Chancery’s dim view of penalties in excess of damages eventually won out. In 1696, Parliament passed a law, the 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.”[1] In 1705, the law was amended to say that “payment of damages” was to be considered “a full substitute for the stipulated penalty under the bond.” [2] Oman argues that the penal bond “continued as a popular transaction form for another century and a half, mainly because of procedural advantages – such as a longer statute of limitations – for actions on specialty contracts like bonds, vis-à-vis simple contracts.” [3] This was despite the fact 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.” [4]

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.” [5] In Massachusetts, the practice was to give “judgment for only one-half the amount of the bond.” [6] 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].” [7]

In America, 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. [8] By 1895, the rule limiting relied 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.” [9]

[1] Nathan B. Oman, Consent to Retaliation: A Civil Recourse Theory of Contractual Liability, 96 Iowa L. Rev. 529 540 (2011) (referencing the Administration of Justice Act, 1696, 8 & 9 Will. 3, c. 11 § VIII (Eng.)). [2] Id. (referencing the Administration of Justice Act, 1705, 4 & 5 Ann., c. 3, § XIII (Eng.)). [3] Id. [4] Id. at 540—541. [5] Curtis Nyquist, A Contract Tale from the Crypt, 30 Hous. L. Rev. 1205, 1233 (1993). [6] Id. [7] Id. [8] Seem, 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 it’s 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.” [9] Kelley v. Seal, 41 P. 615, 617 (Sup. Ct. Terr. Okla.) (1895). Accord McIntosh? v. Johnson, 31 P. 450, 452—453 (Sup. Ct. Terr. Utah) (1892) (disallowing penalties when the amount of damages is reasonably ascertainable).

-- JimParks - 01 Nov 2014