This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
The outward form of the contract is not, of course, decisive of the question. If it were, an easy method of evading the rules as to penalties would be presented. If the whole contract shows that the stipulation for payment is inserted, not to give one party an election, but to coerce performance of the alternative covenant, such stipulation is treated as a penalty.1 Since a provision giving the promisee the option between performing his principal contract and paying a stipulated sum of money, gives an unfair advantage to such party, the courts tend to construe the contract as not in the alternative, but as a promise to perform the principal covenant with a subsidiary covenant for a penalty or for liquidated damages.2 even if such construction requires the court to treat the subsidiary covenant as one for the payment of a penalty.3 A covenant which provides for the performance of a specified act and for paying a certain sum of money in case non-performance has been treated as a covenant for a penalty or for liquidated damages, as the case may be, rather than as an alternative contract.4 A provision in a contract for the sale of machinery for a test and for the return of the machinery within a specified time after the test if it proves unsatisfactory, or for payment of the purchase price in case of failure to return it in such time, has been said to impose a penalty.5
3 Fred W. Wolf Co. v. Monarch Refrigerating Co., 252 111. 491, 50 L. R. A. (N.S.) 808, 96 N. E. 1063.
4 Crouch v. Leake, 108 Ark. 322, 50 L. R. A. (N.S.) 774, 157 S. W. 390.
5Sanford v. Brown Brothers Co., 208 N. Y. 90, 50 L. R. A. (N.S.) 778, 101 N. E. 797.
6 Detwiler v. Downes, 119 Minn. 44. 50 L. R. A. (N.S.) 753, 137 N. W. 422.
1 Condon v. Kemper. 47 Kan. 126, 13 L. R. A. 671, 27 Pac. 829.
2 Dillon v. Ringleman, 55 Okla. 331, 155 Pac. 563.
3 Dillon v. Ringleman, 55 Okla. 331, 155 Pac. 563.
4 Liquidated damages. Grasselli v Lowden, 11 O. S. 349.
5 Walshe Mfg. Co. v. W. T. Smith Lumber Co., 196 Ala. 371, 72 So. 73.
The question of who can exercise the right of election is discussed elsewhere.6