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{{Contract law}}

A '''penal bond''' is a written instrument executed between an obligor and an obligee designed to secure the performance of a legal obligation through the ''[[in terrorem]]'' effect of the threat of a penalty for nonperformance.

== Types of bonds ==

At its simplest, a [[bond (finance)|bond]] need only state who is to be paid, what sum, when, and where (for example: "'Know all men etc. that I, ''AB'', am firmly bound to ''CD'' in [$]''n'' to be paid at Michaelmas next following'").<ref>{{cite book |first=J. H. |last=Baker |title=An Introduction to English Legal History |page=323 |edition=4th |date=2002}}</ref> At [[common law]], these bonds were nearly impossible to contest from the perspective of the obligor (the debtor).<ref>{{cite journal |first=Edith G. |last=Henderson |title=Relief from Bonds in the English Chancery: Mid-Sixteenth Century |volume=18 |journal=Am. J. Legal Hist. |pages=298, 300 |date=1974|issue=4 |doi=10.2307/845168 |jstor=845168 }}</ref> A simple bond can properly be considered a penal bond if it calls for the payment of a sum that is punitive in relation to the damages that would be caused by nonperformance.

Historically, the most significant type of penal bond was the penal bond with conditional defeasance. A penal bond with conditional defeasance combined in one document the bond (the promise to pay a specified amount of money) with the contractual obligation. It did this in what the historian [[A. W. B. Simpson|Brian Simpson]] called a ‘topsy-turvy’ fashion by printing the bond on the front of the document and the condition, whose performance by the obligor would render the bond void (referred to as the indenture of defeasance), on the back.<ref>{{cite journal |last=Biancalana |first=Joseph |title=The Development of the Penal Bond with Conditional Defeasance |volume=26 |journal=J. Legal His. |page=103 |date=2005|issue=2 |doi=10.1080/01440360500162593 |s2cid=144096538 }}</ref>

At early common law, the penal obligations of bonds were enforced through an action of debt which was concerned with that penal obligation rather than the underlying agreement.<ref name=Baker324>{{harvp|Baker|2002|page=324}}</ref> In this sense, the enforcement of bonds in the period preceding the modern simplification of pleading was not concerned with contracts principles at all; rather, the enforcement of bonds was a question of "the law of deeds and conditions."<ref name="ReferenceA">Id.</ref>

==Early history==

The penal bond with conditional defeasance (hereinafter referred to as a '''conditional bond''', conditional penal bond, or penal bond) first arose in [[England]] during the 1340s/1350s.<ref name=BiancalanaSupra3>{{harvp|Biancalana|2005}}, supra note 3.</ref> The conditional bond has been characterized as the dominant method for “framing substantial contracts in the later medieval and early modern periods.”<ref name=BiancalanaSupra3/> In fact, during the [[Tudor Period]], actions of debt were the most numerous single class of actions in the Common Pleas rolls (and would continue to be so for the next 300 years).<ref name=Baker324 />

Although an innovation in its structure, the conditional penal bond was not the first English attempt to impose “fixed monetary penalties” for failure to perform on an agreement.<ref name=BiancalanaSupra3/> [[Penalties in English law|Penalty clauses]] inserted into written contracts, a mainstay in [[Civil law (legal system)|civil law]] jurisdictions, as well as penal bonds with separate indentures of defeasance were commonly used to secure the performance of a contract until well into the fifteenth century.<ref name=BiancalanaSupra3/>

Putting the acquittance on the reverse of the bond itself, however, had a number of advantages over its competitors:

# It “prevented plaintiff [creditor] from pleading that the conditional acquittance or indenture of defeasance [the language which spelled out the condition upon which the obligation to pay the stated sum on the front of the bond was voided] produced by the defendant was not plaintiff’s deed.”<ref name=BiancalanaSupra3/>
# Including the condition which made the bond void as part of the same document as the bond prevented the debtor from alleging outlandish conditions in defeasance of the bond.<ref name=BiancalanaSupra3/>
# [[Compurgation|Compurgators]] were excluded.<ref name=BiancalanaSupra3/>
# “Debtors could plead payment without a written acquittance.”<ref name=BiancalanaSupra3/>
# “[C]reditors could not take advantage of the conditions of defeasance to avoid being repaid purposely to double the debt.”<ref name=BiancalanaSupra3/>
# Courts were willing “to enforce the penalty to the fullest,” but were sensitive to offsets from payments that had been made.<ref name=BiancalanaSupra3/>
# Penal bonds “could be made anywhere and without prior approval of royal officials.”<ref name=BiancalanaSupra3/>

Joseph Biancalana has argued that there was no real advantage inherent in a conditional penal bond as against its competitors, and that therefore its later dominance was attributable to custom and trade practice.<ref name=BiancalanaSupra3/> Robert Palmer, on the other hand, has argued that “[t]he morality that allowed the extension of penal bonds after the Black Death . . . was part of the governmental concern to preserve traditional society by harshly coercing the upper classes to abide by their obligations.”<ref>Robert Palmer, English Law in the Age of the Black Death, 1348-1381 (1993) at 89.</ref> Irrespective of its merits, the conditional bond did overtake other forms of imposing a penalty for nonperformance of an obligation by the fifteenth century.<ref>{{harvp|Biancalana|2005|page=103}}</ref>

At common law, the simple bond “was almost irresistible,” the only defenses available to the debtor being forgery or the production of a sealed acquittance in court.<ref name=Henderson298299300>{{harvp|Henderson|1974|pages=298, 299-300}}</ref> Debtors were not permitted to argue any other defenses including, “payment without taking of a sealed acquittance, payment at another time or place then specified in the bond, failure of consideration, impossibility of performance, or fraud in the underlying transaction.” <ref name="harvp|Henderson|1974|page=299">{{harvp|Henderson|1974|page=299}}</ref> The debtor who was wrongly made to pay twice, however, could win damages in a writ of trespass for the taking.<ref>See, for example, ''Donne v. Cornwall'', Y.B. Pas. 1 Hen VII, fo. 14v, pl. 2 (C.P.), reprinted in Baker and Milsom, Sources of English Legal History, p. 255</ref>

Conditional bonds were somewhat easier to contest from the perspective of the obligor. Courts considered performance of the condition a valid defense to the bond.<ref name=Henderson298299300/> By the mid-sixteenth century, the common law began to recognize a range of limited circumstances “in which non-performance of the condition was excused or a variant performance was held a sufficient defense against the bond.”;<ref name=Henderson298299300/> see, for example, ''Abbot of Cerle’s Case''. Before the mid-sixteenth century, however, substantial performance (unless accepted as sufficient by the obligee), partial payment, and late payment were not accepted defenses.<ref name=Henderson298299300/>

== Competition between the common law and Chancery courts ==

The [[common law]] was eventually made to compete with the [[Court of Chancery]], which began to pass upon the enforceability of penal bonds. ''Barrantyne v. Jeckett'' (1553/54) has been cited as the earliest example of the Court of Chancery giving relief from a penal bond,<ref name="ReferenceA"/> but by the middle of the sixteenth century, “Chancery was already intervening against penal bonds quite frequently” (34 cases being reported for study in the years 1544–1568, with probably as many passed over as routine, and some falling through the cracks as not recognizable as penal bonds in the records).<ref name="harvp|Henderson|1974|page=299"/> “By 1582 Chancery’s intervention was even more frequent,” including some 16 bond cases under consideration in the [[Michaelmas]] term alone.<ref name="ReferenceA"/>

Although Chancery was more favorable to the debtor, it still maintained a relatively strict line in these cases: [[injunctions]] were not routinely granted “simply on the ground that the penal sum was outrageously disproportionate to the underlying debt.”<ref name="ReferenceA"/> The 1557 case of ''Chamberlayn v. Iseham'',<ref>C 33/18 fo. 229, 29 June, 4 & 5 Phil. & Mar. (1557)</ref> illustrates this point. In that case, the debtor (now plaintiff in equity) had given a bond to pay a sum of £400, “defeasible if 20 marks (£13 s. 8d.) was paid by a certain date.” <ref>{{harvp|Henderson|1974|page=300}}</ref> Rather than grant an injunction barring the enforcement of the bond on the ground that the sum was grossly disproportionate to the underlying debt, Chancery “felt it necessary to mention special circumstances in the debtor’s favor,” namely that “he was in the service of the king and queen on the day appointed for payment, and had since paid the twenty marks into Chancery to be held for the obligee.” <ref name="ReferenceA"/>

During the mid-sixteenth century, Chancery sometimes viewed [[substantial performance]] of the condition as sufficient reason to justify intervention. This was the outcome in the cases of ''Rowse v. Wade'', ''Fabyan v. Fuliambe'', ''Atkinson v. Harman'', ''Longe v. Awbery'', and ''Walaston v. Mower''.<ref>C 33/12 fo. 377, 7 May, 1 & 2 Phil. & Mar. (1555); C 33/21 fo. 295, 8 Nov., 2 Eliz. (1560); C 33/15 fo. 96a, 137a, 211, 253, 6 Nov – 31 May, 3 & 4 Phil & Mar. (1556-57); C 33/18 fo. 28, 28 Oct., 4 & 5 Phil. & Mar. (1557); C 78/33, case 17, 31 Jan., 4 Eliz. (1561/62).</ref>

Beyond these cases, “by about 1562 Chancery was beginning to feel that the law of harsh penalties for small defaults was wrong in principle,” having held on a number of occasions that the defendant obligee could not recover more than his damages, notwithstanding the fact that he could have recovered at common law the entire penal sum irrespective of the amount he had been harmed (“damnified” in the verbiage of the time).<ref>{{harvp|Henderson|1974|page=304}}</ref> This shift led Chancery to grant relief “routinely in a whole class of cases,” rather than just in exceptional cases.<ref name="ReferenceA"/> Arguably as a result of this routinizing of chancering penal bonds, Chancery's willingness to intervene regularly in penal bonds (starting sometime in the 1580s/90s) shifted from giving injunctions without regard to whether the common law court had passed on the matter (which was the prior practice) to granting injunctions only during a set period of time.<ref>{{harvp|Henderson|1974|page=306}}</ref>

Unsurprisingly, this caused friction between the common law courts and the Court of Chancery, which came to a head in 1614 over whether the Chancery Court could properly issues injunctions in cases upon which the common law courts had already passed judgment.<ref>For the entire story, see Samuel Rawson Gardiner’s History of England from the Accession of James I to the Disgrace of Chief-Justice Coke, 1603-1616, pages 271-283 (1863).</ref> In the case of ''Courtney v. Glanville and Allen'', which grew out of a particularly egregious example of fraud underlying a debt, [[Edward Coke|Chief Justice Coke]], judge and leading advocate of the common law, sought to challenge the authority of the Chancery Court to review decisions already made by the common law courts. As the common law courts had already given judgment for Glanville and Allen, Coke argued that the Chancery Court could not properly rule on the case so as to give an injunction which ran contrary to the action of the common law court. Eventually, this particular dispute became wrapped up in a wider rift between common law and Chancery in the ''[[Earl of Oxford's case]]'', culminating in a stinging rebuke of the common law courts delivered by King [[James VI and I|James I]], re-affirming the Chancery Court's right and duty to the people to review those decisions of the common law courts which may have been manifestly unjust.<ref name="ReferenceA"/>

== Later history and decline ==

Chancery's dim view of penalties in excess of damages eventually won out. In 1696, [[Parliament of England|Parliament]] passed a law, the [[Administration of Justice Act 1696|Administration of Justice Act]], which said that “a plaintiff suing upon a bond was allowed to execute on property only up to the value of the damages suffered as a result of the breach.”<ref>{{cite journal |first=Nathan B. |last=Oman |author-link=Nathan Oman |title=Consent to Retaliation: A Civil Recourse Theory of Contractual Liability |volume=96 |journal=[[Iowa Law Review]] |page=540 |url=https://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=2160&context=facpubs |date=2011}} (referencing the Administration of Justice Act, 1696, 8 & 9 Will. 3, c. 11 § VIII (Eng.))</ref> In 1705, the [[Administration of Justice Act 1705|law]] was amended to say that “payment of damages” was to be considered “a full substitute for the stipulated penalty under the bond.” <ref>{{harvp|Oman|2011|p=540}} (referencing the Administration of Justice Act, 1705, 4 & 5 Ann., c. 3, § XIII (Eng.)).</ref> The penal bond, nonetheless, remained popular in the ensuing century "mainly because of procedural advantages – such as a longer statute of limitations – for actions on specialty contracts like bonds, vis-à-vis simple contracts."<ref>{{harvp|Oman|2011|p=540}}</ref> For bonds, in fact, there was no limitation period before 1833, although payment was presumed after a period of 20 years (reduced to 12 years in 1939).<ref>{{harvp|Baker|2002|page=325}}</ref> As penal bonds were under seal, preference was also given to them over simple debts in the event of debtor insolvency.<ref>{{harvp|Baker|2002|pages=325-326}}</ref> Despite these minor advantages, the core fact remained that after “the limitation of the early eighteenth century, regardless of the penalty specified in the bond, the value of the underlying promise represented a ceiling on the plaintiff’s recourse against the defendant.” <ref>{{harvp|Oman|2011|pages=540-41}}</ref>

Curtis Nyquist reports that "[b]y the eighteenth century, chancering bonds was a regular practice on both sides of the Atlantic, even in common law courts."<ref name=Nyquist>{{cite journal |first=Curtis |last=Nyquist |title=A Contract Tale from the Crypt |volume=30 |issue=3 |journal=[[Houston Law Review]] |pages=1205, 1233 |date=Fall 1993 |url=https://heinonline.org/HOL/LandingPage?handle=hein.journals/hulr30&div=28 |url-access=subscription}}</ref> In [[Massachusetts]], the practice was to give “judgment for only one-half the amount of the bond.”<ref name=Nyquist/> This trend, unsurprisingly, “undermined” the “in terrorem quality of penal bonds,” and therefore penal bonds were “used less frequently and no longer played a major role in business practice by [1819].”<ref name=Nyquist/> Despite this fact, "until the beginning of the nineteenth century," "virtually all large business transactions" in the United States were conducted via the mutual exchange of two independent penal bonds.<ref>{{cite journal |first=Morton J. |last=Horwitz |author-link=Morton Horwitz |title=The Historical Foundations of Modern Contract Law |volume=87 |journal=[[Harvard Law Review]] |pages=917, 928 |date=1974 |issue=5 |doi=10.2307/1340045 |jstor=1340045}}</ref>

Over time in the [[United States]], not only were penal bonds regarded as invalid insofar as they imposed liability in excess of damages, all contractual mechanisms that purported to impose a penalty in excess of damages (rather than valid liquidated damages) were regarded as invalid.<ref>See, for example, ''Tayloe v. Sandiford'', 20 U.S. 13, 17 (1822) (where Chief Justice Marshall held that “[i]n general, a sum of money in gross to be paid for the non-performance of an agreement, is considered a penalty, the legal operation of which is, to cover the damages which the party, in whose favour the stipulation is made, may have sustained from the breach of contract by the opposite party. It will not of course be considered as liquidated damages; and it will be incumbent on the party who claims them as such, to show that they were so considered by the contracting parties. Much stronger is the inference in favour of its being a penalty, when it is expressly reserved as one. The parties themselves denominate a penalty; and it would require very strong evidence to authorize the-Court to say that their own words do not express their own intention.”)</ref> By 1895, the rule limiting relief to actual damages, and disfavoring penal bonds insofar as they purported to grant more than actual damages, was regarded a positive “[amelioration] of the severity of the common law,” and is aptly described in the case of ''Kelley v. Seay'', spinning a story of progress in the law to the point where it was then regarded as a “settled rule that no other sum can be recovered under a penalty than that which shall compensate the plaintiff for his actual loss.” <ref>''Kelley v. Seay'', 41 P. 615, 617 (Sup. Ct. Terr. Okla.) (1895). Accord ''M'Intosh v. Johnson'', 31 P. 450, 452—453 (Sup. Ct. Terr. Utah) (1892) (disallowing penalties when the amount of damages is reasonably ascertainable).</ref>

==Legacy==
Although penal bonds have not been used for hundreds of years, their influence on English jurisprudence continued through the development of the common law rules in relation to penalty clauses.<ref>Professor [[A. W. B. Simpson]], ''The  penal  bond  with  conditional defeasance'' (1966) 82 [[Law Quarterly Review|LQR]] 392, 418-419</ref>  During their review of this area of the law in ''[[Cavendish Square Holding BV v Talal El Makdessi]]''<ref name=Makdessi>{{cite BAILII|litigants=Cavendish Square Holding BV v Talal El Makdessi|court=UKHL |division= |year=2015 |num=67 |date=4 November 2015 }}</ref> the [[United Kingdom Supreme Court|Supreme Court]] reviewed the relevant history and its effect on subsequent jurisprudence (noting that "[t]he  penalty  rule  in  England  is  an  ancient,  haphazardly  constructed  edifice which has not weathered well".<ref>[https://www.supremecourt.uk/cases/docs/uksc-2013-0280-judgment.pdf ''Makdessi''] [2015] UKSC 67, at para 3.</ref>  With the decline of the use of defeasible bonds the procedural mechanics developed in case law and [[Administration of Justice Act 1696]] and later the [[Administration of Justice Act 1705]] to protect parties became increasingly applied to [[liquidated damages clause]]s, which evolved into the [[Penalties in English law|common law doctrine of penalties]].

==References==
{{Reflist|colwidth=30em}}

[[Category:Contract law]]
[[Category:Legal documents]]