To be potential and controlling that a stated sum is liquidated damage, that sum must be fixed as the basis of compensation, and substantially limited to it. Just compensation is recognized as the universal measure of damages and not punitive, and as such, parties may liquidate the amount by previous agreement. But when a stipulated sum is evidently not based on that principle, the intention to liquidate damages will either be found not to exist, or will be disregarded, and the stated sum treated as a penalty. The intention in all such cases is material. But to prevent a stated sum from being treated as a penalty, the intention should be apparent to liquidate damages in the sense of making just compensation. It is not enough that the parties express the intention that the stated sum shall be paid in case of a violation of the contract. A penalty is not converted into liquidated damages by the intention that it be paid. It is intrinsically a different concept and the intention that it be paid cannot alter its nature. The evidence of an intention to measure the damages, therefore, is seldom satisfactory when the amount stated varies materially from a just estimate of the actual loss finally sustained.
The parties entered into a written contract whereby vendor was to complete certain improvements on the cemetery lot of purchaser, which included the erection of a marble monument. The contract provided for installment payments, the balance to be paid upon completion, and a set amount to be paid each day if the completion of the project was delayed beyond one year. The completion was substantially delayed and the vendor claimed that it was entitled to the entire contract amount due plus interest from the date of completion. The purchaser claimed that the agreed daily amount was liquidated damages and was to be deducted from the amount she owed vendor. The Superior Court denied this claim and refused to grant a new trial. The purchaser appealed the decision of the Superior Court contending that the amount of money named in a contract as a forfeiture was to be regarded as liquidated damages or as a penalty.
Can an amount of money named in a contract as a forfeiture be regarded as liquidated damages or as a penalty?
The court affirmed the judgment and order of the lower court. The court explained that because it appeared that the parties intended the sum named to be a forfeiture or penalty, the purchaser was required to prove damages in order to recover this amount. The court found that the purchaser made no claim of special damage. The court held that the sum named was to be regarded as a penalty and that the vendor was entitled to recover the whole of the unpaid balance.