Will this liquidated damages figure be enforced, or struck as a penalty?
For a sale of goods the statute controls: damages may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy, and a term fixing unreasonably large liquidated damages is void as a penalty (810 ILCS 5/2-718(1)). At common law the most recent Illinois Supreme Court majority statement read for this question is from 1915, not because nothing later exists, but because the later law has not been read: 982 Illinois opinions use the phrase "liquidated damages" in lower case, 21 use "Liquidated damages" and 29 "Liquidated Damages", and none of them was read here. What the 1915 opinion says is this: while the intention of the parties must be taken into consideration, the language of the contract is not conclusive, and the courts of this State lean towards a construction which excludes the idea of liquidated damages and permits the parties to recover only damages actually sustained (Advance Amusement Co. v. Franke). Advance Amusement also restated the three rules deducible from the cases: a greater sum payable on default in paying a lesser sum is a penalty; where damages are not difficult of ascertainment and the stipulated damages are unconscionable they are a penalty; and 'third, within these two rules parties may agree upon any sum as compensation for a breach of contract.' It added the test the facts turned on, courts look to the nature and purpose of fixing the amount, and if it appears to have been inserted to secure the prompt performance of the agreement 'it will be treated as a penalty and no more than actual damages proved can be recovered'. The $2,500 there was held by the lessor 'as security for the faithful performance' of the lease covenants AND was retainable 'as and for full liquidated damages' on a breach; the Appellate Court 'rightly held this sum a penalty and not liquidated damages', and on the only damages question argued below ('whether the $2500 named in the lease should be considered liquidated damages or a penalty') 'The judgment of the Appellate Court will be affirmed. Judgment affirmed.' For goods, § 2-718 goes on: where the seller justifiably withholds delivery for the buyer's breach, the buyer recovers payments above the seller's liquidated damages or, absent such a term, above 20% of the total performance or $500, whichever is smaller, subject to the offset § 2-718(3) gives the seller, to the extent it establishes a right to damages under the Article other than subsection (1) and the value of any benefit the buyer received by reason of the contract (810 ILCS 5/2-718(2)-(3)).
The trap
Illinois' thumb is on the penalty side of the scale, which reverses the drafting instinct: the recital every form carries, that the parties agree the sum is liquidated damages and not a penalty, is precisely the language the court says is not conclusive, and a sum held as 'security' for performance reads as a penalty no matter what the clause calls it. In Advance Amusement the SAME deposit was described in the lease as security in section 11 and as 'full liquidated damages' in section 12, and the label lost. Note also the UCC asymmetry: § 2-718(1)'s void-as-penalty sentence reaches only a term fixing UNREASONABLY LARGE liquidated damages; what becomes of an under-compensatory figure is not answered by any text read for this rule.
10 authorities
- statute810 ILCS 5/2-718enactment date not established
The words that state the rule
Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.
The words that state the rule
While the intention of the parties on this question must be taken into consideration, the language of the contract is not conclusive. The courts of this State, as well as in other jurisdictions, lean towards a construction which excludes the idea of liquidated damages and permits the parties to recover only damages actually sustained.
- statute810 ILCS 5/2-718enactment date not established
The words that state the rule
(2) Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is entitled to restitution of any amount by which the sum of his payments exceeds (a) the amount to which the seller is entitled by virtue of terms liquidating the seller's damages in accordance with subsection (1), or (b) in the absence of such terms, 20% of the value of the total performance for which the buyer is obligated under the contract or $500, whichever is smaller.
The words that state the rule
This court has said that the rules deducible from the cases may be stated as follows: “First, where by the terms of a contract a greater-sum of money is to be paid upon default in the payment of a lesser sum at a given time, the provision for the payment of the greater sum will be held a penalty; second, where by the terms of a contract the damages are not difficult of ascertainment according to the terms of the contract and the stipulated damages are un-' conscionable, the stipulated damages will be regarded as a penalty; third, within these two rules parties may agree upon any sum as compensation for a breach of contract.” (Poppers v. Meagher, 148 Ill. 192 .)
The words that state the rule
Section 11 of the lease between the parties provided that said sum was “to be held by the party of the first part as security for the faithful performance by the party of the second part of the covenants and agreements in this rider and in the indenture of lease to which this rider is attached contained, to be kept and performed by said party of the second part, which said sum of twenty-five hundred dollars ($2500) shall be applied by said party of the first part as rental reserved for the said premises for each of the last seven and one-seventh months of the term herein demised, provided that prior to the application of each of said month’s rental said second party shall not be in default in any of the terms, covenants and conditions in this rider or in the indenture of lease to which it is attached contained, to be kept and performed by said party of the second part. Party of the first part covenants and agrees to pay or cause to be paid to party of the second part, its successors or assigns, interest at the rate of five per cent (5%) annually on the said sum of twenty-five hundred dollars ($2500), so long as said sum of $2500 shall remain in the hands of the said party of the first part undisposed of, under the terms of this rider and the indenture of lease to which it is attached.”
The words that state the rule
By section 12 it was further covenanted and agreed that “in the event that the indenture of lease to which this rider is attached shall be terminated by reason of a breach by party of the second part of any of the terms and conditions in said indenture of lease contained, by said party of the second part to be kept and performed, then and in such event the party of the first part may, at his option, retain as and for full liquidated damages the said sum of $2500 or such portion thereof as may at such time be in the hands of the party of the first part under the terms hereof, and thereafter the party of the second part shall have no further right, claim or interest in and to the said sum of $2500 or any part thereof.”
The words that state the rule
We have frequently said that courts will look to see the nature and purpose of fixing the amount of damages to be paid, and if it appears to have been inserted to secure the prompt performance of the agreement it will be treated as a penalty and no more than actual damages proved can be recovered. (Westfall v. Albert, 212 Ill. 68 , and cases cited.)
The words that state the rule
In the light of the circumstances in this case the Appellate Court rightly held this sum a penalty and not liquidated damages.
- statute810 ILCS 5/2-718enactment date not established
The words that state the rule
(3) The buyer's right to restitution under subsection (2) is subject to offset to the extent that the seller establishes (a) a right to recover damages under the provisions of this Article other than subsection (1), and (b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.
The words that state the rule
The only question .argued there touching upon damages was whether the $2500 named in the lease should be considered liquidated damages or a penalty. The judgment of the Appellate Court will be affirmed. Judgment affirmed.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.