Rabbi Meir Orlean
Avraham needed 500 iron gates manufactured for a building project. He contracted with Motty’s Metalworks.
“It is important that we receive the gates on time,” said Avraham. “Are you sure that you will be able to deliver that quantity in time? I know it’s tight.”
“Certainly. We take pride in our promptness,” replied Motty. “Our record shows that we manufacture on time.”
“If we do not receive the gates on time, it will cause us significant loss,” Avraham explained. “We need a commitment for timely delivery.”
“We guarantee you timely delivery,” assured Motty. “We are even willing to back it up.”
“The contract stipulates that if you do not provide the gates on time,” said Avraham, “there will be a $50,000 penalty.”
“I’m willing to commit to that,” replied Motty. “We will have the gates ready on time!”
Avraham and Motty signed the contract. “To avoid any questions of asmachta (insincere commitment),” said Avraham, “I want the contract and penalty clause confirmed before a beis din with a kinyan” (C.M. 207:15).
“That’s fine with me,” replied Motty.
The production proved more difficult than expected, especially due to the large quantity. By the specified delivery date, Motty’s Metalworks produced and delivered only 60 percent of the gates.
“You didn’t fulfill the contract,” Avraham complained. “You are liable for the $50,000 penalty.”
“We delivered most of the gates,” replied Motty. “The remainder are almost ready. The fine was if we didn’t deliver on time, and we did supply most of the gates.”
“You breached the contract,” replied Avraham. “You were required to provide all 500 gates on time. If even a single one was not delivered, you owe us the penalty.
“That’s not logical,” replied Motty. “Why should we pay a hefty penalty for delay of a single unit?!”
“If you’re not willing to pay the full penalty, I have no choice but to sue you,” said Avraham. “I emphasized from the outset that time was of the essence.”
Avraham sued Motty before Rabbi Dayan’s beis din. “Motty committed to a $50,000 fine if he did not deliver on time,” summarized Avraham. “He provided only 60 percent of the units on time. Does he have to pay the penalty?”
“The Gemara (B.M. 104b) addresses the case of a sharecropper who committed to paying the land owner a very large sum if he left the field fallow,” replied Rabbi Dayan. “He left a third of the field fallow. The Gemara states that he would be liable for a third of the sum were it not for the exemption of asmachta.
“Taz (C.M. 73:8; Y.D. 238:11) derives from this that when the penalty clause is valid, one is liable proportionally to his breach of contract,” continued Rabbi Dayan. “A borrower promised to pay by a certain date and pledged a sum to charity if he didn’t pay, but paid only half the debt. Taz ruled that he is liable for half the pledge, proportional to what he didn’t pay.”
“This seems relevant to us,” said Motty.
“Indeed. A person contracted to supply a quantity of produce by a certain date, and if not, to pay a penalty,” replied Rabbi Dayan. “He supplied only part, and Divrei Geonim (86:9) ruled that he must pay the penalty proportionally.
“Similarly, someone promised his friend a certain sum if he succeeded in collecting a debt. The friend succeeded partially, and Rav Pe’alim (C.M. 2:11) ruled that he is entitled to a proportional amount of the reward.”
“So how much must Motty pay?” asked Avraham.
“Motty must pay $20,000 of the penalty, proportionate to the 40 percent of units not delivered on time,” answered Rabbi Dayan. “Nonetheless, Taz, Divrei Geonim and Rav Pe’alim all conclude that if the penalty clause is so formulated that it is imposed for any breach of contract or requires full performance, the fine would apply completely, not only proportionately” (Pischei Choshen, Halva’ah 2:).