MODULE 5-D: OBLIGATIONS WITH A PENAL CLAUSE

A. Concepts

An obligation with a penal clause is one with an accessory

undertaking by virtue of which the obligor assumes a greater liability in
case of breach of the obligations.

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. The penalty is generally a sum of money. But it can
also be any other thing stipulated by the parties, including an act or
abstention.

A penal clause has two functions, namely:

1. To provide for liquidated damages; and

2. To strengthen the coercive force of the obligation by the threat
of greater responsibility in case of breach.

Note that unlike in the conventional types of damages, proof of

actual damages suffered by the creditor is not necessary in order that the
penalty may be demanded.1 In this jurisdiction, there is no difference
between a penalty and liquidated damages, so far as the results are
concerned. Whatever differences exist between them as a matter of
language, they are treated the same legally.

B. Kinds

1. As to origin

a. Legal
- constituted by law

b. Conventional
- constituted by agreement of the parties

2. As to purpose

a. Compensatory
- it is established for the purpose of indemnifying the damages
suffered by the obligee or creditor in case of breach of the
obligation

1
Civil Code, art. 1228.

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 b. Punitive
- it is established for the purpose of punishing the obligor or
debtor in case of breach of the obligation

3. As to effect

a. Subsidiary
- when only the penalty may be demanded in case of breach of
the obligation

b. Joint
- when the injured party may demand the enforcement of both
the penalty and the principal obligation

C. Rules

Penalty v. Fulfillment

By the Debtor

The debtor cannot exempt himself from the performance of the

obligation by paying the penalty except when the right has been
expressly reserved to the debtor.2

By the Creditor

The creditor cannot demand the fulfillment of the obligation and

the satisfaction of the penalty at the same time except:

1. When the right has been clearly granted to him; or

2. If 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.3

Effect of incorporating a penal clause in an obligation

The penalty fixed by the parties is a compensation or substitute for

damages in case of breach. However, damages shall still be paid even if
there is a penal clause if:

1. There is a stipulation to the contrary;

2. The debtor refuses to pay the agreed penalty; or

2
CIVIL CODE, art. 1227.
3
Ibid.

2
 3. The debtor is guilty of fraud in the fulfillment of the obligation. 4

Nullity of the penal clause v. Nullity of the principal obligation

The nullity of the penal clause does not carry with it that of the
principal obligation. For example, the penal clause may be void because
it is contrary to law, morals, good custom, public order or public policy.
In such case, the principal obligation subsists if valid.

On the other hand, the nullity of the principal obligation carries

with it that of the penal clause. 5 However, the penal clause subsists even
if the principal obligation cannot be enforced:

1. When the penalty if undertaken by a third person precisely for

an obligation which is unenforceable, voidable, or natural, in
which case it assumes the form of a guaranty; and

2. When the nullity of the principal obligation itself gives rise to

the liability of the debtor for damages.

Reduction of penalty by the courts

The courts may reduce the penalty imposed in the following

instances:

1. There is partial performance of the obligation;

2. There is irregular performance of the obligation; or
3. When the penalty is unconscionable even if there has been no
performance.

Enforcement of penalty

The creditor can demand the enforcement of the penalty Only

when the non-performance is due to the fault or fraud of the debtor. But
the creditor does not have to prove that there was fault or fraud of the
debtor. The nonperformance gives rise to the presumption of fault and in
order to avoid the payment of penalty, the debtor has the burden of
proving an excuse – either that the failure of the performance was due to
force majeure or to the acts of the creditor himself.

When there are several debtors in an obligation with a penal

clause, the divisibility of the principal obligation among the debtors does
not necessarily carry with it the divisibility of the penalty among them.

4
Ibid at art. 1126.
5
Ibid at art. 1230.