Penal bond

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.

At its simplest, a 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'"). At common law, these bonds were nearly impossible to contest from the perspective of the obligor (the debtor). 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 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.

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. 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."

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/1350’s. The conditional bond has been characterized as the dominant method for “framing substantial contracts in the later medieval and early modern periods.” 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).

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.Penalty clauses inserted into written contracts, a mainstay in 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.

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