Smith v. Lambert Transfer Co.

• Citation: 109 Wash. 529,187 P. 362
• Decision Date: 19 January 1920
• Docket Number: 15601.
• Court: United States State Supreme Court of Washington
• Parties: SMITH et al. v. LAMBERT TRANSFER CO. et al.

187 P. 362

109 Wash. 529

SMITH et al. v. LAMBERT TRANSFER CO. et al.

No. 15601.

Supreme Court of Washington

January 19, 1920

Department 1.

Appeal from Superior Court, King County; W. M. French, Judge.

Action by George A. Smith and others against the Lambert Transfer Company and others. From a judgment for plaintiffs defendants appeal. Modified and affirmed.

Reeves Aylmore, Jr., Corwin S. Shank and H. C. Belt, all of Seattle for appellants.

Tucker & Hyland, of Seattle, for respondents.

MACKINTOSH J.

On January 30, 1913, the respondents leased to the appellants certain premises for a period of 15 years; the lease containing the following provision:

'The lessee has paid the lessors $5,000 mentioned in the memoranda of agreement entered into between the lessees and the lessors on the 15th day of November, 1912. This payment is made in payment of the last several monthly installments of rental accruing under this lease, which monthly installments aggregate $5,000, and as security to said lessors for the faithful performance of the covenants and agreements on the part of the lessee herein. In case of the nonpayment of the rent payable at any of the times herein specified, or in default of any of the covenants herein contained, the lessors may cancel this lease in the manner provided by law, and said payment of $5,000 shall be forfeited as liquidated damages by the lessors. The lessors covenant and agree to pay the lessees semiannually 7 per cent. interest for the first five years, and thereafter 6 per cent. upon said $5,000, and on January 1 and July 1 of each year the interest then accrued upon said $5,000, as herein specified, shall be credited to the lessees upon the monthly installment of rental due by the lessees to the lessors on said respective dates hereunder and only the balance of said monthly installments after deducting the credit for interest shall be paid by the lessors.'

The appellants, after being in possession some time, failed to meet the monthly payments of rent promptly, and failed to pay the taxes as provided for in the lease, and allowed the same to become delinquent. In 1918 the respondents paid the amount of the delinquent taxes and redeemed the certificate which had been issued therefor, and in August, 1918, the appellants vacated the premises, and the respondents began this action for the purpose of canceling the lease, declaring a forfeiture of and providing for the retention of the $5,000 deposit as liquidated damages, and also asked judgment for $2,145.93, the amount of the delinquent taxes which they were compelled to pay. The judgment of the lower court resulted in favor of the respondents in the sum of $2,145.93, together with the forfeiture of the $5,000 as liquidated damages.

Two questions appear in this case: First, as to whether the provision in regard to the $5,000 is a provision creating a penalty or creating liquidated damages; and, second, if the provision is one creating liquidated damages, whether the respondents are entitled, in addition to the amount of $5,000, to a judgment for the amount which they have expended in the payment of delinquent taxes.

The question as to whether a stipulation in regard to the payment of a fixed sum to a landlord to be used in compensation for breach of the lease is held by the landlord as a penalty or as liquidated damages is one of no little difficulty, for it calls upon the court to determine what was the intention of the parties to the lease, and different courts, in interpreting the intention of the parties, have arrived at what appear to be irreconcilable conclusions, but all the courts seem to agree that the mere language that the parties may have used is not of controlling effect, but is to be given the legal force their intention indicates. Some courts have held that express stipulations for 'penalties' were really stipulations for 'liquidated damages,' and, vice versa, 'liquidated damages' have often been called 'penalties.' Such courts hold that the parties may not agree absolutely upon a large price for the breach of some immaterial or trivial part of their contract; it being said that such an agreement is against the policy of the law. The test of the validity of such contract provisions as the ones before us has been determined by this court to be that of the adequacy and justice of the amount stipulated. The nature of the agreement for a possible breach of which the contract provides is a determining factor in establishing the intent of the parties in providing for a possible violation. Some of the particular things provided for in the contract may be of less importance than others, and their breach may not result in serious damage; but this is no more an absolute guide to the parties' intention than the use by them of the words 'penalty' or 'liquidated damages.' That intention is to be determined by whether, in view of the actual breach complained of, the amount provided for in the contract can fairly be regarded as a penalty, or as a fair measure of the real damage in the minds of the parties most capable of determining the possible effect of the breach of the contract.

'Generally speaking, it may be said that, when the damages arising from the breach of the contract which the obligation is given to secure are uncertain in their nature, and not readily susceptible to proof by the ordinary rules of evidence, and are not so disproportionate to the probable damages suffered as to appear unconscionable, and it is reasonably clear from the whole agreement that it is the intention of the parties to provide for liquidated damages and not a penalty, such a stipulation will be held to be one for liquidated damages.' Madler v. Silverstone, 55 Wash. 159, 104 P. 165, 34 L. R. A. (N. S.) 1.

In a case in which a provision for the deposit of $1,200 for the breach of a lease, the total rent of which amounted to $36,000, was before us, this court said:

'The fallacy of respondent's argument lies in her assumption that the $1,200 was advanced as security only. She ignores the probable contingency that a loss of the tenancy might cause damages to appellants difficult of ascertainment, whether termination of the tenancy resulted from a wrongful and voluntary surrender by respondent or from respondent's default in payment of rent, coupled with appellants' election to then terminate the lease. By exercising their election to terminate the lease, appellants did not waive their right to retain the liquidated damages. The default which caused such termination originated with respondent.' Barrett v. Monro, 69 Wash. 229, 124 P. 369, 40 L. R. A. (N. S.) 763.

In the case before us the penalty was in the sum of $5,000, and the total amount of the rent provided for in the lease amounted to $76,500, so, in this case, we cannot say that the amount is...