CHAPTER 3 Different Kinds of Obligations Issue: Is the clause a penal clause?

Held: No.
SECTION 6 Obligations with a Penal
- Without said clause
Clause - the vendee could recover legal interests under
Article 2209 of the Civil Code which is even more
than the 4% provided for in the clause.
Principal obligation
- Therefore, it does not preclude the recovery of
- is one which can stand by itself
actual/nominal damages by the vendee. (Robes-
- and does not depend for its validity and existence
Francisco Realty & Dev. Corp. vs. CFI and Millan, 86
upon another obligation.
SCRA 59 [1978].)

Accessory obligation
- is one which is attached to a principal obligation
- and, therefore, cannot stand alone.
Article 1226. In obligations with a penal clause, the
EXAMPLE: A stipulation in the contract providing for the
compounding of interest in case of non-performance
partakes of the nature of a penalty clause. If inequitous or
unconscionable, the interest may be reduced. (Hodges vs.
Javellana, L-17247, Apr. 28, 1962).

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.
- Principal Purpose of the Penal Clause
- Its principal purpose is to insure the performance of an
obligation and also to substitute for damages and the
payment of interest in case of non-compliance. (Art.
1224, 1st par., Civil Code).

The penalty may be enforced only when it is PENAL CLAUSE CONDITION

demandable in accordance with the provisions of this
PENAL CLAUSE constitutes CONDITION does not
Code. (1152a)
--------------------------------------------------------- an obligation
OBLIGATIONS WITH A PENAL CLAUSE
although accessory
- DEFINITION: obligation with a penal clause
- is one which contains an accessory undertaking to pay Therefore, the PENAL CLAUSE while the CONDITION
a previously stipulated indemnity
- in case of breach of the principal prestation intended may become demandable is never demandable
primarily to induce its fulfillment.
in default of the unperformed
principal obligation,
- DEFINITION: penal clause
- is an accessory undertaking attached to an obligation and sometimes jointly with it,
- to assume greater liability
- on the part of the obligor (Manresa’s Commentaries on the Civil Code, Vol. 8, p. 244)
- in case of breach of the obligation,
- i.e., the obligation is not fulfilled, or is partly or irregularly
RULE: General Rule: the Penalty Takes the Place of Indemnity for
complied with.
Damages and for the Payment of Interest . (he cannot get
- PARAS: It is a coercive means to obtain from the damages other than what has been stipulated upon as the
debtor compliance from the debtor. (Georg) penalty)
- A penal clause is an accessory undertaking to assume - EXCEPTIONS: (stated otherwise, Instances when
greater liability in case of breach. It is attached to
ADDITIONAL damages may be recovered)
obligations in order to insure their performance. (8
- (1) When there is express stipulation to the
Manresa 245).
effect that damages or interest may still be
recovered,
EXAMPLE:
- despite the presence of the penalty
Facts: A clause in a deed of sale provides for the refund of
clause;
the purchase price plus 4% interest per annum should the
vendor fail to give the transfer certifi cate of title within six (6) - (2) When the debtor refuses to pay the
months from date of full payment. penalty imposed in the obligation;
• __

- (3) When the debtor is guilty of fraud or dolo

(NOTE: Here, the
in the fulfi llment of the obligation. The reason
Gloria cannot Here, Gloria is choice given to
for the third exception is clear: there can be excuse herself clearly and Gloria is absolute.
no renunciation of an action to enforce from the duty of expressly allowed
liability for future fraud because, as we have giving me the ring to make the
seen, this is against public policy and against by simply paying substitution.
P700,000.
the express provisions of the law.
If the ring is lost by If, however, the
- RULE: NOTE: Breach of the obligation
For her to a fortuitous event, ring is lost by a
WITHOUT fraud cannot constitute substitute the fortuitous event,
one of the exceptions. (Cabarroguis, penalty, she must
et al. v. Vicente, L-14304, Mar. 23, be expressly given she is excused she is still obliged
1960). the right to do so. from giving me the to give me the
substitute of P700,000.)
P700,000,
RULE: May Any Penalty Be Demandable?
- ANS.: No. The penalty may be enforced only when it is
for indeed the
demandable in accordance with the provisions of the principal
Civil Code, one of which states that the penalty may obligation has
be reduced if it is inequitous or unconscionable. (Art. been
1229, Civil Code). extinguished.)

RULE: Lambert v. Fox 26 Phil. 588 RULE: Obligations imposing penalties and forfeitures are strictly
- FACTS: In the promissory notes executed by the construed. Thus, it is well-settled that sureties are only
defendants, and incorporated in the mortgage deeds, chargeable according to the strict terms of the bond. The terms
they voluntarily undertook to pay the sum of P1,300 as of their contract are those which measure the extent of their
court costs, expenses of collection, and attorney’s fees, liability. (The Gov’t. of the Phil. Islands vs. Herrero, 38 Phil. 410
whether incurred or not. Issue: Is this penal clause [1918]; see also Asiatic Petroleum Co. vs. De Pio, 46 Phil. 167
valid? [1924].)
- HELD: Yes, this stipulation is valid and permissible penal
clause, not contrary to any law, morals, or public order,
- and is therefore, strictly binding upon the defendants.
KINDS OF PENAL CLAUSE

RULE; Manila Racing Club, Inc. v. Manila Jockey Club 69 Phil. 55

(1) As to its origin:
- FACTS: A purchaser bought some property in - (a) Legal penal clause. —
installments. It was stipulated in the contract that failure - when it is provided for by law; and
to pay any subsequent installment would forfeit - (b) Conventional penal clause. —
installments already made. In this case, the purchaser - when it is provided for by stipulation of the
had already paid P100,000 but defaulted in the parties.

payment of the other installments

(2) As to its purpose:
- Is the clause in the contract regarding forfeiture valid? - (a) Compensatory penal clause. —
- HELD: Yes, such a clause is valid. It is in the nature of a - when the penalty takes the place of
penalty clause and is not iniquitous or unconscionable, damages; and
considering that what has been forfeited amounts only - (b) Punitive penal clause. —
to 8% of the stipulated price. - when the penalty is imposed merely as
punishment for breach.

Obligations with a Facultative Alternative (3) As to its dependability or effect:

penal clause obligation obligation - (a) Subsidiary or alternative penal clause. —
- when only the penalty can be enforced;
Example: Gloria is Example: Gloria is Example: Gloria is and
obliged to give obliged to give obliged to give - (b) Joint or cumulative penal clause. —
me a diamond me a particular me either a - when both the principal obligation and the
ring. diamond ring. particular penal clause can be enforced. (8 Manresa
215.)
However, if she so diamond ring or
If she fails to do so, desires, she may P700,000.
she must give instead give me
P700,000. P700,000. ---------------------------------------------------------

2
• __

- RULE: The word EXPRESSLY means that any

implied reservation is not allowed.

RULE: As a general rule, the creditor does not have this right to
demand fulfi llment of the obligation and the penalty at the
same time.
- EXCEPTION: The exception arises when such a right has
been CLEARLY granted to him
- EXCEPTION: [NOTE: In Cabarroguis, et al. v. Vicente, L-
14304, Mar. 23, 1960, the Supreme Court 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 (Government v. Lim, et al., 61 Phil. 737 and
Luneta Motor Co. v. Mora, 73 Phil. 80), with interest on
the amount of the penalty from the date of demand,
either judicial or extrajudicial.]

EXAMPLE: Navarro v. Mallari 45 Phil. 242

1. On his part, Navarro refused to pay the balance of P4,000

which he still owed the defendant.

2. AND to get P4,000 from Mallari as penalty;

ISSUE: Is Navarro lawfully entitled not to pay his remaining

Article 1227. The debtor cannot exempt himself from debt and at the same time ask for the penalty?

the performance of the obligation by paying the

HELD: Navarro is really entitled to the penalty because of the
penalty, save in the case where this right has been poor construction of the chapel but since he still owes P4,000,
expressly reserved for him. Neither can the creditor what he can get compensates for what he still has to give.
demand the fulfillment of the obligation and the
satisfaction of the penalty at the same time, unless RULE: Hence, Navarro cannot really get anything. His debt
compensates for his credit
this right has been clearly granted him. However, if
after the creditor has decided to require the fulfillment
RULE: Where there is no performance. —
of the obligation, the performance thereof should
- In case of non-compliance,
become impossible without his fault, the penalty may - the creditor may ask
be enforced. (1153a) - for the penalty
--------------------------------------------------------- - or require specific performance.
- The remedies are alternative and not cumulative nor
PENAL CLAUSE successive
- RULE: subject to the exception that the penalty may be
- RULE:The debtor cannot exempt himself from the enforced,if
after the creditor has decided to
performance of the obligation by paying the penalty . require the fulfillment of the obligation, the
[Generally, Debtor cannot substitute Penalty for the Principal
performance thereof should become
Obligation]
impossible without his fault, (see Art. 1191, par. 2.)
- Precisely, the object of the penalty is to secure
- RULE: If there was fraud on the part of the debtor, the
compliance with the obligation. (Cui vs. Sun Chan, 41
creditor may recover the penalty as well as damages
Phil. 523 [1921].)
for non-fulfilment. (Art. 1226.)
- If the debtor is allowed to just pay the penalty,
- this would in effect make the obligation an
---------------------------------------------------------
alternative one. (Art. 1199.)
- CASE: In an obligation with a penal clause, the penalty
cannot, as a general rule, serve as a defense for the
purpose of leaving the principal obligation unfulfi lled.
(see Cui vs. Sun Chan, 41 Phil. 523 [1921].)
- EXCEPTION: He can only do so if the right has been
EXPRESSLY reserved.
- The reason is that if he can just pay, fulfillment
of the obligation will be considered an
alternative one.

3
• __
Article 1228. Proof of actual damages suffered by
the creditor is not necessary in order that the penalty
may be demanded. (n)
---------------------------------------------------------
PENAL CLAUSE
AND
ACTUAL DAMAGES
- RULE: This Article is a new provision of the New Civil Code. The
penalty may, in the proper case, be demanded without the
necessity of proving actual damages.
- RULE: When a penal clause has been agreed upon in a
contract, more as a punishment for the infraction
thereof than a mere security, it is a lawful means for
repairing losses and damages, and upon evidence of
the violation of the conditions stipulated, the injured
party is not obliged to prove losses and damages
suffered, nor the extent of the same in order to
demand the enforcement of the penal clause agreed
upon. (Palacios v. Municipality of Cavite, 12 Phil. 140).
RULE: The creditor may enforce the penalty whether he suffered
damages or not. (Palacios vs. Municipality of Cavite, 12 Phil. 140
[1908]; Lambert vs. Fox, 26 Phil. 588 [1914]; General Insurance &
Surety Corp. vs. Republic, 7 SCRA 4 [1963].)
RULE: But he cannot recover more than the stipulated penalty
even if he proves that the amount of his damages exceeds the
penalty.
EXCEPTION RULE: Damages recoverable in addition to penalty
must be proved.
- Article 1228 applies only where the penalty is fixed by
the parties to substitute the indemnity for damages.
- In any of the three exceptions when damages may be
recovered in addition to the penalty (Art. 1227.),
- he creditor must prove the amount of such damages
which he actually suffered resulting from the breach of
the principal obligation.
---------------------------------------------------------
Article 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)
---------------------------------------------------------
PENAL CLAUSE
When Penalty May Be Reduced by the Court
(a) When the obligation has been partly complied with by the
debtor. (Partial Performance) (See Makati Development
Corp. v. Empire Insurance Co., L-21780, Jun. 30, 1967).
- The penalty should be more or less proportionate
with the extent of the breach of the contract or of
the damage suffered. It is to be presumed that the
parties contemplate only a total breach of contract.
(see Joe’s Radio Electrical Supply vs. Alba
Electronics Corp., 104 Phil. 333 [1958]; Tan vs. Court
of Appeals, 367 SCRA 571 [2001].)
CASE: Chua Gui Seng v. General Sales Supply Co., Inc. 91 Phil.
153
- HELD: No, it is not proper that the entire P3,000 be
forfeited for, after all, the lease had already existed
4
• __

for more than half of the period stipulated.

The nullity of the principal obligation carries with it
- Half of P3,000 may, however, be forfeited. It is unjust that of the penal clause. (1155)
for the whole amount to be forfeited considering, ---------------------------------------------------------
aside from the partial performance, the following
NULLITY OF THE PENAL CLAUSE
factors:
- (a) The landlord could look for another
RULE: The general principle that the accessory follows the
tenant after the 15-day period of grace.
principal and not vice versa is illustrated in the above article.
- (b) The tenant did not leave in bad faith,
for it honestly thought, from the letter of
RULE: If only the penal clause is void, the principal obligation
demand, that it was all right to leave, with
remains valid and demandable. The penal clause is just
the 2 months rent being merely deducted
disregarded. The injured party may recover indemnity for
from the P3,000
damages in case of non-performance of the obligation as if no
penalty had been stipulated. (see Art. 1170.)
(b) When the obligation has been irregularly complied with
by the debtor. (Irregular Performance).
- As a general rule, an obligation is not deemed NULLITY OF THE PRINCIPAL OBLIGATION
performed unless the thing or service in which it
consists has been completely delivered or rendered, RULE: If the principal obligation is void, the penal clause is
as the case may be (see Arts. 1233, 1234, 1235, likewise void. The reason is that the clause cannot stand alone
1248.); without the principal obligation to which it is subordinated.
- EXAMPLE: A is obliged to give B a pack of shabu. There
(c) When the penalty is iniquitous or unconscionable, even if is a penal clause regarding the forfeiture of P500,000 in
there has been no performance at all. (Unconscionable or case of non-compliance of the obligation. Here, the
Iniquitous). subject matter is outside the commerce of man. The
penalty clause here, although in itself valid, will also be
RULE: Here, the penalty may be reduced even if there is no considered null and void because “the nullity of the
performance at all. Even if iniquitous or unconscionable, principal obligation carries with it that of the penal
liquidated damages, whether intended as an indemnity or as clause.” (Art. 1230, 2nd paragraph, Civil Code).
a penalty, are not void, but subject merely to equitable
reduction. (see Art. 2227; Yulo vs. Chan Pe, 101 Phil. 134 RULE: But if the nullity of the principal obligation is due to the
[1957].) fault of the debtor who acted in bad faith, by reason of which
the creditor suffered damages on equitable grounds, the
penalty may be enforced. (see Arts. 10, 19, 20, 21.)
RULE: Where penalty is punitive. — In any case wherein there has
- EXAMPLE: A is obliged to construct a house for B within
been a partial or irregular compliance with the provisions of a
6 months. The contract provides for a penalty clause in
contract with a penal clause, the courts will rigidly apply the
case A is not able to perform his obligation within the
doctrine of strict construction against the enforcement in its
stipulated period. The penal clause consists of the
entirety of the penalty, where it is clear from the terms of the
giving by A to B of several tins of opium. Here the
contract that the amount or character of the indemnity is fi xed
penalty clause is null and void because opium is
without regard to the probable damages which might be
outside the commerce of man. But the principal
anticipated as a result of the breach of the terms of the contract;
obligation, that of constructing the house, remains
or in other words, where the indemnity provided for is essentially
valid. The penal clause will be disregarded. The law
a mere penalty having for its principal object the enforcement of
provides that “the nullity of the penal clause does not
compliance with the contract. (Laureano vs. Kilayco, 32 Phil. 194
carry with it that of the principal obligation.” (Art. 1230,
[1915]; General Insurance & Surety Corp. vs. Republic, 7 SCRA 4
par. 1, Civil Code).
[1963].)
---------------------------------------------------------
RULE: Where penalty is compensatory. — But the courts will be
slow in exercising the authority conferred upon them in Article
1229 where it appears that in fi xing the indemnity the parties
had in mind a fair and reasonable compensation for actual
damages anticipated as a result of the breach of the contract;
or, in other words, where the principal purpose of the penalty
agreed upon appears to have been to provide for the payment
of actual anticipated and liquidated damages rather than the
penalization of a breach of the contract. (see Laureano vs.
Kilayco, 32 Phil. 194 [1915].)
---------------------------------------------------------
Article 1230. The nullity of the penal clause does not
carry with it that of the principal obligation.