Will a Rhode Island court enforce this liquidated-damages clause, or call it a penalty?
Probably, and the stated test is not the modern two-part formula but the whole agreement and the parties’ intention, though the reasoning Rhode Island actually applies inside that test asks the same two questions in older words: whether the loss “could not be ascertained in advance”, and whether the agreed sum is “greatly out of proportion to the damage” the promisee would be likely to sustain (Wholey Boiler Works v. Lewis). No Rhode Island liquidated-damages statute was found, and the UCC provision (§ 6A-2-718) is absent from the Rhode Island statutes we publish, so the rule is entirely judge-made and old. Paolilli v. Piscitelli states it: “The question whether a deposit or other payment is to be regarded as a penalty or as liquidated damages is to be decided upon consideration of the provisions of the whole agreement in view of the circumstances in each case, and the intention of the parties as thus disclosed is the decisive test”, repeated word for word in Wholey Boiler Works v. Lewis. The condition that makes a fixed sum available at all is stated in Muirhead v. Fairlawn Enterprise, Inc.: “where a contract is not for the mere payment of money and there is no certain measure of the damages which would naturally result from a violation of the agreement in question, the parties may fix upon a sum in the nature of liquidated damages which shall be paid as compensation for breach of the agreement.” And a clause that is coercive rather than compensatory fails: in Psaty & Fuhrman, Inc. v. Housing Authority the Court held a construction-delay provision, as applied to landscaping that affected no rental value, “coercive in nature and therefore in substance the imposition of a penalty”, while leaving the same clause standing for the construction delay itself. Note also that a “no damage” clause cuts one way only: it “gave the Authority a defense to the contractor’s claim of damages for delay, but it cannot be used as a springboard by the Authority to recover such damages from the contractor.” No Rhode Island Supreme Court decision located states the modern formula in those words. Where the clause has been upheld the Court simply read the bargain: Wholey enforced a daily forfeiture because the delay damage “could not be ascertained in advance, and the amount of it would be difficult to prove at any time” and the agreed figure did not “seem to be greatly out of proportion”, so “the defendant was entitled to have the amount due under the forfeiture clause deducted from the contract price”; Muirhead upheld a $12,000 sum “intended and fixed by them as in the nature of liquidated damages”.
The trap
The Rhode Island trap is who caused the delay, not how the number was calculated. Psaty & Fuhrman: “a provision for liquidated damages for delay in the performance of a contract will be enforced provided the delay is not due in whole or in part to the fault of the party claiming the benefit of such provision”, and “[t]he question as to which party is responsible for delay… is, on a conflict in the evidence, a question of fact for determination by the trier of the facts”, so an owner who contributed to the delay loses the clause for that delay, and the Court will only apportion where the delays are “separate and distinct from each other”. The second trap runs against sellers of land: Paolilli rejected the idea that a deposit is liquidated damages automatically. The Cavanaugh case “is not an authority for the proposition, nor is it the law, that a deposit thus made, as a matter of law” is liquidated damages in every case, and adopted Dike v. Greene, under which, “when once it appears that the main purpose of the parties to a contract is, the sale and purchase of an estate, any sum that is named in it to be paid by either in the event of his neglect or refusal to perform… is construed as a penalty”. So in a Rhode Island real-estate contract the drafter’s starting point is the opposite of the usual one. The third trap is evidentiary: because the test is intention read off the whole agreement, a clause that recites nothing about why damages are hard to measure gives the court nothing to work with, and calling the sum “liquidated damages” in the text is not decisive.
16 authorities
The words that state the rule
The question whether a deposit or other payment is to be regarded as a penalty or as liquidated damages is to be decided upon consideration of the provisions of the whole agreement in view of the circumstances in each case, and the intention of the parties as thus disclosed is the decisive test.
The words that state the rule
The Cavanaugh case is not an authority for the proposition, nor is it the law, that a deposit thus made, as a matter of law *359 is to be held in every case to be liquidated damages.
The words that state the rule
the principle upon which the cases turn is, that when once it appears that the main purpose of the parties to a contract is, the sale and purchase of an estate, any sum that is named in it to be paid by either in the event of his neglect or refusal to perform his part of the agreement, is construed as a penalty to insure the performance of the contract in the option of the other party, and not as constituting the agreement an alternative one, in the sense of giving him the option to perform his contract or to forfeit the penalty.”
The words that state the rule
The above statement of the law is in accord with the authorities and is applicable to the present case.
The words that state the rule
The question whether a deposit or other payment is to be regarded as a penalty or liquidated damages is to be decided upon consideration of the provisions of the whole agreement in view of the circumstances of each case; and the intention of the parties as thus disclosed is the decisive test.
The words that state the rule
It is generally held that where a contract is not for the mere payment of money and there is no certain measure of the damages which would naturally result from a violation of the agreement in question, the parties may fix upon a sum in the nature of liquidated damages which shall be paid as compensation for breach of the agreement. 2 Pom. Eq. Juris. (5th ed.) § 440.
The words that state the rule
In the case of the Authority against the contractor we find merit only in part of the latter’s contention that the provision of the contract for liquidated damages is in effect the imposition of a penalty and therefore unenforceable.
The words that state the rule
it is generally held that a provision for liquidated damages for delay in the performance of a contract will be enforced provided the delay is not due in whole or in part to the fault of the party claiming the benefit of such provision.
The words that state the rule
Viewed in such a light we consider the provision for liquidated damages in the matter of landscaping as coercive in nature and therefore in substance the imposition of a penalty. The Authority was not entitled to recover liquidated damages for the contractor’s delay in landscaping.
The words that state the rule
The question as to which party is responsible for delay as bearing on the right to liquidated damages is, on a conflict in the evidence, a question of fact for determination by the trier of the facts.
The words that state the rule
Where there are a number of delays which are separate and distinct from each other, then the party without fault in any such instance is in our judgment entitled to recover liquidated damages for delay in any one or more of those instances.
The words that state the rule
After due consideration of exhibit 26 and the surrounding circumstances, we are of the opinion that the parties stipulated, by clear implication if not in express terms, that if the defendant violated its agreement it would pay to the plaintiff at least $12,000, which sum was intended and fixed by them as in the nature of liquidated damages.
The words that state the rule
The damage the defendant would sustain on account of delay in the delivery of the extractors could not be ascertained in advance, and the amount of it would be difficult to prove at any time. The amount agreed upon by the parties to be paid for each day’s delay does not seem to be greatly out of proportion to the damage the defendant would be likely to sustain.
The words that state the rule
The proof showed that the extractors were not delivered on time and consequently the defendant was entitled to have the amount due under the forfeiture clause deducted from the contract price.
The words that state the rule
That clause gave the Authority a defense to the contractor’s claim of damages for delay, but it cannot be used as a springboard by the Authority to recover such damages from the contractor.
The words that state the rule
The complainant’s appeal is sustained, the decree of the Superior Court appealed from is reversed. On July 7, 1923, at nine o’clock, a. m., Standard time, the parties may present a form of decree in accordance with this opinion.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.