SECTION 6 – OBLIGATIONS WITH A PENAL CLAUSE ART. 1226.

ART. 1226. IN OBLIGATIONS WITH A PENAL CLAUSE, THE
Obligation with a penal clause – one which an accessory
undertaking is attached for the purpose of insuring its
performance by virtue of which the obligor is bound to pay
a stipulated indemnity or perform a stipulated prestation in
case of breach.
Three-fold purpose of the penal clause:
1. To insure the performance of the obligation
(general purpose regardless of the character)
2. To liquidate the amount of damages to be
awarded to the injured party in case of breach of
the principal obligation (compensatory in
character)
3. In certain exceptional cases, to punish the obligor
in case of breach of the principal obligation.
(punitive in character)
Kinds of penalty
As to origin
1. Legal – when constituted by law
2. Conventional – when constituted by the
agreement of the parties
As to purpose
1. Compensatory – when established for the purpose
of indemnifying the damages suffered by the
obligee or creditor in case of breach of the
obligation
2. Punitive – when it is established for the purpose of
punishing the obligor or debtor in case of breach
contrary to law, morals, good customs, public order or public
PENALTY SHALL SUBSTITUTE THE INDEMNITY FOR DAMAGES
AND THE PAYMENT OF INTERESTS IN CASE OF
NONCOMPLIANCE, IF THERE IS NO STIPULATION TO THE
CONTRARY. NEVERTHELESS, DAMAGES SHALL BE PAID IF THE
OBLIGOR REFUSES TO PAY THE PENALTY OR IS GUILTY OF
FRAUD IN THE FULFILLMENT OF THE OBLIGATION.
THE PENALTY MAY BE ENFORCED ONLY WHEN IT IS
DEMANDABLE IN ACCORDANCE WITH THE PROVISIONS OF
THIS CODE.
Penal clause may be considered either as reparation or
substitute for damages or as a punishment in case of breach
of the obligation.
- As reparation, question of damages is resolved.
Proof of actual damages is not necessary in order
that the stipulated penalty may be demanded.
- As punishment, question of damages is not yet
resolved. Right to damages still subsists. Damages
must be proved.
GR: penalty is fixed by the contracting parties as a
compensation or substitute for damages in case of breach of
the obligation (penalty in its compensatory aspect)
XPN: penalty in its strictly penal aspect. (Exceptions to the
rule that the penalty shall substitute the indemnity for
damages and the payment of interests in case of
noncompliance)
1. Where there is a stipulation to the contrary
2. When the obligor is sued for refusal to pay the
agreed penalty
3. When the obligor is guilty of fraud.
policy.
If both parties are unable to comply with their respective
obligations, the penal clause cannot be invoked by anyone
of them to the prejudice of the other.
ART. 1227. THE DEBTOR CANNOT EXEMPT HIMSELF FROM
THE PERFORMANCE OF THE OBLIGATION BY PAYING THE
PENALTY, SAVE IN THE CASE WHERE THIS RIGH HAS BEEN
EXPRESSLY RESERVED FOR HIM. NEITHER CAN THE CREDITOR
DEMAND THE FULFILLMENT OF THE OBLIGATION AND THE
SATISFACTION OF THE PENALTY AT THE SAME TIME, UNLESS
THIS RIGHT HAS BEEN CLEARLY GRANTED TO HIM. HOWEVER,
IF AFTER THE CREDITOR HAS DECIDED TO REQUIRE THE
FULFILLMENT OF THE OBLIGATION, THE PERFORMANCE
THEREOF SHOULD BECOME IMPOSSIBLE WITHOUT HIS
FAULT, THE PENALTY MAY BE ENFORCED.
Limitation upon right of debtor – debtor cannot exempt
himself from the performance of the principal obligation by
paying the stipulated penalty. (XPN – when the right has
been expressly reserved for him).
Limitation upon Right of creditor – cannot demand the
fulfillment of the principal obligation and the satisfaction of
the stipulated penalty at the same time, unless this right has
been clearly granted to him. (implied grant is admissible)
- If obligation is not complied with, the creditor can
choose between demanding the fulfillment of the
obligation and demanding the satisfaction of the
penalty. He cannot demand both at the same
time.
- If he chooses to demand fulfillment, and such
becomes impossible WITHOUT HIS FAULT, he may
still demand the satisfaction of the penalty.

As to effect - The obligee can recover not only the penalty, but - If THERE WAS FAULT on the part of the debtor, he
also the damages or interests resulting from the may demand not only the satisfaction of the
1. Subsidiary – when only the penalty may be breach of the principal obligation. penalty, but also the payment of damages. If he
demanded in case of breach chooses to demand the satisfaction of the penalty,
Enforceability of penalty – penalty may be enforced only he cannot afterwards demand the fulfillment of
2. Joint – when the injured party may demand the when it is demandable in accordance with the provisions of the obligation.
enforcement of both the penalty and the principal the Civil Code. Upon the breach or nonfulfillment, the
obligation. penalty stipulated becomes demandable, PROVIDED it is not
ART. 1228. PROOF OF ACTUAL DAMAGES SUFFERED BY THE
CREDITOR IS NOT NECESSARY IN ORDER THAT THE PENALTY
MAY BE DEMANDED.
Proof of damages – applicable only to the general rule stated
in 1226, not to the exceptions.
amount should be reduced or not depending upon
whether it is excessive or reasonable.
Q: Can the court delete the penalty clause?
A: Yes.

If the penalty is fixed by the contracting parties for the
purpose of compensating or substituting the indemnity for
damages and the payment of interests, proof of actual
damages suffered by the obligee or creditor is not necessary
in order that the penalty may be demanded. (Identical to
what is known as “liquidated damages”)
- If there is stipulation to the contrary, or if the
obligor or debtor is sued for refusal to pay the
agreed penalty, or if the obligor or debtor is guilty
of fraud, then the obligee or creditor can demand
not only the satisfaction of the agreed penalty, but
even damages. In such case, the amount of
damages suffered must be proven.
ART. 1230. THE NULLITY OF THE PENAL CLAUSE DOES NOT
CARRY WITH IT THAT OF THE PRINCIPAL OBLIGATION.
THE NULLITY OF THE PRINCIPAL OBLIGATION CARRIES WITH
IT THAT OF THE PENAL CLAUSE.
If the principal obligation is void, it necessarily follows that
the penal clause shall also be void. However, if the penal
clause is void, the validity of the principal obligation is not
affected, since the efficacy of such obligation is not
dependent upon the efficacy of the penal clause.

ART. 1229. THE JUDGE SHALL EQUITABLY REDUCE THE

PENALTY WHEN THE PRINCIPAL OBLIGATION HAS BEEN
PARTLY OR IRREGULARLY COMPLIED WITH BY THE DEBTOR.
EVEN IF THERE HAS BEEN NO PERFORMANCE, THE PENALTY
MAY ALSO BE REDUCED BY THE COURTS IF IT IS INIQUITOUS
OR INCONSCIONABLE.

When the penalty may be reduced – court may equitably

reduce the stipulated penalty in the following instances:

1. If the principal obligation has been partly complied

with

2. If the principal obligation has been irregularly

complied with (all prestations are complied with,
but not in accordance with the tenor of the
agreement)

3. If the penalty is iniquitous or unconscionable even

if there has been no performance.

- while the parties are free to stipulate a particular

amount which the debtor must pay by way of
attorney’s fees and costs in case of non-
fulfilllment of the obligation, it is within the sound
discretion of the court to determine whether the