City of Kinston v. Suddreth

146 S.E.2d 660 (1966) 266 N.C. 618

CITY OF KINSTON, a municipal corporation
v.
H. C. SUDDRETH.

No. 356.

Supreme Court of North Carolina.

March 2, 1966.

George B. Greene, Kinston, for plaintiff appellant.

C. E. Gerrans, Kinston, for defendant appellee.

SHARP, Justice.

Defendant demurred on the ground that, in their contract, the parties had expressly fixed and limited the maximum amount of damages which the City could recover from him in the event he failed to comply with his bid; that he had the alternative to perform or to forfeit; and that the City, therefore, can recover no more than the agreed amount which the parties had denominated "liquidated damages." Plaintiff's position is that the contract provision was not for liquidated damages, but for a penalty which the court will not enforce, thus permitting plaintiff to recover its actual damages.

At the outset, it is noted:

"(T)he test of whether a promise to pay money is liquidated damages or a penalty usually arises in an action brought by the party injured to recover the agreed amount. Whether a deposit is liquidated damages is tested, however, by an action by the party who has broken the contract, to get the court to give back to him the money he has parted with or so much of it as remains after satisfying the loss." McCormick, Damages § 153 (1935).

The plea that a sum stipulated to be liquidated damages is in reality a penalty is ordinarily a defensive one—a shield to protect a defendant from an absurd or oppressive claim which is entirely disproportionate to the actual damage he has caused. We apprehend that it is rare indeed that a party— as here—attempts to use the plea offensively to collect damages in excess of the stipulated figure.

"Liquidated damages are a sum which a party to a contract agrees to pay or a deposit which he agrees to forfeit, if he breaks some promise, and which, having been arrived at by a good-faith effort to estimate in advance the actual damage which would probably ensue from the breach, are legally recoverable or retainable * * * if the breach occurs. A penalty is a sum which a party similarly agrees to pay or forfeit * * * but which is fixed, not as a pre-estimate of probable actual damages, but as a punishment, the threat of which is designed to prevent the breach, or as security * * * to insure that the person injured shall collect his actual damages." McCormick, Damages § 146 (1935).

Liquidated damages may be collected; a penalty will not be enforced. 22 Am.Jur.2d, Damages § 212 (1965).

It is not necessary for us to decide whether the sum, which the parties here have so designated, is actually liquidated damages. Conceding it to be a penalty, as plaintiff contends, the result in this case will be the same. If a provision denominated liquidated damages be deemed one for a penalty, "the measure of damages is compensation for the actual loss, not exceeding the penalty named." Wheedon v. American Bonding & Trust Co., 128 N.C. 69, 71, 38 S.E. 255. (Italics ours.) It seems quite apparent that defendant intended to limit the amount of damages which could be recovered against him in the event he did not purchase the property. Whatever the City may have intended, that was the effect of the contract which it accepted.

We hold that the contract limited defendant's maximum liability to $4,000.00. Defendant voluntarily forfeited the additional $210.00 which he later deposited. Although the contract here contained no such specific stipulation, the validity of provisions limiting the maximum amount to be recovered in the event of a party's breach of contract, leaving actual damages in a lessor amount to be established is unquestioned.

"Contractual limitation of liability to an agreed maximum must be distinguished from a penalty or liquidated damages, though every valid agreement for liquidated damages operates as a kind of limitation. Aside from certain restrictions in the field of public utility law, chiefly relating to common carriers, if the agreed amount to which liability is limited is something more than a merely nominal sum, the validity of the provision has long been recognized." 5 Williston, Contracts § 781A (3d Ed. 1961) and cases therein cited.

The judgment of the court below sustaining the demurrer and dismissing the action is

Affirmed.

MOORE, J., not sitting.

PLESS, J., and RODMAN, E. J., took no part in the consideration or decision of this case.