thorities seem to sustain this proposition, holding that, in case one of the sureties not a party to the agreement for the extension should pay the same, the implied right by virtue of the reservation existed in him to at once bring an action against the other parties who had stipulated for the extension, and that his rights were in no wise impaired. 2 Daniel, Neg. Inst. § 1322, and cases cited; Story, Prom. Notes (7th Ed.) § 416. As to whether section 756 (volume 2) of the Code, authorizing any person bound as surety to require the creditor to forthwith institute an action upon the contract when the right of action has accrued, or, as provided in section 757, in case of a failure to do so within a reasonable time, that the surety would be released, would affect this proposition, we are not called upon, and do not desire, to determine in this case, as the point is not raised by counsel, and we are of the opinion that the second point made by the respondent must be sustained, which is that the taking of another surety under the agreement for the extension released Bussell, who was not a party thereto. This point seems to be sustained by the authorities. No case has been cited to us directly holding the opposite, although a number have been called to our attention holding that the addition of a surety would not discharge the principal maker, because it in no wise altered the contract which the maker of the note had entered into, his obligation being to pay the full amount of the note without any right of recourse against the sureties. But, as applied to a surety, the case seems to be different, because it is an alteration of the contract as to him. Some of the reasons given for holding that a surety not a party to such an agreement is released are that the action might be brought in another jurisdiction, by reason of the addition of another party; that the amount the nonconsenting surety, in case he should pay the note, would be entitled to receive from the sureties with whom he joined by way of contribution, would be lessened; that the integrity of the instrument would be affected thereby. And a further reason is given that the added surety might make a payment upon the note, and thus extend its time, or renew it, as against the statute of limitations. 2 Brandt, Sur. (2d Ed.) § 380; 2 Pars. Notes & Bills, pp. 241, 561; 2 Daniel, Neg. Inst. §§ 1373-1375, 1387-1389.

The motion for a nonsuit was properly granted. Affirmed.

$4,000, recited a consideration of $7,050, and provided that, if the grantee should erect on the premises buildings worth $16,000, the note would be canceled, but would otherwise remain in force. Held that, since the damages to the grantor from failure to erect the buildings are uncertain and difficult to prove, the $4,000 will be considered as liquidated damages, and not as a penalty.

Appeal from superior court, Snohomish county; John C. Denney, Judge.

Action by the Everett Land Company against John J. Maney and Charles S. Zurn. Judg ment for plaintiff, and defendant Maney appeals. Affirmed.

A. R. Titlow, for appellant. Francis H. Brownell, for respondent.

DUNBAR, J. This is an action brought by the respondent to foreclose a mortgage for purchase money upon four lots in the town of Everett, in Snohomish county, Wash.; said lots being purchased by the appellant in the spring of 1892. In addition to the contract to pay $3,050 for the four lots, the appellant gave an obligation, which is termed a "bond," in the sum of $4,000, which obligation was accompanied by a note for that amount. For the balance of the amount claimed, no note was given, and for this amount the respondent asks no personal judgment against the appellant. The respondent, in a contemporaneous writing, agreed, in case the appellant should build upon the lots sold a brick house of the value of $16,000 within 18 months, the note for which the $4,000 was given should be released. This action seeks to recover, in addition to the amount for which no note was given, the sum of $4,000, with interest on the same since the date of its execution, and to foreclose the mortgage for that amount. No question is made by the appellant concerning the validity of the judgment for anything more than the note for $4,000 with interest. Judgment was rendered in favor of the respondent for the whole amount claimed, including the $4,000 note, from which judgment this appeal is taken.

It is the contention of the appellant that the $4,000 was in no sense a part of the purchase price, but that it was a provision for a penalty, and that the respondent must bring his action at law to recover whatever damages he can prove himself to have sustained by reason of the breach of the contract in not building; it being conceded that the contract was not complied with in that respect. It appears from the correspondence in the record that, outside of the $4,000 note, the price asked for the lots by the company was $3.050. On the 4th of March the following instruments in writing were executed, all at one time and on one sheet of paper:

"No. 90. Building Bond. This memorandum witnesseth that the Everett Land Company, a corporation, has, by deed of even date herewith, sold and conveyed to John J. Maney the following described real estate

in Snohomish county, Washington, to wit: Lots one (1), two (2), three (3), and four (4) in block six hundred and eighty-three (683), as shown upon the plat of Everett now on file in the auditor's office of said county, for the consideration of seven thousand and fifty dollars, in part payment of which sum the said John J. Maney has this day executed to the Everett Land Company the following promissory note:

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$4,000.00. Everett, Wash., 4th March, 1892. Eighteen months after date, without grace, for value received, I promise to pay to the Everett Land Company, at the office of said company in Everett, the sum of four thousand dollars, with interest from date at the rate of eight per cent. per annum until paid; principal and interest payable in United States gold coin. In case suit is instituted to collect this note, or any portion thereof, I promise to pay the further sum of four hundred ($400.00) dollars as attorney's fee in such case. J. J. Maney. Due 4th Septr. 1893.'

"In case John J. Maney shall, within eighteen months from this date, cause to be erected and completed, ready for ordinary occupation, on lots 1, 2, 3, and 4 in block 683, above described (or any of them), a brick or store building or buildings, to be commenced within six months, and costing not less than $16,000.00, then the above note shall be canceled and returned to John J. Maney, otherwise paid according to the terms thereof. Dated at Everett, Wash., this 4th day of March, 1892. The Everett Land Company, by Schuyler Duryee, General Manager."

On the same day the respondent executed in legal form a deed to said above-described property to the appellant, alleging the consideration to be $7,050; and on the same day a mortgage was executed by the appellant in favor of the respondent on the lots sold to secure the respective sums of $763, $762, and $762, due respectively March 4, 1893, March 4, 1894, and March 4, 1895; also, specially securing the sum of $4,000 and interest thereon according to the terms of the nonnegotiable promissory note,-describing the note above mentioned. There are some other letters and notices given to the appellant by the respondent before the execution of these instruments, which it is claimed by the appellant conclusively show that the purchase price of the lots was actually $3,050, instead of $7,050, and he contends that the correspondence establishes this proposition be yond a question. Conceding, for the purposes of this case, that the actual amount asked for the lots was as contended for by the appellant, and that the $4,000 was no part of the purchase price,-although there are cases which hold exactly to the contrary, -yet the question is left in this case as to whether or not the note which was given for the $4,000 was intended as a penalty, in which case the action upon the bond would have to be brought by the appellant, and

judgment obtained for the amount of damages proven, or whether it can be considered as liquidated damages. If it is to be considered as liquidated damages, then there would be nothing left for the jury to determine, and the court would have jurisdiction in this case to enter judgment as it has done. There is some conflict in the authorities on this question, and it has been found difficult, and even impossible, to lay down a uniform rule governing all cases; but from the adjudications certain rules have been formulated, which have received the sanction of the great majority of the courts, and which it may be said are to-day universally followed, so that the only question is as to the application of the rule to the facts in a given case. The first rule is that: "Wherever the payment of a smaller sum is secured by a larger, the larger sum thus contracted for can never be treated as liquidated damages, but must always be considered as a penalty." That rule was favorably commented upon, and the principles which it enunciates were followed, by this court in Krutz v. Robbins, 12 Wash. 7, 40 Pac. 415, where it was held that: "An agreement in a note and mortgage securing it that in case of default in the payment of any installment of interest, insurance premium, taxes, or the principal, the mortgagor will pay an increased rate of interest, is in the nature of a penalty, and is unenforceable in a suit for foreclosure." That case is cited by the appellant, but we think that the principles decided and discussed there do not apply to this kind of a case; nor does this case, as we understand it, fall within the rule announced above. The payment of $3,050, which it is claimed by the appellant was the purchase price of the lots, is not, under the terms of this mortgage, secured, or attempted to be secured, in any way by the $4,000 note. So far as the mortgage is concerned, the one does not depend in any manner upon the other, but the two simply form the consideration for which the deed is alleged to have been given. The next rule is that: "Where an agreement is for the performance or nonperformance of only one act, and there is no adequate means of ascertaining the precise damage which may result from a violation, the parties may, if they please, by a separate clause of the contract, fix upon the amount of compensation payable by the defaulting party in case of a breach; and a stipulation inserted for such purpose will be treated as one for 'liquidated damages,' unless the intent be clear that it was designed to be only a penalty." The third is that: "Where an agreement contains provisions for the performance or nonperformance of several acts, of different degrees of importance, and then a certain sum is stipulated to be paid upon a violation of any or of all such provisions, and the sum will be in some instances too large, and in others too small, a compensation for the injury

These rules are set out in their order by Mr. Pomeroy in his work on Equity Jurisprudence (volume 1, § 441), and the author, in presenting the third rule, says: "This rule has been laid down in a somewhat different form, as follows: Where the agreement contains provisions for the performance or nonperformance of acts which are not measurable by any exact pecuniary standard, and also of one or more other acts in respect of which the damages are easily ascertainable by a jury, and a certain sum is stipulated to be paid upon a violation of any or of all these provisions, such sum must be taken to be a penalty,"-thus carrying out the idea that, to constitute a stipulated sum a penalty, the damages must be easily ascertained by a jury, and that if, under the circumstances of the case, the damages cannot be ascertained with any degree of certainty or safety, the stipulated sum must be considered liquidated damages. It seems to us that this case falls squarely within the second rule announced, that there is no adequate means of ascertaining the precise damage which may result from a violation, and that the parties, therefore, may, if they please, contract to fix upon the amount of compensation payable by a defaulting party in case of a breach. Many cases are cited by Mr. Pomeroy to sustain this doctrine, and in many of them the circumstances are identical in principle with the circumstances as shown by the record in this case. The appellant cites, as being parallel with the case at bar, the case of Longworth v. Askren, 15 Ohio St. 370, where it is said: "A note payable in a series of installments provided that a less sum would be accepted in full payment if each installment were paid punctually. Held, that the larger sum was in the nature of a penalty, and that the payment of the less discharged the obligation, though defaults had occurred in paying the installments." In that case the note was as follows: "For value received, I promise to pay N. Longworth, or order, one thousand dollars, with interest yearly till paid, and payable as follows: In two, three, four, five, six, seven, eight, nine, and ten years, equal installments, with interest yearly, as aforesaid; being the contract price of a lot. But if each and every payment is made punctually as due, or before due, or within ten days after each is due, as an inducement to punctuality, two hundred dollars of the amount will be released, and eight hundred dollars and its yearly interest accepted in full payment, but not otherwise." The court, in its opinion in that case, said: "All that the plaintiff, at the time of making the contract, had a right to expect, was the payment of eight hundred dollars, with the interest, in the installments and at the times stipulated. These payments Ricords had promised to make punctually. A default occurred; and in such a contract, in our opinion, interest is to be regarded as a compensa

So

Had

tion for the injury caused by the delay." that it will be seen that this case was decided on altogether a different principle, and that the facts in that case did not bring it within the rule which we have announced, because all that the respondent in this case, at the time of the making of the contract, had a right to expect, was not performed by the appellant. He had a right to expect that the building contracted for would be erected. The contract in the case at bar was not that this $4,000 note should be satisfied if the obligations for $3,050 were paid when due. it been, then it would have been parallel with the case quoted. But this obligation was based upon something separate and distinct from the payment of the amount which the appellant claims was the purchase price of these lots. In Noyes v. Phillips, 60 N. Y. 408, the parties agreed to exchange real estate upon certain specified terms, and each agreed to deliver a deed of his property at a time specified, or forfeit the sum of $500. This was held by the trial court to be a provision for liquidated damages. The case went to the appellate court finally, and while the appellate court concluded, from the state of the pleadings and the record, that that question was not necessarily before them, they did think it worth while, however, to say: "It is, however, proper to say that, if that question was before us, we should hesitate in holding it a penalty, and there are many reasons for regarding it as a provision fixing the measure of damages by the parties. The word 'forfeit' is not conclusive. A fundamental rule upon this subject is that the words employed must, in general, yield to the intention of the parties, as evinced by the nature of the agreement, the amount of the sum named, and all the surrounding circumstances. The sum named is reasonable in amount for a failure to perform this agreement; it is payable for one breach, viz. a failure to deliver a deed; and the injury is in some degree uncertain in amount and extent, and might depend upon many unforeseen contingencies. These are material circumstances favorable to an inference that the parties intended to fix the sum as the measure of damages." In Houghton v. Pattee, 58 N. H. 326, the defendants gave B. their note for $4,000, part of the price of land conveyed by B. to H., and H. gave the defendants a bond of $4,000, to be void if H. should expend $40,000 in building an hotel upon the land within a certain time, and a mortgage of the land to secure the bond. The time expired, and H. did not perform any considerable part of the condition of the bond. It will be seen that this case embraces substantially the facts embraced in the case at bar. In that case the court decided that the parties intended to make the $4,000 the amount of liquidated damages, and that the difficulty of ascertaining the amount of defendants' damage caused by the plaintiff's not building might be sufficient, in the absence of other evidence, to show an intent to fix the amount in a bond. Many cases

were cited to sustain the decision. The same decision was rendered on substantially the same state of facts in Pratt v. Carroll, 8 Cranch, 471, Chief Justice Marshall delivering the opinion. See, also, Chase v. Allen, 13 Gray, 42. Outside of these decisions, this court has passed upon this case in Reichenbach v. Sage, 13 Wash. 365, 43 Pac. 354, where it held that: "A provision in a building contract for the recovery by the owner of ten dollars as damages for each day the completion of the building is delayed after the time stipulated is a provision for liquidated damages, and not for a penalty." The cases cited in the opinion in that case sustain the theory that, where the damages resulting from the breach are indefinite and uncertain, and difficult to prove, upon a breach of the conditions the amount stipulated should be considered as liquidated damages; and the case at bar falls squarely within this rule, and the reasons for the rule apply with irresistible force. From the nature of the transaction, it would be impossible to formulate a rule governing the introduction of testimony which would establish the actual damages. There is no test which can be applied. The contract itself furnishes no standard by which damages flowing from its breach can be estimated or measured or computed with any degree of certainty whatever, and yet it can be easily understood that damages, and great damages, might be sustained by a breach in a building contract of this kind. That a substantial brick building of the value of $16,000 erected on the lots sold would materially enhance the value of adjacent lots is almost self-evident, and the respondent had a right to, and doubtless did, take this fact into consideration in making its contract of sale with the appellant; but, if it were compelled to prove the damages it sustained by reason of the appellant's failure to build, it would be greatly embarrassed. How many sales it lost by reason of the absence of the building contracted for, or how much less it had to take for the lots actually sold, in the very nature of things, cannot even be known to the respondent, to say nothing of the difficulty of proof. For this reason it had a right to arbitrarily fix the damages. It did fix them, and the appellant agreed to the terms; and having made a contract which they had a right to make, and which would obviate any subsequent contention as to the damages incurred in case of a breach, the court will not annul their contract, or read into it a provision that the question of damages shall be submitted to a jury.

It is also contended by the appellant that the court erred in rejecting testimony offered to prove contemporaneous agreements made between the respondent and the appellant, and promises of certain improvements, which promises were violated by the respondent. This testimony, we think, is immaterial under any circumstances, and especially it could not be introduced under the pleadings in this case. There is no allegation of deceit, or that these

representations were made with intent to de-ceive or defraud the appellant.

A great many assignments of error are made in this case, but, without specially reviewing them all, we think they are all without merit, and that the case depends substantially on the determination of the question which we have above discussed. It is, however, claimed by the appellant that the testimony shows that an extension of time was given by the respondent to the appellant to construct this building. This, of course, would be a defense to this action, if it had been substantiated; but a careful examination of the record in this case, which is exceedingly voluminous, fails to substantiate this contention. The testimony on this point was conflicting, and, the trial court having passed upon that question, we do not feel justified in disturbing its judgment. The judgment will, in all things, be affirmed.

INSOLVENCY-SET-OFF-LIQUIDATED DEMANDS.

1. In an action by a receiver of an insolvent. a demand due from the insolvent to defendant before appointment of the receiver may be set off in a case otherwise proper.

2. Under Code Civ. Proc. § 195, declaring that, in an action arising on contract, any other cause of action, arising also on contract, and existing at the commencement of the action, may be urged as a counterclaim, and section 806, providing that defendant, in an action on a contract express or implied, may set off against plaintiff in interest any demand of a like nature which existed and belonged to defendant at the commencement of suit, the fact that a demand arising on contract is unliquidated does not preclude its being set off in a case otherwise proper.

Appeal from superior court, King county; T. J. Humes, Judge.

Action by C. M. Sheafe, receiver of the Washington Savings Bank, against A. W. Hastie. Defendant filed a counter-claim or set-off for the reasonable value of services rendered the bank before it became insolvent, but evidence was not permitted to be introduced thereunder, and from a judgment against him defendant appeals. Reversed. Carr & Preston and W. W. Wilshire, for appellant. Clise & King, for respondent.

DUNBAR, J. The respondent, as receiver of the Washington Savings Bank, sued appellant on two promissory notes, aggregating $400, with accumulated interest. Appellant demurred to the complaint; but, without setting out the complaint, or discussing it further, we think the allegations therein were sufficient to constitute a cause of action, and that the demurrer was properly overruled.

As an affirmative defense and counterclaim.

or set-off, the appellant alleged that at divers and sundry times he had performed services as an attorney for the plaintiff (respondent), which services were reasonably worth the sum of $288.50, and of which only the sum of $20 had been paid. And as a further affirmative defense appellant alleged as follows: "That at all the times herein or in the plaintiff's complaint referred to, and ever since then, the assets of the Washington Savings Bank have exceeded, and they do now exceed, its liabilities." The respondent moved to strike that portion of the answer in relation to the assets of the bank exceeding its liabilities, which motion was sustained by the court. A reply was filed denying the affirmative allegations of the answer. Upon the trial of the cause the respondent objected to the introduction on the part of the appellant of any evidence tending to support his counterclaim, on the ground of incompetency, and that the appellant's alleged counterclaim could not be set up against respondent as receiver of the Washington Savings Bank. This objection was sustained by the trial court, and appellant excepted. Appellant thereupon moved for a continuance on the ground of surprise, for the reason that, the sixth paragraph of appellant's affirmative answer having been stricken, the respondent's motion is immaterial, irrelevant, and redundant, and exposed appellant's said affirmative partial defense and counterclaim to the objection now urged by respondent, and that he should be allowed a continuance to enable him to reinstate said paragraph 6, which contained the allegation that the assets of the bank exceeded its liabilities. The appellant offered to make an affidavit in support of his motion for a continuance, and asked to amend his answer so as to include the allegation contended for, but the trial court overruled the motion, and, upon the hearing of the testimony, instructed the jury to find a verdict for respondent in the full amount of his claim on said notes, which the jury accordingly did, and judgment was rendered thereon. It is not necessary to pass upon the alleged error of the court in striking out paragraph 6 of the answer, for, in the absence of this allegation, we think the set-off should have been allowed. If there was an account existing between the appellant and the respondent's bank, upon which a balance could have been struck at any time prior to the failure of the bank, if it did fail, it ought to have been considered as made, and the relative rights should not have been changed by reason of the insolvency of the bank. the set-off sought to be pleaded by the appellant had amounted to a counterclaim, or a claim which would have overbalanced the claim of the respondent, and would have established a demand over, then it is true that the excess of claim established by the appellant could only have been prorated equally with the claims of other creditors against

If

the bank, if the bank had really been insolvent, and its liabilities exceeded its assets. But that case is not presented here.

cause of

On the technical question as to whether a counterclaim could have been pleaded in this action, we are aware that there is some conflict of authority on the proposition generally; but it seems to us that our statute is so plain and explicit that construction cannot be invoked. If we consider it as a counterclaim, then section 195 of the Code of Procedure provides that the counterclaim mentioned in the preceding section must be one existing in favor of a defendant and against a plaintiff, between whom a several judgment might be had in the action, and arising out of one of the following causes of action: (1) A cause of action arising out of the contract or transaction set forth in the complaint as the foundation of the plaintiff's claim, or connected with the subject of the action; (2) in an action arising on contract, any other cause of action, arising also on contract, and existing at the commencement of the action. This defense falls squarely within the provisions of this clause. The action is an action arising on contract. The counterclaim sought to be alleged and proven is a action arising also on contract, and, according to the record, was existing at the commencement of the action. And if it is to be construed as a set-off, then section 806 is controlling, which provides that the defendant in a civil action upon a contract expressed or implied may set off any demand of a like nature against the plaintiff in interest which existed and belonged to him at the time of the commencement of the suit. There seems to be no real difference between counterclaims and set-offs, so far as the statute is concerned, excepting that technically there is a difference in degree, the set-off amounting only to a set-off or balance of the claim sued upon, or some portion thereof, and the counterclaim comprehending a set-off and an additional claim which would warrant a judgment over in favor of the defendant, if it were established; and, whatever conflict of authority there may be, this court has established the right of the defendant to a set-off or counterclaim where the claim is unliquidated, as in the case at bar, in Shelton v. Conant, 10 Wash. 193, 38 Pac. 1013, where it was held that, under Code Proc. § 195, in an action arising on contract, the defendant could counterclaim for any cause of action against the plaintiff arising on contract, whether liquidated or not.

We think the record shows that the counterclaim sought to be proven in this case was not barred by the statute of limitations. The judgment will be reversed, with instructions to the lower court to grant a new trial in accordance with this opinion.

SCOTT, C. J., and REAVIS and ANDERS, JJ., concur.