Muldoon v. Lynch

Supreme Court of California · 1885 · Contracts

ContractsLiquidated damagesPenalty clausesliquidated damagespenaltyforfeituredelay in performancecontract damages

Facts

Plaintiffs contracted to complete improvements on defendant's cemetery lot, including a marble monument, for a total price of $18,788, with $11,887 due upon completion. The contract required completion of most work within four months and the monument within twelve months, 'under forfeiture of ten dollars per day for each and every day beyond the stated time for completion.' The monument was delayed for nearly two years because the large marble blocks procured in Italy had to await a direct ship to San Francisco, but once they arrived the work was completed according to contract and the only dispute was over the delay. Plaintiffs claimed the full unpaid balance, while defendant argued that $7,820 should be deducted as liquidated damages for the delay.

Issue

Whether the contract clause imposing a 'forfeiture of ten dollars per day' for delay in completion should be enforced as liquidated damages or treated as a penalty, so that defendant could not deduct it without proof of actual damage.

Rule

Parties may agree in advance on damages for breach when, from the nature of the case, it would be impracticable or extremely difficult to fix actual damage. But if the contract shows that the stated sum was intended as a forfeiture or penalty rather than as compensation, courts will treat it as a penalty, and the party claiming it must prove actual damages; language of 'forfeiture' strongly imports a penalty, and a sum materially disproportionate to any reasonable estimate of actual loss will not be treated as liquidated damages.

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In Portland, Oregon, Nora Velez hired Cascade Lantern Builders, a fictional contractor, to complete a private mausoleum by October 1. The contract stated that any delay would be "under forfeiture of $400 for each day" after October 1. The work was finished 40 days late, and Nora withheld $16,000 from the final payment without offering evidence of any monetary loss.

If Cascade Lantern Builders sues for the unpaid balance, how should a court most likely treat the $400-per-day clause?

Explanation. The majority rule is that a stated sum will be treated as a penalty when the contract shows it was intended as a forfeiture or spur to performance rather than as compensation. The use of the word "forfeiture" strongly imports a penalty, and without proof of actual damages the owner may not simply deduct the amount from the contract price.