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DEPARTMENT OF COMMERCE 

OFFICE OF NATIONAL RECOVERY ADMINISTRATION 

DIVISION OF REVIEW 



WORK MATERIALS 



mmm or 



DOCu 



MCIVIS 






•UfV 



No. 27 
EXTRA JUDICIAL METHODS OF ENFORCEMENT 



1. Liquidated Damage Provisions in 
Voluntary and Compulsory Industry 
Agreements. 

2. Imposition of Conditions Upon the 
Letting of Government Contracts. 

3. Government Sanctioned "Boycotts" 
and Other Publicity Devices. 



/ 









J ) 3 :> J ' ' 



Legal Enforcement Studies Section 
January, 1936 



cok;fi.dential 

MSMOiUUDUM TO: SECTION HEADS • January 8, 1936 

SII&TECT: WOEIC MTERIALS ITO. 27 

EXTEA JUDICIAL METHODS 0? ElTEOECEIvIENT 

This preliminary draft of E;:tra Judicial Methods of 
Enforcement has "been prepared under the general supervision 
• of Robert S- Denvir by the persons indicated belov,': 

1, The use of Liquidated Damage Provisions in Voluntary 
and Compulsory Industry Agreements, by Mr. Mortimer 
Weinbach. 

2, The Imposition of Conditions Upon the Letting of 
Government Contracts, by Mr. George W. Lindsay. 

3, Government Sanctioned "Boycotts" and other Publicity 
Devices (Labels, Insignia and other Perms), by Mortimer 
Weinbach. 

This is a preliminary draft — an exploration of the 

field as a basis for further work. Hot all material in it has 

as yet been verified and checked, nor does it present a fully 

rounded treatment of the subject. It is made available for 

confidential use within the Division of Review because of its 

usefulness in connection v;ith various studies. 



L. C. Marshall 
Director, Division of Reviev; 



1 3 Mj 36 g 



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TI3] USS OF LIQ,UIDAT:]D HM/IAGE PROVISIOITS in VOLUIITARY 
AIJD COMPULSORY IITDUSTRY AGRESIvISlITS 



TABLE OF COIITSLTTS 

ConcluGioiis 1 

I. Outline 2 

II. Use of Liquidated Damage Provisions in Industry/- 

Agreement s 4 

III. The Canons of Intenoretation 6 

IV. State Jurisdiction 9 

A. California Annotations 9 

B. Connecticut " 10 

C. Florida " 10 

D. Illinois " 11 

E. Indiana " 12 

F. Massachusetts " 13 

G. Mi ssouri " 14 

H. Mississippi " 15 

J . Ne"braska " 15 

K. Ner York " 16 

L. Ohio » 18 

M. Siiode Island " 18 

IT. Texas " 19 

0. Wisconsin " 21 

V. Federal Jurisdiction 23 

VI. Liquidated Damages Under the N. I . R. A 31 

VII. Liquidated Damages in Cooperative Marketing 

Agreement s 34 

VIII. Legislative Regulation of Remedien 37 



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^1- 

THE USE OF LI QUI DATED DAlvIAGE PEOVISIOKS 
IN IL'DUSTHY AGEEjMEKTS 
Conclusions 

1) Atx agreement, made in advance of a breach, fixing the damages there- 
for, is not enforceable as a contract and does not affect the damages recover- 
able for the brea.ch, imless the amoimt so fixed is a reasonable foreco.st of 
just compensation for the harm that is caused by the brecach, and the harm that 
is caused by the breach is one that is inca:-\able or verjr difficult of accurate 
estimation. 

2) In neighing the ;'oractices with resr^ect to liquidated damages as em- 
ployed in codes "under the National Industrial Recovery Act against the ^^rinci- 
ples enumerated J it is difficult to avoid concluding: in relation to code 
violations (a) that the araounts agreed upon and the administration of the same 
were literally penalties to enforce compliance; and (b), that under the doc- 
trine that where a nev; duty is imposed by statute, if a remedy be given by the 
same statute for its non-performance, the remedy given is exclusive, no legal 
sanction for such a remedy, as the provisions generally employed in the codes, 
v/as permissable under the statute, 

3) Liquidated damages as a means of "self-enforcement" in voluntary agree- 
ments ceji be introduced effectively by adequate provision in a statute pursuant 
to which authority exists for the making of such agreements. 

4) That such pov/er exists in Congress is shown in many statutes and de- 
cisions thereon. 



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-2- 

I . OUTLINS 

This study necessarily assumes the power in Congress to Dass a valid law 
enabling industry members to agree voluntarily to observe specified labor con- 
ditions G.nd competitive "oracticese The subject of the inqmry relates to the 
inclusion in such o.greeineiits of liq'oidated damage provisions as a method '^oy 
which, and the extent to which such method is available, as an enforcement de- 
vice in connection v^fith breaches or other infractions of such agreements* 

Where ur-;3d in private agreements the chief advantage of this device has 
likewise been its most serious legal handicrp: a liq^uidated amount as d.sjna^es 
has the deterrent effect of a fixed "penalty," but if a penalty it is not 
legally enforceable. Hence, at the outset j it is necessary to define and dis- 
tinguish liquidated damages and penalties, and as an aid in an understanding 
of its development as a doctrine to consider the canons of interpretation which 
have been employed by the courts and text writers. 

The position of the State Courts in this connection is fairly represented 
in Section 339 of the Contracts Restatment (Am. L© Inst, 1930) ^ the significant 
portion thereof readings 

"An agreement, made in advance of a breach, fixing the damages therefore, 
is not enforceable as a contract and does not affect the damages recover- 
o.ble for the breach, unless 

"(a) the amount so fixed is a reasonable forecast of just compensation 
for the harm that is caused by the breach, and 

^.("b) the harm that is ca-used by the breach is one that is capable or very 
difficult of accurate estimation.^' 

In the Federal Courts the earlier decisions follov/ed the English Coujrts and 
took the position that the sum stipulated as liquidated damages would be held 
to be a penalty if unreasonable- or unjust or disproportionate to the actiaal 
damages, and, if the intent v/as doubtful, favored the interpretation \7hich 
made the sum a penalty. However, beginning with ^S'u n Printing, Etc « v. I.Ioore , 
183 U. S., the Supreme Court taking a more liberal attitude stressed its will- 
ingness to give effect to the intention of the parties by a proper construction 
of their agrf^oment. The Kothe Case , however, in 280 U.S. renewing the emphasis 
on a proper proportion to the da,mages reasonably to be anticipated. 

In weighing the practices with respect to liquidated damages as employed 
in codes under the National Industrial Hecovery Act against the principles 
enumerated, it is difficult to avoid concluding: (a) that the amounts agreed 
upon and the admini strait ion of the same were literally penalties to enforce 
compliance and (b), that under the doctrine that where a new duty is imposed by 
statute, if a remedy be given by the same statute for its nonperformance, the 
remedy given is exclusive, no legal sanction for such a remedy in relation to 
code violations was permissable under the statute. 

Finding little analogy in the decisions supporting the power of assessmenfe- 
to maintain their purposes by fines or penalties the need for at least an en- 
abling statute providing for such a means of enforcement is recognized in the 

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damage suits ruder the Anti-trust Laws and TDarticularly with relation to the 
experiences of the Cooperative Marketing Associations. It is sho\Tn that the 
Standard Cooperative Marketing Act enahles the "by— laws of the Association or 
the r.arketing agreement to fix the liquidated dpjiiages, and the availa"bilit7 and 
the suitability of this remedy is indicated "by the special position occupied 
~'0Y the Association in such agreements^ It "being difficult to discern any 
analogy in the agency administering the contemplated industry agreements (such 
agency not "being damaged in the same sense) , a statute making similar provision 
for the use of this remedy for breaches of such agreements would subject the 
proponents thereof to the task of adjusting any stipulated swns to a reasonable 
estimate of ajiy damages in the light of the srbsta.ntive principles enumerated. 

It is thus indicated that the enabling statute must itself contain the 
specific prescription for the seme in terms of fixed damages; that such povrer 
exists in Congress is shown in many statutes and decisions thereon. 

It is, therefore, concluded that liquidated damages as a means of "self- 
enforcement" in such agreements can effectively be introauced only bj^ its 
adequate inclusion in the statute pursuant to which authority exists for the 
making of such agreements in the first instance o 



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1 1 . THE USii: OF LIQTJimTED DA1,LA.GE PaOVISIONS IK INDUSTPiY AGBE BMEHTS 

For the purposes of the conclusions reached herein, it will be necessar^r 
to assume, (a) the participation of the Govornnient in or Governmental srxiction 
of agreements by industry menbers to observe specified labor conditions end 
competitive oractices, (b) thp.t such agreements are otherwise valid, and (c), 
that there is pai'ty to such agreements in addition to the members of the in- 
dustries, some agency, Governmental or otherwise, which carries the burden rnd 
responsibility of execution ond. administration. This study relates to the 
availability of liquidated damage provisions in such agreements as a means of 
self-enforcement. 

In private agreements, the utilization and the inclusion of a "provision 
for liquidated damages in the event of a breach thereof, have been of long- 
standing and its development from the common law has turned upon its nature as 
a legal ins trui^-^n tali ty nrede termini ng the damages naturally flowing from an 
anticipated brc-.ich of such r)riv£ite agreements. The primary concern of the 
courts in construing clauses of that type and the effects thereof in private 
agreements, has been the determination of whether by language and by effect 
the same are valid as agreements to liquidate damages, or whether the same are 
"penalties," and hence, legally unenforceable. At the outset, therefore, it 
would seem to be in order to inquire into and define the terms "liquidated 
damages" pjid "penalties," (the latter term to be distinguished, hov/ever, from 
penalties imposed by statute as punishment for certain infractions of law). 

LIQUIMTSD DAl^IAGES MD PEIaLTIES DEgll^D AlTD DISTINGUISHED 

TLiese terms have had a varied treatment in the hands of authoritative text 
writers, (definitions and a genejral discussion of this subject are to be found 
in 2 ;.alliston, Contracts (1920) Sees. 769-792; 1 Sedgwick, Damages (9th ed. 
1912) Sees. 389-427), from which the follovdng would seem to be well settled. 
"Liq"aidated Damages" are a sun which a party to a contract agrees to pay, or 
a deposit which he agrees to forfeit if he breaks some promise, and which j 
having been arrived at ^oy a good faith effort to estimate in advance the actual 
damage, v.'ould probably ensue from the breach, is legally recoverable and re- 
tainable as agreed damages if the breach occurs. A "penalty" is a sura which a 
party similpjrly agrees to pay or forfeit in the event of a breach, but which 
is forfeited, not as an estimate of probable actual damages, but a,s a 'juni sh- 
raent, the treatment of v/hich is designed to prevent the breach, or as security , 
to insure that the person injured shall collect his actual damages. And again, 
where the parties to an agreement stipulate in advance that, if a breach oc- 
curs, the one who committed the breach shall pay to the other a fixed sum of 
money, the ejnount so agreed upon is called liquidated damages if it is the in- 
tention of the "oarties that it shall re-oresent the loss sustained and it does 
actually aopro-imately represent such loss. If the intention of the parties is 
that the sura so fixed shall be paid, not in lieu of performance but to secure 
performance, the sum is called a penalty. The test of v.^hether a sum named is 
liquidated damages or a penalty, is v;hether the -pa-rties agreed upon the same 
as the reasonable equivalent of i^rospective injury from a possible breach, or 
whether they acted to secure performance b^'' a provision for excessive payment 
under fault. 



9426 



The inportance of distinguishing ejid construing these provisions in the 
light of their respective categories is vital to the well-e standi shed doctrine 
that the courts will respect a provision for the payment of liquidated dcjnages 
whereas they v/ill ordinarily relieve against the provision for the payment of 
a penalty. If the court decides that the s'^Jn s/^jeedi upon is a liona fide agree- 
ment to liquidate the damages, the defendant, in case of "breach, must oay to 
the pls.intiff the liquidated amount vmether the actual damages turn out to "be 
more or less than such siara. On the other hand, if the co^ujrt decides that the 
svn a-greed upon in advance is a penalty, the stipulation of the parties v/ill 
not "be enforced oJid the plaintiff will Ids forced to prove the actua,l damages 
the sajne as though no agreement with reference to the dar.iages had "been made, 
(See Brightman, Liquidated Damages , (1925), 25 Col. L. Rev. 277; McCormick, 
Liquidated Da.raages . (1920) 17 Vir. L. Hev. 1C3; 39 Harv. L, Rev. (Tote) 391.) 



9426 



"6- 

III. THE OMOliS Oi' IKTEEPBipilllOIi 

In deciding whether a stipulated siom is liquidated damages or a penalty 
most courts have emplo^^'ed certain important rules or canons of interpretation 
which should he considered as an aid in the development of the doctrine. In 
Keehlc V. Kceble, 85 Ala. 552, Somerville, J., s-a|;;.gested certain rules as 
follov;s: 

"'The following general rules may he deduced from the authorities, 
each having more or less weight, according to tne peculiar circum- 
stcnces of each case, and the nature of the contract so^'jght to he 
construed: (l]^ The court will always seek ty ascertain the true 
and real intentions of the contracting parties, giving weight to 
the language or words used in the contraxt , hut not always being 
e.hsolutely controlled hy them, when the enforcement of such con- 
tract operates v;ith unconscionable hardship, or otherwise ivorhs an 
injustice. (s) The mere denoraina.tion of the sum to he paid as 
'liquidated damages, ' or as a 'penalty, ' is not conclusive on the 
court as to its real character. Although designated as 'liquidated 
damages' it may he construed as a penalty, and often when called 
a 'penalty' it may he held to he liquidated damages, where the 
intention to the contrary is plain. (3) The courts are disposed 
to lean against any interprets,tion of a contract v/hich v/ill mplze 
it liquidated damsiges; and, in all cases of doubtful intention, 
v/ill pronounce the stipulated sun a penalty. (4) Where the payment 
of a sma-ller sum is secured by an obligation to pay a larger sum, 
it will be held a penalty, and not liquidated damages. (5) TTnere 
the agreement is for tne performance or nonperformance of a single 
act, or of several acts, or of several things which are but minor 
ps.rts of a single complex act, and the precise damage resulting 
from the violation of each covenant is wholly uncertain or incapable 
of being ascertained save by conjecture, the parties may agree on 
a fixed sum as liquidated damages, and the courts will so construe 
it, unless it is clear on other grounds that a penalty was really 
intended. (6) When the contract provides for the performance of 
several acts of different degrees of importance, and the damages 
resulting from the violation of some, although n^t all, of the 
provisions are of easy ascertainment, and one large gross sum is 
stipulated to be paid for the breach of any, it will be construed 
a penalty, and not as liquidated damages. (?) \7hen the agreement 
provides for the performance of one or m.ore acts, and the stipula-* 
tion is to pay the same gross sum for a partial as for a total or 
complete breach of performance, the sum will be construed to be 
a penalty. (8) Whether the sum agreed to be paid is out of propor- 
tion to the actual damages, which will probably be sustained b3;- a, 
breach, is a fact into which the court v/ill not enter on inq;a.iry, 
if the intent is otherv/ise made clear that liquidated damag:es, and 
not a penalty, is in contemplation. (9) Where the agreement is in 
the alternative, to do one of two acts, but is to pay a larger sum 
of money in the one event than in the other, the obliger having his 
election tn do either, the amo^int thus agreed to be paid will be 
held liquidated dtimages, and not a penalty. (10) In appl^^-ing these 
rules, the controlling purpose of which is to ascertain the real 
intention of the parties, the court will consider the nature of the 

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contract, the terms of the whole inctrurflent , the consequences no,tural~ 
ly resulting from a oreach of its stipulations, ano. the peculiar 
circumstances s-jTromiding the transaction; thus permitting each case 
to stand, as far as possible on its cv/n merits and peculiarities." 

These rules may be compared v/ith the summary "by Lord Dunedin as set forth 
in Dunlop pneumatic Tyre Go^ , L td. v. lie;? G-a,rage dc Motor Co. , Ltd . , (1915) A.C 
89,86. As enumerated "by Sedg"..'ia: in his wor"'; on Damages, Vol. I, pp. 785-809 
they included: 

"(1) Where the stip-olated sum is v/holly collateral to the object 
of the contract, being evidently inserted merely as security for 
performance, it -.Till not be allov/ed as liquidated damages. 

"(2) TTnenever an ouiiount stipulated is to be paid on the nonpay- 
ment of a less amount or on default in delivering a thing of less 
value, the sum v/ill generall'" be treated as a penalty. 

"(3) TrnenGver the stipulated sum is obviously greater than the 
damage could be, it v/ill not be allov/ed as liquidated damages. 

"(4) TJhenever the stipulated sui-i is to be paid on a breach of a 

contract of such a nature that the loss may be much greater or 

much less than the sum, it v;ill not be allowed as liquidated 
damages. 

"(5) A sum fixed as security for the performance of a contract 
containing a number of stipulations of widely different importance, 
breaches of some of v/hich are cap8,ble of accurate valuation, for 
any of which the stipulated sura is an excessive compensation, is 
a penalty. 

"(6) Vrhere the instrument refers to a sum deposited as security 
for performance, cr paid in advance to be forfeited on default, 
the forfeiture, if reasonable in sinount, v;ill be enforced as 
liquidated damages. 

"(7) If the contract is one in which the measure of damages for 
paxt performance is ascertainable and a sum is stipulated for entire 
breach of it, this sum will not be allowed as liouidated darao^es 
in case of a partial breach. 

"(3) TJhere, independently of the stipulation, the damages v;ould 
be -./holly uncertain, and incapable or very difficult of being 
ascertained, except by mere conjecture, there the damages will be 
usually considered liquidated. 

"(9) Upon breach of a contract for the sale of property of un- 
certain value the stipulated sum is allowed as liquidated damages. 

"(10) TJhere a party binds himself in a sum named not to carry on 
any particular trade, business, or profession, within certain 
limits, or within a specified period of time, the sum mentioned 
will be regarded as liquidated damages &„nd not a penalty. 

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"(11) Parties may usually liquidate damages for delay in perform- 
ance of a contract. 

"(12) If the sum "be evidently fixed to evade the ueury laws or 
-- any other statutory provisions, the courts will relieve "by treating 
it as a penalty. " 

In TJilliston on Contrp.cts (1920) sec. 785, the author sets forth rules 
aiding the court in determining; whether a sum is liquidated damages, as 
follov/s; 

"■flhether the essential question to "be determined is (l) the 
reasons."bleness of a s"um npjned as liquidated damages or (2) the 
fact that the parties attem'pted to value in good faith, when 
the contract was made, the a.ctual injury which would be caused 
"by a "breach, there crmiot well be any other liquidated damages 
for a "breach which causes an injiLTj?-, the extent of which is 
mathematically certain, than the very sum thus mathematically 
determined; and if the amount of the injury, though not raathe- 
ma.tically certain, can readily "be valued, and a valuation must, 
as matter of o"bvious fact, fall within narrow limits, not only 
is a sum much "beyond those limits uiireasona"ble, "but the parties 
must be regarded as cnargealDle with notice of that fact. More- 
over, there is small reason to suppose that the parties will 
attempt in good faith to value the injury "beforehand, if it can 
T)erfectly well be valued afterwards; so that not only are the 
parties more likely to make a bona fide attempt to liquidate 
their damages if from the nature of the contract the breach will 
cause damage uncertain in amount and not readily calculable, but 
the courts also are more ready to regard a provision as reason- 
able where ordinary principles of compensation cannot easily be 
applied, and will not afford certain relief. The amount of the 
sum named, however, even in such a case, ha.-s also an important 
bearing upon the question. Thoiigh the mere fact that, as it 
turns out, the svia named exceeds the actual damage, will not 
malce it a penalty, since the reasonableness of the provision must 
be considered as of the date of the contract, yet the excessive 
size of the sum agreed upon may tend to Ci^ow that the parties o.id 
not make a. bona fide effort to fix the actual value of the injury. 
Even more clearly, where a contract contains a number of promises 
or a continuing obligation, a provision that a fixed sum sha.ll be 
paid for any breach of any promise, or for any delay in perform- 
ing the continuing obligation is a penalty. The provision is in 
fact unreaxsonable, and, furtherm.ore, it is impossible to show in 
such a case that the parties made an honest attempt to estima.te 
the actual injury which would be caused, since no reasonable 
person would suppose that the injury from any breach which might 
occ-ur would involve the same damage as any other breach, * * * 
Whether a provision is penal or only a liquidation of damages is 
a question of law." 



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I V . STATE JU RISDICTION 

The State courts have ^?;enerally respected a provision for the payment of 
liquidated damages and have ordinarily relieved against a provision for the 
payment of a penalty. In view of the representative character of the annota-* 
tions already completed concerning the principles set forth in the Contracts 
Restatement (Am. L. Inst. 1930) on this subject, (these include the States of 
California, Connecticut, Florida, Illinois, Indiana, Massachusetts, Missouri, 
Mississippi, Nebraska, New York, Ohio, Hliode Island, Texas, and TJ'isconsin) it 
would seem to be a fair assertion that the position of the State courts in 
this matter is as set forth in Section 3S9 of the Restatement, subject to any 
qualifications described in the annotations follov/ing. 

This section reads as follows: 

"Sec. 339. LIQJJIIATED DAll^GES IdTD PENALTIES. (l) An agreement, made in 
advance of a breach, fixing the damages therefor, is not enforceable as a 
contract and does not affect the damages recoverable for the breach, un- 
less 

"(a) the amount so fixed is a reasonable forecast of just compensation 
for the harm that is caused ^y the breach, and 

"(b) the harm that is caused Isy the breach is one that is incapable or 
very difficult of accurate estimation. 

"(2) An undertaking in a penal bond to pay a sum of money as a penalty 
for nonperformance of the condition of the bond is enforceable to the ex-- 
tent of the harm proved to have been suffered "ny reason or such nonper- 
formance, and in no case for more than the amount named as a penalty, with 
interest." 

A - C alifornia Annotations 

"Subsection (l) . California is in full a ccord with this section . Cal. 
Civ, Code, Sec, 1670: "Sver^/ contra,ct ^oy Y;hich the amount of damage to 
be paid, or other corapensa.tion to be made, for a breach of an obligation, 
is deteiTnined in anticipation thereof, is to that extent void, except as 
ex[Dressly provided in the next section." Sec. 1671: "The parties to a 
contract may agree therein upon an amount v;hich shall be presumed to be 
the amount of damages sustained by a breach thereof, when, from the nature 
of the case, it would be impracticable or extremely difficult to fix the 
actual damage." 

The use of the words "liquidated damages" in the contract is not control- 
ling. Mente & Co. v. Fresno C. 5: V. Co., 135 Cal. App. 325; Kelly v. 
McDonald, 98 Cal. App. 121; Wright v. Rodger s, 198 Cal. App. 137. The 
use of "penalty" will not prevent construing provisions as a valid one 
for liquidated damages. Dyer Bros, Iron VJlcs, v. Central Iron Fxs. , 182 
Cal. 588. 

A stipulation in the contract that actual damp.ges for its breach would be 
impracticable and extremely diffic-cLlt to fix, does not control, expecially 
where the facts indicate othen.dse. Harlan Dry Dock" Co. v. McNear, 70 
Cal, App. 204; Stark v. Shemada, 187 Cal. 785; See Also Consol. Lumber 
Co. V. City of Los Angeles, 33 Cal. App. 698. 

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-10- 

In certain type of cases the courts have held that, "because of their 
natiire, the provision for liquidated damages will "be construed as s^x:^ 
and held valid. Contracts for cooperative marketing fall within thio 
group, the provisions being held valid. Milk Producers Ass'n, v, Webt, 
97 Cap. App, 551; Calif, ^?£:in Brewers Ass'n, v. Sanders, 66 Ca, Ap"o, 
639; Same v. Hindge Co., I'JS Cal, 168; Poultry Producers v. Mur-ohy, 64 
Cal. App, 450; Ansheim Citrus Fruit Ass'n, v. Yeomen, 51 Cal, Ap^^. "3^9, 

Where the contract providing for liq.uidated damages is such tha,t damages 
for its "breach are ea^sily ascertaina^ble the provision will "be construed- 
as a penalty, Robert Marsh & Co. v. Treraper, 210 Cal. 572. 

If it a.ppears from the contract that the intent was to impose a penalty 
merely, the provision -^yi be bo cc^nstrued. >:akaga'..'a v. Okanato , 164 Cal, 
718. 

« 

Subsection (2). In gccord. Weinreich Estate Co. v. Johnston Co., 23 
Cal. Arop. 144. 

B - Connecticut Annotations 

This section is in hg.rmo ny ^'ith t he Connecticut decisions . 

As a general rule parties are allov/ed to malre such contracts as they 
please, including contracts to liquidate and fix beforehand the anount 
to 'be paid as damages for a breach of such contract; but the courts have 
always exercised a certain power of contx'ol over contracts to liquidate 
dc'jTiages, so as to keep them in harmony with the f-undaraental g-eneral rule 
that compensation shall be commensui'ate with the extent of the injury, 
* * * Li oete.cmi.iiL'.g whether a sum agreed to be paid on breach of contract 
is a penalty or liquida.ted da.raages, the court Y;ill look at the entire 
agreement, its scope, purpose and subject matter and may consider thi 
result of a breach thereof, and the reasonableness of the sum agreed to 
be paid therefor, ijnder all circumstances of fne case. * * * Wlien tbo 
nature of the agreement is such that upon a breach of it the amount of 
damages would be uncertain or difficult of proof, and the parties hare 
beforehand expressly agreed upon the ajnount of damages and that amovxit is 
not greatly disproportionate to the presumable loss, their expressed in- 
tent will be carried out, (l^ew Britain v. New Britain Tel. Co., 76 Conn, 
525, 332, 333. 

Associated Hat Ivlfrs. v. Baird--Jnteidt Co., 88 Conn, 332; Schoolnick V, 
Gold, 89 Conn. 110; Politziner v. Vanech, 101 Conn. 265; Miller v. ILacfar^ 
lane, 97 Conn, 299; Bridgeport v. U. S. F. & G. Co., 105 Conn. 11, 

Subsection (2). It was long ago settled that the penalty of a bond is not 

recoverable as a debt or as a penalty but only as damages for the broach 

of the condition of the bond. Miller v. Macfarlane; Fowler v. Mallory; 
53 Conn, 420. 

C - Florida. Annotations 

The law of Florida generally sup-oorts the statements of this section . 

It is v/ell settled that the parties may contract to pay liquidated c.amages 

for a breach of the contract. Taylor v. Rawlins, 90 Fla. 621. Wliether a 

9426 



-11- 

stipuJ.ation is for a pena,lty or for liquidated damages is a question of 
la-7 aind not for the Jury, Greenblatt v. LicCall & Co., 67 Fla, 155; Chace 
V. Jolmson, 98 Fla. 118; Chace v. Smith, 102 Fla. 1013. 

T'.ie nere denomination of the siun to "be paid as liquidated daraa,;^es is not 
conclusive as to its real character and legal effect. Greenblatt v, he- 
Gaily c; Co., 67 ?la, 165. l/7here an amount agreed on is licjiic.ated 
dai.;a';es, it may be so unreasonable as to shC'-; an intention to provide for 
a penalty. Southern Menhaden Co. v. Ho\t, 71 Fla, 128. 

Smith V, Newell, 57 Fla. 147, holding forfeiture of $500 a nenaltj'' v'here 
its payment was conditional on the breach of stipulations of indifferent 
im"oortance; Lee v. Clearwater Growers' Ass 'n . 93 Fla. 214, amount not 
shovrn to be unjust, op'ores jive , or disproportionate to actual damages. 

A contract for liquidated damages will be upheld, if reasonable and not 
uroviding for a penalty, Atlantic & Gulf Fertilizer Co. v. Mayo-Lyles, 
97 Fla. 1. 

A stipulation in a lease tlia-t the lessor's reentry for conditions broken 
shall not work a forfeiture of rent is not invalid as penalty. Casino 
Amusement Co. v. Ocean Beach Amusement Co., 101 Fla. 59, 

D - Illinois Annotations 

Subsection (l). Aiid even vrhere the parties stipulate for the ua-^Tment of 
a s"uj.i certain on default of performance of an agreement, such stipulation 
will be treated as a ^Denalty, if the damages are not difficult of ascer- 
tainment. (Tiernan v. Hinman (1655) 16 111. 400, 403. 

There is sa.id to be a "well established rule, that where there are 
several covenants or stiiralations in an agreement, the damages for the 
nonperformance of some of v/hich are readily ascertainable by a jury, and 
the daxiages for the nonperformance of the others are not measurable by 
any exact i^ecuniary standard, and a sum is named as damages for a breach 
of my of the covenants or stipulations, such sum is held to be merely a 
penalty," Trower v, Elder (1875) 77 111. 452, 455, cited in East Molina 
Co. V, Weir Tlou Co. (1899 CCA.) 95 Fed. 250, 255, and Iroquois Fm-nace 
Co. V. iTilkin Mfg. Co. (1899) ISl 111. 582, 603, 54 N.E. 937, 994; ajid 
See Bryton v. Marston (1899) 33 111. Ap^. 211,215-216. 

For statements that if the amount agreed to be paid is out of proportion 
to the j)robable dama^ge , the court is disposed to regard the -orovision as 
one for a penalty; Doane v. Chicago City Ry. Co. (1893) 51 111. Airo, 
353,357 affirm.ed (1896) 160 111, 22, 43 N,E. 507; Elgin, Joliet & Eastern 
Ry. Co. V. N.W. National Bank (191l) 165 111, App. 35,39. 

Holding that the amounts fixed by agreements were reasonable forecasts 
E, c^: R. Brewing Co. v. Modselewski (1915) 269 111. 539, 109 N. E. 1058 
(iDrovision for ^p50 liquidated damages for each month in which saloon 
keeper failed to comply with contract to buy all beer from plaintiff 
brev/ery); and see Standard Bre^rery v. Schraalh^ausen (1912) 175 111, App. 
629, 



9426 



-12- 

Hote Christain Mills, Inc. v. Berthold Stern Flour Co. (1927) 24-7 111. 
A;'Vo, 1, A contract for the sale of floui' to be manuf actured and shipped 
on the "buyer's direction -provided that the seller should recover as 
liquidated damages the total from a formula amounting to (a) a-yoroxinr.te- 
ly IC cents per 'ousnel of flour resultin;^ from the loss iroon the v/hept to 
be iiade into the flour; ('b) approximately 38 cents per "bushelc;- flouT 
covering interest on the cost of the wheat insurance and storage for a 
period of fo'or months "between the dates of the contract and "breach; o.nd 
(c) the amount of the decl.ine bot^veen the highest closing price per bush- 
el of v/heat on the date of the contract and the date of the breach, a 
corresponding credit to be given the buyer if the price had advanced. 
The provision was held fair and reasonable. But cf. Marshall Milling Co, 
V. Hosenbluth (1924) 231 111, At)p, 325, 

Holding agreement unenforceable because amounts fixed were not reasonable 
forecasts of just compensation: Scofield v, Tompkins (1880) 95 111, 190 
(provision allowing vendor of land to recover as "liquidated damages" for 
vendee's breach amount equal to sale -orice); Van Kannel v. Higley (1912) 
172 111. App. 88 (provision to "forfeit and Pay" $600 as "liquidated 
danages" for failure to complete a $5500 house by a certain date); vrnite 
V, I.Lndel Bros, (1928) 248 111, A-o"o, 313 (loss of commissions b;^- employee' 
Citing Scofield v, Tompkins, supra; North & South Rolling Stod: Co. v, 
O'Hara (1898) 73 111, JIptd, 691/710. 

In accord with the He statement in holding that only actual damages may 
be recovered; Westfall v, Albert (1904) 212 111. 68, 72 A\E. 4 (bond givei 
to dissolve an injunction); G-iesecke v, Cullerton (1917) 280 111, 510, 
117 II, E. 77 (bond by a lessee conditioned u;oon his faithful performance 
of promise to spend $5000 for improvement within six months). Citing 
westfall V. Albert, supra; People v. Mitchell (1921) 223 111, Am, C,21. 

As to penalbonds running to the United States note the following: "In 
all suits brought to recover the forfeiture annexed to any ... bond,,, 
where the forfeiture, breach or nonperformance appears by the default or 
confession of the defendant, or upon demurrer, the court shall render 
judgTient for the plaintiff to recover so much as is due according to 
en^uity. And vilien the sum for '-hich judgment should be rendered is un- 
certain, it shall, if either of the parties request it, be assessed by a 
jury." U.S. Hev. Stats., sec. 961 (U.S. Code, Title 28, sec. 785) and 
see Chicago House-Wrecking Co, v. United States (1901 CC.A.) 106 Fed, 
335, 

E - .Indiana Annotations 

The American Lab Institute provides for the recovery of liquidated 
damage s , 

Clause (a). Where the amount so fixed is a reasonable forecase of just 
conroensation. In accord. Merica v. Bur get (1905) 56 Ind, 
App. 453; J.I. Case Threshing Mach, Co, v, Souders (1911) 48 Ind. Ap'o, 
503. This rule is generally worded so as to read that liquidated damages 
are recoverable though the amount of the damages for breach is easilj^ 
established if the stipulated amoimt does not differ greatly from v/hat 
\70-uld be recovered under the judicial measure of daraf,ges, Willis on 
Damages, 73, 

9426 



-13- 

Cla.use ("b). ^Ifhere the injury caused "by breach is incapable or very 
difi'icu] t of accurate estimation. In accord. Hamilton v. Overton, 
(1842) 6 Blackf. 206; Duffy v. Schockey (1858) 11 Ind. 70,71; Stuce baker 
V. Uhite (1869) 31 Ind. 211; McCormick v. Mitchell (1877) 57 Ind. 248; 
Joiinson V. Gwinn (1884) 100 Ind. 466; Martin v. Murphy (1891) 129 Ind, 
464; Mondamin Meadov^s Dairy COo v. Brudi (1904) 163 Ind. 642; Beniier v. 
Ilages (1904) 34 Indo Apii. 175; C-eorge B. Swift Co. v. Dolle, Receiver 
(1907) 39 Ind. Apr:). 65G; Barber Asphalt Paving Co. v. City of Wabash 
(1909) 43 Ind. Ap'p. 167; B urley Tobacco Society v. Gillaspy (1912) 51 
Ind, A:op, 583; Miller v. l^letcher Savings Sz Trur,t Co. (1922) 78 Ind. 
Ap-p. 183. 

Conpare vrith liquidated damages a direct obligation of a contract. Beck 
et al V. Indianapolis Light & Po^ver Co. (1905) 56 Ind. Ap-o. 600. 

L'here a contract contains several provisions of different importance, the 
dsxiages for the breach of some of which would be certain and of others -ur- 
certa,in, and a large snjii is expressed in the agreement as payable on any 
of the stipulations, such svm. is regarded as a penalty rather tmn liouid- 
a.ted damages. Carpenter v. Lockhart (1849) i Ind. 434; Jeffries v. Lesh 
(1924) 195 Ind. 305; Calvert v. Price (1924) 82 Ind. App.. 250. 

So also where there is a contract to Durcliase and the purchase price is 
pa3'"able in instalments, if there is a stipulation that, in case of de~ 
faiut of the vendee in the pa^/raent of either a part or -'hole of the ;our- 
chase ;irice, liquidated dcjiiages shall be the fu3.1 aino^ont of the -purchase 
price, such stipu.lation is a penalty and not liquidated daraa,ges. Zenor 
V, Pryor (1914)^57 Ind, Aop. 222. 

In case of doubt, a stipulation should be construed a penalty, Eiken- 
berry v. Thorn (1916) 61 Ind. App. 468. 

Subsection (2). The .penalty of a penal bond is enforceable only to the 
extent that it fixes a minimum. Broun v. Uaulsby (1861) 17 Ind, 10 
( semble ). 

I* - Massachusetts Annotations 

The results of the Massachusetts decisions are in substantial harmony 
-■-±tli this section, although the form in which the results are stated 
differs materially therefrom, 

(1) A bargain for a penalty'- is unenforceable, Perkins v, Lymsji, 11 
Mass, 76; Merrill v. Merrill, 15 Mass, 488; Stearns v. Barrett, 18 Mass. 
(1 Pick.) 443; Bro-m v. Bellows, 21 Mass. (4 Pick.) 1P.9; Kellogg V. Cur- 
tis, 25 Mass. (9: Pick.) 534; Pisher v. Barett, 58 Mass. (4 Cush,) 381; 
Mayer v. Estes, 154 Mass. 457; Briggs v. De Peiffer, 214 Mass, 52, 

(2) A bargain fixing liquidated damages is enforceable. Learv v. Laflin, 
101 Mass. 334; Hall v. Crowley, 87 Mass. (5 Allen) 304; Garst v. Harris, 
177 Mass. 72; ITorcross Bros, v. Vose, 199 Mass, 81; Morrison v. Piichard- 
son, 194 Mass, 370; Putnam Machine Co. v, Mustakangos, 236 Mass, 376; 
Ind, Paper Co. v. Priscilla Co. 281 Mass. 22, 



9426 



-14- 

The -oroblera imder the Massachusetts law is thus resolved to the deternina- 
tion whether a ^iven provision is for a penalty or for liquidated dana,ges. 
The controlling'^ factor in the determination is the intent of the parties 
(Cr-s:iin,2: v. Ereer, 97 Mass, 4/15) Lynde v. Thompson, 84 Mass. (2 Allen) 
456; Leary v. Laflin, 101 Mass. 354; Roues v. Upton, 125 Mass. 258; Kaplan 
V, Gray, 215 Mass. 269; Putnam Machine Co. V. ": lus ta.kanr^o s , 237 Mass. 376. 

The "reB.l intent of the partier." for which the c^^urt searches appears to 
"be their intent either to make a reasonable forecase of .just compensation 
or to provide a punishment in terrorem for a "breach. 

The lan-'juage used hy the parties is not controlling on the question of 
intent. Pierce v. duller, 8 Mass. 223; Snute v. Taylor, 46 Mass. (5 Met.) 
61, Eonever, in the case of C-uerin v. Stacy, 175 Mass. 595 G. J., Holmes 
said: "The proper course is to enforce contracts according to their 
i^lain meaning and not to -ondertake to be \7iser than the parties and there- 
fore that in cZ'eneral when -os.rties say that a sum is payahle as lio^uidated 
dana.f';es they will "be taken to m.ean -'hat they say and will be held to their 
words," makin.-?; an exception in a case ■:rhere the -oa'/ment "secures several 
promises of varying importance, one or more of which is for the pajiaent 
of a much smaller sum of monoy. " See also Garst v. Harris, 177 Mass. 72; 
Kaplaji V, Gray, 215 Mass. 269; Bedard v. C. S. Ransom Inc., 241 Mass, 74 
where the transaction is such tn.r. t damages are difficult to estimate 
a.ccurately, the oarties are "deemed to have intended that the sum agreed 
on shall he treated as llo^uidated damac;];es." Chase v. Allen, 79 Mass, 
(1 ' Gro.y) 42; Lynde v. Thompson, 84 Mass, (2 Allen) 456; Atlantic Refin- 
ing Co. V. Barnard, 264 Miiss, 550. 

Wliere a "bond is given for the satisfactory -oerformance of a contract, with 
a Slim named to "be paid in the event of nonperformance of the bond' s con- 
dition, the rvle is the same as that already e.xpressed, .and if the sujn 
named is intended as liquidated damages, it is recoverable as such, 
Ho-ges V. King, 48 Mass. (7 Met.) 583; Guerin v. Stacy, 175 Mass, 595, 
Sut where the bond provides for a penalty it is not enforceable, Shute 
V. Taylor, 46 Mass. (5 Met.) 61; Fish v. Gray, 95 Mass. (11 Allen) 152; 
Henry v. Davis, 123 Mass. 345. 

G - Missouri Annotations 

Missouri law substantially in accord wit"i:i the iceas of this section . 

Subse ction (l). In Buchanan v. Louisana Purchase Exposition Co. (1912) 
245 Mo, 357, the court sta.tes that, in distinguishing between lio_uidated 
damages and penalties, t"ne question is "v/hether the damages follov/ing a 
breach of the agreement are sucli as can be definitely or rea.dily ascer— 
ta,ined 'lyy evidence or fixed ruJ.es of computation; or, on the other hand, 
whether the damages are such that it would be difficult, if not impossi- 
ble, to measure thera oy any exact pecuniary statute or calculate them 
with approximate accuracy. In the first instance, if the amount stiijulat- 
ed is grossly disproportionate to the loss following 8. brer.c'n of contract, 
the court will construe it to be a penalty, * * * in the second instance, 
if the amount specified appears to be a reasonable estimate of rn definable 
and unascertainable damages, the coui^t will construe it as a proper 
liquidation." In accord are: May v. Crawford (1899) 150 Mo, 504-; Cochran 
V. Peoples Ey Co. (1892) 113 Mo. 359; Morse v. Rathb^jirn (1868) 42 Mo, 594. 

9426 



See also Yerxa v. Randazzo Macaroni Co, (1926) 315 Mo. 927; Adams v, 
Luckamaxi (Mo. App. 1923) 256 S.F, 103; Thonroson v, St. Charles Comity 
(1910) 227 Mo. 22C^; Tinkhcon v. Satcri (l89l') 44 Mo. App. 659. 

Adajns v, Luckaman (Mo. App. 1923) 256 S.W. 103, decides that "'-here 
there are several covenants in a contract of varying degress of 
importance and a sum is stipulated therein which is to "be paid on 
the "breach of either or any of such stipulations, the courts axe in- 
clined to treat the same as a -penalty." In acuord, see Knaus v, 
Lindsey (1926) 222 Mo. App. 476. 

The fact that damages stipulated are called either a 'oenalty or 
liquidated damages is not conclusive. Yerxa v. Handazzo Macaroni 
Co, (1926) 315 Mo. 927. 

Board of Education of St. Louis v. National S-urety Co. (1904) 183 

Mo. 166. 

Subsection (2). R. S . Mo. 1929, Section 2879 (Mo. St. An. Section 
2879, p. 741 ) , -orcvides that judgment on a panal oond for the pay- 
ment of money shall be rendered for the sum actually due, with 
interest and costs. 

H ~ Mississip-pi Annotations 

Subsection (l). Clause (ajh). Accord. Jones v, Mississippi 
!Farms Co., 16 Miss. 295; Brown v. Staple Cotton Coop. Ass'n ., 132 
Miss. 659; Shields v. Early, 132 Miss. 282. 

Clause (Id), An agreement for stipulated damages or a Denalty is 
unenforceable where the damages for the breach of the Contract are 
fixed by law. 

Failure to pay proniissory note, Hughes v. Fisher, Walk. 516; Pyle 
V. Gentry, 127 Miss, 784. Or, where the daxiages are certain or easy 
of estinv.tion. 

Failure to comply vath -ororaise to loay money and execute note. Bright 
V, Rowland, 3 How. 398. 

Agreements held to be (l) penalties; Light, Hea.t & Water Co, v. City 
of Jackson, 73 Miss, 598; (2) liquidated damages; Hardie I^nes 
Fo-ondry & Machine Co, v. Glen Allen Oil Mill, 84 Miss. 259; Coker v. 
Brevaxd, 90 Miss. 64; Jones v. Mississippi Farms Co., 116 Miss, 295; 
Brown v. Staple Cotton Coop. Ass'n., 132 Miss. 859; Shields v. Early, 
132 Miss, 282. 

Subsection (2). Accord, Bright v. Ro land, 3 How, 398; Coker v. 
Brevard, 90 Hiss. 64; T:/le v. Gentry, 1,.^7 l.iss. 784. 

J - Nebraska Annotations 

The Nebraska law is in a,c:.oria?^ce with ^Ye Restatement. 



9426 



-15- 



In the following cases the agreements veve held to provide for 
liquidated damages aiid. were sustained; Panl^omin v. Gorder (1914) 
97 Neh, 337 ($23.50 per month for "breach of contract not to compete); 
Edward E. Gust in & Go. v, Nebraska Building & Investment Co. (1923) 
119 Neh. 241 ($15,000 for breach of 99 yeax lease and agreement to 
Kiild hotel); Van Horn v. Ericson L^ke Co, (1925) 113 Nsb. 332 
($3300 for breach of agreement to maintain or operate public utility 
for period of 15 years); Nebraska Wheat Gro'./ers' Ass'n. v. Smith 
(1927) 115 Neb, 177 (25^ per bushel for breach of agreement to deliver 
wheat to cooperative marketing associc.tion) . 

In International Milling Co, v. North Platte Elour Mills (l930) 119 
Neb, 325 effect was given to an agreement for liquidated damages itt 
place of the difference between contract price and market Drice for 
breach of a sales contract. The court relied u"Don the express pro- 
visions of the Sales Act (Neb. Corap. Stat. 1929 Sec. 69-471) permitting 
this. 

A stipulation for liquidated damages precludes the recovery of other 
damages incurred by reason of the specified breach. Jobst v. Hayden 
Bros. (1911) 88 Neb. 469. 

In the following cases stipulations wer<? held to provide for penalties 
and hence to be unenforceable^: Brennan v. Clark (l890) 29 Neb. 385 
($10 a day for delay in completing building, on theory that damages 
would be rental value of building, easily computable?) ; Lee v, Carroll 
Normal School Co. (I90l) 1 Neb. (unoff.) 681, ($25 a day for delay in 
completing school building); Yant Constr. Co, v. Village of Cajirpbell 
(1932) 123 Neb. 360, ($200 per month for delay in street improvement, 
court considering that damage to village was readily ascertainable). 

Subsection (2) . Is illustrated by Haffke v, Collins (1911 ) 89 NeTs. 
134 on the point of necessity of -oroving dain;^^ges under a penal bond. 
Note also Gillilan v. Rollins (1394) 41 Neb. 540. A bond may be con- 
strued as providing for liquidated (lBnnr;es, Edvrard E. Gustin & Co. v, 
Nebraska Building & Investment Co. (l9?3) 110 Neb. 241; Van Horn v, 
Ericson Lake Co. (l925) 113 Neb. 332. That the penalty fixes the 
maj:imum recoverable is recognized by Mullen v. Morris (1895) 43 Neb. 596, 
See also Sexson v, Kelley (1873) 3 Neb. 104; Uldrich v. Gilmore (1892) 
35 Neb. 288. 

K - New York Annotations 

This s ection is in accord with the New York Law, except as ap'oe??r.'j 
belov; in respect of Clause (l-'b) . 

Clause (l-a). Where it appears that a breach of contract will probably 
result in substantial injury, but the circumstances are such that the 
amount of damages will be difficult or impos:^ible of accurate estimar- 
tion or proof, an agreement of the parties to pay a sum as liquidated 
damages will be upheld if it represents a bona fide preestimate which 
is not out of proportion to the probaole loss. 



9426 



9426 



.1^^ 



T his doctrine is illustrate d "b y the folloninp: cases in which -provisions 
for liquidated dpjiiaa,'es were UDheld ; Cotheal v. Talmadge, 9 IT. Y, 551 
(1854); l^agley v. Ped..ie, 16 II. Y. 469 (1857), bond for $3000 given 
Dv defendant a.s liquidated damages to secure faithful performance 'by 
plaintiff's employees; ¥ooster v. Kisch, 26 Hun 61 (1892) aff'd 94 11. Y. 
630, licensee of patented article agreed to pay $1,000 to licensor for 
any refusal to permit inspection of pl^nt; Tode v. Gross, 127 IT. Y. 
480 (1891), covenant by seller of cheese factor^^ not to compete "under 
penalty of $5,000, which is hereby named as stipulated damages" i 
Hacicenheiraer v, Kurtzmann, 235 N. Y. 57 (1923), covenant by seller of 
stock of pianos and business not to use name "Kurtzmann." 

P enalties . "It may be observed, g-.-nerally, that v/henever the damages 
flov/ing from the breach of a contract can be easily established, or the 
damages fixed axe, plainly, disproportionate to the in^"'ury, the stipu*- 
la.ted sum will be treated as a 'penalty'." Gray, J., in Mosler Safe Go. 
Y, Maiden Lane S. D. Co., 199 No Y. 479. 

"It is also true that a stipulation to forfeit a certain sum for the 
breach of any of the terms of the contract canr.ot be separated and a 
part treated as a penalty and the remainder as liquidated damages * * * 
v/here a contract contains a number of covenants of different degrees 
of importance and the loss resulting from the breach of some of them 
\7ill be greatly disproportionate to the sum sought to be fixed as liqui- 
da^ted damages, especially vhere the loss in some cases is readily a„s~ 
certainable, the sura so fixed will be treated as a penalty. The 
strength of the payment is that of its weakest link." Andrews, J., in 
Seidlitz v. Auerbach, 250 II. Y. 167, 172-5 (1920), deposit to secure 
performance of all the covenants of a lease, 

Neither the intention of the parties , nor the words used by them, is 
conclusive, though the courts in construing the provision freojaently 
sta.te that the intention und "ouroose of the pajrties is the decisive 
factor: Cotheal v. Talmadge, 9 H. Y. 551 (1854); Bagley v, Peddie, 16 
II. Y. 469 (1857); Todd v. Gross, 127 II. Y, 480. * * * See also Cit:/ of 
New York v. Brooklyn & M. Fer:-y Go,, 238 N. Y, 52 (1924), pointing out 
that in case of doubt the tendency of the courts was to construe the 
provision as a penalty and not as liquidated damages. 

Clause (l-b) . The New York law is apparently contra. The agreement is 
almost alwa^^s interpreted after the injur^r has occurrred, and the court 
is -undoubtedly influenced by what has hap'oened. It is us-aally st-pted, 
however, that the agree-ment is to be interpreted as of its date, not as 
of its breach: Dunn v. Morgenthau, 76 N. Y. S. 827 (1902), ai'f'd 175 . 
N. Y. 518; Seidlitz V. Auerbach, 230 N. Y, 167, 172-175 (192^); 
Hackenrneier v. Kurtzmann, 235 T, Y, 57 (1923), affirming 198 J^p, Div, 
691, 192 N. Y. S. 181, ^r^here the point was expressly decided. Plaintiff 
recovered $50,000 stipulated damages, :iot"fithst ending evidence that the 
breach caused no substantial injury. This case is critically noted 
(1922) 7 Cornell L. Q,uart. 358. See aJso Frick Co. v. Rubel Corp., 
62 P. (2d) 765 (C.C.A. 2d, 1933), 

Subsection (2 ). Is in accord with the New York law. It is illustrated 
by the following cases: Lyon v. Clark, 8 N. Y. 148 (1853), recovery on a 
bond to secure the pa;^''ment of money cannot exceed the face of the bond 
with interest; Beers v. Shannon, 73 N. Y. 292 (1878), action on a penal 



bond to secure the discharge of a mortgage, plaintiff must Drove the 
dpnages, and recovery may not exceed the -oenal sum rith interest; 
WinlcemaJi v. W. , 208 App. Eiv. 68, 203 F. Y. S. 63 (1924), to the same 
effect, "bond to secure the payment of money; City of New York v. 
Brooklyn & M. Perry Co., 238 Nc Y. 52 (1924); Guffanti tr. National 
Surety Co., 234 IT. Y. 192 (1922). tmrety "bond; Burston v. Garrett Bldg. 
Corp., 252 N. Y. 2^0 (1929), This result also follov/s from the e:rpress 
provision in C.P.A. sec. IcO. 

A valid ;orovision for liquidated damages may, houever, "be secured hy a 
"bond, and in this case the face of the bond may be recovered without 
proof of actual damages: Cotheal v. Talmadge, 9 v., Y. 551 (1854); 
Bagley v. Pedcie, 16 N. Y. 469 (1857). Cf. City of New York v. Palladinc 
208 IT. Y. 554, "oenal bond, but plaintiff's damages axceed the penalty. 

Equitable relief i s not barred by an agreement for liquidated damages, 
but would be barred by the promisor's election to pay a sura of money 
agreed uioon as an alternative: Phoenix Ins. Co. v. Continental Ins. Co., 
87 N. Y.' 400 (1882); Diamond Match Co. v. Roeber, 106 IT. Y. 473 (1887); 
Zimmerman v, Gerzog, 43 F. Y. S. 339 (1897). 

L " Ohio Annotations 

This section is in accord v.dth the law of Ohio . 

In Do£n V. Eogan (1909), 79 Ohio S. 372, 388, the Court held stating 
the substance of Cl.-^use (l) (a) in some\-^hat more elaborate form as 
follows; II* * * where parties to a contract and in terms provided that 
the damages of the injured party for some particular breach, or for a 
total breach of the contract, shall be a certain sum specified as 
liquidated damages, and it is apparent that damages for such breach 
would be uncertain as to amount and difficult of ^roof and the contract 
trlren as a whole is not so manifestly unreasonable and disproportionate 
as to justify the conclusion that it does not truly express the inten- 
tion of the parties but is consistent v'ith the conclusion that it vras 
their intention that damages in the amount st- ted should flow from such 
breach, it is the o.uty of the courts of la;: to give effect to the plain- 
ly expressed will of the contracting parties. * * *." 

The following cases illustrate the doctrine, as stated in Doan v. Rogan, 
. and sec. .3^0 (l)'("t5) (a); lAackemzie v. Stuber. U929), 119 Ohio S. 5£8; 
Jones V. Stevens (1925) 112 Ohio S. 43; Bramon v. The Ohio Poultry 
Producers Cooperative Ass'n. , (1927), 27 Ohio App. 426; Burley Tobacco 
Growers" Coop. Ass'n., v, Gardner (1924), affirmed 114 Ohio 361 on other 
grounds. 

Clause (2): Miller v. Blockberger (1924), 111 Ohio S. 798; Midwest 
Properties Co. v. Renkel (l93l), 38 Ohio Ap:o. 503. 

M - Rhode Island Annotations 

Subsection (l) . For a c~se in accord 1th this subsection see Bradstreet 
V, Balcer, 14 R. I. 546 (1884), ^-'hcre defendants agreed to buy a quantity 
of ice from the plaintiff at a certain orice and to pay the same price 

9426 



-19- 

for all ice not taken "by them. The court held th^^t this iDrovision 
ajncjjited to a penalty and v70-a].d not be enforced. For a further case in 
accord v/ith the proposition stated in this subsection, see Darcey v, 
Da.rcey, 29 2c I. 284 (1909), v-here the court construed the terms of the 
contract as providing merely for liquidated damages and not for a 
penalty or forfeiture. This case is a good illustration of Comnent _c. 

For a further case in accord ^ath the section, see Paolilli v. 
Piscitelli, 45 R. I, 354 (1922), where in connection rith a contraxt 
for the sale and purchase of real estate for $6,000, containing a 
provision that either narty who defaulted should "oay the other the 
sum of $200, the court came to the conclusion that the contract was 
not one in the alternative, that the seller could he made to "oerform 
specifically and that the provision v/ith reference to the $200 v/as in 
the nature of a loenalty. The court said that the q^uestion of rrhether 
such a provision is to be regarded as establishing a -oenalty or 
liquidated damages, is to be decided UDon consiueration of the pro- 
visions of the whole agreement, in vie7.r of the circumst'^nces in each 
case. And another case in accord "ith this section, see If/holey Boiler 
Works V, Lewis, 45 E. I. 441 (1924), saying tha^t the question of 
whether a deposit or other payment is to be regarded as a penaJ.ty or 
liquidated damages is to be decided UDon consideration of the provisions 
of the whole agreement, in view of the circumstances of each case. 
The contract provided for a bonus for the delivery of machines in 
advance of a certain date and for a nenalty for the delay after tha^t 
date. The court held that liquidated damages and not a penalty were 
intended, 

N - Texas Anno tactions 

Subsection (1,2 ), In the following cases the -provision for liquidated 
damages was upheld: Tetter v. Hudson, 57 Tex, 604 (1882); Mazav v, 
Conner, 298 S. W, 641 (T.CA, 1927); Talkin v, Anderson, 19 S. W, 
852 (Tex, Sup. 1892); Levy v. Goldsoll, 62 T.CA. 257, 131 S, 7. 420 
(1910), writ of error refused; Carruthers v. Gay, 91 S. ¥, 593 (T.CA, 
1905); Richardson v, Terry, 212 S. ^.T, 523 (T.CA. 1919), Reinhardt 
V. Borders, 184 S, 7/. 791 (T.CA. 1916), writ of error refused; 
Magruder v, Poulton, 257 S. T/. 533 (Comm, App. 1924); Lipscomb v, 
Fuqua, 103 Tex. 585 (l91l); Read v, Gibson & Johnson, 12 S. liir. (2d) 
620 (T, C. a, 1928), writ of error dismissed; Button v. Miller, 11 S. 17, 
(2d) 551 (T.CA. 1928); Pierce v. Peacock M. College, 220 S. W, 191 
(T.CA, 1920), Way v. Brice, 2 S, W, 2d 553 (T,CA. 1928). 

The form of words used is not conclusive: Tetter v, Hudson, 57 Tex. 
504 (1882); Farrar v. Belman, 63 Tex. 175 (1884). 

As to whether the intention of the -oarties i.n controlling see the 
following cases: Eaking v, Scott, 70 Tex, 442, (1888), where no actual 
dajnage accrued from the breach, and damages in this type of transaction 
were capable of definite ascertainment, the intention of the parties 
th^-^t the amount stipulated was to be liquidated dainages controlled. 
Collier v, Betterton, 87 Tex, 440 (1895), holding that if the amo-ont 
of damages naraed is out of proportion to the loss suffered, the -orovision 
will be trea.ted as a penalty; Collins-Decker Co. v. Grumpier, 114 Tex. 

9425 



-^u- 



528 (1925), in answer to certified questions apToroved of the Ericin case 
without reference to the Collier case, a]-thou.?;h the court of several 
appeals cited both in its question. See also, Covrart v. Connally & 
Co., 108 S. W. 973 (ToCA. 1903), and Eilley & Son v. Wise & Hervey, 
160 S, ¥. 985 (T.CAo 1913). 

There is a line of decisions that "base their result on a degree of 
dispaj-ity "bet-veen -^-he dc::;....^.ges sti-oulated and those actually suffered. 
McElvy V. Bell, 6 S. W. (.?d) 300 (T^CAo 1928); Kelsey V. Blackman, 
293 S. ¥. 199 (T.C.A. 1927); Jones v, M^ys, 248 S. ¥. 129 (T.C.A. 1923), 
writ of error dismissed forv'ant of jurisdiction; Mathev/s v, Caldnell, 
258 S, \J, 810 (Gomm, App. 1924). 

Sulisection 1 (l,b) . Texas is contra to this suhsection. 

The contract is to he interpreted a„s of its date, and not of its 
"breach, and if it reasonably apr'eared to the parties that the actual 
damages would be difficult to determine, the stipulation will be up- 
held. EaJrin v. Scott, 70 Tox. 442, (1888); William v. Beasley, 300 
S. ¥« 193 (ToCcA. 1927), writ of error refused, Santa Fe Ry. Co. v. 
Schutz, 37 T.C.A. 14 (1904), writ of error refused. 

It seems that an agreement for liquidated damages, when interpreted 
as of its date, is not changed in character by the fact that after 
breech it apioears that damages are certain in amount or capable of 
proof. Eakin v. Scott, 70 Tex. 442 (1888). 

The sajne rule obtains though it be known that plaintiff did not suffer 
any actual damage at all. Eakin v. Scott, 70 Tex. 442 (1888); IJelson 
v. Richardson, 299 S. W. 304 (T.C.A. 1927), writ of error refused. 
But see Schwarz v. Lee, 287 S. ¥. 519 (T.C«A« 1926), writ of error 
dismissed for want of jurisdiction. 

If the stated sum is found to be a "oenaltyp the actual damages sus- 
tained will be the m.e8sure of recoveryo B^rrard v, Cantrell, 232 S. ¥• 
911 (TeCcA, 1922), reversed on other grounds 240 S. ¥. 533 (Comi.u App. 
1922); Bowder v. Southern R. I. Plow Co., 203 S. ¥. 124 (T.C.A. 1918); 
Atwood V, Fagan, 63 T.CrA> 659 (l91l); First National Bank v. Smith, 
150 S« ¥. 311 (T.C.A. 1913), -■rit of error refused. 

If actual damages exceed the stipulated penalty the full amount of the 
damages may be recovered. In Davis v. V'agner, 237 S. ¥, 612 (T.C.A. 
1922), it was said: "The contract required a check to be ppid up as 
honest ixioney showing good faith. This, therefore, is not subject to be 
contained and treated as liquidated damages by way of the settlement of 
all dama^-es that may inure to appellee by reason of appellant's breach, 
Not so at all. It must be treated as a penalty and stand as a breach 
and security to compensate for damages f.o f-^r a,s it will go toward the 
loss occurring by reason of the cre-'.cL. 

Accord: Hough v. Fink, 141 S. ¥. 147 (".".A. 1911); Kellan v. Hampton, 
58 T.C.A. 484 (l910); Dobbs v. Turner, 70 S. 7. 458 (T.C.A. 1902); 
Palestine Ice, Fuel & Gin Co. v. Connally & Co., 148 S. ¥. 1109 (T.C.A. 
1912), writ of error refused. 



9426 



-21- 



Subsection (2 ). The rule of this subsection is following in Texas 
slid, the danjc?.ges in either a comrcoii law or a hteXv^tovy penal "bond are 
limited to the aiiount of the penal saj:i. G-rp.nd Lodge v, Cleghorn, 20 
T.C.A. 134 (1898). 

- Uisconsin Anxiotat ions 

Subsection (l) . The ITis consin c^ses are in accord with the Restatement . 

The court is not hLund by the nrme given by the parties to their agree-- 
raent. If the sun fixed as dj-'ia^n^^es is excessive or beprs no rersonable 
relief to the probable damages resulting from a breach, it will be 
treated as a penal ty. If, however, the sun fixed does not ap'oear ex- 
cessive, rmd the contract is of such a nature that the damages result- 
ing from a breach are uncertain and difficult to ascertain, the sum 
fixed will be tre-^ted as liquidrted damages: Fritz v. Ifoldenberg, 199 
Wis. 99 (1929); Tekowski Vc Staclima, 176 "Jis. 154 (1922); Sheffield- 
King Hilling Co, v„ Jacobs, 170 Wis. 339 (l920); Keachie v. Starkweather 
Drai-.iage District, 168 Wis. 389 (1919); Giant Marble Co. v. Marshall 
& Ilsley Bank, IGG Wis. 547 (1913); Studebrker Corp. v. Gollmar, 159 
Wis. 579 (1915); La^is v. LaCrosse Hosp, JL^s'n., 121 Wis. 579 (1904); 
Madison v. Am. Sanitary Eng. Co., 118 Wis. 480 (1903); J. G-. Wagner Co. 
Y. Ca^jker, 113 Wis. 532 (1902); Seiman v. Bieman, 108 Wis. 365 (iGOO), 

Where not in conflict with the general effect of its terms, or the 
rules of la.w concerning penalties, and liquidated damages, the v'ording 
of the contract will be given effect: Elmor Realty Co. v. Genz (Wis.) 
241 N. W, 632 (1932). 

A provision in a contra^ct of employment, where the damages to which the 
employer might be subjected by the employee's breach were uncertain, 
that the employer might retain 15 days' wages for a breach of the 
contro,ct was held to be a provision for liquidated dajnages. Walsh v. 
Fisher, 102 Wis. 172 (1899). 

Subsection (2) . The law of Wisconsin is in accord with the Restatement. 

This matter is governed by Wisconsin Statute, Section 270,61. 

" Damages in actions on bonds, etc. In all actions brought for the 
breach of the conditions of a bond or to recover a penalty for non- 
performance of any covenant or agreement if the plaintiff recover his 
damages shall be assessed and judgment entered for the ajno-'mt thereof, 
and enforced as in other actions upon contract. No such judgment shall 
concrade any claim upon such bond, covenant or agreement not embraceo. 
in the pleadings or by a discharge of the penal sum binding the amount 
of damages recovered thereby. This section does not apply to actions 
regulated by chapter 19. 

Chapter 19 referred to in the above striate governs official bonds. 



9426 



"The provisions of this statute, the amount of a bond cannot be re- 
covered '-'here the daiiaa^es are less -chan the "oen?l sui'n, but jud.£jneiit 
for the actunl damages onl^^ is entered-^ ¥liereatt Vo Ellis, 103 
Wis. 348 (1899); Heidtke v. Kraus, 97 Wis. 118 (1897)." 

Where the amount of damages exceeds the -oenalty of the bond, judgment 
may be recovered for the amount of the -oenal sum v/ith interest; 
Whereatfcv. Ellis, 103 Wis. 348 (1899), 



9426 



-23- 
V. FEDEBAL JUP .IS DICTION 

The earlier federal decisions followed the English courts in their 
treatment of the subject of liquidated dama<^es and penalties and, in "brief, 
took the position that in a contract involving a provision for the payment 
of damages in case of a breach the sum named therein, even though e-Dpressly 
stated to be liquidated damages, would be held to be a penalty if the s-can 
stipulated war unreasonable, or unjust, or oppressive, or extravagant, or 
disproportion; :.:e to the actual damages. 

Tayloe v. Sandiford, 7 Wheat. 13, 5 L. ed. 334; Spencer v. Tilden, 
5 Cowen, 151; Noyes v. Phillips, 60 N.Y. 411; Gay Mfg. Co. v. 
Cajnp, 13 CCA. 137, 25 U.S. App. 134, 65 Ted. 794, 15 CCA. 226, 
25 U.S. APP. 376, 68 Eed. 67; Ward v. Hudson River Bldg. Co., 125 
H.Y. 230, 26 II. E. 256; L Sedgw. Damages, 8th ed. pp. 358, 585-586; 
Colwell V. Lawrence, 38 N.Y. 74; Pecks ill, S.C & LI.R. Co. v. 
Peekskill, 21 App. Div. 94, 47 N.Y. Supp. 305; 1 Pom. Eq. Jur. 2d 
ed. sec. 440; David v. United States, 17 Ct. Cl. 201; Watts v. 
Gamers, 115 U.S. 353, 29 L. ed. 405, 6 Sup. Ct. Rep. 91; Majoie 
Demages, 5th ed. 1894, p. 148; Charleston Eruit Co. v. Bond, 26 
Fed. 18. 

If the intent was at all doubtfixL, the tendency of the courts was in 
favor of the interpretation which made the sum 8. penalty. 

I Pom. Eq. Jul'. 2d ed. sec. 440; Harris v. iviiller, 6 Sawy. 319, 

II Eed. 118; Dimech v. Corlett, 12 Moore, P.CC 199; Jones v. 
Green, 3 Younge & J. 304; Green v. Price, 13 Mees. & W. 701, 16 
Uees & ¥. 346; Betts v. Burch, 4 Hurlst. <S: IT. 511; Clashing v. 
Drew, 97 Mass. 445; Wall is v. Carpenter, 13 Allen 19; Lynde v, 
Thompson, 2 Allen, 456; Streeper v, Williams, 48 Pa. 450. 

Beginning v/ith the case Sun Printing & Publishing Ass'n . v. W m. L. Moore , 
183 U.S. 642, the U. S. Supreme Court emphasized the principle that the in- 
tention of the parties in agreements containing such provisions is to be 
arrived at Qy a proper construction of the agreement made between them and 
reviews the development of liquidated damages and penalty clauses in agree- 
ments from the common law and af ter , the adoption of the statute of 8 & 9 
Wm. III. The argument of the appellant was to the effect that the naming of 
a stip-uJLated sum to be paid for the nonperformance of a covenant is not 
conclusive upon the parties merely in the absence of fraud or mutual mistolce; 
that if the amount is disproportioned to the loss, the court has the right 
and the duty to disregard the particular expressions of the parties ajid to 
consider the amount named merely as a penalty, even though it is specifically 
said to be liquidated damages. The contention made was said to be expressed 
in the reasoning of the opinions in Chicago House-Wrecking Co . v. U.S ., 106 
Fed. 385, and Gay Mfg. Co . v. Camp , 65 Eed. 794, 38 Eed. 67, viz. "Wliere 
actual damages can be assessed from testimony, " the court must disregard an;^-^ 
stipulation fixing the amount, and require proof of the damage sustained. 
The cQ-'jTt by Mr. Justice White stated "we think the asserted doctrine is 
wrong in principle, was unl%:nown to the common law, does not prevail in the 
courts of England at the present time, and it is not sanctioned by decisions 
of this court," and then proceeded to review the history of liquidated and 
penalty sums. After setting forth the situation at common law and the effect 

9426 



-24- 

of stctute 8 & 9 WM. Ill, Chapter 11 stated %hile the courts of the United 
States, in actions at law, unuouotedly possessed the power conferred upon the 
courts at coirjnon law by the statute of 8 dc S Wm. Ill, and v;hile recognition 
of such poY/er was embodied in the judiciary act of 1780, reproduced in sec- 
tion 961 of the Revised Statutes, the duty of such cour-ts to give effect to 
the pl^.lnly expressed will of contracting parties is as imperatively necessary 
nov; as it v/as at common law after the adoption of the English statute, i' 

In referring to some of the adjudications of this court, it stated 
"decisions of this court on the doctrine of liquidated damages and penalties 
lend no support to the contention that parties may not bona fide , in a case 
where the damages are of uncertain nature, estimate and agree upon the mee.sure 
of dai.iages which may be sustained from the breach of an agreement. On the 
contrary, this court has constantly maintained the principle that the inten.- 
tion of the parties is to be arrived at by a proper construction of the 
agreement made betv/een them, and that whether a particular stipulation made 
to po.y a sum of money is to be treated as a penalty, or as an agreec". ascerain- 
ment of damages, is to be determined by the contrPvCt, fairly construed, it 
being the duty of the court a.lways, v/here the damages are uncertain encL have 
been liquidated ''oy an agreement, to enforce the contract. " Then follows a 
reviev.c of several decided cases in England, the court stating: "The counts 
in England as already intimated, constantly maintain the rigiit of individuals, 
when contracting with each other, to estima.te tne value of propert;/ or other- 
wise determine the quantum of damages for a. breach of an agreement where the 
damage is of -oncertain nature." (Citing I rvin g v. Manning , (1647) 1 H.L.Ca.s. 
■287,307,308; Ranger v. Great Uestern R. Co ., (1854) 5 H.L. Cas. 72,94,104, 118; 
Dimech v. Corlett (1858) 12 Moore, P.C.C 199,229; Elohinstone v. Mongland 
Iron (S: Coal Co . (1886) L.R. 11 App. Cas. 332, 34'5, 546; Price v. G-reen (1847) 
16 Mees. & TJ. 346, 354. 

The court then went on to refer to the character of the stroulations 
under consideration each rendering it unnecessaxy to review in detail the de- 
cisions of state courts and while suggesting much contrariness of opinion on 
some phases of the doctrine, proceeded to distinguish the state cases argued 
in support of the appellant 's contention and similarly concluded that "It may, 
we thinl:, fairly be stated that when a claimed dispraportion has been asserted 
in auctions at law, it has usually been of excessive disproportion betv/een the 
stipulated sum and the possible damage resulting from a trivial breach ap- 
parent on the face of the contract, and tne question of disproportion ha,s been 
simply an element entering into the consideration of the question of v/hat v.-as 
the intent of the parties v/hether bona fide to fix the damatges or to stipulate 
the payment of an arbitrary s^ai:i as a penalty, by way of security. " : 

The emphasis on construction of intention is again shown in U.S. v. 
Be thlehem Steel Co. , 205 U.S. 105 where, in an action on a contract with the 
government for the construction of certain disappearing gun carriavges, in 
whicn contract there was a clause providing for a deduction of $35 from the 
purchase price for each day's dela.y in delivery, the court by Mr. Justice 
Peckham, at p. 119, stated: "There has, in almost unnumerable instances, 
been a question as to the meaning of language used in that part of a contract 
which related to the pa-^nent of datmages for its nonfulf ilment, whether the 
provision therein made was one for liq;aidated damages or whether it meant a 
penalty simply, the damages to be proved up to the amount of the penalty. 

9426 



-25- 

This contract might "be coriGidered as "being one of that class where a dou"bt 
might "be claimed, if nothing "but the contract were examined. The co'^ort at 
one time seemed to be quite strong in their vie\7s and would scarcely admit 
that there ever was a valid contract providing for liquidated dR,mc^'es. Their 
tendency was to construe the language as a penal tj'^, so that nothing "but the 
actual damages sustained by the party aggrieved could "be recovered. Subse- 
quently the courts became more tolerant of such provisions, and have nov/ 
become strongly inclined to allow parties to malce their own contracts, and to 
carry out their intentions, even when it v/ould result in the recover;;- of an 
amount stated as liquidated damages, upon proof of the violation of the 
contract, and without proof of the damages actualljr sustained. This \7hole 
subject is reviewed in Sun Printing & Pub. Ass'n v. Moore , 183 U.S. 64-2, 559, 
45 L. ed. 366,380, 22 Sup. Ct. Rep. 240, where a large number of authorities 
upon this subject are referred to. The principle decided in that case is 
much lilce the contention of the government herein. The question alwa^'s is, 
What did the parties intend by the language used? When such intention is 
ascertained it is ordinarily the duty of the court to carry it out." 

In deciding that it was the intention of the parties to that contract 
that the amount specified should be rega,rded as liquidated damages and not 
technically as a penalty the court took the occasion to state that "this view 
is also strengthened when we recognize the great difficulty of proving damage 
in a case like this, regard being had to all the circumstances heretofore 
referred to" and further, "the circumstances were such that it v/ould be almost 
necessarily impossible to shov; what damages (if any) might or naturally would 
result from a failure to fulfil the contract" and again "the amount is not so 
extraordinarily disproportionate to the damage which might result from the 
failure to deliver the carriages as to show that the parjbies must have intended 
a penalty, and could not have meant liquidated damages." 

In advancing the concept of the freedom of contracts and in la^-ing stress 
upon construing the intention of the parties in adjusting in advance the 
settlement of breaches of contracts by liquidated damage provisions the Supreme 
Court of the United States had this to say in the case of Wise v. U.S. 249 
U.S, 361, 

"The subject of the interpretation of provisions for liquidated 
damages in contracts, as contradistinguished from such as provide 
for penalties, was elaborately and comprehensively considered 
by this court in Sun Printing & Pub, As s'n v. Moore , 183 U.S. 642, 
46 L. Ed. 366, 22 Sup. Ct. Rep. 240, applied in United States v. 
Bethlehem Steel Co . , 205 U.S. 105, 51 L. ed. 731, 27 Sup. Ct. Rep. 
450, and the result of the modern decisions was determined to be 
that in such cases courts will endeavor, by a construction of the 
agreement Y»?hich the parties have made, to ascertain what their 
intention was when they inserted such a stipulation for payment of 
a designated sum, or upon a designated basis, for a breach of a 
covenant of their contract, precisely as they seek for the inten- 
tion of the parties in other respects. Then that intention is 
clearly'- ascertainable from the writing, effect v/ill be given to 
the provision, as freely as to any other, where the damages are 
uncertain in nature or amount, or are difficult of ascertainment, 
or where the amount stipulated for is not as extravagant, or 
disproportionate to the amount of property loss, as to show that 

9425 



compensation was not the object aimed at, or as to imply fraud, 
mistake, circumvention, or oppression. There is no sound reason 
v/hy persons competent and free to contract may not agree upon 
this subject as fully as upon any other, or why their agreement, 
T/hen fairly and under standingly entered into with a view to just 
compensation for the anticipated loss, should not be enforced. 

"There ; .■."e no doubt, decided cases which tend to support the 
contention advanced by appellant, but these decisions were, for 
the most part, rendered at a time v;hen couTts were disposed to 
look uoon such provisions in contracts with disfavor, and to 
construe them strictly, if not astutely, in order that damages, 
even though termed liquidated, might be treated as penalties, so 
that only such loss as co-old be 6.efinitely proved could be recover- 
ed. The later rule, however, is to look with candor if not with 
favor, upon such provisions in contracts when deliberately entered 
into between parties who have equality of opportunity for under- 
standing and insisting upon their rights, as promoting prompt per-» 
formciice of contracts, and beca.use adjusting in advance, and 
amicably, matters the settlement of v/hich through courts would 
often involve difficulty, uncertainty, delay and expense. 

"The parties to the contract, with full understanding of the results 
of delay, and before differences or interested views had arisen 
between them, were much more competent to justly determine what the 
amount of damage would be - an amount necessarily largely conjectiir- 
ed and resting in estimate - than a court or jury would be directed 
to a conclusion, as either must be, after the event, by views £.nd 
testimony derived from witnesses who would be unusual to a degree if 
their conclusions were not, in a measure, colored and partisan." 

That the amount stipulated in a liquidated damage provision must not be 
so disproportionate to any damage reasonably to be anticipated in the circum- 
stance, was emphasized in the Kothe Case (Kothe, Trustee, v. Ta^^or Trust , 
280 U.S. 224). In that case which involved a lease for two yesTs betv/een the 
parties, the ^essee agreed that the mere filing of a petition in boiilrruptcy 
against him should be deemed a breacli and that thereupon the lease should 
terminate, and the lessor become entitled to reenter and also to recover 
damages equal to the full amount of the rent reserved for the remainder of the 
term. In holding the liq.uidated damage aspect unenforceable the cOLijrt by 
Mr. Justice LicReynolds after referring to the Sun Printing Case and the 
Bethlehe m Steel Ca se, stated "But agreements to pay fixed sums plainly \7ithout 
reasonable relation to any probable daiaage which may follow a breach will not 
be enforced. This circumstance tends to negative any notion that the parties 
really meant to provide a measure of compensation - to treat the s-ir.i named 
as estimated and ascertained damages." Referring to U^. v. United En,?;ineer - 
ing Co . , 234 U.S. 236, 241 in declaring the provision an unenforceable 
penalty, the court pointed out that the amount stipulated was disproportionate 
to any dajiiage reasona.bly to be anticipated from the circumstances disclosed, 
and stated, "The parties were consciously undertaking to contract for payment 
to be made out of the assets of a bankrupt estate - not for something which 
the lessee personally would be required to discharge. He, therefore, had 
little, if any, immediate concern with the amount of the claim to be present- 
ed; most probably, that would affect only those entitled to share in the 

9426 



proceeds of property iDeyond his control*" It was felt that the agreement 
tended to defeat the "beneficent design of the Bankruiotcy Act and tho.t the 
real design of the challenged 'orovision vas to insure to the lessor preferen- 
tial treatment in the event of "bankruptcy. 

At this point perha'Ds reference should "be made to a fev/ cases indicat- 
ing the treatment of this subject in the courts "below and serving to 
emohasize the principles hereina"bove enumerated: 

Belstrat Hotel Cor-p , v» Sarnoffj 37 Fo (2d) 16 (in the Second Circuit) ♦ 
In an capoeal from the District Coijirt for the Second District of New York this 
court, citing the Sun Printing Case , construed the deposit provisions of the 
lease in question as indicating that the parties did not regard the deposit 
money as liquidated damages* "The parties, intended, by the terns of the 
lease, the.t the deioosit should be as security for actufil damages." 

In re G-elino's InC c 43 F» (2d) 833: In this caie, under a contract to 
install a preferred cable cash system in bankrupt's store, the bankrupt was 
required to pay instalments over a period of 10 years© The agreement provided 
that if duri^r-r the term bankruptcy proceedings were commenced, all ""anpaid 
instalments L-iould without notice be at once precipitated and become due and 
payable 5 and the owner v:ould be entitled to retake possession and remove the 
system and that the user's interest therein should be valued at 20 per cent 
of the amount of pa^nnents for the unejrpired terma The claimant retook pos- 
session of the system and presented a claim for unaccrued instalments less 
the discount of 20 per cento The court in disallowing the claim as a penalty 
pointed out, at pages 833 and 834: 

"A provision in a contract as to the sum to be paid in case of 
breach vdll, if it is a provision of liquidated damages, be en- 
forced according to its terms. If it is a provision for a 
penality, the recovery will be limited to the actual damages 
sustained. Illinois Suret;, Co . v. U,^. (C.C.A.) 229 ?<» 527. 
Vlhether a sum named in a contract to be paid by a party in de- 
fault on its breach is to be considered liquidated damages or 
merely a penalty, is one of the most perplexing and difficult 
inquiries encountered in the construction of written agreements. 
Wilson v. Baltimore , 33 Md, 213, 34 A. 774, 55 Am. St. Rep. 339. 
The q^ueation is one to be determined by the contract fairly 
construed. Sun Printing etc . v. Moore , 183 U.S. 642, 22 S. 
Ct» 240, 46 L. ed. 366. Pertinent are the circumstances bear- 
ing uoon the -ovover construction of and consideration of the 
instrument as a whole, the situation of the -oarties, the sub- 
ject-matter of the contract, the magnitude of the stipulated 
siijn as compared with the value of the subject-ma.tter, and in 
proportion to the orobable conseouence of the breach 17 C.J. 
936. It is commonly said that ^'here it is doubtf-oJL whether 
the orovision should be deemed for a "oenalty or for liquidated 
damages, the courts incline to regard it as for a penalty. 
London v c Shelby Coi.mty Taxing Dist., 104 U.S. 771 26 L. ed. 
923; Tayloe v. Sandiford, 7 ^Theat. 13, 5 L. ed. 384; 17 C.J.937# 

"\/here the sum named in a contract to be oaid on a breach is 
wholly disproportionate to the actual damages sustained, the 

9426 



-PR- 



courts vrill deem the r)o.rties to have intended to stiDiilate for 
a Mere penalty to secure "oerformance , and not for a liquidation 
of the damages. In re Liberty Doll Coo (D.Co) 242 F»695; Smith 
v» Copiah County (Do Co) 239 Fo 425 « The same situation results 
v/here it is obvious that the principle of compensation has been 
disregarded© Decker v. Pierce, 191 Mich» 64, 157 UoW, 384; 
17 C, Jo 945o" 

Larabee Flour Mills Coe v. Cari^nano , 49 F, (2d) 151 ( CCA. -10th Cir.), 
This r/a-s an action at law for breach of a contra.ct to b-uy flour* The contraxt 
provided for liquidated damages in case of the bujz-ers failure to furnish 
shipping instructions on the basis of 1/3^ per day per barrel of flour from 
date of sale to date of termination as expense of carrying, plus 20^;^ ner 
barrel a.s cost of selling, and plus or minus the ajnount of the difference 
betv/een the market value of wheat on the date of sale, a.nd the date of 
termination, times 4o6 times the number of barrels of flour. The trial court 
submitted to the jury the question of whether the liquidated damage provision 
was ill violation of an Lhio statute ivhich provides tha.t "where an obligation 
of any kind apijears to create a right to unconscionable and grossly oppres- 
sive da.raages, contrary to substantial justice, no more than reasonable 
damages can be recoveredo On the appeal defendants sought to justify the 
submission of this question under sections 5068 and 5069, CC.iS. 1921, which 
prohibit stipiilations as to damages, exce-ot "when, from the nature of the 
case, it would be impracticable and extremely difficult to fix the a.ctual 
damages" This court regarded such submission as error on the ground that 
it T/as sa.tisfied that the record brought the case within the precise words 
of the statute - that it was "impracticable and extremely difficult to 
fix the actual damage," It stated that similar provision in contracts for 
the manufacture and sale of flour had been many times sustained citing 
Yerxa, Andrew & Thurston v, Randazzo Macaroni Mfg* Co., 315 Mo. 927; 
Sheffield--Xing Milling Co, v. Jacobs, 170 T7is. 589; Sheffield-King Milling 
Co, V, Domestic Science Bailing Co., 95 Ohio St, 180; International Milling 
Co. V, Rierson, et al (S.Do), 225 N«T7. 218; New Prague Flouring Mill Co. 
V. Heuett Grain & Provision Co., 226 Mich, 35; H.H. King Flour Mills Co. 
V. Bay City Baking Co., 24 Micho 79. 

The court then went on to state, "Farthermore, there is a distinct 
trend toward a relaxation of the rules, as to liquidated damages. Courts 
have always abhorred penalties, and have looked closely to see that pen- 
alties v/ere not masquerading as liquidated damages. And if the stipula.tion 
is in fact a penalty - if it bears no fair relation to the damage contem- 
plated - it will not be enforced, no matter what it may be called. And if 
there is available an Q.ccvTate and readily ascertainable method of fixing 
the damages, courts will assess the damages accordingly. In the com- 
plexities of modern business, breaches of contract involve more incidental 
but real damage than when business was less complicated; in later years, 
business men and associations of business men have been more desirous of 
contracting as to damage j in order that their liability may be known rather 
than unknov/n quantity o Responding to these changing conditions in the 
business world, the courts have been much less reluctant than formerly to 
enforce provisions for liquidated damages, 

Boston Wire and Metal Company v. C^. , 55 F, (2d) 125 (CC.A - 
4th Cir.) - thj Boston Com;oany entered into written contract with the 

9426 



-29- 



United States, through the shi"o-oing Board, for the "ourchase of five steera- 
shios for $175,000. The "buyer was to remove the ster.mships on or before 
a date e::oired, and scrao and disnantle the same on or before another ex- 
pired date to prevent their further use and operation as steamships* The 
agreement recited that if the buyer should fail to do any of the things as 
provided, the seller v7ould be greatly dam.8.ged and that nuch damages co-old 
not be ascertained with any degree of definiteness or certainty; that the 
buyer vTould oay, as liquidated damages and not as a penal t", $100 for each 
vessel not scrapped or destroyed for each ds,y the buyer was in defau].t» Of 
tv;o questions of iraoortance , raised 'by the appeal one was whether the aiiount 
fixed to be yaid in the event of a breach was a penalty or liquidated 
damages* Tlie court held that the actual damrge was im"oossible of arxer- 
tainmont and in upholding this provision cited Mr. Justice McReynolds in 
Kothe V* E.G. Taylor Trust, 280 U.So 224, U.S. v« United Engineering Co., 
234 U,S« 236, 241, and the Sun Printing Case, 183 U. S. 642, The Court 
referred to its position in D etroit Company v* Wyat t Co , , 1 F. (2d) 788,789; 
"The contract is embraced with a strong presuinr)tion that the officers and 
counsel of these large cor'oorations knew the meaning of the langua^ge they 
used and intended v.-hat they said * * * the courts will disregard the 
specified intention of the T)arties to orovide for such liquidated dam.a^es 
onlj'- T/rfien the "orinciTole of com.pensation is evidently destroyed*" 

■American Surety Co «» v. Hutchin son, 63 P* (2d) 537 (C.C.A» 5th Cir.)~ 
In this action to recover on a surety company bond g^aaranteeing compliance 
with the terns of a lease, the appellant contended that the bond was for a 
penalty. The court, at page 538, stated "It is immaterial whether a bond 
in terns prov .des for a penalty or liquidated damages* The court will 
construe the instrument according to the intent of the parties* Conceding 
that, in order to do justice, courts usually construe bonds such as here 
involved as -troviding for a penalty, nevertheless the parties to a contract 
may stipulate for liquidated damages instead of a penalty. If the amount is 
reasonable and it is evident that proof of actual damages would be difficult, 
the contract will be enforced*" 

Frick Company v. Rubel Corp, , 62 P (2d) 765, (C.CA. 2d Cir.)* In 
this ca.se the plaintiff was a manufacturer of ice mailing machinery v;hich it 
installed in the defendant's premises pursuant to contract. Tlie action was 
brought to recover the contract price and liquidated damages for the de- 
fendant's delay's in accepting delivery of the apparatus* The coioi't con- 
sidered the validity of the liquidated damages cla.use and concluded, "The 
proof, and even offer of proof, did not show that at the time when the 
contract was made - which is the relevant moment - the clause was not 
genuinely intended as a liquidation of losses otherwise difficult of 
appraisal*" 

The trial judge had refused to allow the defendant to nrove that the 
liquidated daj.iages v/ere v^holly disproportionate to the act"aal losses 
suffered b3'- the "olaintiff because of the dela^y. Defendant then offered to 
prove that the a.ctual loss vrhich \7as made necessary, the cost entailed 'by 
the alleged delay, was infinitesmally small as compared with the penalty, 
and the judge refused to allow such proof* On these points this court 
stated: 

"It \7ill be observed that the defendant did not offer to prove 

9426 



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disparitji" between the amoiint fixed as liquidated d.ama.ges and the 
losses which were in conteTai3lB,tion when the contract was signed. 
Unless oroof of the actti^il losses was -.'.laterial to that issue, 
the offer ¥/as of irrelevant evidence, and no question arose 
v/hether gross disproportion between liquidated darna^^es and 
losses in contem'olation would he evidence that the clause wa,s 
"oonal. That question itself turns on how far some of the 
lang-aa.ge in Sun Printing & Puhl. Coo v, Moore, 183 U, S. 
642, 672-574, is to be read literally, and how far it has 
'oeen modified by UrS«. V. Bethlehelm Steel Co., 204 U.S. 103, 
U.S. V. United Engineering & Const. Co., 235 U.S. 236, and 
Wise V, U.So, 249 U.S. 361, 365, and by the decision in 
Kothe V. R.C. Taylor Trust Co., 280 U.S. 224. 



"My brothers thini:, though I do not, that evidence as to the 
actual loss v/as not material to the issue of the losses in 
contem-olation, though we all agree that it is the comToarison 
of the liquidated damages vdth the last, not the first, which 
can raise the "^oint at all. On their vie"/-, the offer did 
not therefore raise the question, and it follows that judg- 
ment was right, and that the judgFient on the second and 
third causes of axtion mu.st also be affirmed." 



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VI . LIQUIDA TED DAlvIAGE S UILD ER T HE HATIQ-JAL IlIDUSTRIAL 

lit LCQVERY ACT 

Excopt as inciicp.tive of an effective wGs.pon in the hands of certain Code 
Authorities or other dcnonina-tod adrainistrative a:^enciesj the experience vdth 
liquidated damage provisions in the codes of fair conroetition under the adr.iin- 
istra.tion of the N-.I,H»A. is of little valiie in the treatment of this subject. 
The polic;;- of the II. H. A. v/as as stated in the HRA Office Manual 11-1526, et. 
seq« It was thought that this policy was affectuated and v/ould effectuate the 
hIHA "by administrative approval of agreenents entered into "by those industry 
nenhers who desire to do so, en"bodying clauses liquidating damages for viola- 
tions of v/age, hour, and other lahor provisions, and provisions involving tran- 
sactions incidental and noninci dental, respectively, to sales of industry 
products. In retrosTDOctj one is inclined to doubt the validity of such proce- 
dure (vdthout any desire to level any criticism whatsoever). The fact that 
such agreements were voluntary did not thv/art the applicability of the princi- 
ples herein enumerated. And, in the light of such principles, there ap'oea.r 
certain obvious difficulties - equally applicable to voluntary/ industry a^gree- 
ments covering labor conditions cJid fair trade practices. 

Dealing with labor conditions - wages and hours - the breach of a. provisic 
in such agreements pursuant to which the signatories agree to ;oay not less thar 
a s-oecified minimum wage involves, for the purposes of this discussion, two 
happenings. There is first of all, the tp.ngible occurrence of the payment of 
a lesser wa^;. which is obviously capable of computation and beyond actua.l resti 
tution to the employees, without necessary predetermination. To the extent 
that it might serve as the ba.sis for a cause of action as between employer and 
employee, the liq^uidated amouot is merely reyietitious of the a^mount recoverable 
by the employee; to the extent that it constitutes a breach of the agreement as 
among signatories the pa.yment to them would be totally unrelated to the damages 
sustained and hence a "oenalty. The payment td them could only be justified on 
a showing of a.ctuail damages and a reasonable relationship thereto of the ai.iount 
agreed upon. Pnen, there is also the intangible happening - the payment of a 
lesser v/age, permitting a lo.ver price v/ith the consequent unfair competition, 
loss of businessj diversion of trade, etc. The first question that v/onld arise 
in connection with this subject woul.d be the m.atter of damages. Are they copa- 
ble of ;orooi7 If not, the subject to be liquidated would seem to be absent* 
But beyond this, v/hat yard stick is available under such circumstances in a 
nation-\7ide industry to form a basis of computation pursuant to the requireneni 
of a. reasonable relationship betvreen the liquidated amount and the probable 
damage? ITliile there are certain industries, the majiufacturers of v/hose prodtr 
ucts confine themselves to so-called marketing a-reas and in which the diversior 
of tra^de could undoubtedly'' flow from the intrusion of an outsider paying less 
than a minimum wage in violation of an agreement, hov; could it be shovm that 
this elem.ent alone was responsible for such hap;oenings v/ith b. consequent 
damage to the members in the marlreting a.rea? 

It seems to me that these weaknesses apply v/ith eqiial force to maximum 
hour limitation provisions, and with greater force v/hen attempting to fix a 
reasonable ariount as liquidated dajiiages for breaches of provision relati:ig to 
child labor and the so-called consumer benefit trade pra,ctices - false ad.ver- 
tising, etc., and even with relation to those competitive practices set up 
prir.arily for the benefit of the signatories - price-filing, uniform discovuits 
commercial bribery, etc. - it is difficult to escape the conclusion that the 

9426 



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rmoimts agreed upon as liqiiidated danagos v/ould not literally "be penalties 
to insiu-e compliance. 

T?i.ere uere fifteen approved codes containing liquidated damage provisions. 
It ¥0-uld seen fro;n a study which was i.iado of the operation of these Codes that 
the assessing of d-^inages 7jursua.nt to the agreements v/as quite effective in 
procuring cor.ipliance dxiA. facilitating administration* It is to be noted, 
hoxvever, that the agreements, or any payments required thereunder, have never- 
so far as is Imoun - "been tested in the courts, and consequently it v;oLild be 
prooably a mistake to place nuck v/eight or in'oortance to such measures. It 
is said that $10 per ton, the liquidated damage figure in the Iron and Steel 
Code v/as an arbitrary figure with the basis of con-?utation not being shown 
anyi.vhere as reasonably relating to the dpjnages sustained, the theory being that 
for most products the figure was sufficiently prohibitive to induce compli^mce, 
and in the Motor Vehicle Retailing Code the amounts were levied v/ithin the 
maxinun prescribed but in rola.tion to the "heinousness" of the violation. In 
some of these codes the liquidated damage provisions never becaine operative. 

Incidentrl to the question of the validity of such -orovisions in the codes 
in the first instance, the "oronulgation of an additional rem.edy not provided 
for in the statute (NISA) even though under the guise of voluntary action, was 
of at least doubtful sanction in law. ( See' P ro/:rcssive Tiners, etc. L. Union 
No. 109 V. Peabody CCo .. 7 F. Sump. 340 345.) It is a general rule in the 
construction of statutes under the doctrine of exoressio unius est exclusio 
alteriiis that where a nev/ right is created or a new duty imposed by statute, 
if a remedy be given by the same statute for its violation or nonperformance, 
the remedy given is exclusive. 1 C.J. 988-890. (See Pcige v. New York Realty 
Co., 196 P. 871, 59 Mont. 305, citing Lewis- Sutherland on Statutory Construc- 
tion (2d Sd.), Section 491; see also G-lobe Newspa-oer Co » v. Walker , 210 U.S. 
356, 52 L. ed. 1096; and Standard Oil Co. (ind. ) v. U. S. et al. , 283 U.S. 231.) 
In this connection there is attached a copy of the opinion of the Attorney'' 
General of the United States on the question whether the Federal Alcohol Con- 
trol Adj'unistration had mov/er tc commromise civil and criminal liabilit,]' for 
violations of codes of fair competition for the various alcoholic bevei-age in- 
dustries* A fev.r lines are quoted therefrom "* * * Penalties are purely the 
creatui'-es of the legislature. They cannot be created by judicial implication, 
but must be e:rpressly immosed by statute, etc. * * * The National Industrial 
Recover;/ Act does not provide for civil penalties. * * * It is also urged by 
the Acjiiinistration that payment of the civil menalties to be assessed by the 
Administration would be entirely voluntary. Hov:ever, criminal prosecution or 
permit revocation might, and probably v/ould, result from a refusal to pay the 
civil T^enaltj^, aJid it is difficult to reach the conclusion that such payments 
would be held to be entirely voluntary.* * *" 

There is therefore need at least for an enabling statute providing for 
such a means of enforcement, and the question that imneo-iately presents itself 
is ho\7 faJT ca.i and need the statute go in this respect. 

ASSO CIATION PENALTIES - DAIvIAGSS IN ANTI-TRUST SUITS 

Little supmort can be found for the pa^Tient of stimulated sums as liquid- 
ated damages in voluntary agreements in the somewha.t general line of authority 
affirming the pov/er of associations or groups to maintain their purposes ''oj 
the a.ssessment of fines or menalties; these appear to constitute separate 

9426 



-33- 

rules of sulDstance* Even in these cases the reasonableness of the surn stipu- 
lated to "be paid seems to have "been an important consideration. (See U. S > 
V. Fur Dressers^ & Ivx ly ers As s'n., 5 F. (2d) 869; State v. Carondolet Planinp; 
Mill Co . , 309 Ko, 353; }:osser t v. Dhuy , 221 N.Y. 342; and Ooh.i & Roth Elec . 
Co . V. Br i c kl aye r s Unio n, 92 Conn. 161.) 

In aJiti-trust cases the mention "by the courts of the presence or absence 
of the provisions in the combination agreement for the payment of a. specified 
sum for a "breach thereof as a. ciroumstance in determining whether the com"bina- 
tion offends against the ojiti- trust statutes v/ould apoear to raise some ques- 
tion as to whether such provisions might not affect the validity of the com- 
bination so far as the anti-trust la.ws are concerned. But this question is 
merely academic because of one of our original assumptions. (See American 
Linseed Oil Co. Case , 262 U.S. 371, and the I:Ia^^le Flooring Mfrs. Ass'n Case , 
268 U.S. 563.) 

Incidentally, in connection v/ith the damage suits arising out of a "breach 
under the Anti-trust Laws, sections, 15, Title 15, U.S. C.A. , which provides 
"AnjA person who shall be injured in his business or property by reason of any- 
thing forbidden in the aiiti-trust laws may sue therefore* * *and recover three- 
fold the da.mages by him sustained* * *", recovery cannot be had unless it is 
shown that as a result of the defendant's acts damages in some amount suscept- 
ible of e^cpression in figures resulted, and the damages must be proved by 
facts from which their existence is logically and legally inferrable, and can- 
not be supplied by conjecture. (Sec Keo gh v. Chicago & N.W.R.Co. , 260 U.S. 
156,) In Ea£- '.m an Co . v. Southern Photo C o., 273 U. S. 359, which was a suit 
to recover daiiages for a violation of the Sherman Act Mr. Justice Sanford in 
delivering the opinion of the court, quoted approvingly from the opinion of 
the court of appeals below, which stated: 

"*The plaintiff has an established business, and the future profits 
could be shown by past exoerience. It was "permissible to arrive at 
net profits by deducting from the gross profits of an earlier period 
an estimated ejrpense of do? ng business^ D amages are not rendered uii' - 
certain becaxise they cannot be calculated with ab s olute exactness. 
It is. suffic ie nt if a reasonable basis of computation is afforded , 
althou'^-h the result b e orxly aoproxima.te, ' This, we think, was a 
correct statement of the applicable rules of law." 

And f-uxther on: 

"The jury v/as instructed, in effect, that the amount of the damages 
could not be determined by mere speculation or guess, but must be 
based on evidence furnishing data from \".'hich the axiount- of the prob- 
able loss could be ascertained as a matter of reasonable inference*" 



9426 



-7)4- 



VII. LICUIDATB D JAi'UGgS II I COQPIJBATI VE ^^lAJ^KS^IiTCr AaRSENENTS 

The eiroerience vdth the coooerative marketing associations caJi perhaps 
be cited to indicate some direction. 

A coooerrtive a.ssociation inherently is a mutual enterprise. The 
merahers comnonly -out their "oroducts into a comnon mass and dra?/ their ret'JTn 
out of a cor.L-ion fund, after the ejcoenses of the operation have "been met* 
The iTord generally used to describe these joint activities is pooling, v/hich 
connotes the mingling of products of equal grade during a definite period, 
so that the member receives ultimately the average net -nrice obtained by 
the Association in selling the tjroe of product the member delivered. Tne 
purpose of pooling is to im;orove the bargaining "oositi >n of the grov;ers, to 
distribute ;orice fluctuations, TDhysical c'eterioration, and other inevitable 
risks, and losses over the vrhole product, p^nd to expand the market for the 
commodity ''oy controlling the time, place, r nd methods of its sale. Market- 
ing contracts are either of the agency t^roe or of the oiu-chase and sale 
tyoe, and they usually state that the association must accept delivery, 
handle, grade, insure, process, 'oool, and market the products, c^nd ret^urn 
the oroceeds, ninus certain deductions for exoenses and reserves. The 
cooperatives early developed the theory that the members by establishing 
the association Y/ere creating a selling agency, for whose continuing 
operation they should be burdened v/ith an annual cha,rge or a charge at 
least so long as they had -oroduce to market. In the normal course of deal- 
ings, this Ciiarge would be paid out of deductions from the proceeds of 
products marketed for the members, measured by stipula.tions contained in the 
by-laws, association agreement 5 or the m.ember's contract. The maintenance 
clauses in cooT^erative contracts were attacked as "oenalties and were defend- 
ed as assessments for facilities and a,s liquidated damages. In Alfalfa 
Growers of Calif , v, Icardo, 82 Calif. App. 72Z, 256 P. 287 (192?), the 
plaintiff was a coo-oerative membership association organized under the 
California. Cooperative Act, of 1909, The fo'or defendants constituted a 
partnership member of the association© The association sued to recover an 
assessment levied against the nc .ibership. Tiie court held for the 
defendants although the articles of incor-ooration and the by-laws both 
provided that the directors might levy assessments on members in proportion 
to the acreage controlled. The court oointed out that the sta.tute Tuidcr 
which the association was organized gave no soecific authority to levy 
assessments* While admitting a„uthority for the proposition that the power 
to assess might be created 'by contract, the court asserted that in this 
case there was no v/ay to make equitable assessments. Not only v\fere persons 
enga^^-ed in producing, oreserving, packing, or -oreparing for market, etc., 
eligible for membership, but it was a matter of common laiov/ledge that the 
quantity and quality of alfalfa va.ried greatly from acre to acre. 

The first of the devices em^^loyed by cooperatives to hold members to 
their contraLctual obligations v^/as the stipulation for liquidated damages 
(See 15 Cal* L. Rev, 97), These damages, fixed in an amount designed to 
cover both the tangible and the imponderable losses suffered by the 
association if the member defai^lted on his agreement to make delivery, 
have been a feature of the cooperative contracts either in the form of 
maintenance clauses, or otherwise, since comparatively early in the 
cooperative movement. John Hanna, in his book "Law of Coopera.tive Marl-iet- 
ing Associations" states, at Sec. 124, "Today^ the right to liquidate 

9426 



damai;,'es is confined to cooperatives by statute in loractically all 
American jurisdictionse" 

^le relevant -orovisions in the Standard Cooperative Marketing Act (see 
Cooperative i.Iarketing letter from the Federal Trade Commission, 70th 
Congress, 1st Sess., Gen. Doc. ITo. 95, p. 3?6), section 18, paragraph (a) 
are as follov.-s: "The By-lars or the marketing contract may fix, as 
liquidated damages, specific suj-ns to "be paid "by the mem'ber or stocldiolder 
to the association upon the breach by him of any provision of the marketing 
contract regarding the sale or delivery or withholding or products; and may 
further provide that the member will pay all costs, -oremiuiris and bonds, 
expenses and fees, in case any action is brought upon the contract by the 
association; and any such ;orcvisicns shall be valid and enforceable in the 
courts of this State; and such clauses providing for liquidated damages 
shall be enforceable as such and shall not be regarded as penalties." 

Mr» Hanna further states that the cooperp.tive associations vere 
freq^uently successful in recovering liquidated damages even before the 
period of the presient liberal ''.•ooperative marketing actsj and this is 
borne out in such cases as Ex P arte; "Baldwin Cop Producers Corp ., 203 Ala. 
345; IF ashing t on Coopc 7, :: -" £z P p-^j ltry .-'. ss'n, v. Tp^p_r, 122 Uash, 466; 
Bullville Milk Produccis A ss'n v, Armstr ong^ 1V3 lIoY.So 612; Burley Tobacc o 
Society v. Gill a spy , 51 Ind, App, 583; j^nd Ansheim Citrus Fruit Ass'n v. 
Yeoman J 51 Gal. A^xp. 759 o Eut the significant tiling in connection v.dth 
these decisions for the pur'ooses herein, is indicated, for example, in the 
ODinion of James, J., in the la.st case cited herein. The court stated, 
after discussing the concepts of penalties and liquidated damages, at page 
765: 

"The association was organized for the purpose of the better 
handling of citrus fruits through the cooperative and joint 
effort of its membirs. From the nature of the organization 
and the statements of its o-'or-ooses as found in its articles 
and by-laws, it can be fa^x-ly and reasonably inferred that 
by the coo"oeration of its members, mutual advantages would 
accrue to all through greater economy in handling and ship- 
ping a2id the securing of iiiore generous marketing fa,cilitieso 
These r-3 suits would be de-oendent directly u~oon the performance 
''oj the liembers of this agreement to deliver their fruit into 
the hands of the association for the purnoses declared. De- 
fendant sought to show at the trial that the damage w"hich 
would accrue to the association by reason of any of its members 
failing or refusing to market their fruit through the associa- 
tion could be easily and exactly estima.ted, and that such 
da.i.iarje would consist wholly of an approximate amount of over- 
head operating cost. By the line of questioning loursued, it 
was made clear that the association did suffer on actual mone- 
tary loss "oy reason of the failure of the defendant to deliver 
his fruit to the association packing house for the market, as 
he ha,d agreed to do, and in the very nature of the case v^e do 
not think tha.t such denage s'hould be the only damage considered 
to have been suffered ''o}/ the plaintiff . Other elem.ents have 
alreaidy been suggested -> The existence and life of the asso- 
ciation itself depended upon its being furnished fruit to dis- 
'.nose of in the public market . A reduction in the ajiount of 

9426 



-36- 

f rui t so handle d woul d not only tend to increase th e overhend 
cost to the nontrpnsrressin rnemoers, "out, v/e mp.7 ar5"a'"ne, to 
some extent effect the presti f:e an d stan dinjC; of the association 
as a m arketinp; conce rn.^ His ar^^'ui-nent v/ould oe the same, re- 
gardless of the q^Uc-^ntity of fruit 'vhich might have teen handled 
oy the defendant, whether it counosed "but a small fractional 
part or one-half or more of the entire loroduct designed to he 
narketed by the olaintiff agencjT-, Enough has been said, we 
think, to show that the case falls within the class as to which 
the lav; pernylts damages to he liquidated "b^^- contract in advance 
of its occTxrrenceo " 

It is therefore the imique or, at least, s'oecial oosition occupied 
"by the association in theee agreements and the recognition of the economic 
significance in such instances which have aided in the development and 
the availahity of this remedy to suit the needs of these organizations* 

Reverting to the agency vmich is contemplated in relation to voluntary 
industry agr-^3ments, it "becomes at once ap"orrent that there is little 
analogy, and except as a central "bod^'' to serve as a check and otherwise 
administer the agreement in "behalf of all the signatories, liquidated 
damages \70uld bear little relationship to the duties exercised 'hy and the 
expenses incidental to such an agency, 

^ere cooperative associations failed in their efforts to enforce 
liquidated damage -nrovisions in contracts or by-laws, the administrative 
hold-ing was sometimes due to the court's opinion that the damage claiise 
mereljr prescribed a penalty (see 3Dair3/men's Leagrae Cooo« Ass'n. Inc« v# 
Holmes Bros. , 207 AoD, 429, 202 I-I.I«So 683), but more frequently becau.se the 
contract T,a-s considered in restraint of trade. At the present time, so long 
as the liquidated damage stipulations bear some reasonable relationship to 
the damages which might in fact be sustained, the cooperative will have little 
difficulty in obtaining r judgment against the member contract breaJcer for 
the lieuid.ated amoujit, ( Poultr.-y Producers of Central Calif* v. MurDhy , 54 
Gal» App. 450: Calif ornia Bean G-rov.'ers Ass'n. v, Sa.nders , 86 Cal. App. 639; 
Lee V, Clearwater Gro\Jers Ass^n ,. 93 ila. 214; Harrell V. Cane Grov/ers Goo-q . 
Ass'n . 160 G-a. 50; ' ^.:]:rotie^ii Se . jd Growers Exchange V, Hollinger , 238 111. 
Ar)p, 178; Kansas V/he a t Crrowers Ass'n . v. Schulte , 113 Ian. 673; Hart Potato 
G-rov/ers Ass'n . v. C-rainer , 236 Mich. 653. 

Provisions for liquidated damages as well as other enforcement measures, 
are available eoually in resioect to agency a.s to ourchase and sale contracts* 
Notwithstanding the contract clause and the statutes, fhe reasonable relation- 
ship requirement has apparently not been abrogated and the ere sumption in 
favor of the contract clauses can be overcome by showing that the liquidated 
dama.ges are absurdly out of eroportion to any likeljr injury to the associa.tion. 
( Sun-Maid Ha j - in Growers v. Oklahoma Cotton Growers Ass'n. , 126 Ckla. 265* 
It is believee., therefore, that legislation enabling industry groups to 
similarly resort to this ty^pe of remedj^-, in the manner suggested in the 
relevant provisions in the standard o.ct governing cooperatives, while at least 
providting a statutory basis for any action taken in accordance therewith, 
might fall short of the goal sou';;^ht to be attained; it vrould still leave open 
to attack* the metliod of adjusting the sum sti-niila.ted to be paid to a reason- 
able estimate rf the extent of the injury which a breach of the agreement 
might cause, 

9426 



-37- 



VIII LB&ISLATIYB REqUIAT I OH OF HSLIEDI.-S S 

Th3 foregoing lec.ds one to the conclusion that if the eiiiployment of 
such a renedy in connection with voluntary industry 8,greeraents is available 
at ?.ll, its legal justification can only "be found in a specific description 
of the same in the legisla.tion under which such agreements are to be con- 
suramated. 

If the power otherwise exists to regulate the subject matter, that Con- 
gress has the right to regula.te priva,te contractual rights "by renedial 
legislr.tion venal or com'oensatory in character, is indicated in the enact- 
ment of raany such statutes and the decisions of our courts. 

C hicago, B & 0, R-% Coo v. Gram, 223 U.S. 70, 57 L. Ed. 754, involved 
the voJ-idit" of a statute of the State of ilebraslia, fixing the minimum speed 
for the transoort3.tion of live stock and which provided that a carrier 
"violating any provisions of the Act s'hall pay to the OT.Tier of such live 
stock the Bvja of $10. for each hour for each car it extends or prolongs the 
time of trans'oortation beyond the period here limited as liquidated damc^es, 
to be recovered in p.n ordinary action, as other debts are recovered." Tne 
Suprei.ie Com't of Nebraska held (84 IJebo 607, 122 IT.TJ, 3l) that the statute 
imposed only compensatory damages, fixing them at a sum certain because of 
the difficulty of the ascertaimnent of the actnal damages suffered. Tliis 
view upheld in the U. So Supreme Court. lire Justice IIcKenna stating: " Two 
p ro"oositions only are invo Ived : (l) the DO^ - 'er of tlie legislature to ic roose 
a limitation of the time l or t h e tr on sportation o f live stock : ( 2 ) to 
provide adeq u ate m ea rure of da.m a ges w h ich may be difficult to estimate or 
prov'3 . It is 1 00 la.te i n the day to deny the poss e ssion of the first -power , 
and we think " ". xe o t her is fully established , and that the statute was enact- 
ed to meet co:.ultions v/hich had arisen from the conduct of the carriers and 
which in the judgment of the legislature, demanded a remedy." 

'Tirie provision in an Act of Utah providing a limitation in the daily 
working of certain miners a.nd that anj/ person, etc, who shall viola.te the 
same shall be deemed guilty of a misdemeanor was sustained as a valid ex- 
ercise of the policy power of the State, and not violative of the provisions 
of the Foujrteenth Amendment of the Constitution of the United States in 
Hoi den v. H ardy , 169 U.S» 36. 

The infringement of copyright under the copyright laws of the United 
States is "orotected in the statute, (See. 25, Title 17, U.S.C.A.) ^y a 
provision that infringers shall pay "such damages as the copyright pro- 
prietor nay have suffered *" "'^ * as well as the "orofits which the infringers 
shadl have made from such infringement * * * or in lieu of actual damages 
and profits, such damages as to the cohort shall appear to be just; a.nd in 
assessing such damages the court may, in its discretion, allow the amounts 
fixed by the statute, etc." Tne statute then soecifies certain limits of 
assessment in respect of copyrighted matters and conclud.es: "and such 
damages shall in no case exceed the sum of $5,000, nor be less than '^250, 
and shall not be regarded as a penalty." The court in S.E. Hendricks Co . v. 
Tliomas Piibo Co . , 242 F. Rep. 37, related that the language of this section 
V7a,s 8. growth of years, resulting from the efforts of Congress to avoid the 
strictness of construction which historically attaches to an^^ statute in- 
flicting penalties, and to confer uiDon an injured copyright owner some 

9426 



"38- 



pecimiary solece, even v^rhen the rules of la.w render it difficult, if not 
im-possitle (as it often is), to -Drove damages or discover profits. See, 
also, Brady v. Daly. 173 U.S. 143, 44 L. Ed. 109. 

Regulations relating to mercha.nt seamen contained in Chapter 18 of Title 
46, U.S.C.A. rlso erernplifj/^ control by Congress of "orivate contractual re- 
lations. Thus, Section 594, "Any seaman v/ho has signed an agreement and is 
afterward discharged before the comnencement of the vo^^age, or before one 
raonth* s v/ages are earned, without fault on his part justifying such dis- 
charge, and without his consent, shall be entitled to receive from the master 
or o\7ner, in addition to any wages he may have earned, a sum eq_ual in amount 
to one month's wages as corapensationj and may, on adducing evidence satis- 
factory to the court hearing the case, of having been improperly discharged, 
recover such compensation as if it were v/ages duly earned." In Calvin v. 
Huntly , 178 llasso 29, 59 N.3. 455, it was held that the statute was not penal 
but remedial, the court stating, "It is to be observed that the language of 
the section is not that ordinarily used in a penal statute, Neither the 
word 'loenalty' nor 'forfeiture' is in ito Moreover, it does not provide 
punishment f t the class of criminal offense, nor for the neglect of a 
statutory du'.y, nor even for the neglect of a duty in the Derformance of 
which the "oubliCj as such, may be suo-nosed to have an interest. It speaks 
not of "ounishraent, but of compensationo Its object is to protect the sea- 
men from, loss, rather than to mmish the master for discharging him. .Tlie 
remedy is given to the seaman alone, and its plain 'our'pose is to furnish a 
clear and well-defined ?:ule of dcM,mciges, as bet\/een him and the master, for 
a breach of contract i n which the seaman and the master or owner are the 
onl7>r -persons interested o" See also Sections 596, 597, 642, and 570 of the 
same Statute. 

Section 86 of Chapter 2, Title 12, (Banks and Banking) U.S.C.A., after 
prohibiting the charging of a rate of interest greater than is allov/ed by 
the preceding section provides, "In case the greater rate of interest has 
been made, the person by whom it has been paid, or his legal representatives, 
may recover back, in nature of j,n action of debt, twice the amount of the 
interest thus paid from the association taking or receiving the same. * * *" 
The enactment of this section was upheld as a valid exercise of the -oov/er of 
Congress, in Schle singer v. Gilhooly . 81 L\E. 619, 189 N.Y. 1. 

Tlien there are the 'Workmen's Compensation Acts and the line of decisions 
supporting the same, "That it was consistent for the legislature to pre- 
scribe a rule for computing compensation to be ;oaid injured em-olo5'"ees is not 
open to q^uestion." — luorison-Iierrill and Co» v. Industrial Commission , 
186 P, (2d) 295, 

Hie courts have invariably held that the optional statutes do not in- 
fringe the due process and equal -protection provisions of the Constitution, 
(See L.R.A. 1916A, 414) In Smith v. Cudahy Packing Co., 115 Kan. 874,875; 
225 P. 110, blie Supreme Court of Kansas said "The further contention is made^ 
however, that under the interpretation given itthe statute violates the 
clause of the Fou.rteenth Amendment to the Federal Constitution relating to 
due process of law, and that relating to the equa.l protection of the law, 
by allowing a greater sum for an injury to the thumb and finger than would 
be allov/ed for their entire loss. The measures of compensation prescribed 
by the Act are necessarily arpproximations, and if inequalities arise from 

9426 



-39- 

the application of the general rules there la,id dovm ne do not think a 
violation of the Constitution results. We perceive no discrimination against 
the defendant. The provisions challenged may sometimes rrork to its "benefit 
and sometimes to its disadvantage. However that may "be, the defendant has 
the option of subjecting itself to the operation of the Compensation Act or 
of being e::empt therefrom. Ha ving voluntarily elected to be governed by the 
statute, it is not in a situation to inv oke the inequality resulting from its 
provisions as a ground for declaring it unconstitutional . We do not discover 
that the precise point here involved or one closely akin to it has been pass- 
ed upon, but questions as to v/hether various features of a v/orkmen's compen- 
sation act were violative of the Fourteenth Amendment have frequently been 
disposed of by reference to the fact that its application was made optional." 
And in Brenne r v. Heruben, 170 Wis. 565, 176 N.W. 228 (later confirmed in 
Llueller & Son Co . v. Sothard, 173 Wis. 135, 179 N.W. 576) where, by amendment 
to the YJorkraen' s Compensation Act it was provided that compensation be trebled 
if an injured employee be a minor of permit age and at the time of injury is 
allowed to work without a written permit pursuant to statute (Child Labor 
Law) , the argument against its constitutionality was that treble compensation 
was a penalty, and its exaction was in effect the enforcement of a penal or 
criminal statute, viz. , that of the child labor law which was not in any way 
germane to the subject of compensation for industrial accidents. The court 
stated, hoT/ever, "But the question is, not whether it is a justifiable common- 
law scheme, but whether it is fairly germane to, and within the limits of the 
general scheme of, the Workmen's Compensation Act. If it is, then it is con- 
stitutional, for an employer in coming under the act waived his common-law 
remedies and agreed to be bound by the remedies afforded by the Act and of 
lawful amendments thereto. Anderson v. Miller Scrap Iron Co . , 169 Wis. 106, 
170 N.W. 276, 171 IT.W. 935." See also, Slick v. Hamaker , 28 ?. (2d) 103.. 

N or is a compensation act invalid for the reason that it creates a new 
remedy . Be May v. Liberty Foundry Co . , 37 S.W. (2d) 640. "The state has 
complete control over the remedies which it offers to suitors even to the 
point of mal-^ing them applicable to rights or equities already in existence. 
It may change the common law and the statutes so as to create duties and 
liabilities which never existed before." — Ives v. So. Buffalo Ry. Co . , 94 
N.E. 431, 201 II. Y. 271, 298. 

"If it (Legislature) may change defensive common-law rules, may it not 
also change a common-law rule of liability? The power of the Legislature 
cannot exist in the one instance and not in the other. In virtue of its 
authority to enact laws, and in doing so, to supersede common-lav; rules where 
it deems such action wise, it exists in both; and it was in our opinion there- 
fore competent for the Legislature by this Act (Texas Worlonen' s Compensation 
Act), * * * to provide, according to its plan, a fixed compensation to be 
paid the employee * * *." Middle ton v. Texas Power & Light Co ., 185 S.W. 556, 
561, (aff'd 249 U.S. 152). 

Crowe 11 V. Benson , 285 U.S. 22 involved the validity of the Longshore- 
men's and Harbor V/orker's Compensation Act (Act of March 4, 1927). Mr. Chief 
Justice Hughes stated at page 41, "In view of Federal power to alter and re- 
vise the maritime law, there appears to be no room for objection on constitu- 
tional grounc-, to the creation of these rights (referring to classifying 
disabilities, fixing the range of compensation, etc) unless it can be found 



9426 



~40~ 

in the due process clause of the Fifth Amendment. But it canno t "be scid t hat 
either the cl. ' Ssif ication of the s ta tute or the extent of the compensation 
provided ai'e unre asona"ble. In view of the difficulties which inhere in th e 
ascertainment of actual da m a;q:es , the Con^?:ress "v/as entitled to provide for the 
paj'-menu of ainounts which v:ould reaso nabl;/ approximate the pro'ba.'ble dai.ia^es . 
See Chica.ft-0 B. & Q,. 5y. Co . v. Cram , 228 U. S. 70, 84; compare Ivlissouri 
Pacific It-. Co. v. Tucker, 230 U. S. 340, 348." 



s}: :t: j)i :^ :tt 



5426 



-41- 



TIIE IIvIPOSITIOlT OF CONDITIONS 
IIPOII THE LETTING OF GO^/EENJ/ffillT CONTMCTS 

TA3LE OF CONTENTS 

Page 

Conclusions 42 

I. N. S. A. Experience 43 

Executive Orders requiring contractors bidding on 
Crovernraent proposals to comply with codes. 

Government Contracts Division - Organization, Powers, 
Relation with other Divisions, Examples. 

II. Economic Study 45 

Conditions in Government Contracts as a prima.ry 
means of enforcing laoor standards. 

Discussion of extent of Government purchases of 
material,, 

Industries affected. 

III. Walsh Government Contracts Bill 46 

Committee Report 
Analysis of Sill 
Scope of Sill 
Criticism and suggestions 

IV. Legality 51 



EXHIBITS 



"E" - Tabulation from "Trend of Employment" . 53 

"H" - Bacon-Davi s Act 54 

"J" - Excerpts from "Buy American Act" 55 

"K" - Excer[3ts from "Memorandum of Lav/ In Regard to S.3055.... 56 
"L" - N.R.A. Legal Research Memorandum No. 636 - "New 

Legislation - Government Purcha,ses" 58 



9426 



-42- 



THE liylPOSITIOi: 0]? CClIDITIOlvTS UPON THE L3TTI1IG 
0±' GOVEIM.GHT COilTRA-CTS 



CONCLUSIONS 



1) The im'oosition of conditions in the letting of G-overnment contracts 
"onder Executive Orders 6246 and 6646 was an effective means of enforcing the 
provisions of the K.H.A. codes in certain industries. 

2) The effectiveness of the Government Contracts Division was sone'Th^vt 
hampered "by the lack of cooperation of other Governroent De;oartnents. 

3) The imposition of conditions in the letting of Government contracts 
is sound in "i^rinciple although, rs a 'orimary means of establishing wage and 
hoTJT standa-rds, it would "be effective only in a limited field, 

4) The imposition of conditions in the letting of Government contracts 
will "be a valuable aid in enforcing any legislation designed to maintain v/age 
and hour standards or axiy general plan to that end, 

5) The Walsh Government Contracts Bill (S 3055) as passed by the Senate 
is generally satisfactory, but is susceptible to amendnent contained in the 
report. 

6) Under the authorities there is no doubt as to the right of the Govern- 
ment to -ore scribe the conditions uiDon which it will permit public work to be 
done on its behalf. 



9426 



THB IrJP QSITION OF COLISITIQHS UPON TUB 
LETTING OF GOVEHin'£Ei:T COHTBACTS . 

I . N>2.A. EXPERIENC E 

Executive Order llo. 5248, dated Au^^ust 10, 1933, 'orovided that contrr.cts, 
entered into "by the United States, or any of its agencies, for supplies mined, 
produced or manufactured in the United States, should require the contractor 
to comply with the appropriate code, or if there was no such code then v/ith th' 
President's Reemployment agreement. Cancellation and open market ;3urchases 
at the risk of the contractor ajid the surety were provided as penalties for 
non-compliance. 

Executive Order No. 6646, dated March 14, 1934, broadened the scope of 
the previous order, to req'^oire thpt all "bids "be accompanied "by a certificate 
of compliance and to include all contracts and purchase orders of Federal 
agencies or those of states, municioalities, counties, oersons and corpora- 
tions in connection with projects involving a loan or grant of Federal funds. 
Fine a.nd im^orisonraent (similar to Sec. 10(a) of N.I.R.A.) were provided for 
false certification in addition to cancellation and completion of the contract 
at the e^cpense of the guilty party. 

A Government Contracts Division of N.R.A. v/as organized to administer 
these Executive Orders end to handle cases arising thereunder. The division 
is now engaged in the preparation of (a) a case study of approximately?- 8,000 
cases ha/ndled "by the division, (b) a detailed history of the division and its 
activities, and (c) a report for the House Judiciary?- Committee which is con- 
sidering the ?falsh Goverrjnent Contracts Bill (S 3055). These studies which 
are occupying the entire time of a large staff will to ;:\ large extent cover 
the outline of ray work as set forth in 7ork Outline No. 26. It v/as impossi"ble 
for one man working alone to cover adequa.tely the entire field and therefore, 
effort has "been made to avoid duplicating the work of others. 

At the outset it must "be realized that the Executive Orders referred to 
constituted an ancillary and supplementary method of enforcing compliance with 
N.I.R.A. The effectiveness of such methods, (whether under Executive Orders 
or statutes) as a secondary means of enforcement would not necessarily ena^'ble 
the accurate -orediction of their effectiveness as a pri)-,ary means of establish- 
ing wage and hour standards. Uidcr such Orders i':)ersons doing "business with 
the Government v/ere merely required to comply with existing law. But in the 
a"bsence of a lav^ similar to N»I*R.A legislation the Walsh Government Contracts 
Bill would require those doing "business with the Government to esta"blish la"bor 
standards not otherwise required of them and not required of their competitors 
who do not "bid for Government "business. This distinction is most important 
and must "be kept in mind in any consideration of N.R.A. e:rperience with Govern- 
ment Contracts. 

Vihat is now the Government Contracts Division was originally constituted 
as the "Government Contracts and ComToetition Branch of the Compliance Division" 
in March 1934 by a Com.pliance Division memorandum. Office Memorandiim No. 341, 
dated March 1, 1935, crea,ted the "Government Contracts Division of N.R.A." ajid 
set forth its powers and duties. At no time did the Division or its predeces- 
sor ha.ve the power to cancel contracts. It could hear pnd determine complain tf 
but as far as cancellation was concerned it could only make recommendations 
9426 



-44- 

to the various G-overnment Departments. Bie case studj?- alDove referred to v/ill 
sho".v the-^.t the other Be-oartKent s did not alwa;>'-s follow the recoranendation to 
cancel. An illustration of this situation is given. 

The co.se of Morrison Brothers is typical of such insta,nces. They were 
the low "bidders and were awarded a contract to remodel school huildings at 
Bethesda, Md» Before the job was started they v;ere found to he in viols.tion 
of the Contractor's Code, and the right to use the Blue Eagle was termina.ted 
by the Compliance Division. The Government Contracts Division, after inves- 
tigation, recommended cancellation of the contract, but P.W.A, , for reasons 
that seemed good and sufficient to them, declined to follow the recommendation 
and permitted the performance of the contract. Without meaning to criticize 
the action of P.VJ.A., or to question the soundness of the reasons which 
promoted such action, it is submitted that the work of the Government Contractr 
Division was seriously hampered and its prestige and effectiveness consic.erabl;;- 
dj.ima,ged thereby* 

Despite its lack of loower of cancellation of contracts and the lack of 
complete cooperation of Governmental Departments, there can be little doubt 
as to the value of the v/ork of the Division in securing; code compliance in 
many industries. In the ca.se against the Baltim o re Lumber Company (L-1407) 
it appeared that orders for government v/ork constituted 70^ of the defentaait's 
business, and because of this fact the defenda.nt was v/illing to consent to 
an injunction in order to retain his eligibility status* In the building 
trades and among building and roads contra.ctors conditions in Government con- 
tracts were very valuable in securing code compliance, and the tremendous 
purcha.se s, under such contracts, of steel, cement, lumber, machine sho;os 
products, cotton garments and paper undoubtedly greatly aided enforcement by 
other means. 

In several cases, the details of which will be fully set forth in the 
History of the Division, the legal propriety and a.pplicability of the Executive 
Orders was q^uestioned, but in no case was the decision of the court adverse 
to the Government. Because the subject is included in the History, and because 
the Orders are no longer in force, a discussion of the cases is unnecessary 
here, but the legality of the underlying principles v.'ill be discussexi later. 



9426 



-45- 
II. ECONOMIC STUDY 



All of the foregoing treats of the subject as a secondary means of 
enforcing N.E..A. codes. If another similar statute is passed v/hat has oeen 
said will apply, and the History and Case study of the Government Contracts 
Section will "be of great value. But if no such legislation is passed there 
will "be an entirely different situation and the past experience of II. R. A. 
will Tdc of less value. The effectiveness of legislation similar to the 
Walsh G-overnment Contracts Bill will depend upon the economic pressure that 
can "be exerted "by the G-overnment as a customer and creditor, and the value 
of the Government as a customer would depend entirely upon the amount of 
Government purchases in a given industry. The Report for the Eouse Judiciary 
Committee above referred to covers the economic aspects of the Bill, but the 
independent research herein set forth may prove helpful. 

Press Release ITo. 1420 of the P.W.A. and the charts thereto attached 
shov: quite conclusively the very great importance of the Government a.s e. 
customer of the building trades and allied industries. It appears that at 
one period nearly 9O70 of the total construction work was on Governraent jobs. 
The building of dams, roads, public buildings, bridges, schools, hospitals 
and other P.W.A. projects has required the purchase of huge quantities of 
mill v;ork, builders' supplies, builders* hardware, sheet metal work, lumber, 
stone, brick, pipe, cement, steel and other building material, and as long 
as P.W.A. and W.P.A. continue the type of v/ork that requires a large per- 
centage of material such purchases will continue. "Trend of Emploj^niient", 
issued by the Burea:^ of Labor Statistics (April 1935) on pages 40-41, 
tabulates the materials purchased by P.W.A. up to March 15, 1935, and shows 
the total purchases to be $769,263,578.00. There is no doubt of the in- 
fluence the Government could exert to maintain wage and hour standards in 
many of the industries mentioned, but, even so, the small builders and 
contractors, and the small manufacturers who do not bid on Government con- 
tracts, would not be affected in the slightest degree by conditions imposed 
in the letting of such contracts. 

A complete tabulation of all purchases of all governraent departments 
and agencies would disclose the full extent of the Government's purchasing 
power, but no such tabulation has been made. These figures are being com- 
piled for the Congressional Committee and will be available in the near 
future. Cotton and woolen garments for the Array, Navy, Marines, CCC and 
other organizations are purchased in large quantities, but, even so, the 
Government makes such purchases for only a small percentage of the total 
popula-tion. In the retail trades and in the service trades which v;ere so 
troublesome under N.R.A. , and in many small industries employing in the 
aggregate thousands of workers, the influence of the Governraent as a customer 
would be negligible or entirely absent. Prom these observations it is clear 
that the imposition of conditions in the letting of Government contracts as 
a primary means of enforcing wage and hour standards would be highly ef- 
fective in some industries, would have but slight effect in some but would 
have no effect whatever in many others. An accurate determination of the 
extent to which individual industries would be affected can be made only 
after statistics of individual industries are available. 



9426 



-46- 
III. WALSH aOVEHNMENT COIITEACTS BILL 



S-3055, generally known as the Walsh Government Contracts Bill, was 
introduced in the Senate on June 14, 1935, and was referred to the Cor-mittee 
on Education and Laoor. It was rewritten in committee and reported out on 
August let. The Committee report included the following: 

"The object of the "bill is to prescribe labor conditions 
to be incorporated in all contracts for construction, articles, 
materials, sxipplies, equipment, or services, including contracts 
for loans or gr<v.nts made by the United States. 

"The purpose of the bill is to establish and maintain 
reasonable wages on purchases, loans, or grants where Federal 
fmids are involved, directly or indirectly, thereby sustaining 
the pur cheesing power of employees. 

"The bill is applicable only to those individuals or 
concerns who receive the benefit of contracts, loans, or grants 
made directly or indirectly by the Federa.1 Government. The 
requirements as to wage, hour', and other conditions apply only 
to those employees whose labor is involved in the performance 
of the principal contract and such subcontracts thereunder. 

"It will end the present paradoxical and ULifair situation 
in which the Government, on the one hand, urges employers to 
maintain and uphold fa.ir wage standards and, on the other hand, 
gives vast orders for supplies and construction to the lov\?est 
biddei", often a contractor or manufacturer who does not 
syr.ipa.thize with and fights hardest against labor and social 
welfare policies," 

"The bill has been prepared upon the theory that Congress 
has power to prescribe conditions in public contracts, loans, 
or grants, and adopt such policies as conditions in them and 
to direct or authorize the President with respect to their 
effectuation. Decisions of the Supreme Court bear out this 
policy. The committee believes that in the absence of action 
by Congress, the Executive has power to require any condition 
in contracts, loans, or grants necessary to protect the United 
States but that his authority stops there and that matters of 
general policy not strictly necessary to secure to the United 
States the performance of a contract can only be laid down by 
Congress. 

"Coincident \vith this theory, the committee has deemed it 
desirable to include in sections 1, 1-A, 2, 2-A, and 2-B, pro- 
visions requiring contractors, subcontractors, and suppliers 
of articles, materials, supplies, equipment or services upon 
Government contracts or contracts involving the expenditure of 
Federal funds in whole or in part, to furnish representations 

9426 



-47- 

or agreeraents that employees engaged in the performance of the 
contracts or in the production or furnishing of materials or services 
in connection therev/ith, have been and v;ill "be paid not less than the 
minim-um rates of pay and employed not to exceed the maximum hours as 
specified in those approved N.R.A. codes of fair competition in effect 
on May 26, 1935, which are applice-"ble to their respective trades or 
industries. " 

"Existing statutes require that Government contracts "be let to 
the lowest responsible bidder on open competitive bidding. The 
operation of this statute was qualified as to wages and hours under 
the provisions of Executive Order No, 6646 of March 14, 1934. Su.bse- 
quent to the issuance of this Executive Order, borrowers, grantees, 
contractors, and subcontractors, on Government contracts were required 
to conply with the codes of fair competition to which they were 
subject and in the absence of such codes, with the President's Re- 
employment Agi^esi^ient. This procedure was found in actual experience, 
to be practical and v/orkable and not productive of undue hardship 
upon industry. Hov/ever, following the Supreme Court decision in the 
Schechter case , the operation of Executive Order No. 6646 was 
necessarily suspended. 

"Since the suspension of Executive Order ITo.- 6646, the a.bove 
statute has been construed as requiring an acceptance of the low bid 
withou.t any limitations as to wage and hours except those contained 
in other Federal statutes such as the Adamson Act and Bacon-Davis Act, 

"Such cons tr^Lict ion commits the Government to the unconscionable 
practice of allowing private industry to dictate wages and hours of 
labor - no matter how oppresive — for undertakings financed v/ith 
Federal funds. The insistence of such standards on projects financed 
wholly or in part with Federal funds, should, in due course, encourage 
private industry voluntarily to adopt like standards in private 
underta'^ings, thereby increasing purcnasing pov/er and improving the 
general conditions of our citizens. 

"The committee believes fhat the enactment of this bill will 
aid materially in securing industrial recovery and the permanent adop- 
tion of the standards of wages and hours and conditions of labor set 
forth in the bill." 

As originally introduced the Bill was 'quite restricted but as reojrafted 
by the Committee was exceedingly broad, and, if it could be enforced without 
any exei-iptions or exceptions, every one who did business with the Government, 
directly or indirectly, would be required to certify maintenance of code 
YJages end hours after the effective date of the Act. The Bill is lengthy, 
and the following abstract is included for purposes of convenience: 

"Section 1 provides that in connection with all Government 
purchases or contracts there shall be included in the proposal or 

9426 



^48- 

contra.ct a representation that all persons eiaplo;^'-ed "by the contrs.ctor 
in any •.lovlz connected v/itli or relating to the Government p-urchases 
have, since the effective date of the Act, been not paid less theji 
minimtijn rates of pay and employed not more than such maxiniujii hours as 
on May 26, 1935, were Sx^ecificd in the appropriate Code of Fair 
Competition, or in the a"bsence of such Code, in the President's re^ 
employment agreement, and further that such wage and hour provinions 
will he adiiered to in carrying out the contract and that after the 
effective da.te of the Bill no persons under sixteen years of s^e and 
no convict lahor have been employed or will "be employed in carrying 
out the contract. 

"Section la provides the same conditions ';ith reference to 
suh^contractors or suppliers of material to the principal contractor. 

"Section 2 provides the same conditions v;ith reference to 
industrial borrov/crs or grantees. 

"Section 2a provides the same conditions for States or 
political sub-divisions thereof receiving Tederal loans or grants, 

"Section 2b provides the same conditions for sub-contractors 
under Section 2 and 2a. 

"Section 3 provides for liquidated dsjnages and cancella.tion. 

"Section 4 provides for suits by the United States and the 
disposition of the funds. 

"Section 5 provides for hearings with reference to breach of 
contra^ct, the sunmonsing of witnesses and the conclusiveness of the 
findings. 

"Section 5 provides: 

(a) That President raaj^ make exceptions in specific 
cases or otherwise whenever such action is recommended by 
a Governmental agency or when justice or public interest 
will be served. 

(b) Upon the joint recommendation of the Governmental 
Agency and the contractor, the president may modify the 
terms of an existing contract respecting pay a.nd hours of 
latbor. "As may be found necessary and proper in the public 
interest or to prevent injustice or undue hardship. " 

(c) The President ma.y provide reasonable limitations 
and may make rules a,nd regulations allowing reasonable 
va.riations, tolerances and exemptions to and from any provi- 
sions of the Act on the extent of the application to 
contractors and others. 

"Section 7 permits the rejection of bids by those who have 
previously brea^ched contracts. 



9426 



►.49- 

"Section 8 sets up wage and. hour standp.rds for the 
guiclcjice of the President. 

"Section 9 relates to existing contracts. 

"Section 10 relates to G-overnment agencies "bidding in 
competition v/ith private enterprises. 

"Section 11 authorizes the organization to administer 
the Act and provides the funds, 

"Section 12 preserves the principles of the Buy~American 
and Eftcon-Davis Acts. 

"Section 13, separa'bility clause." 

It will be observed that the langiaage of the Act requires the rarJ-n- 
tenojice of wage and hour standards only in the v^rp^i'u.ction of the goods 
purchased "by the Government and does not seek to affect wage and hour stand- 
ards in the manufacture of other merchandise, prom a practical point of view, 
however, it would be difficult if not impossible for an industry to segregate 
the manufacture of goods for a Governinent contract, and hence the prc.ctice.l 
effect of the Act is broader than the language would indicate. It is this 
T/ide scope of the jlct that mfilces provif:ion for exeiaptions absolutely essential, 
because it may v/ell be that in ae^ny industries there will be no members what- 
ever who can o^ualify under the Act. The proponents of the Bill xiere rpoarent- 
ly well aware of this condition and for this reason gave the President 
exceedingly broad powers to gra.nt exemptions and exceptions. In the debate 
on the floor of the Senate, Senator Hastings, of Delaware, objected very 
forcibly to the granting of such broad powers to the president. 

The Bill also seeks to use the lending as well as the spending pov/er 
of the Government to maintain v/age 3Jid hour standards, and private persons 
and corporations, a.s well as states, municipalities and other political sub- 
divisions who receive Government loans or grants for projects, are required 
to comply v:ith the Act as to such projects. A study of the use of the 
Government's lending power is not included in my assignment, but since the 
spending and lending power are botxi included in the Walsh Bill, the lending 
power will be considered briefly. In the lending of money for construction 
purposes the operation of the Act should be just as effective as in con- 
struction projects by the Government. But in the case of loa.ns to industry 
the effectiveness of the Act would be diminished by competitive conditions. 
If a borrower from the Government were compelled to pay in its manufacturing 
process a higher wage than its more fortunate competitors who did not have 
to borrow from the Government it is difficult to see liovi the borrower could 
successfully compete and repay the loan. Under such circumstances exemptions 
and exceptions would undoubtedly be very numerous. 

If legislation of this tjrpe is to be advanced at the coming session 
of Congress consideration should be given to redrafting the Walsh Bill to 
simplify and clarif2'- its provisions and to extend its scope to exclude all 
child ajid convict labor. The Bill as drafted permits bidders on Government 
contracts to use child labor except on Government work. It is submitted 
that the Government should refuse to do business with any concern that employs 

9426 



-50- 



child or coir, ^ct la."bor at any time or uncier any circiimstances. And, 
since exceptions and exemptions will play such an important part in the 
administration of the Act, definite standards for the granting of exceptions 
and exemptions should "be incorporated in the Act instead of the exceedingly 
"broeod pouers contained in Section 6 as nov; drafted. The advisalDility of 
tying the Bill so closely to the old N.R.A. codes should also he considered, 
for, V7hile the wage and hour provisions in many codes were quite satisfr.ctory, 
many of them are very complicated and some contain differentials which would 
prove most troublesome. Serious consideration should 'be given to the 
extension of the principles of the Bacon-Davis Act to include projects which 
are financed in whole or in part "by i'ederal funds and to include hours of 
lahor as well as wages. The principles of the "Bijy American Act" could he 
extended to confine pi;j:chases to American manufacturers who pay prevailing 
wages through the simple expedient of authorizing the rejection of "bids of 
those manufacturers who do not maintain wage and hour standards, Considerar- 
tion should he given to the establishment of a separate Board for the 
administration of the Act as contemplated "by the Walsh Bill instead of 
having the Act administered by the Department of Labor as provided by the 
Bacon-Davis Act. 



9426 



31- 



IV. LEGALITY 



UncTer the ar.thorities there is no doulDt as to the right of the Government 
to prescribe the conditions upon \7hich it will penr^it puhlic work to "be done 
on its behalf. Menorand-mn No. 635, of the N.R.A. Legal Research Division, 
covers certain phases of the question, and the very able memorandum prepared 
by Lir, Franlc Healy, of the IT.R.A. Governraent Contracts Division, covers the 
subject very fully except perhaps in connection with the question of liquidated 
dana^ges, which subject is being given exiiaustive consideration by Mr. Llortimer 
Weinbach. 

The vreight of authority holds tha,t an unsuccessful bidder on a Governraent 
contract has no stan.ding in court to question the letting of the contract. 
These decisions are referred to in the meraorsndum above mentioned, and appear 
to be based on the theory/ that no vested or contractual rights are involved. 
The caJLcellation of contracts, hov/ever, does involve such rights, and contracts 
should be cancelled only after notice and an opport-imity to the contractor 
fully to present his side of the case. The jprocedure set forth in the TJalsh 
Government Contracts Bill is generally satisfactory^ but consideration should be 
given to amending it to protect the contractor's rights to a full and fair 
hearing. 



9426 



•52- 



THE IlvIPOSITIOH OF CONDITIONS UPON 
THE LETTING Oi' GOVSEl!lvIENT CONTEACTS 



TABLE OE CONTENTS 

EXHIBIT 

A. Executive Order No. 6246, August 10, 1933, on Administra- 
tion of the National Industrial Recovery Act. (Not here 
rejD reduced) . 

B. Executive Order No, 6646, March 14, 1934, on Government 
Contracts and Contracts Involving the Use of Government 
i!\inds. (Not here reproduced). 

C. Office Memorandum, No. 341 (3165), March 1, 1935, on 
Government Contracts Division. (Not here reproduced). 

B. P. ¥. A. Release No. 35432, June 9, 1935, Division of 

Economics and Statistics Pieport to P'u'blic Works Administra- 
tor, Harold L. Ickes. (Not here reproduced). 

E. Tabulation from "Trend of Employment," on Value of Material 
Orders Placed for Puhlic Works Projects, "by Type of Material, 

F. S. 5055 - Walsh Government Contracts Bill. (Not here 
reproduced) . 

G. Committee Report on S. 3055. (Not here reproduced). 
H. Bacon-Davis Act - Approved, March 3, 1931. 

J. Excerpts from "Buy American Act." 

K. Excerpts from "Memorandmn of Law in Regard to S. 3055. 

L. N. R. A. Legal Research Memorandum, Ma.rch 12, 1935 - 
"New Legislation - Government Purchases," "by Raymond 
J. Heilman. 



-53- 



EXHIMT S 



'value of Material Orders Placed for Public Works Projects, by Type 
of Material 

[Subject to revision] 



Type of material 



All materials. 



Aircraft (new) 

Airplane parts 

Aluminum manufactures 

Ammunition and related products.. 

Asbestos products, not elsewhere classified. 

Awnings, tents, canvas, etc 

Belting, miscellaneous 

Boats, steel and wooden (small) 

Bolts, nuts, washers, etc 

Brick, hollow tile, and other clay products. 

Carpets and rugs..". 

Carriages and wagons .• 

Cast-Iron pipe and fittings 

Cement. 



Chemicals - 

Coal - 

Compressed and liquefied gases 

Concrete products - 

Copper products 

Cordage and twine - --- 

Cork products, not elsewhere classified. 
Cotton goods 

Creosote. 



Crushed stone — - - -•-- 

Doors, shutters, and window sash and frames, molding and trim (metal). 

Electric wiring and fixtures 

Electrical machinery, apparatus, and supplies 

Elevators and parts 

Engiues, turbines, tractors, and water wheels... 

Explosives 

Fell, goods - 



1' uearms. 



Forgintis, iron, and steel 

Foundry and machine-shop products, not elsewhare classified. 
Furniture, including store and office fixtures , 

Glass- 



Hardwii a, miscellaneous 

lie.iing and ventilating equipment 

lrislrui:ieuts, professional and scientific. 

Jute goods.- 

Lead products.. 

Lime - 



Linolerfm •_ 

Loconioiives, other than steam ..- 

Locomotives, steam,. 

■Lumber and timber products,'''not elsewhere classified 

Machine tools — 

Marble, granite, slate, and other stone products 

Mattresses and bed springs 

Meters (gas, water, etc.) and gas generators 

Minerals and earths, ground or otherwise treated 

Models and patterns 

Motorcycles and parts 

Motor vehicles, passenger 

Motor vehicles, trucks 

Nails and spikes 

Nonferrous-metal alloys and products, not elsewhere classified. 

Paints and varnishes 

Paper products... ^ 

Paving materials and mixtures, not elsewhere classified... 

Petroleum products 

Photographic apparatus and materials 

Planing-mill products 

Plumbing supplies, not elsewhere classified 

Pumps and pumping equipment 

Radio apparatus and supplies 

Rail fastenings, excluding spikes 

Ralls, steel 

Railway cars, freight 

Railway cars, mail and express 

Railway cars, passenger 

Refrigerators, and refrigerating and Ice-maklng machinery 



Roofing materials, not elsewhere classified - 

Rubber goods 

Sacks and bags 

Sand and gravel r — 

Sheet-metal work - ~ 

Springs, steel ,--,-.-.- : % :-\ * 

Steam and other packmg, pipe and bouer covermg, and gaskets 

Steel-works and rolling-mill products, other than steel rails, including struc- 
tural and ornamental metal work 

Stoves and ranges, other than electric 

Switches, railway - 

Theatrical scenery and stage equipment 

Tiling, floor and wall, and terrazzo. 

Tools, other than machine tools—. 

Upholstering materials, not elsewhere classified 

Wall plaster, wall board, insulating board, and floor composition 

Waste. 



9426 



Window and door screens and weatherstrip. 

Window shades and fixtures.. 

Wire products, not elsewhere classified 

Wrought pipe 

Zinc products 

Other materials 



Value of material orders 


placed— 


From begin- 


During 
month ending 
Apr. 16, 1936 


ning of pro- 
gram to Mar. 
15, 1936 


$769, 268, 678 


$31, 645, 166 


5, 786, 768 




6, 080, 671 




232, 390 


12,327 


772i 270 


30, 097 


66, 567 


460 


183, 786 


21, 184 


28, 982 


1,651 


1, 281, 973 


6,262 


2, 383, 359 


89. 365 


9, 644, 135 


789,850 


44,786 


326 


28,893 


145 


14, 514, 552 


1, 112, 613 


101, 884, 305 


3.353,892 


236, 232 


21,855 


1, 248, 336 


52. 154 


236,517 


6,683 


14, 643, 325 


827, 581 


517, 655 


24, 528 


225, 368 


7,697 


76, 983 


3, 623 


79, 661 


6,027 


511,215 


27, 152 


28, 037, 633 


1.166,079 


3, 628, 172 


291, 493 


3,961,402 


503, 685 


38, 626, 299 


1, 0S4, 048 


ooe, SOO 


185, 219 


8,419.803 


717, 535 


3, 137, 748 


162, 125 


168, 654 


327 


772, 981 




3, 824, 925 


165.435 


SO, C07, 185 


2. 964. 758 


1, 725, 397 


146, 339 


m-i, 068 


00, 345 


3,7.';0,416 


274, 125 


6.888,155 


622, 169 


1,656,988 


27, 077 


54, 340 


3,484 


169, 723 


18,614 


169, 904 


1,836 


56, 114 


14, 309 


11, 813, 333 




6, 837, 064 




36, 584, 919 


1,439,959 


4, 789, 569 


221, 813 


12, 520, 195 


457, 545 


15, 805 


248 


208, 284 


24. 499 


1T)2,823 


146 


14, 094 


688 


274, 395 




483, 588 


3.657 


8, 573, 200 


15, 021 


751,248 


69,992 


1,139,056 


62,206 


1, 720, 709 


86. 082 


45,903 


1,576 


11, 969, 447 


386,924 


22, 693, 459 


1, 062, 180 


168,646 


470 


4, 386, 377 


191,393 


7, 472, 616 


393, 760 


8,686,181 


481,062 


668,878 


8,848 


6, 202, 501 


399,488 


18,013,011 


770, 831 


35, 392, 551 


2,373 


429, 443 




7, 627, 436 




603,736 


8,496 


$2, 286, 376 


$169,804 


356, 431 


14, 347 


20,693 


519 


48.133,886 


1,886,834 


2,237,063 


70,288 


587,917 


698 


669, 316 


42, 441 


111,276,583 


6, 558, 977 


204,505 


394 


649, 910 


25, 789 


30,897 


2,308 


1,606,718 


156,600 


3, 993, 738 


116,753 


116, 710 


732 


1, 946, 743 


163, 147 


24, 610 


66 


82, 224 


2,443 


77,983 


6,906 


4,333,049 


230, 553 


694, 249 


116,676 


27. 103 


25, 910 


34. 345, 222 


1, 169, 607 



-54- 
EXHIBIT H 

BA,CQH-DAVIS ACT 

' ' 3e it enacted l)y the Senate and HouGe of Repr ese ntatives of the United 
States of America in Congress assemlpled , That everj^ contract in excess of 
$5,000 in amount, to which the United States or the District of Col-mnlDia is 
a party, which requires or involves the emplojnnent of la"borers or mechanics 
in the construction, alteration, and/ or repair of any pulDlic "buildings of the 
United States or the District of Colurn'bia within the geographical limits of 
the States of the Union or the District of Columhia, shall contain a provision 
to the effect that the rate of wage for all laborers and mechanics employed "by 
the contractor or any subcontractor on the puhlic Duildings covered "by the con- 
tract shall "be not less than the prevailing rate of wages for work of a simi- 
lar nature in the city, town, village, or other civil division of the State 
in which the public buildings are located, or in the District of Colui-ihia if 
the public buildings are located there, and a further provision that in case 
any dispute arises as to what are the prevailing rates of wages for worl: of 
a similar nature applic3.ble to the contract which can not be adjusted by the 
contracting officer, the matter shall be referred to the Secretary of Labor 
for determination and his decision thereon shall be conclusive on all parties 
to the contract: PHOVIDSD, That in case of national emergency the President 
is authorized to suspend the provisions of this Act. 

S3C. 2. This Act shall tai:e effect thirty days after its passage but 
shall not affect any contract then existing or any contract that may there- 
after be entered into T^ursuant to invitations for bids that are outstanding 
at the time of the passage of this Act." 



Approved, l.'arch 3, 1931. 



942( 



EXHIBIT J 

BUY AI^IiCRICAN ACT 

"SEC, 2. Not '.withstanding any other provision of lav/, and lojiless the 
head oi the de-oartment or independent estahlislunent concerned shall deter.:iine 
it to he inconsistent pith the public interest, or the cost to be Tmreasonaule, 
onl",'- such ujinanuf acturcd articles, materials, and suTDTolies as have '^oeen :-iined 
or loroduced in the United States, and only such manufactured articles, mater- 
ials, and sup-olies as have been manufactured in the United States substantial- 
ly c.ll from articles, materials, or supplies mined, produced, or manufactured, 
e.s the case may be, in the United States, shall be acquired for public use. 
This section shall not apply with respect to articles, materials, or supplies 
for use outside the United States, or if articles, materials, or supplies of 
the class or kind to be used or the articles, materials, or supplies from v:hich 
they are manufactured are not mined, produced, or manufactured, a.s the case 
may be, in the United States in sufficient and reasonably available commercial 
quantities and of a satisfactory quality, 

SEC, 3 (a) Every contract for the construction, alteration, or repair 
of 3.irf ;oublic building or -oublic v.'ork in the United States growing out of a:,n 
ap-oropriation heretofore made or hereafter to be made shall conta.in a provi- 
sion tha.t in the -oerformance of the vrork the contractor, subcontractors, 
material men, or supoliors, sha.ll use only such unvaanui'actured articles, 
materials, rjid supplies as have been mined or produced in the United States, 
and only such i.-ic?nufactured articles, materials, ond. surolies as have 'oeen 
manufactured in the United States substantially all from, articles, na.terials, 
or sup;)lies mined, produced, or manufactured, as the case miay be, in the 
United States except as provided in section 2: PilOVIDSD, HOWEVER, That if 
the head of the department or independent esta.blishiflent making the contract 
shall find that in respect to some particular articles, materials, or supplies 
it is impracticable to make such requirement or that it would unreasonably 
increase the cost, an exception shall be noted in the specifications a.s to 
that particular article, material, or supply, and a public record made of 
the findings vfhich Justified the exception," 



9426 



E]gII3IT K 

EXCERPTS EROM 

l^dOMl^romi OE IM IN REG/Jffl TO S. 3055 



I . Po rer of Con ,9: res5 to Recuire Covenantn and Im-pose Penalties 

In Contract s 

The United States Suprene Court, in considering the act of Au^rast 1, 
1892 (27 Stat. 340), used the follovdn;;^ lan^^age: 

Tlie provision in the act of Aii^^st 1, 1892 (27 Stat, 340), limiting 
the hours of laborers and mechanics employed "by the United States 
for any contractor or subcontractor upon azrj of the public works 
of the United States to eight hours per day except in cases of ex- 
tra,ordina,ry emergency, and imposing penalties for the violation 
thereof, are constitutional and v/ithin the pouers of Congress. In 
this respect Congress has the same pov;er as a State has over the 
construction of its public vor]:s (Atkin v. Kansas , 191 U.S. 207; 
Ellis V. United S tates , 206 U.S. 246). 

The case of Atkin v. The State of_ Kansas (191 U.S. 207) cited above is 
one of the leading cases decided by the United States Supreme Court on the 
question of legislative acts relating to public contracts. This case involved 
the validity under the Constitution of the United States of the statute knorm 
as the "Eight-hour law of Kansas of 1891," chapter 114, being pages 3827, 3828, 
and 3829 of the General Statutes of 1901 of that State. This statute made it 
a criminal offense for a contractor for public work to permit or require an 
employee to perform labor upon that \7ork in excess of S hours each day. The 
Supreme Court of the United States in upholding the statute as being consti- 
tutional uses the following language: 

It may be that the State, in enacting the statute, intended to give 
its sanction to the view held by me, that, all things considered, 
the general welfare of employees, mechanics, and workmen, upon whom 
rest a portion of the burdens cf government, will be subserved if 
labor performed for 8 continuous hours was talcen to be a full day's 
work; that the restriction of a day's work to that number of hours 
v/ould promote norp.lity, improve the physical and intellectual con- 
dition of laborers sind worlanen, and enable them the better to dis- 
charge the duties appertaining to citizenghi-o. T/e have no occasion 
here to consider these questions, or to determine upon which side is 
the sounder reason; for v/hatever may have been the motives control- 
ling the enactment of the statLite in question, we can imagine no 
possible ground to dispute the power of the State to declare that 
no one undertaliing work for it or for one of its municipal agencies 
should permit or require an employee on such worj: to labor in ex- 
cess of 8 hours each day, and to inflict punisiiment upon those who 
are embra.ced by such reigulations and yet disregard them. It cannot 
be deemed a part of the liberty of any contractor that he be 
allowed to do public work in any mode he maj'' choose to adopt, with- 
out regard to the wishes of the State. On' the contrary, it belongs 



9426 



-57- 

to the State, as the guardian and trustee for its people, and having 
control of its affairs, to prescribe the conditions upon v;hich it vjill 
permit public work to "be done on its 'beha.lf , or on "behalf of its 
municipalities. No court has authority to review its action in that 
respect. Regulations on this suhject suggest only considerations of 
puhlic policy. And v/ith such considerations the courts have no concern. 

The above decision closes \7ith a "broad statement on the su'bject as 
f ollov/s: 

TTe rest our decision upon the "broad ground that the vjork "being of a 
puDlic character, a'bsolutely under the control of the State and its 
municipal agents acting "by its authority, it is for the Sts^te to 
prescribe the conditions under which it will permit work of that 
kind to "be done. Its s.ction touching such a matter is fina.l so long 
as it does not, "by its reg:ulations, infringe the personal rights of 
others: and that has not "been done. 



9426 



-53- 
EXHIBIT L 
LIS-LlORMTDUM ON I'EW LEGISLATION — GQVERia.'IEWT PmCHilSES 
(By Rayinond J, Feilraan) 

Tl'iis nenoranduia concerns the i:ossi"bility of conflict as between existing 
statutes end. the following proposed statute: 

"The President may provide rneans for promotion and maintenance of agree— 
i.ients and codes by reauirinf; der)art.aents and a.gencies of the United 
States to "ourchase only from persons complying with such codes and agree- 
i.ients, " 

An e::isting statute of ^"hich consideration anpears to be necessarj'' is the 
follo\7ing one: 



U. S. C, A, § 5 Title 41 — /public Contracts/. 

is. A dvertisements for -proposals for purchases and contracts for 
suirolies or services for departments of Government , Except as otherv/ise 
provided by law all purchases and contracts for suprilies or services in 
any of the departments of the Government and purchases of Indian suoplies, 
exce-it for personal services, shall be made by advertising a sufficient 
tine previously for proposals respecting the same, '--hen the public ex- 
igencies do not require the immediate delivery of the articles, or "oer- 
foriance of the service. When irimediate delivery or performance is re- 
ruired by the public exigency, the articles or service required may be 
procured by open purchase or contract, at the places and in the manner in 
which such articles are usually bought and sold, or such services engaged, 
between individuals, (P. S. § 3709; Jime 25, 1910, c 431, § 23, 36 Stat. 
861,) 

This letter of this statute does not appear to stand in the way of the giving 
of full effect to a proposed statute of the sort set forth above. However, 
it is necessary to examine the judicial treatment of this statute in order to 
make sure that the statute has not been interpreted or construed as requiring 
that the lowest bid or the bid the terms of which are most advantageous to the 
government, ta.king the subject-matter of the particular transaction concerned, 
must be excepted, regardless of any consideration extrinsic of the particular 
bargain involved, 

Recentl^r a federal district court has declared that under the quoted 
existing statute the proposal of the lowest responsible bidder must be accepted 
by the govern: .ent, v/hile holding that a lowest bidder upon a pro;oosal by 
officials of the Federal Emergency Relief Administration for bids couD.d not by 
injunction or mandamus prevent award of a contract to another bidder, OV.^rien 
V. Carney, 6 E, SupD. 761 (.D,C. Mass, 1934), 

Brewster, District Judge, said (p,762): 

"The next question is whether the lowest unsuccessful bidder has any 
such rights as will entitle him to prevent the execution of the contra-ct, 
conceding that it was not awarded in accordance with law. There -/as no 



9426 



-59- 

contrctCtuaJ. relation "betueen the complainant and the Administration 'be- 
cause his iDid had never "been accepted. If the complainant can assert any 
ri/-;hts to the av;ard uhich this coiirt can recognize, they, I tclze it, i.itist 
s-jrin.;-; from some federal statute. I do not find any statute \7hich in 
e:roress terms confers any such rifht upon a low "bidder -'hose "bid has "been 
rejected. Revised Statutes, Sec. 3709 441 U.S.C., Sec. 5 (41 u,S,C,A, 
Sec. 5), requires that purcKases and contracts for suT)->'-lies in any de- 
partment of government shall "be made "by due advertising for proposals 
e;:ce')t -"hen the i)iiDlic exigency requires immediate delivery. It i.iust 
follOT.' as a necessary corollary that this act i^aposes a duty uoon the 
de-oa,rtment to accept the proToosal most advpnts.geous to the government^ 
othervfise the statute \70uleL "be meaningless. It has "been so held, Scott 
V. United States, 44 Ct, 01, 524* It sho\ild "be observed, however, that 
according to the Scott case the duty is to accept the lo'^est responsi'ble 
"bid, 'This result is "both necessary and legitimate. It v.^ould not 'oe to 
the advantage of the government to compel the acceptance of a low "bid 
oro-DOsed "by one who wos unable to perform. Revised Statutes, Section 
370^^ (41 USCA, Sec, 5) v/as enacted for the bemefit of the United States 
.--jrid not for the bidder. American Smelting & Refining Co, v. United 
States, 259 U. S. 75, 42 S. Ct. 420, 66 L, ed. 833; United States v. New 
Yorh e. Porto Rico Steamship Co,, 230 U. S, 88, 36 S. Ct, 41, 60 L. ed. 
161, Colorado Paving Co. v, I.Iur^^hy, C. C, A. 78 P, 28, 31, 37 L, ed, 
R,A, 630, 

"This last cited case denies to an -onsuccessful bidder, even though 
subviitting the lowest bid, any rights to equitable relief. In the 
opinion it is stated: 

"'It is not settled by the great weight of authority that the lov;est 
bi, der csmnot com-oel the i..;.sue of a writ of mandamus to enter into a 
contract with him , , , and the courts hold that he cannot maintain 
an action at law for damages for their refusal to enter into the 
contract, . , , This principle is as fatal to a suit in equitj'^ as 
to an action at law. It goes not to defeat any particular cause of 
action "but to defeat the right to any relief," 

The court's conclusion v/as 

"thr.t on the authorities these ministerial acts of the res"oondents are 
not subject to judicial review and this court is powerless to afford re- 
lief." (p. 763,) 

'Jhile the court remarried that in the statutory phrase "resToonsible bid^- ■ 
cer- "the term 'responsible' means something more than pecuniary ability; it 
includes also judgment, skill, ability, capacity and integrity" (p, 762, q.uot- 
ing from Benson, J, in Vfilliams v. Topeka , 85 Kan, 857, 118 P, 864 (1911) it 
may be doubted, that the courts would include •under "responsibility" com- 
plia.nce ^rith Code provisions although it is conceivable that the courts could 
and :.ii:,ht trc t non-com^pliance as so detracting from the integrity and con— 
seciuentl;- the responsibility of a bidder as to justify award to a higher bid'- 
derwholir.d complied with Code provisions, particularly as the very fact of 
non-coyT-ili.?nce with Code provisions might be the condition which made it 
possible to underbid the bidder who had carried out the Code provisions a"o— 
plicable to him. 



9426 



-60- 

It v-oLilo- seem clear that were the proposed statute enacted the e::isting 
statute set fo:.th woul.d "be treated as not inconsistent v:ith it. The t'.-o would 
seem r.mtually reconcilable. In the decision which has been discussed above 
the Coiu't seems to have held a view of this sort in coinraenting that 

"...The law creating the Federal Emergency Relief Administration mlzes 
no e::ception to the requirements of la.w and re,gulations governing p"ur— 
cho.se of suTTolies and services for government develO"Dments generall;^ . • 
. ." (p. 763). 

Another statute relevant in the present connections is the foll.o.ring one: 

U. S, C. A. § 7 (1) /Title 41 - Public Contract!/ 

"i 7. (l) Miscellaneous suTpulies for executive departments and 
othor C-overninent establishments i n Washington; advertisements and co n-. 
ti-acts for . Except as otheri^ise provided by law all surpnlies o:!' fuel, 
ice, stationery, and other :miscellaneous supplies for the executive de- 
partiients a,nd other Government establishments in Washington, vrhen the 
public exigencies do not reciuire the immediate delivery of the article, 
shall be advertised and contracted for by the Secretary of the Treasury'', 
iroon such days as he may designate." 

The scne consider,ations a-npear applicable to this statute as rjertain to the 
existing statute previously discussed (U. S. C. A. § 5). 

Another statute which would have rare applicability at ost with res^oect 
to Codes is the following one in which the phrase "lowest responsibl.e bidder" 
is included: 

U, S. C. A. § 24 /Title 41 - Public ContractT/ 

"i 24, Contracts for transportation of moneys, bullion, coint and 
_seciu'ities , Tfiienever it is practicable contracts for the transports.tion 
of moneys, bullion, coin, notes, bonds, and other secijrities of the 
United States, and paper shall be let to the lowest responsible bidder 
therefor, after notice to all parties having means of transDortrtion, 
(Jul.y 7, 1884, c, 332, 8 1,* 23 Stat. 204,)" 

Conclusion 

The proposed statute shoul.d not be and probabl*^ '-ould not be held in- 
compatible ■ ith existing statutes, 

Adde ndum 

Attention is invitecl to Section 7 of the attrched Trending "Bill to Es- 
tablish Uniform Reouirements Affecting Government Contracts." (s. 215; H.R. 
134). 



9426 



-61- 

G0VEHMENT-SANCTI01\lED "BOYCOTTS" AlID OTHER PUBLICITY DEVICES 
(Lal^elG, Insignia and Other Forms) 

TA:BLE of CONTENTS 

Page 

Conclusions , 62 

I . Boycott 63 

II. Types of Blue Eagle 63 

III. Blue Eagle and Consumer's Blue Eagl« 63 

IV. Code Eagle 65 

V. LalDels 65 

VI, Distinctions.. , 66 

VI I . Voluntary Use of Insignia 66 

VIII. Comj^ulsory Use of Insignia 69 

IX. Procedure 69 

X. Economic Value 69 

XI . Some ProlDlems 70 



9426 



coN cms IONS 

1) The ri ht of the Goverixient to devise insiOTia indicating; compliance 
\vith P.P.. A, rnd to take measures to prevent the iTnproper use of such insignia 
is "beyond question, ^ . 

2) Tl-.e extent to which the Government may apply the economic pressure of 
boycott to secure voluntary com'pliance depends upon the ends sought to "be oh- 
tained and the reasonableness of the means to attain those ends, 

3) The right of Oon;2^ess to require the use of labels as indicating com- 
pliance v/ith a statute is not subject to serious doubt, provided Congress had 
the constitutional power to pass the statute in quesoion and provided the label 
requirements are reasonable, 

4) Any future lef^islation similar to the N.I. P. A, mi^^ht well include 

the enforcement provisions employed by N.R.A, If it is contemplated that under 
such le£;islation labels are to be used, provision therefor should be made in 
the Act, 

5) Any statute establishing the voluntary or compulsory use of insignia 
or Icbels shoiild make clear provision for the removal of insignia and label 
privileges under ru3.es, regulations, and procedure in conformity ^-.uth due 
Drocess requirements, 

6) The economic va-l^ie of the Lise of insignia cenends entirelj?- upon pub- 
lic sentiment. Any attemrit to appraise the value of an insignia system is 
nothing more than an attempt to anticipate public sentiment. Public opinion 
changes rapidly, and what may be an accurate estimate today may be totally 
useless ne:;t month, 

7) Union labels constitute a valuable property right and in the drafting 
of any legislation similar to the N, R, A, consideration should be given to 
the protection of such labels as far as possible. 



9426 



-DO- 
GO VEMMENT-SMCTIOHED "BOYCOTTS" MD PUBLICITY DEVICES 
La"bels, Insignia, and Other Forms 
I. Boycott 

The tern ""boycott" has been subject to many and varied judicial defini- 
tions. By some courts the use of the terra implies an inherent illegality, 
while Dther courts have held boycotts lawful unless accompanied by illegal 
means. It is important, therefore, at the outset, to define the word as used 
in the above title o.nd as it is to be used in this discussion. The word "boy- 
cott" uill be used herein in its broad sense, impl-'-in-j no illegality and in- 
cluding: r:Trj agreement or combination to withhold business intercourse from 
certain clac£;es of persons and to induce others to withhold such intercourse. 

The use of the Blue Eagle imder the National Recovery Administrr,tion v/as 
freou.ently referred to as a governmental boycott and is the logical starting 
point for a discussion of the subject, A history of the Blue Eagle is being 
written by the N.R.A, Organization Studies Group, and a case study is being 
conducted by the Complisjice Division, This work will not be duplicated except 
where necessary to a proper understanding of this study, 

II « T'.naes of Blue Eagl e 

In practice three varieties of Blue Eagles came into use. The first was 
kno\rn as the Blue Eagle and signified that the person using the Blue Eagle had 
signed and was complying with the President's reemployment Agreement, The 
second was a Consumer's Blue Eagle, which indicated that the person display- 
ing this insignia had expressed a willingness to deal only with those persons 
authorized to display the Blue Eagle, The third was known as the Code Eagle 
and signified that the person using it was a member of a codified industry and 
that he v/as complying with the provisions of the code. In addition to the 
above uses of the insignia, certain codes required that labels bearing the 
N,H,A, insignia be attached to the products of the industry under such codes, 
A brief resume of the salient facts relative to the origin of the various 
types above referred to will disclose inherent differences which were fre- 
quently overlooked* 

III, Blue Eagle and Consumer's Blue Eagle 

Section -: (a) of the National Industrial Recovery Act provides as follows: 

"The President is authorized to enter into agreements with, and to approve 
vcltintary agreements between and among, persons engaged in a tra,de or in- 
dustry, labor organizations, and trade or industrial organizations, 
associations, or groups, relating to any trade or industry, if in his 
judgment su.ch agreements will aid in effectuating the policy of this title 
with respect to transactions in or affecting interstate or foroig-n com- 
merce, and will be consistent m th the requirements of clause (2) of sub- 
section (a) of section 3 for a code of fair competition." 

Pxu'-suant to this provision an agreement knoT,7n as The President's Reemploy-^ 
ment Agreement was f ormijlated. The primary object of this Agreement was to 
imDrove employment conditions by providing maximum hours and minimum wages. 
The Agreement was to remain in force from August 1st to December 31$ t, 1933, 
9426 



-64- 

or to any earlier date of approval of a code of fair competition to which the 
individual signer mi.£;ht "be subject. In Section (10) of the Agreement, the 
signer agreed: 

"To siTD'oort and -oatronize establishnents v/hich also have signed this 
agroonent and are listed as members of N.R.A. " 

Bulletin No, 3 of the National Hecovery Administration, issued July 20th, 
1S3G, set forth the President's Reemployment Program and the Agreement above 
mentioned. Paragraphs 6 and 8 of that Bulletin provided as follovrs: 

" 6, E:.!'") lovers' bad"::e of cooperation 

ITor the public to do its part, it must knovi which employers have done 
their part to -nut people back to work by making these AG-HEEIvIEiTTS with the 
President and by codes. Every industrj^ r.nd every emr)loyer who has agreed 
with the President on this plan, or who has had aD'oroved a code covering 
the vital subject of reemployment, will be enrolled as a member of N,R,A, 
..nd given a certificate and a Government badge showing the seal of N*Pl,A. 
and the words: " Member N,R,A , We do our Dart ." It will be authorized 
to show this badge on all its equipment, goods, communications, and 
premises. Lists of all employers authorized to use this badge will be on 
file at all post offices so that any misrepresentation by unauthoi-ized 
use of N.R.A, bad.ges can be prevented." 

" S . Consumers' badge of cooDeration 

Every cons"amer in the United States who wishes to cooperate in the 
President's reemployment drive and be considered as a member in N.R.A, 
may at any time after August 1, 1933, go to the authorized establishment 
in his locality (to be announced later) and sign a statement of cooperar-» 
tion as follows: 

^1 wall cooperate in reem.plo:vment by supporting aiid patro nizing 

employers and v/orkers who are members, of N.R.A., ' 
Any such signer will then be given and ma^^ thereafter use the insignia 
of consumer membership in N,R.A. " 

It will be noted that while these i^aragraphs referred to insignia,, there 
is no specific reference to the Blue Eagle, The Bu-lletin No. 3, hov/ever, in 
its original issue had the Blue Eagle design stamped on it. N,R.A, Circular 
No, 1, issued July 23rd, 1933, promulgated regulations governing the use of 
N,R,A, insignia, but contains no specific reference to the Blue Eagle, BuJ-le- 
tin No, 4, hovrever, issued shortly thereafter, refers specifically to the 
Blue Eagle; and among the instructions under the heading, "How to Earn the 
Blue Eagle," we find the follov/ing: "Deal only with others 'Under the Blue 
Eagle. ' " 

Bulletin No, 5 of the National Recovery Administration promulgated regu- 
lations on procedure for local N.R.A. compliance boards and provided that era^ 
ployers v/ho willfully persisted in non-comToliance with P.R.A. shoulo. lose the 
right to display the Blue Eagle. 

The signing of the PoR.A,, the compliance therewith, and the use of the 
Blue Eagle signifying compliance were entirely voluntary. By Executive Order 
6335 issued October 14th, 1933, the iraproner use of N.R.A, insignia, was pro« 
hibited and made subject to the penalties provided in Section 10 (a) of 
N.I.R.A. 

9426 



— oo- 



Adjninistrative Orders X-Al dated October 17th, 1933, and X-A2 dated 
Noverii"ber 4th, 1933, established re2:iilations for the use of N^R^A* insi-^^nia. 



IV. Code Ea^le 

As codes of fair competition were adopted for various industries, the use 
of the Blue Eagle was continued, "but instead of signifying compliance with 
P.R.A. , it vras used to signify compliance with the proper code of fair compe- 
tition. The practice was continued until the creation of the so-called Code 
Eagle by Administrative Order X-22 approved April 19th, 1934, 

It has been pointed out that compliance with P.R.A. was entirely voluntary. 
With the adoption of codes, however, comDliance therewith was compulsory and 
non-coiroliance made subject to fine and imprisonment. In the absence of some 
code provision, however, the use of the N.R.A, insignia was optional. 



Y« Labels 

Certain codes required the use of N.R.A. labels» For example, Section V 
of the Code of Fair Competition for the Men's Clothing Industry (No, 15) pro- 
vided as follows: 

"All garments manufactured or distributed shall bear an N.R.A, label, 
which shall remain attached to such garments. Such labels shall bear a 
registration number specially assigned to each manufacturer in the In- 
dustry, The privilege of using such labels shall be granted and such 
labels shall be issued to any manufacturer from time to time engaged in 
the Clothing Industry upon application therefor to the Code Authority, 
accor.ipanied by a statement of compliance with the standards of operation 
prescribed by this Code. The privilege of using such labels and the 
issuance thereof may be withdrawn and cease or may be suspended in respect 
of any such manufacturer whose operations, after apT)ropriate hearing "by 
The Lien's Clothing Code Authority and review by the Administrator, shall 
be found to be in substantial violation of such standards. Manufacturers 
shall be entitled to obtain and use such labels if they comply v;ith the 
provisions of this Code, 

"The Men's Clothing Code Authority may establish appropriate machinery for 
the issuance of such labels in accordance with the foregoing provisions," 

By this provision, the use of N,R,A. labels was made mandatory and Section 
2 of Article IX of the Code of Fair Competition for the Retail Trade (No, 60) 
provided as follows: 

" N.R.A . label , — No retailer shall purchase, sell, or exchange any mer- 
chandise manufactured under a Code of Fair Competition which reo;uires such 
merchandise to bear an N.R,A, label, unless said merchandise bears such 
label. Any retailer rightfully possessing the insignia of the N,R,A» 
who has in stock or purchases similar merchandise which has been manu- 
factured before the effective date of the Code of Fair Competition re- 
quiring such merchandise to bear an N.R.A. label nay attach thereto the 
N.R.A. insignia," 



9426 



-66- 
Under these codes both compliance and the use of labels were o'bli.;i'atory. 

VI. Distinctions 

The distinction "between volimtary and compulsory use of labels is ii.ioort- 
and, c'.n<^. therefore the statement that imder P.R.A. s-n^. under many codes the 
use of the insignia, was optional, while under other codes the use of the in- 
sip,nia v.^as obligatory is repeated. The importance of this distinction lies 
in the fo.ct th^t Congress might authorize the use of insignia, indicating a 
course of conduct which Congress, had no power to compel, while the compulsory 
use of insignia co-old only be required in those cases where Congress he.d. power 
to act. 



VII. Voluntary Use of Insi.gnia 

The use of insignia to indicate a certain status is too old and well es- 
tablished in tiie la^ to be questioned seriously at the present time. The use 
of badges to indicate mer.bership or to indicate v/ar service, and the use of 
labels to indicate union origin of manufactured goods are examples of the time- 
honored use of insignia. The right of the Government to devise insignia in- 
dicating compliance with P.R.A, and to take measures to prevent the improper 
use of such insi^Tnia was beyond question. But it must be remembered that in 
the regulations concerning the Blue Eagle, the Governmentnot only sought to do 
these things, but also to establish v^hat was tantamount to a boycott against 
those not "under the Blue Eagle," While the question is not free from doubt, 
the great v/eight of p^uthority supports the legalit^^- of such a boycott. 

In Penns^/lvania Railroa-d Company v. United States ^iailroad Labor Board et 
al., 261 U.S. 72 (1923), suit was brought to enjoin publication of a decision 
of the Railroad Labor Board to the effect that the plaintiff had violated a 
previous decision of the Board. Before considering the arguments of the jjlain- 
tiff, the Court described the nature of the Board as follows: 

"The decisions of the Labor Board are not to be enforced by process. The 
only sanction of its decision is to be the force of public opinion in- 
voked by the fairness of a full hearing, the intrinsic justice of the 
conclusion, strengthened by the official prestige of the Board, and the 
full publication of the violation of such decision by any party to the 
proceeding. The evident thought of Congress in these "orovisions is that 
the economic interest of every micnber of the Public in the undisturbed 
flo\7 of interstate commerce and the acute inconvenience to which all must 
be subjected by an interruption caused by a serious and widespread labor 
dispute, fastens public attention closely on all the circumstances of the 
controversy and arouses public criticism of the side thought to be at 
fault. The function of the Labor Board is to direct that public criticism 
against the party who, it thinks, justly deserves it," 

The plaintiff contended that its right to deal with individual representa- 
tives of employees as to rules and v/orking conditions was an inherent right 
which could not be constitutionally taken from it, so that the decision of the 
Labor Board compelling the 'olaintiff to recOj^nize labor unions was invalid. 
The Court answered this contention as follo'-'s; 

9426 



-67- 

"3ut Title III was not enacted to provide a trilDiinal to determine '7lmt 
\7ore the legal rights and obligations of railvay emiDloyers and employees 
or to enforce or protect them. Courts can do that. 'Tlie Labor Board nas 
created to decide ho^-' the parties ought to exercise their legal ri^yhts 
so as t-. enable them to cooperate in running the railroad. It vras to 
reeich a fair compromise between the parties without regard to the legal 
rij-'hts upon which each side rai-rht insist in a court of law. The Board 
is to act as a Board of Arbitration. It is to give expression to its 
vievj of the moral obligation of each side as members of society to agree 
upon a basis for cooperation in the work of running the railroad in the 
public interest. The only limitation upon the Board's decisions is that 
they should establish a standard of conditions, which, in its o;ninion, is 
just and reasonable. The jurisdiction of the Board to direct the 2Darties 
to do v;hat it deems they should do is not to be limited by their constitu- 
tional or legal right to refuse to do it. Under the act there is no con- 
straint upon them to do what the Board decides they should do except the 
moral constraint, already mentioned, of publication of its decision," 

The injunction was therefore aenied, the Court concluding that the de- 
cisions were v.dthin the lawful function of the Board to render, and not being 
compulsory, violated no legal or equitable right of the complaining company. 
The case was followed in Pennsylvania Federation v, Pennsylvania Hailroad 
Company, 257 U.S. 2C3 (1925). 

It will be noted that in the above case the Pennsylvania Ptailroad sought 
an inj-'jjiction against publication of the decision, and there is no indication 
that the Board sought to obtain agreements to boycott those who did not coraiDly 
with their decisions, as was done in the case of the P.P. A. However, in each 
case, the weight of public opinion was the only nesjis of enforcement. 

The Aiierican Federation of Labor became involved in a dispute as to hours 
of labor "ith the Buck Stove and Pgjige Company, This resulted in a boycott 
being declared against the Stove Company and in its name being placed on the 
American :;?ed': ration of Labor's "unfair list" and on its "we don't patronize 
list," In addition to this, other methods, such as speeches and editorials, 
were used, v/hich tended to coerce third persons into refraining from dealing 
with the Stove Company. The court, while granting a part of the relief prayed 
for ''oy the complainant, held: 

"xio one doubts, I think, the right of the members of the American Federa- 
tion of Labor to refuse to patronize employers whom it regards as imfair 
to labor. It may procure and keep a list of such employers, not only for 
the use of its members, but as notice to their friends that the employers 
v.'hose names appear therein are regarded as unfair to labor. This list 
ma3^ not only be procured and kept available for the members of the asso- 
ciation and its friends, but it may be published in a newspaper or series 
of papers. To this extent they are within their constitutional rights* 
at least, where a court of equity cannot intervene." (A.F. of L. v. Buck 
Stove and Range Co., 33 App. L, C. 83 - App, to U.S, s, Ct. dismissed in 
219 U.S, 531 on the ground that as the case had been settled by the 
parties, the question was a moot one.) 

The above quotation a;opears to be sup-ported by the great weight of 
authority in this coiintry, and since it is not illegal for members of the 
American Federation of Labor to establish a boycott, it is difficult to see 

9426 



-68- 

how it coiild "be held that the members of trades and industries suhject to 
N.R.A. corld not do likewise, 

llDii-^ "boycotts have oeen held "onlawful imder the anti-trust la^TS heca'j.se 
of their i^estraint upon interstate commerce, Le^-al memoranda X-141 and X-245 
of the N.It.A. Legal Research Division contain citations of many such cases. 
They had no r-jolication, however, to any question arising under the JTational 
Industrial Recovery Act because of Section 5 of Title I of the Act, i/hich reads 
as follo'"s: 

''Fnile this title is in effect (or in the case of a license, uhile section 
4 (o) is in effect) and for sixty days thereafter, any code, agreerient, 
or license aiD-i-iroved, prescribed, or issued and in effect under this title, 
and pjiy action complyin:^' -/ith the provisions thereof taken during such 
"ocriod, shall he exempt from the provisions of the antitrust lar-s of the 
United States. 

Puolic hesolution No, 26, er'tending the National Industrial :iecovery Act 
to A'oril 1st, 1?56, rest.icted the operation of this provision. In rny future 
consideration of a systen similar to the P,R,A, or the use of insignia there- 
under, careful provision should he m.'*de to suspend the operation of the anti- 
trust la.vjs so far as such system is concerned. 

In Holcomhe v. Cramer, 231 Massachusetts 99, 120 N.E. 354 (1918), the 
Massachusetts Court had before it a statute establishing a Minimum \7a,ge Cora- 
m.issicn for the State of Massachusetts. The statute authorized the Coxmission 
to fix minimran v/ages for v.'oraen. The v'ages fixed vere not compulsory and could 
be disregarded 'oy emiployers. However, the Commission was directed to publish 
the names oi those employers who failed to abide by the minimum wages establish- 
ed. Suit was brought by members of the Minira-ujn Wage Commission against the 
defendant to force the Irtter to give evidence as to the wages paid by him. 
Defendant contended that the statute was miconstitutional. The Coui^t held the 
statute constitutional on the ground that it conta,ined no compulsory features, 
but stated: 

"There are limits to the right of the public to inquire into orivo.te 
affairs. The coercion resulting from legislation, in form not compulsory, 
i.iay in ;jrp.ctice be so severe as to leave no alternative save ccm'olicnce. 
In such a case its validity wou].d deioend not ■oiTon its form but its sub- 
stance. But it is not necessary to discuss limitations of this character, 
for the rea.son that the present statute does not according to its terms 
reach into tria.t realm. There is nothing in the record to warrant the 
inference tl-ia.t such is its actioal effect," 

The extent to v;hich the Government may apnly the economic pre s •-.ure of 
boycott tc secure volimtary com^;)liance depends u"non the ends sought to be ob- 
tained and the reasonableness of the mep.ns to attain those ends, Means that 
may be entirel3'- legal under one set of circumstances may be illegal "under 
another, as being tantamo-ojit to compulsion. Each case must rest on its ov.ti 
facts, and no ?,t tempt will be iiiade here to do .'ore than indicate the general 
principles involved, it being inroossible to conceive and discuss all the 
various phases tjfici.t mi^-dit posr-.iblj^ arise. 



9426 



VIII . ComDiilsory Use of Insi.:??iia 

The v.se of insignia can only be required by the Congress in matters fall- 
ing '-ithin its constitutional powers. The use of various kinds of starris a,s 
indicating the payment of taxes is well established. The right of Congress to 
require the use of labels as indicating compliance with a, statute is not sub- 
ject to serious doubt, provided Congress had the constitutional povrer to pass 
the statute in question 8.nd.. the label requirements are reasonable. All tliat 
has been said \:ith reference to the Government's T-)0wers v/ith reference to the 
use of voluntary insignia applies with eoual force to the use of conpulsory 
insignia, and since those not using the insignia, would be law brea,kers, the 
Governiient might reasonably use means to make a boycott affective that would 
be improper imder a voluatary system. 

Under the N.ItR.A. , violation thereof, or of any code promulgated there- 
under, v;as -o-jnishable by fine. The District Courts were also given jurisdic- 
tion to prevent and restrain violations of codes of fair competition; and, in 
addition to these remedies, the Federal Trade Commission was empowered to take 
appropriate action. The Act nowhere provided for the use of labels as a means 
of obtaining compliance; but, under the broad provisions of the Act, such pro- 
visions v/ere properly incorporated in codes of fair cOinpetition. 

Any future legislation similar to the II, I.R.A, might well include the en- 
forcement provisions em;iployed by N.R.A. If it is contemplated that imder such 
legislation labels ere to be used, provision therefor should be made in the 
Act, 



IX* Pr ocedure 

The isGuance of labels from time to time under codes requiring ].£.bels was 
in effect a license frequently renewed. Failure to comoly with the Act ter- 
minated ihe right to purchase labels; anc since labels were necessarj^ to do 
business lavrfixily, it really ter.iinated the right to do business, ^Tliile the 
privilege of using labels and N.R.A, insignia v;as in some respects a mere 
license, in some industries it was tantamoimt to 8. franchise and as such con- 
stituted a property right within the Fourteenth Amendment of the Federal Con- 
stitution. (Frost V, Corporation Commission, 278 U.S. 515 (1929)), It lia.s 
been held that the restraint imposed UTion legislation by the due process 
clauses contained in the Fifth and Fourteenth Amendments of the Constitution 
is the same. (Heiner v. Donnan, 285 U.S. ^'12 (l9o2)). It would thus seem 
that the right to use labels could oe terminated only in accord v/ith due pro- 
cess requirement s. Too many N.R.A, mem.oranda have oeen written concerning the 
requirenents of due process to warrant any discussion of the subject here, ex- 
cept to state that any statute establishin.-' such a system should ma.ke clea,r 
provision for the removal of label privile^-es imder rules, regulations, and 
procedure in conformity with due nrocess reouirements. 



X. Economic Value 

The economic value of the use of insignia depended entirely upon public 
sentiment. The rush of many millions to secure Blue Eagles and Consumer's 
Eagles indicated overwhelming public support, and the economic pressure 

942B 



-70- 

throii<::ho-.it t:i6 entire co-imtiy wo.s at th.-'t time very substantial. The liistorjr 
of the Blue Sa/-;le a"bove referred to v/ill give the facts and figures indicating 
the e;:tent of the public support, 

Aiiy attempt to apnraise the value of an insi:r:nia system is notiiin.-; more 
than an atteir-jt to anticipate riuhlic sentiment. Public opinion chan;;;es rapid- 
ly, ond what may he an accurate estiimte today moy he totally useless ne::t 
month. It shou-ld he noted, however, that a lahel system that "'OuD.d ho very 
popular in one part of the country would he very i.mpopular in another, Lihe- 
V'^ise, a lahel system that would he very effective and popular in one industry 
would he totally ineffective and very unpopular in another. In atteriToting to 
draft any le;;.^islation estahlishing a system of labels and insignia, due con- 
sideration shou].d he plven to these and other factors. 



XI. Some Problems 

Insignia may be used to indicate the status of a particular individual in- 
sofar as compliance is cmcerned, Por various reasons it wo^old seem preferable 
for the insignia, to stand for com-oliance, rather than non-compliance, Pron 
the achministrative aspect it is easier to permit individuals to publicize their 
compliance and to denrive them of such privile,_;9 on proof of non-coimliance 
than to s.lter the status quo cmd to sti,gmatize \dth the "scarlet letter" after 
the offense has been discovered, Faile both involve a certain amount of de- 
ception ujitil non-compliance is discovered, the former lorompts initial action 
on the individual's part and hence per-iit the im losition of conditions at the 
outset, lloreover, the individ"ual is anxious affirmatively to indicate his 
complir.nce "oy a significant insi.;.?piia, Pinall''", it -ou.ld seem that both the 
consur.iin;: i^iihlic and the regulated individual would be more receptive to a 
systeri that affirmatively publicizes the good merchant than to one that af- 
f irraativel"'- singles out the "had man," Since the effectiveness of the use of 
such insignia is based upon the joint cooperation of the public and the group 
re_^L-i].o.ted, it is vital that consideration be riven their psychological pre- 
ferences as far as they may be determined, 

A serious problem v-ould arise if the insignia did not have universal 
application. In all probability, vmatever regulatory law is adopted, it will 
not appl3^ to every individual engaged in trade or industry. iJoreover, it is 
probable that the groups subject to it -ill not he defined in tens that the 
public can apnly with certaintv, since the extent to \7hich an indlvlv?iel is 
engaged in or affects interstate commerce vrin be an important factor. As a 
result, there will be a Irarge number of individuals who ^^ill be outride the 
scope of the law, but ^-'hose freedom from regulation will not be apparent to 
the general public. If this group is not permitted to display the insignia 
of cor-nlipjice, this inabilitj)' of the Toublic to distinguish the members of this 
group from those individuals who have oeen deprived of the insignia for non- 
comjlio.nce will obviousl-/ result in loss to the former. This could be remedied 
by either permitting such individuals to display insignia upon volunta.ry com- 
pliance vTith certain standards or by permitting them to indicate in some 
standardized xj8,y that they are exerapt from re.gulation. Both methods are 
difficult to ap-oly. The first necessitates the difficult administrative task 
of establishing and supervising standards for these individuals. The second 
necessitates a preliminary clascif ication of the entire industrial life of the 
nation. Because of the legal problems involved and because of tne ;Dreced.ents 
that -.--ill be established by such classification, the task would be both bur- 
densome and hazardous to those administeri-ng the law, 
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The use of informative insignia can onl;,' be effective if the incignia and 
;7hat it strjicls for a.re •■.idely publicized. The consuming puhlic 7/ill he urj-^'ed 
in one forr.i or another to patronize those concerns that display the insii^Tiia, 
since such display indicates th:^,t the inlividual is complying \"ith the la\7 
and hence conducting his uusiness on the "basis of fair and decent standards. 
Since only the Government may -Tithdraw the right to disolay such insi-^nia, the 
Govornr.ient is thus placed in the position of guaranteeing to the puolic that 
each individual displaying the insignia is complying vdth lav; and is entitled 
to c.ispl-ay the insignia. It does not seem possible for the Government to live 
up to th:.t guarantee — the administrative task is too great. Moreover, even 
•,7hen violation is detected, there v/ould be an int ir7a,l of time het^-ecn detect* 
tio2i and reiioval of the privilege to dis'ol.ay the insignia, during nhich the 
Govern::ent v/ouLd be ;oractically pc/erless to infm; the puhlic that the tacit 
guarantee could not 'be relied upon. The use of insi ;-ni.a indica.ting ncn-corv- 
pliance c.-es not alter this difficulty, 

Lahels 2-ave boen used in th.is country more thrn half a century/ to indi- 
cate goodc manufactured in accord:_mce ^.vith certain standards. Such Ici/oels nere 
first used to indica.te tliat cigars vere made "b-"- -Thite and not "by coolie laoor. 
Union lahels have 'oeeri used for many years to indicate goods made in accordance 
with union standards. In raajiy instances, the standards indicated by the union 
label \7ere higher thj3,n those required under codes and indica.ted by the Blue 
Eagle, The Union Label Trades Department of the American federation of Labor 
protested that the use of the 31ue Eog-le v;3.s interfering '-^ith the use of union 
labels, ''O action vras talren, ho^/ever, and the orr.-anization then published a 
namphlet reading in part as follo'-^s: 

"There are some who think that the Blue Eagle is a substitute for the 
Union Label, This false i^^ea ir; fostered by certain anti-union employers 
xrho see in it a distinct advantage, because the Union Label rerjresents 
stajidards of em"nloyment superior to those required by the National Re« 
covery Administration, 

"The Blue Eagle does not signify that products are made under trade union 
c.'nditions. Daily, ne^vspapers direct ouj: a.ttention to the business es-- 
tabj.ish.ients which are entitled to use the Blue Eagle, but v/hich conv- 
pletely ignore proper representation and collective barga.ining agreements 

^oy denying their uorkers the right to crgs.nize,, 

"• , .Therefore, v;hen it comes to Union Labels and the Blue Eagles, look 
for both of them, if you choose, but dem:aid the Union Label, There is no 
substitute! " 

It is difficult to see hov/ this problem can be satisfactorily met. It 
does not seen lilcely that in the im.mediate future the Government rdn attempt 
to coi.ipel the payment of ■•union wtiges. Even if the Government did ma.ke such 
an atteiipt, the unions v^OLild no doubt raise thei.- standards, so that in a?.l 
probability there v/ill be continually a hiatus bet^-een any standards thxP.t m.ay 
be established by the Government and the standards established by trade rjiions. 
Union labels constitute a valua,ble property right, and in the drafting of any 
legislation si-..iilar to the N,Il,A,, consideration should be given to the pro- 
tection of such labels as fa,r as possible. In order to do this, it might be 
well to lia-ve different insignia for union and non-ionion manufactured goods. 



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