Article 1226-1230

Tan, Dale P.
Article 1226
In obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interest 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 fulfilment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.
Interpretation:
Penalty clause is an accessory obligation or undertaking attached to a principal
obligation, which imposes an additional liability in case of breach of the principal
obligation, in order to secure the performance of the principal obligation.

The penalty imposable is a substitute for the indemnity for damages and payment of
interest in case of breach of the obligation, unless there is contrary stipulation, in which
case, the additional damages may further be recovered.

Case
Ramon entered into a contract with
Vincent, he sold a truck with the latter which
was secured by a promissory note and a
chattel mortgage on the truck. The truck
which is 10,000 pesos is to be paid within 1
week and has 1000 pesos interest per day if
Vincent does not complete the payment.
The promissory note also provided that when
the collection is not paid and there is a need
to take the case to court, there would be
additional payment of 25% attorney’s fees.
Question:
In the case that the case is taken to court, will
the court accept the contract, or will they
disregard it?
Answer:
The contract may be disregarded since a
contract for attorney’s fees is different from
other contracts. It may be disregarded if the
amount fixed is unconscionable or
unreasonable, considering the value of the
work accomplished.
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.
Interpretation:
The general rule is that debtor cannot exempt himself in paying the penalty only and
not giving the principal. The exemption is when the debtor was granted the right to pay
the penalty and not the principal amount.

On the other hand, as a general rule the creditor cannot demand the penalty and the
fulfillment of the obligation at the same time.

Case
When Arnold contracted with Cane for
the construction of a building in which they
are agreed to finish it in two months. The
contract is 10,000 down payment and another
10,000 when the construction is finished with
a penal clause of 10,000. Then, Cane did not
manage the construction instead his son took
place in this. Arnold was dismayed and sued
Cane for the penalty of not finishing the
project on time and not using exact materials
he told Cane.
Question:
Does Arnold have the right to claim the
penalty?
Answer:
Yes, Arnold has the right to claim the penalty
since Cane violated the contract. However,
since he has not paid fully and still has a
balance of 10,000 and coincidentally it is the
same price of the penalty, the price he has not
paid and the penalty will cancel hence he will
not get anything.
Article 1228
Proof of actual damages suffered by the creditor is not necessary in order that
the penalty may be demanded.
Interpretation:
If the contracting parties had fixed the penalty for the purpose of compensating or
substituting the indemnity for damages as well as the payment of interests, proof of actual
damages suffered by the creditor is not necessary to enforce the penalty whether or not
damages had been suffered as long as the agreement or contract had been breached.
Thusly, in this sense, penalty and liquidated damages are the same.

Case
Mark is living on rent with 5,000
monthly and has a plan to build a house.
Mark has made a contract with Josh to finish
the house within 6 months with a penalty of
10,000 php per month of delay. Josh had not
completed the project leading to a delay in
the moving of Mark.
Question:
If the house construction is delayed for a
month and the damage to Mark is worth 5000
php would he be able to add the damage and
penalty for Josh to pay?
Answer:
No, since the agreed upon penal cause is
10,000 php, this is the only required payment
he can claim.
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.
Interpretation:
JUDICIAL REDUCTION OF PENALTY

1. When the obligation has been partly complied with by the debtor. (Partial
Performance). This refers to the extent of fulfillment, the latter, to the manner. The
penalty should be more or less proportionate with the extent of the breach of the
contract or of the damage suffered.

2. When the penalty is iniquitous or unconscionable, even if there has been no

performance at all. (Unconscionable or Iniquitous). Here, the penalty may be reduced
even if there is no performance at all. Even if iniquitous or unconscionable, liquidated
damages, whether intended as an indemnity or as a penalty, are not void, but subject
merely to equitable reduction.

Case
Cyrus promised to deliver 200 cases of
Red Horse to Carlo on January 1. It has been
stipulated that failure to do so would give rise
to the penalty of php 200,000. However,
Cyrus was only able to deliver 180 cases.
Carlo now demands the full $200,000 while
Cyrus counters that the penalty should be
reduced.
Question:
Should the penalty be reduced or not?
Answer:
The court is allowed by Article 1229 of the
Civil Code to reduce the penalty when there
has already been partial fulfillment of the
obligation. Carlo was already able to deliver
a part of the promised 200 cases and only 20
cases were left. It would be unfair now for
Carlo to collect the whole amount of penalty
considering the fact that he already benefited
from the 180 case of red horse delivered.
Article 1230
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.
Interpretation:
It is not uncommon that penal clauses are attached to the principal obligation in
order to coerce the debtor to completely and faithfully comply with the terms of the
contract. In case when the penal clause is declared or becomes unlawful, the principal
obligation shall stand unaffected.

In case, however, when the principal obligation is the one that turns out to be null
and void, the penal clause goes with it

Case
Person A obliged himself to pay Person
B the amount of 100,000 pesos monthly for 5
years. Should he fail to deliver the said
amount on the said due date an additional
1000 pesos will incur. On the third year,
Person A died, and the contract was
transferred to Person A’s wife with the wife
unaware of the contract. The wife failed to
pay the 100,000 pesos and person B
demanded the penalty. The wife appealed for
an extension to pay the 100,000 pesos but
would not want to pay the penalty.
Question:
Should the penalty be nullified?
Answer:
Under this illustration the main
obligation is valid which is the payment of
100,000 but the penalty clause is unlawful for
being iniquitous. Under the law the main
obligation must be complied with, and the
penal clause must be disregarded.