43 Wn.2d 562, N. MON WAI et al., Respondents, v. GEORGE E. PARKS, Respondent, JACK T. WATKINS, Appellant
[No. 32349. En Banc. Supreme Court October 26, 1953.]
N. MON WAI et al., Respondents, v. GEORGE E. PARKS,
Respondent, JACK T. WATKINS, Appellant.«1»

GRADY, C. J. (dissenting) - This case is an illustration of how a very plain and simple business transaction may by a process of reasoning and construction of a contract become complicated and confusing in an effort to avoid the payment of an honest debt. The defense to the action for unpaid rent and the arguments made in its support fall within the category known to trial lawyers as the "cuttlefish" defense or argument - one whereby the debtor so darkens the legal waters that he may confuse the pursuing creditor and thus escape his obligation.

The contract between the parties had a twofold but severable aspect. In one part, Parks and Watkins agreed to and did pay to Wai a sum of money to defray a part of the cost of making improvements upon the property being leased by them. The other part of the contract was a lease of the property for a term of years with a monthly rent reserved.

570 WAI v. PARKS. [43 Wn. (2d)

The lease contained the usual provision that, if rent was not paid, the lessor had the option to terminate it and recover possession of the property. The party who prepared the contract-lease added to the latter provision the words "and all moneys paid by lessees to lessors shall be forfeited as liquidated damages to lessors." It is these words that furnish the loophole through which Watkins hopes to escape and avoid his debt. The trial judge grasped the situation, saw through the fallacy of the contention that the words "all moneys paid" had reference to either the five thousand dollars paid for improvements or to the earned installments of rent and declined to be led into a legal cul-de-sac. It seems to me that the quoted words have reference to covenants in the lease and have no relation to the executed part of the contract for the improvements or the five thousand dollars contributed to the cost thereof. However, if we consider the contract-lease in its entirety, construe it most strongly against the lessor who prepared it, give effect to each and every term and provision thereof, and allocate the liquidated damage clause to both the item of five thousand dollars and the rent that had accrued and been paid up to the time of the breach of the lease as is done in the majority opinion, we must then determine whether such sums of money fall within the liquidated damage clause and constitute "all moneys paid by lessees to lessors" and that such sums of money or either of them stand in lieu of unpaid rental which the lessors seek to collect in an action to forfeit and terminate the lease.

In argument, counsel for the lessor who prepared the contract explained that the liquidated damage provision was merely "thrown in" in order to be overly cautious. Whether a liquidated damage clause in a contract can serve any purpose depends upon the remedy a party to it may seek, but in order to be of any use there must be something to which it may be applied, such as a sum of money paid or deposited when the contract is made, or a provision in the contract fixing an amount to be paid in case a damage is sustained. In real-estate contracts and leases, a liquidated damage

Oct. 1953] WAI v. PARKS. 571

clause may have a twofold objective. Such a provision avoids the necessity of returning money paid on the purchase price or for rental when rescission is sought and is secured. Forfeiture is sometimes confused with rescission, but the two are not the same. In either case, the contract is terminated and at an end, but in the case of forfeiture the contractual clause therefor is enforced and further performance of the contract ended, while in the case of rescission the contract is set aside and annulled and is the same as though it never existed. In the former case, the vendor or lessor has the right to keep the money that has been paid on the purchase price or for rent without any affirmative provision in the contract authorizing him so to do, but in the case of rescission each party must be placed in statu quo in so far as is possible, and this includes the return of the moneys paid on the purchase price or for rental.

A vendor or lessor may be damaged if the covenant to pay the installments of purchase price or rent are breached by nonpayment and he takes the property back. The loss of his bargain may be a damage, or the property itself may have been injured by the vendee or lessee. The amount of such damages may be difficult of proof to satisfy the requirements of the law on that subject. If the vendor or lessor is fortified by a liquidated damage clause and resorts either to the remedy of rescission or the enforcement of the contract or lease, moneys paid may be retained in lieu of the amount of his actual damage.

Mon Wai sought enforcement of his lease in two instances recovery of unpaid rent and termination of the lease. He did not make any claim for damages; he did not seek rescission of the lease. In the enforcement of the two covenants of the lease, he had no use for the liquidated damage clause, and neither did the lessees. It is an anomaly indeed to say in a case of this kind that installments of rent a lessee has paid or what he has contributed to the improvement of the leased property as part of the consideration for the lease, stand as liquidated damages in lieu of accrued and unpaid rental installments. This becomes apparent when we

572 WAI v. PARKS. [43 Wn. (2d)

compare the case now under consideration with such cases cited in the majority opinion as Smith v. Lambert Transfer Co., 109 Wash. 529, 187 Pac. 362; Pacific & Puget Sound Bottling Co. v. Clithero, 162 Wash. 156, 298 Pac. 316; and Benjamin Franklin Thrift Stores v. Jared, 192 Wash. 252, 73 P. (2d)525.

The Smith case falls within the class where a lease provides for a total sum of rental to be paid and payment of a substantial sum is made to apply upon the last installment, and it is stipulated that such sum shall constitute liquidated damages in case of forfeiture of the lease. The principal question before the court in that case was whether the sum of five thousand dollars paid was a penalty, but treating it as liquidated damages the court, quoting from Barrett v. Monro, 69 Wash. 229, 124 Pac. 369, pointed out that a loss of the tenancy might cause damages to the lessor difficult of ascertainment in the event of lessee's default in payment of rent and a termination of the lease by the lessor. In such a case, the money paid would cover such damages.

In the Clithero case, a part of the consideration for the lease was a deposit with and a payment to the lessor of two thousand dollars. The lease provided that, in the event there was a default in the payment of rent or in any of the conditions or covenants of the lease, this sum should be forfeited as liquidated damages. The lessee defaulted in the payment of a considerable amount of rent; an unlawful detainer action was commenced in which it was sought to recover double the amount of rent due and possession of the premises. It was decided that the deposit covered the unpaid rent.

In the Jared case, a sublessee deposited forty-five dollars with the sublessor, and it was provided that, if the lessee performed the terms of the lease, the forty-five dollars should either be refunded at the termination of the lease or credited on the last month's rental. It was further provided that if the lessee failed to pay rental, the lease might be canceled and the forty-five dollars retained as liquidated damages.

Oct. 1953] WAI v. PARKS. 573

In the case before us, the lessees made no deposit with the lessor to be retained in lieu of unpaid rental installments. There was no fixed sum agreed upon that the lessees agreed to pay in the event they defaulted in the payment of rent. The item of five thousand dollars was not any such kind of a deposit. It was no different than if the lessees had paid the money direct to the one who made the improvements on the property.

The cases above referred to and some of those cited in the opinion discuss the subject of liquidated damages, and from them one should conclude that neither the item of five thousand dollars nor the accrued and paid rentals constituted "moneys paid by lessees to lessors," which would constitute liquidated damages.

The judgment in favor of N. Mon Wai should be affirmed.

HILL, WEAVER, and OLSON, JJ. (dissenting) - We concur in the dissent of the Chief Justice, except as to the opening paragraph.

43 Wn.2d 562, N. MON WAI et al., Respondents, v. GEORGE E. PARKS, Respondent, JACK T. WATKINS, Appellant[No. 32349. En Banc. Supreme Court October 26, 1953.]N. MON WAI et al., Respondents, v. GEORGE E. PARKS, Respondent, JACK T. WATKINS, Appellant.«1»

43 Wn.2d 562, N. MON WAI et al., Respondents, v. GEORGE E. PARKS, Respondent, JACK T. WATKINS, Appellant
[No. 32349. En Banc. Supreme Court October 26, 1953.]
N. MON WAI et al., Respondents, v. GEORGE E. PARKS,
Respondent, JACK T. WATKINS, Appellant.«1»