In his book, Debt: The First 5,000 Years, anthropologist David Graeber traces the history of debt and its relationship with and effect on human societies. Among other things, Graeber focuses on the development of how the idea of “debt” is used today in explaining moral relationships, which he claims is a historical anomaly.

Palmer writes that the high-mortality rates of the black death threatened to destabilize credit, and thus the government sought to shore up the enforcement of debt obligations lest the “wealthy would shirk their debts.” (p. 59) It is interesting to me how penal bonds were one of the mechanisms used to help “stabilize credit relations and to reinforce commercial and social relationships.” (p. 63). These penal bonds carried penalties of default worth double the value of the underlying debt. Although Palmer does not directly address this point, and I am unsure whether my question is actually researchable, to what extent could a sense of morals have driven this development?

-- JulianAzran - 25 Sep 2014

A penal bond “with conditional defeasance endorsed on the back of the bond” was an innovation of 14th century England (first appearing sometime between the 1340’s and 1350’s) which “unified a bond with a separate indenture of defeasance into a single document,” with the aim of “provid[ing] a penalty for failure to perform a contract.” [1] The penal bond has been characterized as the dominant method for “framing substantial contracts in the later medieval and early modern periods.” [2] What is unusual about the penal bond is that it upended the usual method of setting forth a contract (it has been characterized by Simpson as ‘topsy-turvy’ because of this quality), in that it had the bond (the “written promise to pay a sum of money,” – the penalty) written on the front of the document, and the condition, whose performance by the obliged party would render the bond void, on the back of the document. [3] Legal proceedings to enforce the agreement were not brought as an action on the agreement (the condition on the back), but as “action[s] in debt on the bond.” [4]

The penal bond, although innovative, was not the first English attempt to attach “fixed, monetary penalties” for failure to perform on an agreement. [5] Penalty clauses, frequently used and well-known in Roman law, were imported into England through “the teaching of Roman law, the activities of the church courts and ecclesiastical officials, and trade with the continent.” [6] Penalty clauses make their first appearance in England as straightforward contractual provisions in written agreements. [7] In these early contracts, the agreement itself set out the respective obligations of the parties, and the penalty clause set forth a penalty for non-performance. [8] What was different about the penal bond was that “the obligation was the penalty and performance of the agreement discharged the obligation.” [9]

While seemingly more complicated, the rise of penal bonds was facilitated by the prevalence of penalty recognizances. [10] Recognizances concerning debt appear in the rolls at the beginning of the 12th century, and increased in use from there, evidently out of their efficacy to creditors. [11] Debtors had limited defenses to recognizances (they could not, for example, wage their law or appeal to a jury to prove payment) – they either had to produce a written acquittance or prove payment “recorded on the rolls with his recognizance.” [12] Recognizances “could include a penalty for non-payment.” [13] The recognizance “could itself be the penalty, defeasible by the performance of a side agreement,” this side agreement sometimes enrolled with the recognizance. [14]

In the 1340/50’s, when the penal bond first emerged, a number of methods for imposing a penalty for nonperformance were at the disposal of private parties: “agreements with penalty clauses, penalty recognizances, bonds with separate indentures of defeasance and similar letters of account, and bonds put in escrow.” [15] Penal bonds, however, may have had a number of advantages over its contemporaries:

(1) Putting the acquittance on the reverse of the bond itself “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 defendant was not plaintiff’s deed.” [16] (2) “[M]aking the acquittance part of the bond prevented defendants [debtors] from alleging or producing strange conditions in defeasance of the bond.” [17] (3) Compurgators were excluded. [18] (4) “Debtors could plead payment without a written acquittance.” [19] (5) “[C]reditors could not take advantage of the conditions of defeasance to avoid being repaid purposely to double the debt.” [20] (6) Courts were willing “to enforce the penalty to the fullest,” but were sensitive to offsets from payments that had been made. [21] (7) Penal bonds “could be made anywhere and without prior approval of royal officials.” [22]

Although popular when introduced, the penal bond did not immediately replace the other methods for affixing a penalty for nonperformance of an agreement, and would not do so until well into the fifteenth century. [23]

It has been argued, despite the above mentioned advantages a penal bond might contain as against the competing forms, that there was no sound legal reason to prefer one method of affixing a penalty over another, and that it was really the role of custom and trade practice that led to the penal bond becoming ascendant. [24] Palmer, on the other hand, 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.” [25]

Even if Palmer’s historical point about the implicit motivations driving the enforcement of penal bonds, penal bonds were not unique in their imposition of penalties, and other penalty provisions and schemes were routinely enforced. It is, therefore, impossible to say that moral motivations, solely or even primarily, pushed the move towards penal bonds and away from other methods of securing penalties for nonperformance, although it may well have been the case that moral disapprobation of those who wished to ‘shirk’ the debt obligations they had assumed was a motivating factor behind the routine enforcement of all types of penalty provisions.

[1] Biancalana, Joseph, “The Development of the Penal Bond with Conditional Defeasance,” 26 J. Legal His. 103 at 17, 1 (in the SSRN version) (2005). Robert Palmer in English Law in the Age of the Black Death, 1348-1381 (1993) asserts that the earliest penal bond with endorsed conditional defeasance did not appear until 1357 (at 85), contrary to Biancalana, who seems to suggest 1348 as the appropriate date. [2] Id. at 1, internal quotation and citation omitted. [3] Id. at 1. [4] Id. [5] Id. at 2. [6] Id. [7] Id. at 5. [8] Id. [9] Id. [10] Id. at 6. A recognizance is, generally speaking, “an obligation of record entered into before a court or magistrate requiring the performance of an act (as appearance in court) usually under penalty of a money forfeiture” (Merriam-Webster, “recognizance”). [11] Id. at 7. [12] Id. [13] Id. at 10. [14] Id. [15] Id. at 17. [16] Id. [17] Id. [19] Robert Palmer, English Law in the Age of the Black Death, 1348-1381 (1993) at 89. [20] Id. [21] Id. [22] Id. [23] Biancalana, at 20--22. [24] Id. at 25. [25] Palmer, at 91.

-- JimParks - 26 Sep 2014

The conditional bond was the primary method for securing the performance of contracts in the period prior to the landmark decision in Slade’s Case which marked the full development of the action of assumpsit (permitting aggrieved parties in contractual disputes to recover damages in a tort action falling out of trespass on the case, even when an action of debt was also a viable alternative).[1]

At common law, the simple bond (which just stated who was to paid, what sum, when, and where) “was almost irresisitable.”[2] The only defenses available to a debtor were forgery or “a sealed acquittance to be shown in court acknowledging or releasing payment.”[3] Debtors were not permitted to attempt 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.”[4] 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, where the return of the bond at issue in the case from the obligee to the obligor (debtor) in return for payment was ruled to do nothing to cancel the debt because there was no sealed acquittance, although the judges disagreed on this point. The key distinction, it appears, was that the debt could only be discharged by an act of the law (the sealed acquittance), not an act of the parties (the return of the bond in return for payment). The judges seem to be much consoled (and therefore comfortable in their ruling) when it is finally decided at the Common Bench that "the party [defendant] suffers no mischief, for if the plaintiff recovers in this writ of debt, [the defendant] shall recover back the same amount in damages in a writ of trespass for the taking" (257).

Conditional bonds were somewhat easier to contest from the perspective of the obligor. Courts considered “performance of a valid condition” as a “valid defence to the bond, to be proved as a matter of fact , without specialty, and at least from about 1500 jury trial (rather than wager of law) was contemplated as the mode of proof).”[5]

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.”[6] For example, if the obligee refused to take payment on the appointed day (and the obligor had always been ready to pay the debt), a third party refused to accept payment, or the condition “was performed as specified except that it was done at a different place or before it was due, and the obligee accepted this performance,” then non-performance or variant performance by the obligor was excused.[7] It was said by Serjeant Townsend that if a condition “became impossible by act of God such as a death, the obligor would be excused,” but, according to Henderson, “only one adjudged case under this rule was found.”[8] In that case (Abbot of Cerle’s Case[9]), the defendant was excused when he bound himself to an arbitration of three named persons on a particular day, and on that day one of the arbitrators was too ill to be present.[10]

Certain conditions were recognized as invalid at common law, although these cut both against and to the benefit of the obligor. Conditions to hold the obligee harmless from “the consequences of his illegal act would render the entire bond void,” as would conditions which said that the obligor “should do an illegal act,” or even “simply if the condition was illegal.”[11] If, however, the condition to be performed was impossible, then the condition was void, but the bond was good (perhaps on the theory that it was the obligor who had himself drafted the impossible condition).[12]

By the mid-sixteenth century, however, substantial performance was “never a defence against suit for the penal sum,” “unless the obligee had accepted it as sufficient.”[13] Part payment and late payment were similarly ineffective defenses.[14] Additionally, “conditions to be performed for the benefit of at third party,” had to “be strictly performed, without variation and regardless of the third party’s behavior.”[15] Rather more murkily, “a condition to save the obligee harmless against damages from all the world was void and the bond not defeasible by a showing that this condition had been performed.”[16]

The common law eventually began to be made to compete with the Court of Chancery in this area, which eventually began to pass upon the enforcement of penal bonds. As Henderson points out, the complaints which are printed in the Calendar of Chancery Proceedings seem to conform to our expectations of equitable relief in that they “all seem to involve elements of duress, unconscionable violence or the like in the making of a bond, rather than objections to the unfairness of enforcing it.”[17]

Barrantyne v. Jeckett (1553/54) has been cited as the earliest example of the Court of Chancery giving relief from a penal bond,[18] 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 1544-68, with probably as many passed over as routine, and some falling through the cracks as not recognizable as penal bonds in the records).[19] “By 1582 Chancery’s intervention was even more frequent,” including some 16 bond cases under consideration in the Michaelmas term alone.[20]

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.”[21] The 1557 case of Chamberlayn v. Iseham[22] 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.”[23] 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.”[24]

In the mid-sixteenth century, Chancery sometimes viewed substantial performance of the condition as sufficient reason to justify intervention. This was the scenario in the cases of Rowse v. Wade,[25] Fabyan v. Fuliambe,[26] Atkinson v. Harman, [27] Longe v. Awbery,[28] and Walaston v. Mower.[29]

Fabian v. Fuliamble and Atkinson v. Harman presented cases of temporary impossibility of performance, where the plaintiff-obligor was given relief. Longe v. Awbery and Walaston v. Mower were cases in which substantial performance was given as the reason for intervention (in Longe, the plaintiff-obligor had delivered the grain shortly after the date on which he had contracted to do so and in Walston, the plaintiff-obligor claimed that he had successfully delivered the grain he had agreed to sell save a small amount).[30] In Rowse v. Wade, the plaintiff in equity had covenanted, as part of the sale of the land, that he was the “very owner” of the land, despite being only having a copyhold tenure in fee. The Chancery Court “enjoined the buyer from suing on the bond given by the seller for performance of the covenants in the indenture of bargain and sale.”[31]

Beyond these cases, Henderson argues that “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, regardless of the fact that he could have recovered at law the entire penal sum regardless of how much he had been harmed (“damnified” in the verbiage of the time).[32] This, Henderson argues, was the great shift permitting relief in exceptional cases to permitting relief “”routinely in a whole class of cases.”[33]

An interesting outgrowth of Chancery’s willingness to intervene regularly in penal bonds (starting sometime in the late 1580’s/90’s) was the shift from giving injunctions without regard to whether the law court had passed on the matter (which was the prior practice) to giving injunctions only during a set period of time.[34] Henderson argues that this change was likely the result of a shift in the mindset regarding these cases – from the earlier thought that the Chancery court was only correcting “maverick cases in which the legal procedures have caused unjust results”[35] therefore justifying injunctions without regard to prior action, to the later thought that Chancery was regularly intervening because the law itself was unjust, and therefore the “time limit ought to be short and narrow” in doing so.[36] Whether or not “more research in the records of those years [1580’s/90’s]”[37] will produce clarity on whether that was the case, and I tend to think not, Henderson’s suggestion seems to be a plausible one.

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.[38] In the case of Courtney v. Glanville and Allen, which grew out of a particularly egregious example of fraud underlying a debt, 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 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 the King, 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.[39]

-- JimParks - 16 Oct 2014

[1] Edith G. Henderson, Relief from Bonds in the English Chancery: Mid-Sixteenth Century, 18 Am. J. Legal Hist. 298, 299 (1974). [2] Id. at 300. [3] Id. [4] Id. [5] Id. at 300. [6] Id. [7] Id. at 301. [8] Id. [9] Y.B. Mich. 12 R. II (Ames Fdn.) 70 (1389-90). [10] Henderson, at 301. [11] Id. at 302. [12] Id. [13] Id. at 301. [14] Id. [15] Id. [16] Id. [17] Id. at 298. [18] Id. [19] Id. at 299. [20] Id. [21] Id. [22] C 33/18 fo. 229, 29 June, 4 & 5 Phil. & Mar. (1557) [23] Henderson, at 300. [24] Id. [25] C 33/12 fo. 377, 7 May, 1 & 2 Phil. & Mar. (1555). [26] C 33/21 fo. 295, 8 Nov., 2 Eliz. (1560). [27] C 33/15 fo. 96a, 137a, 211, 253, 6 Nov – 31 May, 3 & 4 Phil & Mar. (1556-57). [28] C 33/18 fo. 28, 28 Oct., 4 & 5 Phil. & Mar. (1557). [29] C 78/33, case 17, 31 Jan., 4 Eliz. (1561/62). [30] Henderson, at 304. [31] Id. at 303. [32] Id. at 304. [33] Id. [34] Id. at 306. [35] Id. [36] Id. [37] Id. [38] For the entire story, see Sameul 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). [39] Id.

-- JimParks - 16 Oct 2014

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