UMALI VS. MICLAT G.R. No.

L-9262 | LAGRIMAS Obligations with a Penal Clause; When Judicial Reduction of Penalty is Applicable (Art. 1229); Penalty is a substitute for the indemnity for damages and interests unless there is a contrary stipulation and if obligor refuses to pay penalty (Art. 1226) NOTE! I skipped the part that doesnt have any relation t o our syllabus where the case is found. Since this case (according to the syllabus) is under Obligations with a Penal Clause, Reduction of Penalty, dun na lang ako nag focus. nina

FACTS: Umali is the president and general manager of Maharlika Pictures (some kind of movie distributor?) Miclat worked for Umali. As stated in the Contract and the Job Order, Miclats job was to prepare posters, a theater show board display, a theater display standee, a float, and other forms of advertisement for the showing of the film "LAGRIMAS" Under the Contract, Umali shall pay him P900. Umali paid Miclat P225 in advance. A balance of P675.00 was still due. Under the Job Order, Umali shall pay him P344.50 Miclat accomplished the tasks under the Contract and the Job Order. Miclat demanded from Umali the payments due to him but Umali refused to pay saying the work done by Miclat was not complete and was unsatisfactory. Miclat filed an action to recover sums of money plus damages and attorneys fees against Miclat The lower court rendered judgment in favour of Miclat ordering defendant Umali to pay plaintiff the sum of P675.00 (the balance that was due), plus 10% surcharge thereon as stipulated in the parties contract The Court also ordered that the sums of P675.00 and P344.50 shall bear 6% interest per annum from the date of the filing of the complaint until paid A stipulation in the contract says that if Umali should fail to pay the balance of P675 after the lapse of 30 days from the date exhibition of the film "LAGRIMAS" has started, he should pay a surcharge of 10% every 30 days thereafter until the amount has been fully paid Umali claims that this surcharged amount is unconscionable and unreasonable, because it is tantamount to imposing an interest of 10% a month, or 120% a year on the balance of the obligation until the same is paid in full Umali also claims that the decision which orders the payment of 6% interest per annum from the date of the filing of the complaint until full payment of the obligation due, which is also considered unreasonable considering that Umali was already ordered to pay the penalty agreed upon

The Obligation in this case: Umali pay Miclat the remaining balance of P675.00 with a penalty of 10% surcharge after the lapse of 30 days from the date exhibition of the film Lagrimas has started.

The Period in the Obligation: after the lapse of 30 days from the premier date of the film Lagrimas o The Penalty in the Obligation: 10% surcharge every 30 days from the premier date of Lagrimas movie Umali wasnt able to fulfil the obligation, the per iod in the obligation already lapsed so he is already subject to a penalty.

ISSUE: 1. WoN the surcharged amount (A.K.A. the penalty imposed in the contract) is unconscionable and unreasonable? YES 2. WoN the 6% interest is also unconscionable and unreasonable since Umali was already ordered to pay the penalty? NO RATIO: 1. While the surcharge partakes of the nature of a penal clause which the parties may stipulate under the law (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 xxx) the amount is unconscionable and unreasonable. o Appellant would pay P67.50 a month, or P810 a year, which considering the time that has already elapsed since appellant defaulted, would amount to P3,420. Equity demands that the penalty be reduced in fairness to the debtor .

Court therefore held that the penalty should be reduced accordingly:

Applying 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

2. Article 1226 of the new Civil Code provides: o In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty xxx

In other words, the penalty takes the place of the interests only if there is no stipulation to the contrary, and even then, damages may still be collected if the obligor refuses to pay the penalty. In this case not only is there an express stipulation to pay damages in addition to the penalty, but Umali has failed to pay his obligation as well as the penalty.