OBLIGATIONS WITH PENAL CLAUSE

1. No. A party cannot perform the penalty outright in lieu of the principal obligation.

The general rule is that the debtor is not allowed to just pay the penalty instead of the
fulfillment of the principal obligation. As provided under Article 1227 of Civil Code, he
can only do so if the right has been expressly reserved. The reason is that if the party
can just pay, fulfillment of the obligation will be considered as alternative. The word
expressly in the provision means that any implied reservation is not allowed.

2. No. Proof of actual damages suffered by the aggrieved party is not necessary in order that
the penalty may be demanded. (Article 1228).

A penal clause, when agreed upon in a contract, is more of a punishment for the breach
rather than a security. It is a lawful means for repairing the losses and damages and upon
the violation of the condition agreed, the aggrieved party is not obliged to prove losses
and damages suffered, nor the extent of the same in order to demand for enforcement of
penal clause.

3. SAMPLE CONTRACT WITH PENAL CLAUSE (See below)

 LEASE CONTRACT
 
KNOW ALL MEN BY THESE PRESENTS:

This CONTRACT OF LEASE is made and executed at the City of Tabaco, this 20th day of May,
2020, by and between:
 
        Jessy Lu of legal age, single Filipino, and with residence and postal address at Pawa,
Tabaco City, 4511, hereinafter referred to as the LESSOR.
 
-AND-
 
        Carl Jung, Filipino and with residence and postal address at Poblacion, Tiwi, Albay
4513, hereinafter referred to as the LESSEE.
 
WITNESSETH; That
 
WHEREAS, the LESSOR is the owner of THE LEASED PREMISES, a residential property
situated at Pawa, Tabaco City, Albay, 4511;
 
WHEREAS, the LESSOR agrees to lease-out the property to the LESSEE and the LESSEE is
willing to lease the same;
 
NOW THEREFORE, for and in consideration of the foregoing premises, the LESSOR leases
unto the LESSEE and the LESSEE hereby accepts from the LESSOR the LEASED premises,
subject to the following: 
 
TERMS AND CONDITIONS
 
1. PURPOSES:   That premises hereby leased shall be used exclusively by the LESSEE for
residential purposes only and shall not be diverted to other uses. It is hereby expressly agreed
that if at any time the premises are used for other purposes, the LESSOR shall have the right
to rescind this contract without prejudice to its other rights under the law.
 
2. TERM:  This term of lease is for ONE (1) YEAR. from June 1, 2020 to June 1, 2021
inclusive. Upon its expiration, this lease may be renewed under such terms and conditions as
may be mutually agreed upon by both parties, written notice of intention to renew the lease
shall be served to the LESSOR not later than seven (7) days prior to the expiry date of the
period herein agreed upon.
 
3. RENTAL RATE:   The monthly rental rate for the leased premises shall be in PESOS:
AMOUNT IN WORDS (P10,000.00), Philippine Currency. All rental payments shall be payable
to the LESSOR.
 
4. DEPOSIT:   That the LESSEE shall deposit to the LESSOR upon signing of this contract and
prior to move-in an amount equivalent to the rent for THREE (3) MONTHS or the sum of 
PESOS: AMOUNT IN WORDS (P 30,000.00), Philippine Currency.  wherein the two (2) months
deposit shall be applied as rent for the 11th and 12th months and the remaining one (1) month
deposit shall answer partially for damages and any other obligations, for utilities such as
Water, Electricity, CATV, Telephone, Association Dues or resulting from violation(s) of any of
the provision of this contract.
 
5. DEFAULT PAYMENT:  In case of default by the LESSEE in the payment of the rent, such as
when the checks are dishonored, the LESSOR at its option may terminate this contract
and eject the LESSEE. The LESSOR has the right to padlock the premises when the LESSEE is
in default of payment for One (1) month and may forfeit whatever rental deposit or advances
have been given by the LESSEE.
 
6. SUB-LEASE:   The LESSEE shall not directly or indirectly sublet, allow or permit the leased
premises to be occupied in whole or in part by any person, form or corporation, neither shall
the LESSEE assign its rights hereunder to any other person or entity and no right of interest
thereto or therein shall be conferred on or vested in anyone by the LESSEE without the
LESSOR'S written approval.
 
7. PUBLIC UTILITIES:   The LESSEE shall pay for its telephone, electric, cable TV, water,
Internet, association dues and other public services and utilities during the duration of the
lease.
 
8. FORCE MAJEURE:   If whole or any part of the leased premises shall be destroyed or
damaged by fire, flood, lightning, typhoon, earthquake, storm, riot or any other unforeseen
disabling cause of acts of God, as to render the leased premises during the term substantially
unfit for use and occupation of the LESSEE, then this lease contract may be terminated
without compensation by the LESSOR or by the LESSEE by notice in writing to the other.
 
9. LESSOR'S RIGHT OF ENTRY:   The LESSOR or its authorized agent shall after giving due
notice to the LESSEE shall have the right to enter the premises in the presence of the LESSEE
or its representative at any reasonable hour to examine the same or make repairs therein or for
the operation and maintenance of the building or to exhibit the leased premises to prospective
LESSEE, or for any other lawful purposes which it may deem necessary.
 
10. EXPIRATION OF LEASE:   At the expiration of the term of this lease or cancellation
thereof, as herein provided, the LESSEE will promptly deliver to the LESSOR the leased
premises with all corresponding keys and in as good and tenable condition as the same is now,
ordinary wear and tear expected devoid of all occupants, movable furniture, articles and effects
of any kind. Non-compliance with the terms of this clause by the LESSEE will give the LESSOR
the right, at the latter's option, to refuse to accept the delivery of the premises and compel the
LESSEE to pay rent therefrom at the same rate plus Twenty Five (25) % thereof as penalty until
the LESSEE shall have complied with the terms hereof.  The same penalty shall be imposed in
case the LESSEE fails to leave the premises after the expiration of this Contract of Lease or
termination for any reason whatsoever.
 
11. JUDICIAL RELIEF:   Should any one of the parties herein be compelled to seek judicial
relief against the other, the losing party shall pay an amount of One Hundred (100) % of the
amount clamed in the complaint as attorney's fees which shall in no case be less than
P50,000.00 pesos in addition to other cost and damages which the said party may be entitled
to under the law.
 
12. This CONTRACT OF LEASE shall be valid and binding between the parties, their
successors-in-interest and assigns.
 
IN WITNESS WHEREOF, parties herein affixed their signatures on the date and place above
written.
 
 
 
Jessy Lu                                Carl Jung
LESSOR                                                LESSEE
 
Signed in the presence of:
 
 
_____________________________                  ______________________________
 
ACKNOWLEDGEMENT
 
Republic of the Philippines)
_________________________) S.S
 
BEFORE ME, personally appeared:
 
   Name                                 CTC Number             Date/Place Issued
 
      Jesssy Lu                    10000000           February 24, 2020 / Tabaco City
Carl Jung                           10000000           January 07, 2020 / Tiwi, Albay
 
Known to me and to me known to be the same persons who executed the foregoing instrument
and acknowledged to me that the same is their free and voluntary act and deed.
 
This instrument consisting of 3 page/s, including the page on which this acknowledgement is
written, has been signed on each and every page thereof by the concerned parties and their
witnesses, and and sealed with my notarial seal.
 
WITNESS MY HAND AND SEAL, on the date and place first above written.
                                                                    
                                                                                      
Notary Public
 
Doc. No.______;
Page No. ______;
Book No.______;
Series of 20___.
 
CAPSULIZED CASES

PENAL CLAUSE SHALL SUBSTITUTE INDEMNITY AND INTEREST

Article 1226 of the Civil Code provides that 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. In other words, where the contract stipulates the rate of
interest and the amount of penalty to be paid in case of failure to pay the obligation within a given
period, both the penalty and the interest can be collected by the creditor. (Edmerito Ang Gobonseng,
et.al., vs. Unibancard Corporation, G.R. No. 160026, December 10, 2007)

A penal clause is an 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: (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.The obligor would then be bound to pay the stipulated indemnity
without the necessity of proof of the existence and the measure of damages caused by the breach.
(Erminda F. Florentino vs. Supervalue, Inc., G.R. No. 172384, September 12, 2007)

FORFEITURE CLAUSE AS PENAL CLAUSE

In contract of lease may contain forfeiture clause. The validity of such was upheld in Country
Bankers Insurance Corp. vs. CA, A provision which calls for the forfeiture of the remaining deposit
still in the possession of the lessor, without prejudice to any other obligation still owing, in the event
of the termination or cancellation of the agreement by reason of the lessee's violation of any of the
terms and conditions of the agreement is a penal clause that may be validly entered into. A penal
clause is an accessory obligation which the parties attach to a principal obligation for the purpose of
insuring the performance thereof by imposing on the debtor a special prestation (generally consisting
in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or
inadequately fulfilled. (Fort Bonifacio Development Corporation vs. Yllas Lending Corporation, et.al.,
G.R. No. 158997, October 6, 2008)

WHEN PENALTY IS INIQUITOUS OR UNCONSIONABLE

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 which provides:

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. (Filinvest Land, Inc.,
vs. Court of Appeals, G.R. No. 138980, September 20, 2005)

In ascertaining the whether the penalty is unconscionable or not, the court set the following
standard in Ligutan vs CA, to wit:

The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective. Its resolution would depend on such factor as, but not necessarily confined to, the
type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the sound discretion of the court. (Erminda F.
Florentino vs. Supervalue, Inc., G.R. No. 172384, September 12, 2007)

EFFECTS OF UNCONSCIONABLE PENALTY

Petitioner also argues that the 3% monthly surcharge partakes of the nature of a penalty
clause. A penal clause is an accessory undertaking to assume greater liability in case of breach and
is attached to an obligation in order to secure its performance. The penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance. But if such
stipulation is found contrary to law for being usurious, it can be nullified by the courts without
affecting the principal obligation. (Banco Filipino Savings and Mortgage Bank vs. Juanita B. Ybanez,
G.R. No. 148163, December 6, 2004)