McIntire v. Cagley

Miller, J.

The court below held that the stipulation in the note sued on, by which the maker agrees to pay “ an attorney’s fee of ten per cent,” on the amount of the note, was in the nature of a penalty to cover the expense of collecting the note by action, and therefore recoverable only to the extent of such actual expense which must be shown by evidence.

We have decided in a number of cases that it is competent for parties to written instruments for the payment of money to stipulate for the payment of a reasonable sum as an attorney’s fee where suit is brought to enforce payment of the money due on the instrument, and that such agreements will be enforced. See McGill v. Griffin, et ux., 32 Iowa, 445, where the cases are collected and reviewed. In none of those cases, however, did the question here made arise. In those cases the agreement was to pay a “ reasonable ” sum; here it is to pay a fixed amount, viz., ten per centum on the amount of the note.

One of the rules of construction in cases of this nature is that the action of the court will not be defined and determined by the terms which the parties have seen fit to apply to the sum agreed upon. Although they have called it a penalty, or given it no name at all, it will be treated as liquidated damages, if from the nature of the agreement and the surrounding circumstances, and in reason and justice it ought so to be. Sainter v. Ferguson, 7 Com. Bench, 716 ; Chamberlain v. Bagley, 11 N. H. 234; Brewster v. Edgerly, 13 id. 275; Mundy v. Culver, 18 Barb. 336; Foley v. McKeegan, 4 Iowa, 1, and cases cited on page 6. And, on the other hand, although they call the sum liquidated damages, it will be treated as a penalty, if, from a consideration of the whole contract, it appears that the parties intended it as such, or if, where the injury is certain, the sum fixed upon is clearly disproportionate to the injury, and the real claim which grows out of it. Foley v. McKeegan, supra, and cases cited.

Among the principles upon which this question should be determined are these: That the sum agreed upon will be treated as a penalty unless, first, it be payable for an uncertain amount; and second, unless it be payable for one breach of contract, or if for many, unless the damages to arise from each of them are of uncertain amount. Foley v. McKeegan, supra ; 3 Pars. on Cont. 159, and cases cited in notes.

In Taylor v. Sandiford, 7 Wheat. 13, Marshall, C. J., says: “ In general, a sum of money in gross, to be paid for the non-performance of an agreement, is considered a penalty, the legal operation of which is to cover the damages which the party in whose favor the stipulation is made may have sustained from the breach of the contract by the opposite party.”

Guided by these principles, we are of opinion that the stipulation in the note to pay the attorney fee cannot properly be regarded as a penalty. It is not to be paid for the nonperformance of an agreement; it does'not- become payable, nor does it create any liability whatever upon the maturity of the note, unless'suit is brought to enforce collection thereof. It is an agreement to reimburse the plaintiff for his expenses incurred in collecting the note by suit. Williams v. Meeker, 29 Iowa, 292. Again, it is payable for an injury of uncertain amount and extent. It is not like a case of a promise to pay $2,000 if the promisor fail to pay $1,000 in three months; in which case it is obvious that the larger sum is a penalty for the non-payment of the smaller one, even though the parties call it liquidated damages. The injury in such case is a certain one, and the measure of damages is also certain, being legal interest on the sum due. Bagley v. Peddle, 5 Sandf. 192; Williams v. Dakin, 22 Wend. 211; Hoag v. McGinnis, id. 163; Heard v. Bowers, 23 Pick. 455; Mead v. Wheeler, 13 N. H. 351. But in the case before us, the measure of damages is uncertain. What would be a reasonable amount to reimburse the plaintiff for the fees of an attorney in prosecuting a suit upon the note, and collecting the amount due thereon, is not certain, and, in the absence of an agreement of the parties, would have to be ascertained by the court, or a jury upon evidence. In cases like this the parties may agree beforehand what the injury shall be valued at, or what shall be taken as a compensation; for if the court should set it aside, it can only do what the parties had a right to, and have done, and that is, arrive at a general probability by a consideration of all the circumstances of the case. The court would have to hear testimony and determine therefrom the measure of the injury. It being impossible to define with certainty beforehand by reference to a money standard the measure of the injury, it was competent for the parties to agree thereon, which they have done. The collection of a note of the amount of the one sued on in this case might, under some circumstances, involve labor and expense much greater than under others. There being this uncertainty, the sum agreed upon by the parties will not be treated as a penalty, unless for such obvious excess and disproportion to rational expectation of injury as to make it clear that the principle of compensation was wholly disregarded (3 Pars. on Cont. 159, 160 and 161, and notes), which does not appear in this case.

Of course, if this sort of an agreement be resorted to as a cloak for usury, and it is so made to appear in an action thereon, it will be treated as any other usurious contract. The party would not be permitted to recover a sum of money under the denomination of attorney’s fees, which was in fact unlawful interest.

The judgment of the court below will be

Reversed.

Cole, J., dissenting.