OBLIGATIONS WITH A PENAL CLAUSE

Principal obligation – one which can stand by itself and does not depend for its
validity and existence upon another obligation.
Accessory obligation – one which is attached to a principal obligation and, therefore,
cannot stand alone.
Obligation with a penal clause – one which contains an accessory undertaking to
pay a previously stipulated indemnity in case of breach.
Penal clause – an accessory undertaking attached to an obligation to assume greater
liability in case of breach, i.e., the obligation is not fulfilled, or is partly or irregularly
complied with.
Purposes of penal clause
a. to ensure their performance by creating an effective deterrent against breach to
substitute a penalty for the indemnity for damages and the payment of interests in case
of non-compliance; or to punish the debtor for the non-fulfillment or violation of his
obligation
Kinds of penal clause
A. as to origin
a. Legal penal clause – when it is provided for by law.
b. Conventional penal clause – when it is provided for by stipulation of
the parties.
B. as to its purpose
a. Compensatory penal clause –when the penalty takes the place of damages.
b. Punitive penal damages – when the penalty is imposed merely as punishment for
breach.
C. as to its demandability or effect
  a. Subsidiary or alternative penal clause – when only the penalty canbe
enforced.
  b. Joint or cumulative penal clause – when both the principal obligation
and the penal clause can be enforced.
Penalty substitutes for damages and interests.
In an obligation with a penal clause, the penalty takes the place of the indemnity for
damages and the payment of interests in case of non-compliance.
Proof of actual damages suffered by the creditor is not necessary in order that the
penalty may be enforced.

When creditor may recover damages

a. when so stipulated by the parties
b. when the obligor refuses to pay the penalty
c. when the obligor is guilty of fraud in the fulfillment of the obligation
Ex.: X promised to construct a house for Y. The contract carried a penal clause that in
case of non-compliance, X would have to pay a penalty of ₱50,000. X did not construct
the house and, as a consequence, Y suffered damage in the amount of ₱40,000. In this
case, the penalty of ₱50,000 shall be paid. Y cannot recover more than ₱50,000, the
penalty stipulated, even if he proves that the damages suffered by him is ₱60,000.

When penalty may be enforced

The penalty may be enforced only when it is demandable in accordance with the
provisions of the Civil Code. The penalty, as a stipulation in a contract, is demandable
only if there is a breach of the obligation and it is not contrary to law, morals, good
customs, public order, or public policy. If the obligation cannot be fulfilled due to a
fortuitous event, the penalty is not demandable.

Penalty not substitute for performance.

The debtor cannot just pay the penalty instead of performing the obligation.
The object of the penalty is to secure compliance with the obligation.
Ex.: A is required to deliver to B certain products; otherwise, he shall pay a penalty in
the amount of ₱10,000.
Penal clause presumed subsidiary
The creditor cannot demand the fulfillment of the obligation and the satisfaction of the
penalty at the same time.
The primary purpose of penalty is to urge the debtor to the performance of the main
obligation.

Penalty demandable without proof of actual damages

In an obligation with a penal clause, all that the creditor has to prove, to enforce the
penalty, is the violation of the obligation by the debtor.