where the sum mentioned is disproportionate to the damage which will presumably or probably ensue, or to a degree of loss which is ascertainable, it will be construed as a penalty.32 Similarly, an agreement to build in a specified time, and in a particular manner, and in the event of failure to meet these conditions, to pay a gross sum specified in the contract has been construed to be a penalty.33

The element most helpful in securing the interpretation of the contract provisions as provisions for liquidated damages is the element of uncertainty in the ascertainment of the loss which will result from delay. It may, indeed, be stated broadly and as a general rule, that in the case where it is impossible to ascertain, or where it is impossible to ascertain with any degree of exactness, the damage which will result from the delay, a situation will be presented where the sum named in the contract as damages if not clearly out of proportion to the probable loss will be considered to be damages and will not be construed to be in the nature of a penalty." And this may be true, even where the word penalty is used.35 In the

32 Coen V. Birchard, 124 Iowa 394-holding a proviso for the payment of $5 a day a penalty, where the rental value of the building was shown to be but $25 per month; and see Ward V. Hudson River, etc., Co., 125 N. Y. 230-indicating, however, that provision would have been held

to be for damages, if house had been for private use as a residence.

33 Tayloe v. Sandiford, 7 Wheat (U. S.) 13, opinion by Marshall, C. J.

34 McCullough v. Moore, III Illinois Appeals 545.

35 McManus v. Rothschild, 25 Ontario L. R. 138.

words of the New York Court of Appeals in one of the cases already cited: 36

"Whether the sum agreed between parties to be paid, in the event of a breach of some agreement is termed by them a 'penalty,' or 'liquidated damages,' is not controlling upon the question of construction. Their use of such words is not always conclusive as to their legal meaning. To get at that we must consider the subjectmatter and nature of the agreement and understand clearly the intention of the parties. If it shall then appear that the damage and loss, which may be presumed to result from non-performance, are uncertain and incapable of exact ascertainment, then the payment or liability fixed by them must be deemed to be liquidated damages and recoverable as such. Where, however, a sum has been stipulated as a payment by the defaulting party, which is disproportionate to the presumable or probable damage, or to a readily ascertainable loss, the courts will treat it as a penalty and will relieve; on the principle that the precise sum was not of the essence of the agreement, but was in the nature of a security for performance. This subject has been reviewed in very many opinions; to a few of the more interesting of which, in the English reports and in those of our State, I direct attention.

"In Lowe v. Peers (4 Burr, 2228, 2229), Lord Mansfield, and in Kemble v. Farren (6 Bing. 141), Tindal, C. J., discuss the subject. In Dakin v. Williams (17 Wend. 447 and 22 id. 201), Nelson, Ch. J., in the first report, and Chancellor Walworth, in the second, review the question in the light of the English and New York See also Hosmer v. True, 19 Barb. 106; Lampman v. Cochran, 16 N. Y. 275; Clement v. Cash, 21 id. 253; Little v. Banks, 85 id. 258.

cases.

"The result of an examination of cases is to confirm

36 Ward v. Hudson, etc., Co., 125 N. Y. 230.

the idea that it is difficult, if it is even possible, to lay down a general rule applicable to all the cases which arise where parties have undertaken to provide against a loss consequent upon a breach of an agreement. We may, at most, say that where they have stipulated for a payment in liquidation of damages, which are in their nature uncertain and unascertainable with exactness, and may be dependent upon extrinsic considerations and circumstances, and the amount is not, on the face of the contract, out of all proportion to the probable loss, it will be treated as liquidated damages."

A provision for liquidated damages will not be affected or negatived by another clause in the contract, referring to arbitration the matter of any damage caused by delay in the performance of the work.37

871. Contract Not to Usurp Jurisdiction of the Courts. Finally, in regard to the provisions of the building contract it should be noted that the courts, while ready to give a broad construction to all proper provisions, for the purpose of recognizing and enforcing the intent of the parties, will, nevertheless, not countenance provisions which are of such a character that, if enforced, they will oust the courts of jurisdiction.

The reference of disputes to arbitration is to be encouraged and the parties may enter into such proper arbitration covenants as they will, but care must be taken, if these are to be upheld and enforced, that they do not invade the province of the courts, or attempt to leave to arbitration questions

37 Drumheller v. American Surety Co., 30 Wash. 530.

which it is the natural duty and province of the courts to pass upon.

38

In the case last cited the Court, under the facts there present, decided that the clause in the contract to which objection was made was not such that it should be held void as tending to oust the courts of jurisdiction and proceeded thus to state the distinction between provisions valid and invalid in this respect:

"The question presented by this demurrer is whether the clause in the contract above referred to, comes within the rule which nullifies contracts ousting the courts of their jurisdiction, or within another and equally well-established rule, that parties may covenant that no right of action shall accrue until a third person has performed specific acts or determined certain differences between them. The line of demarcation between the two classes of cases is clear and distinct. The difficulty, if any, lies in the application of particular facts to a clearly defined rule. In Seward v. City of Rochester (109 N. Y. 168) this rule was stated in the following language: 'The distinction between executory agreements of arbitration which oust a court of jurisdiction and, therefore, are rejected as a bar, and those which are sustained as a sole remedy between the parties, is carefully drawn and fully discussed in Delaware & Hudson Canal Co. v. Pa. Coal Co. (50 N. Y. 250).' In one class it is said 'the parties undertake by an independent covenant or agreement to provide for an adjustment or settlement of all disputes and differences by arbitration to the exclusion of courts; and in the other they merely, by the same agreement which creates the liability and gives the right, qualify the right, by providing that before a right of action shall

38 National Contracting Co. v. Hudson, etc., Power Co., 170

N. Y. 439, reversing 67 A. D. (N. Y.) 620.

accrue certain facts shall be determined or amounts or values ascertained, and this is made a condition precedent either in terms or by necessary implication.' The reasons for the rule thus clearly stated are fully set forth in Delaware & Hudson Canal Co. v. Pa. Coal Co. (supra) and need not be further adverted to here."

As a guide to determining those cases in general where an arbitration stipulation is valid, and where, on the other hand, it is not valid because it will be construed to be of such a character that it will oust the courts of jurisdiction, it may be stated as a general rule that where the arbitration agreement merely provides that differences arising under the contract shall be submitted to arbitration, under such conditions that the decision of the arbitrators will merely determine certain facts and amounts or values in controversy, which in themselves are conditions precedent to any right of action, the agreement will be upheld. Such an agreement merely qualifies the right of action of the claimant by providing the method by which the facts necessary to legal action may be determined and does not, therefore, so operate to oust the courts of jurisdiction that it will be considered to be illegal.39

39 The President, etc., of the Delaware & Hudson Canal Co. et al. v. Penn. Coal Co., 50 N.

Y. 250; Sweet v. Morrison, 116 N. Y. 19.