#### CRANE COMPANY v. THE UNITED STATES.

[No. 30617.

Decided April 3, 1911.]

*On the defendants’ Demurrer.*

The contract is for furnishing the Isthmian Canal Commission with certain pipes and fittings. It is provided that in case of delay there shall be a deduction from the contract price of one-tenth of 1 per centum per day. No damages are shown by the defendants, and the single question in the case is whether the deduction for delay should be regarded as liquidated damages or as penalty.

I. Where the damages are of an uncertain nature, the parties may estimate and agree upon the measure of damages; and where the contract is for the delivery of water pipes to be used in the construction of the Isthmian Canal the damages caused by the contractor’s delay must be regarded as uncertain, and a reasonable amount named in the contract must be deemed liquidated damages and not penalty.

II. A provision in a contract that *“when no damage or mconven-ience has been suffered by the Q-overnment,”*the responsible officer *“may waive the deduction,”*does not change the provision to one of penalty.

*The Reporter’s*statement of the case:

The facts of the case appear sufficiently in the opinion of the court. •

*Mr. 8. 8. AsKbaugh*(with whom was *Mr. Assitcmt Attorney General John Q. Thompson)*for the demurrer.

*Mr. Bynum E. Hinton*opposed. *PacJc, Hinton c& Pack*were on the brief.

In considering a contract of this kind, it should be borne in mind that the courts have always preferred to construe such provisions as penalties rather than as liquidated damages. 13 L. E. A., page 672 (note), cites a long line of authorities in support of the proposition. In line with this tendency, it has universally been held that in doubtful cases the courts will always construe the provision as a penalty.

“ If by the agreement it is doubtful whether the parties intended that the sum specified should be a penalty or liquij* dated damages, courts incline to treat the contract as creatf *344ing a penalty to cover the damages actually sustained by the breach and not as liquidated damages. *(Foley*v. *McKee-*gan, 4 la., 1.”) *(Jamison*v. Gray, 29 la., 537, 547; *Brennan*v. Clarice, 29 Nebr., 385.) In 13 L. K,. A., page 672 (note), the editor says:

“ If upon the face of the instrument it be • doubtful whether the contracting parties intended that the sum specified in the agreement shall be a penalty or liquidated damages, the inclination of courts is to consider the contract as creating a penalty to cover the damages actually sustained by a breach of the contract, and not liquidated damages.”

and cites in support of it numerous cases, including the case of *Taylor*v. *SaMiford*(20 U. S., 7 Wheat., 13). This court in the recent case of *Ellioott Machme Co.*v. *United States*(43 C. Cls. K.., 232), while deciding that the particular contract under consideration provided for liquidated damages, conceded the proposition (p. 235) that if an agreement is ambiguous or doubtful it will be construed as a penalty.

(See also to the same effect, 5 American English Encyclopedia, p. 27 (note) and cases there cited. Bouv. Law Diet, titled “Liquidated damages.”)

The reasons underlying this attitude of the courts are fundamental, and are found in the fact that a contract for a penalty permits the courts to do absolute justice between parties; while a contract for liquidated damages is highly penal in character, and frequently works the greatest injustice. Every principle of equity and justice demands that at least unless parties have unequivocally contracted to that effect, one party to the contract should not be compelled to pay and the other be allowed to recover an arbitrary sum for the technical breach of a contract, regardless of whether or not any damage has actually resulted from such breach.

There is nothing whatever in the language used to indicate that the parties fixed, adopted, or agreed upon this deduction as the measure of damages which would result in case claimant should fail to make the delivery within the prescribed time. The failure of the parties to in any way show that this deduction was fixed and agreed upon as the measure of damages would in itself seem to be fatal to any contention that this provision was intended by the parties *345as a liquidation of damages. To say the least, it makes it extremely doubtful whether the parties intended to liquidate the damages, and therefore brings the case squarely within the authorities above cited.

It is also pointed out that the idea that the parties agreed upon and fixed the damage in advance seems to be entirely negatived by the proviso found at the end of the clause providing for the deduction, which is to the effect that if no damage or inconvenience should result from the delay the chairman of the commission might accept that as sufficient cause for waving such deduction. In fact, it is difficult, if not quite impossible, to reconcile such a provision with any other idea than that the parties merely intended that the Government should deduct only the actual damage suffered because of the delay. In this connection attention is invited to the case of *Holliday*v. *The United States*(33 C. C., 453).

Provisions like the one now under consideration have been uniformly construed by the Comptroller of the Treasury as being provisions for a penalty, and this notwithstanding the parties in some instances designated the deductions as *“*liquidated and fixed damages,” his decisions being based on the ground that a provision in a contract reserving to one of the parties the right to inflict or remit at his discretion any damages that might accrue is utterly inconsistent with the principle of liquidated damages. (14 Comp. Dec., 424; *Leonard ease*(unpublished decision, dated June 6, 1910).)

Another principle of contract construction, which would seem to require that the contract now under consideration be construed as a contract for a penalty, is the well-established rule that a contract should be so construed as to give effect to every provision thereof. If the clause in question properly provides for liquidated damages, these damages accrued at once when the delays occurred and immediately vested in the United States, and the chairman of the commission was then without authority to remit them. The proposition is well established that no Government officer has authority to waive or remit damages which have accrued to the Government under a contract providing for liquidated *346damages. Such damages are as much an asset of the United States as money in the United States Treasury; and we submit that a Government official, in making a contract for the Government, can not effectively reserve to himself this right of remission of accrued damages without vitiating the liquidated damage clause. Certainly it has never been considered that this could be done. If a contract with the Government could be made to contain a valid liquidated damage clause, and at the same time give to Government officials the discretion to waive this damage, if they saw fit to do so, then Congress was doing a useless thing when it solemnly enacted section 21 of the act of June 6', 1902 (32 Stat. L., 326), requiring the Secretary of the Treasury to insert in all contracts for the construction or repair of public buildings or public works a stipulation for liquidated damages for delay, and authorizing and empowering him to remit the whole or any part of such damages as in his discretion might be just and equitable. If the right to remit liquidated damages can not be reserved in a Government contract without specific authority from Congress, then it must follow that the clause now under consideration must either be construed as a penalty or it must be held that the proviso attempting to reserve to the chairman of the Isthmian Canal Commission the right to remit the deductions is absolutely without effect; and under such an alternative, it must be conceded, we submit, that the clause should be construed as a provision for a penalty under the rule requiring a contract to be so construed as to give effect to all of its parts.

Ateinson, J.,

delivered the opinion of the court:

The claimant company in its petition alleges that it entered into two contracts with the Isthmian Canal Commission on June 26, 1906, and September 11, 1906, respectively, whereby it agreed to deliver to said commission on the Isthmus of Panama, within certain periods, certain pipes and fittings for a stipulated price. Said contracts provided that in case there was delay in delivery beyond the contract time there should be a deduction from the contract price at the rate of one-tenth of 1 per cent of the total cost of the *347undelivered material for every day of such delay. The material part of article 6 of said contracts is as follows:

> “In case the said party of the second part shall fail or neglect to deliver the material at the time and place herein specified, the purchase price hereinbefore set forth shall be reduced in the sum of one-tenth of 1 per centum (1-10%) of the total cost of the undelivered material for each day such default continues, or until the material is supplied by purchase in the open market, or otherwise, by the commission, provided that such delays on account of which such deductions may be made as herein stated, caused by strikes, riots, fire, or other disaster, or delays in transit or delivery on part of the transportation companies, or when no damage or inconvenience has been suffered by the Government, may, in the discretion of the chairman of the Isthmian Canal Commission, be accepted as sufficient cause for waiving the deduction.”

It appears that there were considerable periods of delay by claimant company in delivering the pipes and fixtures, on account of which the Canal Commission, upon final settlement under said contracts, deducted from the contract price the sum of $1,354.42, in accordance with the provisions contained in section 6 of the contracts above quoted, and to recover said sum this suit was brought.

The defendants appeared and demurred on the ground that claimant’s petition does not state facts sufficient to constitute any cause of action against the United States. The single question, therefore, for the court to determine is whether the parties to the contract intended the deduction of one-tenth of 1 per cent per day for delay in delivery of the articles should be regarded as liquidated damages or a penalty.

This question turns upon the construction to be given to article 6, as quoted.

Claimant’s counsel cited many authorities in his argument to sustain his contention that the parties to these contracts did not contemplate liquidated damages by the language used, and that it should be considered in the light of a penalty only; hence no deductions should be made unless the defendants can show actual damages sustained by the delay. *348Courts have frequently decided that the sum stipulated to be paid on the breach of an agreement to be, from the nature of the case, a penalty, notwithstanding the strongest language showing the intention of the parties to be that it should be paid in full as liquidated damages. So, too, cases are numerous in which the parties have used the term “ penalty,” which seems on its face to import a forfeiture rather than a valuation of damage, yet the stipulated sum, from the very nature of the case, should be considered as liquidated damages and recoverable in full. *Page on*Contracts, section 1172, says in substance that the use of either of these terms in a contract is not conclusive; that “liquidated damages” may appear from the context of the contract to be really a provision for a penalty, and will be so treated. On the other hand, a contract for a penalty may be shown by the intention of the parties to be liquidated damages. The question must therefore hinge upon surrounding conditions and the intent of the parties to the contract.

This whole subject was ably and exhaustively treated by the present Chief Justice White in the case of *Sun Printing and Publishing Association*v. *Moore*(188 U. S., 642, 669), and it was therein settled for the Federal courts that parties may *bona fide*in a case where the damages are of an uncertain nature estimate and agree upon the measure of damages which may be sustained from the breach of an agreement. The rule announced in that case is applicable to this case, because here the damages were certainly uncertain in nature, and there is no question as to the contract for the payment of damages being *bona -fide.*

It is contended by the claimant, however, that the provision in article 6, that under certain conditions the chairman of the Isthmian Canal Commission may, in his -discretion, waive the deduction for damages, makes it a provision for a penalty instead of liquidated damages. It may be admitted that there is some authority for this contention, but the decision in the case of *Bethlehem, Steel Co.*v. *United States*(205 U. S., 105) settles that question for this court. In that case the provision for payment of damages in case of -delay in the execution of the contract was substantially like the one in the *349case at bar, in that it was provided that such damages might be waived by one of the officers of the Government. In the contract in that case the word “ penalty ” was used in some portions of the contract, which made the case still stronger against the Government. It was there decided, however, reversing this court, that the provision was for liquidated damages and not a penalty.

We accordingly decide that the provision in article 6 for the reduction of price in case of delay was a provision for liquidated damages and was not a penalty, and the demurrer is sustained.

Howry, J., took no part in the trial and decision of this case.