquidated damages were not punitive.
Did the circuit court err in ruling that the provision in the contract was one for liquidated damages, and not an illegal penalty?
On review, the court held that the provision in question had to be considered one for liquidated damages rather than a penalty for the following reasons: I. Damages for delay in constructing a new highway were impossible of measurement. II. The amount stated in the contract as liquidated damages indicated an endeavor to fix fair compensation for the loss, inconvenience, added costs, and deprivation of use caused by delay. The court concluded that the amount stipulated in the contract bore a reasonable relation to probable damages and was not, as a matter of law, disproportionate to any and all damage reasonably to be anticipated from the unexcused delay in performance. Moreover, each day's delay, while unquestionably injurious, was injurious frequently in ways that were difficult to estimate.