Penalty means Punishment; especially used of a peculiar fine. Money recoverable by virtue of a penal statute. A sum named in a bond as the amount to be forfeited by the obligor in case he complies not with the conditions of the bond.

If the parties to a contract, have by the terms of their agreement, fixed upon a particular sum as payable in the event of a breach, the question arise, whether the sum so fixed ought to be regarded as a penalty or as an ascertained or liquidated sum, fixed and agreed on between the parties and, therefore, the proper measure of the damage. The decision of the question (which is a question of law) does not depend so much upon the mere terms of the agreement or the mere largeness or otherwise of the sum named as upon the intention and object of the parties to be derived from a view of the whole contract. Where a certain gross sum of money is reserved in an agreement to be paid in case of non-performance of such agreement, it is generally to be considered as a penalty, the legal operation of which is, not to create a forfeiture of the entire sum, but also to cover the actual damages occasioned by the breach of contract. And notwithstanding that a sum may be so named, still in an action on the bond, the court or jury will enquire what damages the plaintiff has sustained by breach of the condition, and plaintiff cannot take out execution for a larger amount than the amount thus assessed. The distinction between a penalty and a sum payable as liquidated damages is this, that the penal sum is generally or always double the amount of the debt secured by the bond, whereas liquidated or ascertained damages, as the name indicates are intended to denote, and usually denote, the exact amount of the debt.

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