OBLIGATION WITH PENAL CLAUSE

PART 1

BY ALMA
MONCADA
ARTICLE 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
A PENAL CLAUSE IS AN ACCESSORY UNDERTAKING ATTACHED TO AN
OBLIGATION TO ASSUME GREATER LIABILITY ON THE PART OF THE OBLIGOR IN
CASE OF BREACH OF THE OBLIGATION.
PURPOSE OF PENAL CLAUSE

Ensure performance
Substitute the indemnity for damages and the
payment of interest in case of noncompliance
Punish the debtor for the non-fulfillment of his
obligation.
 EXAMPLE
Moncada promise to construct the
house of Rusiana within 120days for 2
two Million Pesos.

“ For every day’s delay after the the

stipulated 120 days, Moncada would pay
a fine/penalty of P10,000.00”
OBLIGATION WITH Conditional Facultative Alternative
PENAL CLAUSE Obligation Obligation Obligation

Moncada Moncada Moncada

Moncada promise promise promise
promise to give Rusiana to pay Rusiana to give Rusiana to give
a Hilux car, and P1,000,000.00 if a Hilux car, and her , either a
she fails to give if Moncada, Hilux car or a
if she fails to do her the Hilux car desires he can P1,000,000.00
so, she must give Rusiana
give Rusiana
P1,000,000.00
P1,000.00
KINDS OF PENAL CLAUSE.

As to its origin:
1.)

Legal penal clause.

Conventional penal clause
2.) As to its purpose:
compensatory penal clause
Punitive penal clause
3.) As to its dependability or effect:
Subsidiary or alternative penal clause
Joint or cumulative penal clause
EXAMPLE

Moncada obliged himself to give Rusiana a

specific car on September 25, if she fails to
do so, Moncada will pay P 200,000.00

Moncada obliged himself to give Rusiana a

specific car on September 25, if she fails to
do so, Moncada in addition to the car muy
pay Rusiana will pay P 200,000.00
 PAYMENT OF PENALTY INSTEAD OF
FULFILLMENT (1227)
ARTICLE 1227. The debtor cannot exempt himself from the
performance of the obligation by paying the penalty, save in the case where this
right 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 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.
Moncada oblige himself to contruct the house of Rusiana and finish it within
4months, otherwise Moncada is going to pay Rusiana , P200,000.00as penalty.
What are the the rights and obligations of the parties?

1. Moncada cannot just pay P200,000.00and refuse to construct the house of

Rusiana, unless of course, if there is an agreement giving him that option.

2. Rusiana cannot demand from Moncada that she will construct the house
and at the same time pay P200,000.00, unless agreed upon.

3.If Rusiana demand fulfillment, but the performance became imposible due
to Moncada’s fault, without the fault of Rusiana, Rusiana can ask the
payment of Penalty.
CHAPTER 3
OBLIGATIONS WITH A PENAL CLAUSE PART 2

BY: TRYYAM A. RUSIANA

 QUESTION:
SUPPOSE THE DEBTOR DID NOT PERFORM HIS
OBLIGATION, CAN HE REFUSE THE PAYMENT OF
THE PENALTY WHEN THE CREDITOR IS NOT ABLE
TO SHOW PROOF OF ACTUAL DAMAGES?
NO.

ARTICLE 1228 states that:

Proof of actual damages suffered by the creditor is not necessary in order

that the penalty may be demanded.

PENALTY - compensate indemnity for damages and payment of interests

Penalty can be demanded due to noncompliance of debtor with or
without presentation of any proof of losses/damages
incurred/suffered by the creditor
Important: To establish the failure of the debtor to comply with the
obligation
Creditor cannot claim for penalty beyond what is stipulated, even if
damages or losses are substantial
SAMPLE CASE
LAMBERT VS FOX
. Lambert and Fox took over John R. Edgar & Co., a stationary and retail book company, as
its two major stockholders.
. Both Lambert and Fox agreed to avoid selling or transferring any part of their
stockholdings within one year from date of agreement unless otherwise stated in writing and
should there be a violation on this agreement: a penalty of P1,000.
. In the same year, Fox was able to sell his stocks to its competitor company, E.C. McCullough
& Co. of Manila.
. Fox offered to sell the same stock to Lambert for that sum minus the penalty of P1,000.
. Court decided to rule in favor of Lambert. Fox should pay penalty of P1,000 as agreed.
ARTICLE 1229 states that:

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.
PARTIAL/IRREGULAR COMPLIANCE

Penalty must be proportionate to the extent of breach.

INIQUITOUS/UNCONSCIONABLE / NO PERFORMANCE

Liquidated damages (whether as indemnity or penalty)

should be considered but reduced appropriately
SAMPLE CASE
BACHARACH MOTOR CO INC VS FAUSTINO ESPIRITU
. Faustino Espiritu purchased a two-ton white truck from Bacharach Motor for a price of P
11,983.50 with an initial payment of P1,000 and the balance to be paid as per agreement.
. Prior to this, Faustino also purchased a one-ton white truck from the same company for the
price of P7,136.50 with a remaining unpaid balance of P4,208.28.
. This truck and two other trucks of Faustino were mortgaged to secure the second purchase. He
also signed a promissory note solidarity with his brother for the payments.
. Faustino failed to pay the balance of the second purchase as well.
. Parties agreed for the payment of 12% interest on the unpaid balances of both purchases and
25% for penalty upon nonpayment at maturity.
. The penalty was reduced by the court to 10% as the initial agreement of twice the agreed interest
payment within the limits of the law is unconscionable.
ARTICLE 1230 states that:

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.
In case the penal clause happens to become unlawful or against
morals, good customs, public order or public policy, the principal
obligation will not be affected.
In case the principal obligation becomes unlawful or impossible, the
penal clause comes with its nullity.
Exception: If the nullity of the principal obligation is due to bad
faith of debtor, penal clause may be enforced.
SAMPLE PROBLEM

. If a supplier agrees to deliver 12 sacks of Apo Coffee Beans to a popular

coffee shop next month.
. Supplier agrees to pay a penalty of P20,000.00 in case he is not able to
deliver the said sacks of coffee beans.
. The following day of the agreement, the Congress declared the prohibition
of harvesting of Coffee Beans from Mount Apo for its preservation.
. Since the principal obligation of the delivery of the Apo Coffee Beans was
made unlawful, the penal clause also become null along with it.
GOOD DAY AND KEEP SAFE!