OBLICON SD
02/07/2018
C2021
Cabarroguis v. Vicente
G.R. No. L-14304 | March 23, 1960
 from the time of delay, which means from the date of judicial or extrajudicial
Gutierrez, J.
Arada, Group 2
Plaintiffs/appellees: Antonia Cabarroguis and Mamerto Cabarroguis
Defendant/appellant: Telesforo Vicente
Topic under which it is assigned: VII. Obligations With a Penal Clause, A. Purpose
of Penalty
Art. 1226. In obligations with a penal clause, the 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. (1152a)
Ratio:
General rule: if the obligation consists in a sum of money, the only damage a creditor
may recover if the debtor incurs in delay is the payment of the interest agreed upon, or
the legal interest, unless the contrary is stipulated (Art. 2209, NCC). However, the
creditor may also claim other damages, in addition to interest, the award of which is
left to the discretion of the court.
In obligations with a penal clause, however, as provided in Art. 1226 of the NCC,
the penalty shall substitute the indemnity for damages and the payment of
interests. The exceptions are: (1) when the contrary is stipulated; (2) when the debtor
refuses to pay the penalty imposed in the obligation, in which case the creditor is
entitled to interest on the amount of the penalty, in accordance with Art. 2209; and
(3) when the obligor is guilty of fraud in the fulfillment of the obligation.
Applying Art.1226, it is evident that no interest can be awarded on the principal
obligation of defendant because of the stipulated Php200 penalty in the
agreement, which took the place of the payment of such interest and indemnity
for damages. There was no stipulation to the contrary and the breach of the
compromise agreement by defendant was not occasioned by fraud.
As to the penalty attached to the principal obligation, it has been held that in
obligations for the payment of a sum of money when a penalty is stipulated for default,
both the principal obligation and the penalty can be demanded by the creditor.
Plaintiff is then entitled to interest on the amount of the penalty because
defendant refused to pay when demand was made by the former.
Art. 2210 of the NCC also provides that in the discretion of the court, interest may be
allowed upon damages awarded for breach of contract. This interest is recoverable
demand. Since there is no showing as to when demand for payment was made,
plaintiff must be considered to have made such demand only from the filing of
the complaint.
Issue:
 W/N defendant should pay interest on the amount of the judgment from the
date of the filing of the complaint until its full payment – NO, interest only
on the amount of the penalty
Facts:
 Antonia Cabarroguis sustained physical injuries (which caused permanent
partial disability to her right forearm) as a result of an accident when the
jeepney she was riding in hit another vehicle at a street corner in Davao City
 Defendant, owner and operator of the jeepney involved in the accident,
entered into a compromise agreement with Cabarroguis to avoid court
litigation
o Obligating himself to pay her Php2,500 "as actual and compensatory
exemplary and moral damages suffered by (her) . . . from the said
accident"
o Should he fail to complete payment within a period of sixty (60)
days, he would pay an "additional amount of Php200.00 as
liquidated damages"
 Defendant paid only a total of Php1,500.00, leaving a balance of Php1,000
 He failed and refused to comply with his obligation (despite repeated
demands) under the agreement after it became due and demandable, thus
plaintiff brought suit in the Municipal Court of Davao City
 Defendant’s defense:
o The injury sustained by plaintiff was not serious or consequential as
to entitle her to the payment of the amount stipulated in the
compromise agreement
o The agreement did not express the true intention of the parties
thereto "by reason of mistake, fraud, inequitable conduct or
accident" so that a reformation of the agreement was in order
 MC ruled in favor of plaintiff; defendant appealed to CFI who then held that
defendant was just trying to evade paying his obligation and sentenced him
to pay plaintiff Php1,200 with interest at legal rate from the date of filing of
the complaint until full payment
 Defendant appealed to the CA, saying that the CFI erred in sentencing him to
pay interest on the amount of the judgment from the date of the filing of the
complaint until its full payment
 o He cited Art. 1226 of the Civil Code, saying that in obligations with
a penal clause, the penalty substitutes the indemnity for damages and
payment of interest
 CA certified the case to the SC because the question is a question of law, thus
this petition
Country Bankers Insurance Corp. vs Court of Appeals
Sept 9,1991
Medialdea J.
Petitioners, Country Bankers Insurance Corporation and Enrique Sy
Respondents, Court of Appeals and Oscar Ventanilla Enterprises Corporation
Ponente: Romero, J.
TOPIC
Obligations with a Penal Clause
RELEVANT PROVISION
Art 1226. In Obligations with a penal clause, the 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
RATIO
The Forfeiture Clause is a Valid Penal Clause that was agreed by both parties.
290,000 taken from the cash deposit and was given in favor to the respondent
The penalty arising from the penal clause however cannot substitute the damages
suffered from the missed opportunity cost of OVEC from the months Feb-Nov
ISSUE
- W/N Sy is liable to pay damages additional to the penalty due to the forfeiture
clause stipulated in the Lease agreement
FACTS
- OVEC and Enrique Sy entered into a lease agreement wherein, Sy would be
leasing for 6 years the movie theaters and land of OVEC in Cabanatuan City
o After 2 Years: due to late payments by Sy, OVEC made a demand
for repossession.
- After negotiations, OVEC Reconsidered and allowed Sy to continue
operations
o Sy Deposited 600k – but OVEC stated that only 300k was given
o Reduced the missed payment from 125,455 to 71,028
o To pay for the amusement fees of 84,000
- After further demand, Sy still failed to pay OVEC
- OVEC then locked the gates and theaters so that Sy’s business would not be
able to operate
- Sy filed an Action for reformation of the lease agreement + Damages and
Injunction
o Praying to enjoin OVEC from taking possession of the theaters
o Conditioned by a bond filed on behalf of Country Bankers Insurance
(CBISCO)
RULING
 Forfeiture clause provides that the deposit shall be deemed forfeited,
 Penalty however is added on top of the damages, which were worth Php
100,000
 Purpose of a penal clause is to affirm the compliance to an obligation.
Noncompliance would lead to added fees and penalties.
o Therefore, obligee can recover from the obligor not only the penalty
but also the damages resulting from the non-fulfillment or defective
performance of the principal obligation
Pamintuan v CA
G.R. No. L-26339
December 14, 1979
Group 4 – Aniag
Petitioners: Mariano Pamintuan
Respondent: Court of Appeals, and Yu Ping Kun Co., Inc.
TOPIC UNDER WHICH IT IS ASSIGNED: VII. Obligations with a Penal
Clause
A. Purpose of
Penalty
RATIO: “The proven damages supersede the stipulated liquidated damages” is
supported by the opinion of Manresa (whose comments were the bases of the new
Article 1226, not found in Article 1152) that in case of fraud the difference between
the proven damages and the stipulated penalty may be recovered.
ISSUE AND DISPOSITION: WON YPKC (Private Respondent) is entitled to the
penalty? – YES. However, for reasons of justice and since actual damages have
already been determined by the Court, these actual damages should prevail over
the penalty stipulated.
MATERIAL FACTS: Pamintuan has barter license to send a Japanese company
white flint corn in exchange for plastic sheeting. Pamintuan thereafter executed a
contract with Yu Ping Kun Co. wherein he would send YPKC the plastic sheeting in
consideration of P265,550. The contract stipulated a penalty of P10,000 for any party
who violates the contract. The Court determined that it was “not easy to
categorize” whether the purpose of the clause is to enforce the contract or to
accommodate prospective damages. Later, Pamintuan violates the contract by
withholding the plastic sheeting (after YPKC has fully complied with its reciprocal
obligation) and overpricing the already delivered sheets (to offset the undelivered
sheets). Withholding and overpricing the sheets constitutes fraud for Court.
YPKC filed a suit.
NOTES: In determining the damages suffered by the Respondent, the Court computed
the following: 1) For the plastic sheeting, P67,174.17 as unrealized profits and
P12,282.26 as overpayment, 2) Pl,102.85 as premium paid by the company on the
bond of P102,502.13 for the issuance of the writ of preliminary attachment and (d)
P10,000 as attorney's fees.
Hence, the damages recoverable by the firm would amount to ninety thousand
five hundred fifty-nine pesos and twenty-eight centavos (P90,559.28), with six
percent interest a year from the filing of the complaint.
Makati Development v. Empire
G.R. No. L-21780 | June 30, 1967 | Castro, J.
MAKATI DEVELOPMENT CORPORATION, petitioner vs.
EMPIRE INSURANCE CO. and RODOLFO P. ANDAL, respondents
Group 6- De Guzman
TOPIC: VII. Obligations with a Penal Clause
B. When courts may reduce (Art. 1229)
SUMMARY:
MDC sold a lot to Andal. The Deed of Sale had a “special condition” that Andal should
complete at least 50% of his residence by March 1961 or his bond of P11,123 will be
forfeited in favor of MDC. After failing to comply with said obligation, MDC filed a
complaint with CFI Rizal to collect the bond in full amount. The lower court granted
the petition but reduced the amount to P1,500. Upon appeal, SC ruled that if the
purpose of the penalty is to compel the performance of the obligation and punish non-
compliance, then the court may reduce the penalty upon partial performance (Art.
1229). Here, the penal clause was inserted to compel performance of the "special
condition" and a house had already been built shortly after the period stipulated.
Hence, the trial court’s reduction of penalty is fully justified.
RELEVANT PROVISION/TERMS:
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 unconscionable. (1154a)
ISSUE/S WITH RATIO:
1. W/N Andal was liable for the full amount of the bond upon his failure to build a
house within the two-year period. NO. (FOR OUR CLASS: W/N Court can reduce
the penalty attached to an obligation with Penal Clause- YES)
The "special condition" in the Deed of Sale is in reality an obligation- to build a house
with at least 50 per cent of which to be finished within two years. The penal clause of
payment of P12,000 in case of failure to comply with said obligation was inserted to
secure its performance.
 In obligations with a penal sanction, the penalty takes the place of "damages
and the payment of interest in case of non-compliance" and the obligee is
entitled to recover it upon the breach of the obligation without the need of
proving damages.
However, when there is partial performance of an obligation, the Court may
validly mitigate the obligor's liability. Art. 1229 of the Civil Code states: 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 unconscionable.
 The trial court found that Juan Carlos had finished more than 50 per cent
of his house by April 1961, or barely a month after the expiration on March
31, 1961 of the stipulated period. Therefore, there was a partial
performance of the obligation within the meaning and intendment of Art.
1229 and Court may validly reduce obligation from P12,000 to P1,500.
 The lower Court also note that even before March 1961, the entire area was
already fenced with a stone wall and building materials were stocked in the
premises which are clear indicia of the owner's desire to construct his house
with the least possible delay.
SC ruled that the penal clause was inserted not to indemnify MDC for any damage
it might suffer as a result of a breach of the contract but rather to compel
performance of the "special condition" and thus encourage home building among
lot owners in the Urdaneta Village.
  Considering that a house had been built shortly after the period stipulated, the
substantial, although tardy, performance of the obligation fully justified the
trial court’s reduction of penalty.
MATERIAL FACTS:
March 31, 1959: Makati Development Corporation (MDC) sold to Rodolfo P. Andal
a 1,589 square meters lot in Urdaneta Village, Makati, Rizal, for P55,615.
Deed of Sale contained a "special condition" that: "[T]he VENDEE/S shall
commence the construction and complete at least 50% of his residence on the
property within two (2) years from March 31, 1959 to the satisfaction of the VENDOR
and, in the event of his failure to do so, the bond which the VENDEE/S has delivered
to the VENDOR in the sum of P11,123.00 and evidenced by a cash bond receipt dated
April 10, 1959 will be forfeited in favor of the VENDOR by the mere fact of failure
of the VENDEE/S to comply with this special condition."
 To insure compliance with "condition," Andal gave a surety bond wherein
he, as principal, and the Empire Insurance Company (Empire), as surety,
jointly and severally, undertook to pay MDC P12,000 in case he failed to
comply with his obligation.
Andal did not build a house and instead sold the lot to Juan Carlos, who likewise did
not build a house within the stipulated period. Hence, on April 3, 1961, MDC sent a
notice of claim to Empire.
 The demand for P12,000 was refused by Empire, which led to MDC filing a
complaint in CFI Rizal to recover the bond in the full amount, plus attorney's
fees.
o Empire Insurance Co. asked that the complaint be dismissed or, in
the event of a judgment in favor of MDC, that the Court order Andal
to pay Empire whatever amount it will be ordered to pay MDC, plus
interest at 12%, from the date of the filing of the complaint until said
amount was fully reimbursed, and attorney's fees.
o Andal admitted the execution of the bond but alleged that the
"special condition" in the Deed of Sale was contrary to law, morals
and public policy. He also averred that Juan Carlos had started
construction of a house on the lot.
CFI Rizal: Reducing the liability for breach of the undertaking from the stipulated
P12,000, the lower court ordered Empire to pay MDC P1,500, with 12% interest from
the time of the filing of the complaint until the amount was fully paid, P500 for
attorney's fees, and the proportionate part of the costs.
 Andal should in turn reimburse Empire all the amounts and costs it payed to
MDC.
 MDC appealed directly to this Court.
HELD:
The appealed decision of CFI Rizal is AFFIRMED, at appellant's cost.
FILINVEST V. CA
G.R. No. 138980 | September 20, 2005 | Chico-Nazario, J.
Maog | Group 6
PETITIONER: Filinvest Land, Inc.
RESPONDENTS: Hon. Court of Appeals, Philippine American General Insurance
Company and Pacific Equipment Corporation
TOPIC
WHEN COURTS MAY REDUCE (Article 1229)
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
unconscionable. (1154a)
TOPIC IN DISCUSSION
As a general rule, courts are not at liberty to ignore the freedom of the parties to agree
on such terms and conditions as they see fit as long as they are not contrary to law,
morals, good customs, public order or public policy. Nevertheless, courts may
equitably reduce a stipulated penalty in the contract in two instances: (1) if the
principal obligation has been partly or irregularly complied; and (2) even if there has
been no compliance if the penalty is iniquitous or unconscionable in accordance
with Article 1229 of the Civil Code…
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
unconscionable (Art. 1229, New Civil Code).
We are hamstrung to reverse the Court of Appeals as it is rudimentary that the
application of Article 1229 is essentially addressed to the sound discretion of the
court.
RATIO
CA decision is AFFIRMED.
Penalty was mutually agreed upon by parties, but the Court has power, by virtue
of Art. 1229, to reduce the amount of the penalty if they deem it iniquitous or
unconscionable.
 Penal clause: accessory undertaking to assume greater liability in case of breach.
It is attached to an obligation in order to insure performance and has two
functions; (1) to provide for liquidated damages, and (2) to strengthen the coercive
force of the obligation by the threat of greater responsibility in the event of breach.
 As a general rule, courts are not at a liberty to ignore the freedom of the parties to
agree on such terms and conditions as long as not contrary to law, morals, etc.
 Nevertheless, courts may equitably reduce a stipulated penalty in the
contract in two instances
o If the principal obligation has been partly or irregularly complied, and
o Even if there has been no compliance if the penalty is iniquitous or
unconscionable in accordance with Art. 1229 of the Civil Code.
 Trial court ruled that penalty charge for delay (P15,000 per day of delay =
P3,990,000) was excessive and reduced to P1,881,867.66 “considering the
amount of work already performed and the fact that Filinvest consented to
three prior extensions. CA affirmed this, adding that the penalty was
unconscionable as the construction was already not far from completion
(94.53%).
 Laureano v. Kilayco (1915): cautions courts to distinguish between two kinds of
penalty clauses in order to better apply their authority in reducing the amount
recoverable
o SC held: in any case wherein there has been a partial/irregular
compliance with the provisions in a contract for special indemnification
in the event of failure to comply with its terms, courts will rigidly apply
the doctrine of strict construction against the enforcement in its entirety
of the indemnification where it is clear from the terms of the contract that
the amount of the indemnity is fixed without regard to the probable
damages which might be anticipated as a breach… But the courts will be
slow in exercising the jurisdiction conferred upon them in article 1154
(now 1229).
o This doctrine is inapplicable. Distinction between penalty clause
imposed in case of breach and penalty clause imposed as indemnity for
damages should be made in cases where there has been neither partial
nor irregular compliance with the terms of the contract.
 Filinvest’s argument that the first part of Art. 1229 on partial performance should
not apply because the penalty clause would kick in situations where Pacific had
already begun work but could not finish on time, thus being penalized for delay,
is insufficient to reverse the CA ruling.
o Penalty isn’t only being reduced for partial performance but also because
the penalty was unconscionable.
o Ligutan v. CA: question of whether a penalty is reasonable can be partly
subjective and partly objective. Factors to consider: purpose of penalty,
nature of obligation, mode of breach & consequences, relationships of
parties, etc.
 Finally, Pacific substantially complied with their obligation in good faith, and
Filinvest isn’t entirely faultless either (failed to pay Pacific for work actually
performed).
ISSUE
1) W/N the liquidated damages agreed upon by the parties should be
required, considering that (a) time if of the essence of the contract, (b)
liquidated damages was fixed by the parties [as penalty in case of delay and
anticipated damages Filinvest may suffer because of this], and (c) the total
liquidated damages sought is only 32% of the total contract price, the same
freely and voluntarily agreed upon by the parties: NO
MATERIAL FACTS
 April 26, 1978: Filinvest Land, Inc. (FILINVEST), a corporation engaged in the
development and sale of residential subdivisions, awarded to defendant Pacific
Equipment Corporation (PACIFIC) the development of its residential
subdivisions consisting of two (2) parcels of land located at Payatas, Quezon City.
 To guarantee its faithful compliance and pursuant to the agreement, defendant
posted two (2) Surety Bonds in favor of plaintiff, issued by Philippine American
General Insurance (PHILAMGEN).
 Despite three extensions, Pacific failed to finish the contracted works.
 Oct. 19, 1979: Plaintiff wrote Pacific advising the latter of its intention to takeover
and hold them liable for damages which it had incurred and will incur to finish
the project.
 Oct. 29, 1979: Plaintiff submitted its claim against Philamgen under its
performance and guarantee bond, but the latter refused to acknowledge its liability
because its principal, Pacific, refused to acknowledge liability.
 Defense of Pacific: Failure to finish contracted work due to inclement weather
and the fact that several items of finished work and change order which plaintiff
refused to accept and pay for caused the disruption.
o Contractual relationship = reciprocal obligation; failure of plaintiff to
pay its progressing bills estops it from demanding fulfilment of Pacific’s
obligation
o Three extensions = waiver of right to claim damages
o Unilateral and voluntary action of plaintiff’s preventing the completion
of work has relieved Pacific from completing it.
 Defense of PHILAMGEN: Various amendments made on the principal contract
and the deviations in the implementation thereof which were resorted to by
plaintiff and co-defendant Pacific without PHILAMGEN’s written consent
thereto have automatically released the latter from any or all liability within the
purview of the coverage of the surety bonds it has issued.
 July 7, 1981: Architect sent to conduct an ocular inspection to determine the
amount of work accomplished by Pacific and plaintiff to complete the project.
 Nov. 28, 1984: Contract billings and payments made by both parties were the best
basis; no proper procedure in terminating the contract; lack of inventory work
accomplished; no logbook; inadequate documentation and system of construction
management
o Billings: Pacific’s work – P11,788,282.40 (except last billing in
P844,396.41); total amount of work to be accomplished by plaintiff was
 based on the original contract amount less value of work accomplished
by Pacific (P12,470,000-11,788,282.42 = P681,717.58)
o Court Commissioner found no sufficient basis to justify alleged repairs
made by plaintiff. Pacific had even done additional work.
 RTC: On the basis of the commissioner’s report, the trial court dismissed
Filinvest’s complaint (and Pacific’s counterclaim)
o Amount due defendant: P1,881,867.66
o However, Pacific was still in delay since April 25, 1979. Thus, they are
liable. However, the claim of P3,990,000 in the form of penalty by reason
of delay was found to be too excessive. A forfeiture of the amount due
defendant appears to be more reasonable.
 CA: Affirmed the decision.
 Filinvest @ SC: The penalty in its entirety should be respected; it was a product
of mutual agreement; represents only 32% of the P12,470,000 contract price, thus
not shocking. It was fixed not only to ensure compliance with the terms but to
provide for anticipated liquidated damages. Thus, pursuant to Laureano v.
Kilayco, courts should be slow in exercising the authority conferred by Art. 1229
of the Civil Code.
Florentino v. Supervalue, Inc
G.R. 172384 | 12 Sep 2007
Chico-Nazario, J.
Facts:
 Pet’r is engaged in the retail of empanada with outlets in different malls and
establishments, under the name “Empanada Royale”
 Resp Supervalue is a domestic corporation engaged in the business of leasing
stalls located inside SM Malls
 They executed a Contract of Lease over the cart-type stalls at SM North Edsa,
SM Southmall and SM Megamall.
• 4-month term, which may be renewed upon agreement of both
 Before expiration of lease, Florentino received 2 letters from Resp
• First letter: charging the Pet’r with the following violations:
 Not opening twice
 Selling a different product (mini embutido) without Resp’s
prior approval
 Increasing the price of the goods (Php20-22) without
Resp’s prior approval
 Frequently closing earlier than usual mall hours
• Second: informing Pet’r it will no longer renew the Contract of
Lease
 Resp took possession of the store space in Megamall and confiscated the
equipment and personal belongings of the Pet’r after the expiration of the
contract
 Pet’r demanded the release of the equipment seized and the return of security
deposits, amounting to 192,000Php, turned over by Pet’r upon signing the
Contract
• Pet’r filed an action for specific performance, sum of money and
damages before RTC
 Pet’r claims that Resp made verbal representations that the Contract will be
renewed, so she introduced improvements upon the store in Megamall in the
sum of 200K.
• RTC: In favor of Pet’r, ordered Resp to give the security deposits
back to Pet’r, return properties, reimburse for the improvement OR
require the Pet’r to remove improvements
• CA: Pet’r is not entitled for the security deposits and
reimbursements for improvements, but Resp should return
properties after Pet’r settles her obligations
Issues:
 W/N Resp is liable to return the security deposits. ONLY HALF.
 W/N Resp is liable to reimburse Pet’r for the sum of the improvements she
introduced in the leased premises. NO.
 W/N Resp is liable for attorney’s fees. NO.
Ratio (Main):
 Contract of Lease established in Secs. 5 & 18 that the security deposit was for the
full and faithful performance to each and every term, provision, covenant, and
condition and was not a pre-payment of rent; and that any breach of the terms and
conditions shall constitute forfeit of the deposit
o Pet’r was guilty of several breaches of contract
 Sec. 18 is a penal clause to ensure Pet’r’s faithful compliance with terms and
conditions
 Penal clause: accessory undertaking to assume greater liability in case of
breach. It is attached to an obligation in order to insure performance and has
a double function:
o to provide for liquidated damages, and
o to strengthen the coercive force of the obligation by the threat of
greater responsibility in the event of breach
 Obligor bound to pay the stipulated indemnity without need of proof of the
existence and extent of damages
 Art. 1226, NCC:
o In obligations with a penal clause, the 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
o The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code
  General rule: courts are not at liberty to ignore the freedoms of the parties to
agree on such terms and conditions as they see fit
o As long as they are not contrary to law, morals, good customs, public
order or public policy
 However, courts may equitably reduce a stipulated penalty in the contracts in
two instances:
o If the principal obligation has been partly or irregularly complied
with; and
o Even without compliance, if the penalty is iniquitous or
unconscionable with respect to Art. 1229, NCC:
 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 unconscionable
 Ligutan v. CA:
o The question of W/N a penalty is reasonable or iniquitous is partly
subjective and partly objective
o Depends on factors such as: type, extent and purpose of the penalty;
nature of the obligation; mode of breach and its consequences;
supervening realities; standing and relationship of the parties; etc.
o Discretion of the court
 Forfeiture of the entire amount of the security deposits worth Php 192,000
was excessive and unconscionable considering the breaches were not so
grave as to prejudice Resp unduly
o Reduced to 50%
[Ratio of other issues]
 Sec. 11 of the Contract mandates that the PET should secure Resp’s consent
before making any improvements; Pet’r did not
 To be entitled to reimbursement for improvements, PET must be considered
in good faith (Art. 1678, NCC)
 Arts. 448 & 546, NCC, which allow full reimbursement of useful
improvements and retention of the premises until reimbursement is made,
apply only to a possessor in good faith
 A builder in good faith is one who is unaware of any flaw in his title of the
land at the time he builds on it
 Pet’r cannot claim that she was not aware of any flaw or was under the belief
that she was the owner of the premises since she is merely a lessee
o Since Florentino’s interest in the store space is merely that of the
lessee under the lease contract, she cannot be considered a builder
in good faith
 Attorney’s fees may be awarded when a party is compelled to litigate or to
incur expenses to protect its interest by reason of unjustified act of the other
o It was not shown that RESP unjustifiably refused to grant the
demands so as to compel the PET to initiate legal action to enforce
her rights
PRYCE CORPORATION v PHILIPPINE AMUSEMENT AND GAMING
CORPORATION
G.R. No. 157480 | May 6, 2005
Panganiban, J.
Group 2
What is it saying about the topic
The termination or cancellation of a contract would necessarily entail enforcement of
its terms prior to the declaration of its cancellation in the same way that before a lessee
is ejected under a lease contract, he has to fulfill his obligations thereunder that had
accrued prior to his ejectment. However, termination of a contract need not undergo
judicial intervention
To rescind is to declare a contract void in its inception and to put an end to it as though
it never were. It is not merely to terminate it and release parties from further obligations
to each other but to abrogate it from the beginning and restore the parties to relative
positions which they would have occupied had no contract ever been made.
Issue
1. WON there was only a right to termination, and not recission thereby
entitling PPC to future rentals or lease payments for the unexpired
period of its contract with PAGCOR – YES
 Petitioners had the right to ask or termination plus the full payment of future
rentals under the provisions of the Contract, rather than just rescission under
Article 1659 of the Civil Code. This Court is not unmindful of the fact
that termination and rescission are terms that have been used loosely and
interchangeably in the past. But distinctions ought to be made, especially in
this controversy, in which the terms mean differently and lead to equally
different consequences.
 The distinction between termination (or cancellation) and rescission (more
properly, resolution), Huibonhoa v. CA held that, where the action prayed for
the payment of rental arrearages, the aggrieved party actually sought the
partial enforcement of a lease contract. Thus, the remedy was not rescission,
but termination or cancellation, of the contract.
 There is a distinction in law between cancellation of a contract and its
rescission. To rescind is to declare a contract void in its inception and to
put an end to it as though it never were. It is not merely to terminate it
and release parties from further obligations to each other but to abrogate
 it from the beginning and restore the parties to relative positions which
they would have occupied had no contract ever been made.
 The termination or cancellation of a contract would necessarily entail
enforcement of its terms prior to the declaration of its cancellation in the
same way that before a lessee is ejected under a lease contract, he has to
fulfill his obligations thereunder that had accrued prior to his ejectment.
However, termination of a contract need not undergo judicial
intervention.
 Thus, mutual restitution is required in a rescission (or resolution), in order to
bring back the parties to their original situation prior to the inception of the
contract. Applying this principle to this case, it means that PPC would re-
acquire possession of the leased premises, and PAGCOR would get back the
rentals it paid the former for the use of the hotel space.
 In contrast, the parties in a case of termination are not restored to their original
situation; neither is the contract treated as if it never existed. Prior to its
termination, the parties are obliged to comply with their contractual
obligations. Only after the contract has been cancelled will they be released
from their obligations.
 In this case, the actions and pleadings of petitioner show that it never intended
to rescind the Lease Contract from the beginning. This fact was evident when
it first sought to collect the accrued rentals from September to November
1993 because, as previously stated, it actually demanded the enforcement of
the Lease Contract prior to termination. Any intent to rescind was not shown,
even when it abrogated the Contract on November 25, 1993, because such
abrogation was not the rescission provided for under Article 1659.
2. WON the penalty of PAGCOR should be equitably reduced
 In certain cases, a stipulated penalty may nevertheless be equitably reduced
by the courts. This power is explicitly sanctioned by Articles 1229 and 2227
of the Civil Code, which we quote:
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
unconscionable.
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall
be equitably reduced if they are iniquitous or unconscionable.
 The question of whether a penalty is reasonable or iniquitous is addressed to
the sound discretion of the courts. To be considered in fixing the amount of
penalty are factors such as -- but not limited to –
o the type, extent and purpose of the penalty;
o the nature of the obligation;
o the mode of the breach and its consequences;
o the supervening realities; the standing and relationship of the parties;
and the like.
 In this case, PAGCORs breach was occasioned by events that, although not
fortuitous in law, were in fact real and pressing.
o From the CAs factual findings, which are not contested by either
party, we find that PAGCOR conducted a series of negotiations and
consultations before entering into the Contract. It did so not only
with the PPC, but also with local government officials, who assured
it that the problems were surmountable.
o Likewise, PAGCOR took pains to contest the ordinances before the
courts, which consequently declared them unconstitutional. On top
of these developments, the gaming corporation was advised by the
Office of the President to stop the games in Cagayan de Oro City,
prompting the former to cease operations prior to September 1993.
 Also worth mentioning is the CAs finding that PAGCORs casino operations
had to be suspended for days on end since their start in December 1992; and
indefinitely from July 15, 1993, upon the advice of the Office of President,
until the formal cessation of operations in September 1993. Needless to say,
these interruptions and stoppages meant that PAGCOR suffered a tremendous
loss of expected revenues, not to mention the fact that it had fully operated
under the Contract only for a limited time.
 While petitioners right to a stipulated penalty is affirmed, we consider the
claim for future rentals to the tune of P7,037,835.40 to be highly iniquitous.
The amount should be equitably reduced. Under the circumstances, the
advanced rental deposits in the sum of P687,289.50 should be sufficient
penalty for respondents breach.
FACTS
 Pryce Properties Corporation (PPC) executed a contract of lease with
PAGCOR involving the ball of Pryce Plaza Hotel for a period of 3 years
for the purpose of opening a casino in Cagayan de Oro City.
 Parties executed an addendum to the contract which included a lease of
an additional 1000 square meters of the hotel grounds
 Afterwards, PAGCOR started their casino operations however, numerous
Resolutions were passed by the Sangguniang Panlungsod ng Cagayan de Oro
 City that prohibited the issuance of business permits and allowed the
canceling of existing of business permits to any establishment that allow the
use of their premises for casino operations.
 The said Resolutions were declared by the CA as unconstitutional. This
was affirmed by the SC.

 PAGCOR resumed operations however, due to incessant public

demonstrations, it was forced to indefinitely suspend operations.
 After a while, PAGCOR decided to stop its casino operations as per
advice of the President of the Philippines.

 In 2 statements of account, PAGCOR was informed of its outstanding

account for the quarter Sept. 1 to Nov. 20, 1993.
 PPC sent PAGCOR another letter as follow-up.
 PAGCOR answered through a letter stating that:
- it was not amenable to the payment of the full rentals citing as
reasons unforeseen legal and other circumstances which prevented
it from complying with its obligations.
- it had no other alternative but to pre-terminate the lease agreement
due to the relentless and vehement opposition to their casino
operations.

 In a letter dated October 12, 1993 PAGCOR asked PPC to refund the total
of P1,437,582.25 representing the reimbursable rental deposits and expenses
for the permanent improvement of the Hotels parking lot.

 In a letter dated November 5, 1993, PAGCOR formally demanded from PPC

the payment of its claim for reimbursement.

 On November 15, 1993, PPC filed a case for sum of money in the Regional
Trial Court of Manila, while on November 19, 1993, PAGCOR also filed a
case for sum of money in the Regional Trial Court of Manila.