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.
[4] 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.
was part of the governmental concern to preserve traditional society by harshly coercing the upper classes to abide by their obligations.”[7] Irrespective of its merits, the conditional bond did overtake other forms of imposing a penalty for nonperformance of an obligation by the fifteenth century.
[8] 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.
[9] 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.”;[9] see, for example, Abbot of Cerle’s Case.
[9] The common law was eventually made to compete with the Court of Chancery, which began to pass upon the enforceability of penal bonds.
[14] 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).
[5] 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.
[22] 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.” [23] 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.
[26] 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.” [27] 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.