SECTION 6.

Obligations with
a Penal Clause
ART. 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. The penalty may be enforced only when it is
demandable in
accordance with the provisions of this Code. (1152a)
MEANING OF PRINCIPAL AND ACCESSORY
OBLIGATIONS

(1) Principal obligation

(2) Accessory obligation
 MEANING OF OBLIGATION WITH
A PENAL CLAUSE.

An obligation with a penal clause is one which contains an

accessory undertaking to pay a previously stipulated indemnity in
case of breach of the principal prestation intended primarily to
induce its fulfillment.
 MEANING OF PENAL CLAUSE.
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, i.e., the obligation is not
fulfilled, or is partly or irregularly complied with.
• PURPOSES OF PENAL CLAUSE

• PENAL CLAUSE AND CONDITION

DISTINGUISHED
 KINDS OF PENAL CLAUSE
They are :
(1) As to its origin:
(a) Legal penal clause.
(b) Conventional penal clause.

(2) As to its purpose:

(a) Compensatory penal clause.
(b) Punitive penal clause.

(3) As to its dependability or effect:

(a) Subsidiary or alternative penal clause.
(b) Joint or cumulative penal clause.
• PENALTY SUBSTITUTES FOR DAMAGES
AND INTERESTS

• WHEN CREDITOR MAY RECOVER

DAMAGES
 EXAMPLE :

S promised to deliver a specifi c car to B. The contract carried a penal clause that in case of
non-compliance, S would have to pay a penalty of P20,000.00. S did not deliver the car and, as
a consequence, B suffered damage in the amount of P15,000.00.

In this case, the penalty of P20,000.00 shall be paid. B cannot recover more than P20,000.00,
the penalty stipulated, even if he proves that the damages suffered by him is P25,000.00. The
penalty substitutes the indemnity for the damage of P15,000.00, unless there is a stipulation
to the contrary in which case, B may also recover the damages proved by him.

If S refuses to pay the penalty, B may recover legal interest thereon, the interest representing
new damages brought about by the nonpayment of the penalty.

If S is guilty of fraud (not mere fault) in the fulfi llment of his obligation, he is also liable for
the damages caused thereby in conformity with Article 1171. Proof of the fraud and the
existence and amount of damages is incumbent upon B. But B need not prove fraud to
recover the penalty.
 ART. 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 fulfi llment of the obligation, the
performance thereof should become impossible without his fault,
the penalty may be enforced. (1153a)
 PENALTY NOT SUBSTITUTE FOR PERFORMANCE.
Generally, the debtor cannot just pay the penalty instead of
performing the obligation. Precisely, the object of the penalty is to secure compliance with the
obligation. If the debtor is allowed to just pay the penalty, this would in effect make the
obligation an alternative one. (Art. 1199.)
The debtor can exempt himself from the non-fulfi llment of the obligation only when
“this right has been expressly reserved for him.”
EXAMPLE :

S is required to deliver to B certain products ; otherwise, he shall pay a penalty in

the amount of P10,000.

Under the above article, S cannot just pay the penalty as a substitute for non
compliance of the principal obligation except when he is expressly given the right by B
to do so.
PENAL CLAUSE PRESUMED SUBSIDIARY.

(1) Where there is performance

(2) Where there is no performance
EXAMPLES :

(1) In the preceding example, if S delivered the products after he has incurred in delay and B accepted
the delivery, the penalty cannot also be demanded by B unless such right is clearly given to him in the
contract in which case the penal clause is joint.

(2) If S did not comply with his obligation, B can choose between requiring fulfillment of the principal
obligation or satisfaction of the penalty.

(a) If B has selected fulfillment, he may not subsequently demand the payment of the penalty
unless fulfillment should become impossible without his fault (i.e., through S’s fault)

(b) If B has chosen and received the penalty, he may not subsequently require the fulfillment
of the obligation which is deemed repudiated by both of them. However, he may still demand
fulfillment should S not pay the penalty.

(c) If the non-fulfillment of the obligation is attributable to the fraud committed by S, both the
stipulated penalty and damages suffered by B may be recovered by him.
 WHEN PENAL CLAUSE JOINT
The debtor has the right to pay the penalty in lieu of performance only when this
right has been expressly reserved for him.

With respect to the creditor, he has right to demand performance and payment of
penalty jointly when this right has been clearly granted him. It is, therefore, not
required that this right be expressly reserved for him; an implied grant clearly
deducible from the evidence or the nature of the obligation is suffi cient. Thus,
when a penalty is stipulated for default in an obligation to pay a sum of money, it is
clear that the creditor can demand both the principal obligation and the penalty
with legal interest on the amount of the penalty from the date of demand where the
debtor refuses to pay the penalty.
ART. 1228. Proof of actual damages suffered by the
creditor is not necessary in order that
the penalty may be demanded. (n)
 • PENALTY DEMANDABLE
WITHOUT PROOF OF ACTUAL DAMAGES

• DAMAGES RECOVERABLE IN
ADDITION TO PENALTY MUST BE PROVED
EXAMPLE :

Chiz Cayetano entered into a contract with building contractor Mark Ramirez to
build a resort-type residential community at his hacienda. Under their deal, Mark
Ramirez should complete the project in 12 months. Otherwise, Mark Ramirez will
pay Chiz Cayetano a penalty of P1 million for each month of delay in the project.

Mark Ramirez failed to complete the project within the specified timeframe, and
the result of which Chiz Cayetano could not start the sale of properties in his new
residential community. In this case, Chiz does not need to prove to court the actual
damages brought by the breach and he only needs to prove that Mark Ramirez
failed to complete the project within 12 months as stipulated in their contract so
that he can obtain the P1 million per month of penalty.
 ART. 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)
 WHEN PENALTY MAY BE REDUCED
BY THE COURTS
(1) When there is partial or irregular performance.
Example :
Pedro agreed to construct the house of Nene within four months for P 1,000,000 pesos according
to certain specifications. The contract stipulates that in case of noncompliance with the obligation,
Pedro will pay a penalty of P100,000. Except for some finishing touches, Pedro practically completed
the construction of the house after four months.

This is a case of partial performance. It is clearly unfair for Pedro to exact the payment of the full
amount of P100,000 as penalty. Since, Nene has been benefited by the partial performance the
court may equitably mitigate the penalty, say to P20, 000. The penalty should be more or less
proportionate with the extent of the breach of the contract or of the damage suffered.

An example of irregular performance is when Pedro completed the construction of the house
but not in accordance with the specifications of the contract.
(2) When the penalty agreed upon is iniquitous or unconscionable.

EXAMPLE :

Annie(the tenant), signed a rental agreement with her landlord for a small
apartment. In this rental agreement, there's a clause that states if Annie pays
her monthly rent one month late, she must pay a penalty of P10,000.
ART. 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.
(1155)
EFFECT OF NULLITY OF THE PENAL CLAUSE.

EXAMPLE :

Sarah, the owner of a vacation rental property, enters into a rental

agreement with John, the tenant. The rental agreement contains a
clause that imposes a penalty of P100,000 on John if he causes any
damage to the property during his stay.
 EFFECT OF NULLITY OF THE PRINCIPAL
OBLIGATION.
EXAMPLE :

John enters into a contract to buy a car from Paul, and the contract specifies a
payment of P100,000 in exchange for the car. However, the sale of the car is
illegal because it was stolen, and John didn't know that when he made the
agreement.
THE END.