Balanueco, Queen

OBLIGATIONS WITH A PENAL CLAUSE PURPOSE OF PENALTY

Cabarroguis vs Vicente
L-14304
23 March 1960

FACTS:

Plaintiff Antonia Cabarroguis sustained physical injuries which cause permanent partial
disability in her right forearm due to an accident when AC Jeepney hit another vehicle.
Telesforo B. Vicente, the owner and operator entered into a compromise agreement to
pay Antonia the sum of P2,500 as actual and compensatory, exemplary and moral
damages
P1,500 has already been paid therefore leaving an unpaid balance of P1,000
It was also stipulated that should the defendant (Vicente) fail to complete payment within
a period of 60 days, he would pay and additional amount of P200 as liquidated damages
After series of demands, defendant Vicente refused to comply with his obligation, plaintiff
Cabarroguis and husband filed a suit in the Municipal Court.
Defendant Vicente alleged that the injury sustained by plaintiff was not serious or
consequential as to entitle her to the payment of the amount stipulated in the
compromise agreement and that the agreement did not express the true intention of the
parties thereto by reason of mistake, fraud, inequitable conduct or accident, a
reformation of the agreement was in order.
Municipal Court ruled in favor of Plaintiff Cabaroguis and upheld by the Court of First
Instance citing that the defendants pretension against the due execution of the
agreement was a mere afterthought, prompted by a desire to evade payment of an
obligation, voluntarily assumed and for valid consideration.
CFI ordered defendant to pay 1,200 with legal interest from date of the filing of the
complaint until full payment and to pay costs.
Defendant then appealed to the CA contending the interest citing that Art 1226 of the
Civil Code. He argued that in obligation with a penal clause, the penalty substitutes the
indemnity for damages and payment of interest.

ISSUE
Whether the court erred in sentencing defendant to pay interest from the date of the
filing of the complaint until full payment.

HELD
NO
Article 1226 of the NCC provides that the penalty shall substitute the indemnity for
damages and the payment of interests.
Exceptions:
o When the contrary is stipulated
Balanueco, Queen

o When the debtor refuses to pay the penalty imposed in the obligation, in which
case the creditor is entitled to interest on the amount of the penalty, in
accordance with Article 2209 (If the obligation consists in the payment of a sum
of money, and the debtor incurs in delay, the indemnity for damages, there being
no stipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six per cent per
annum.)
o When the obligor is guilty of fraud in the fulfillment of the obligation
No interest can be awarded on the principal obligation. The 200-peso penalty having
taken the place of the payment of such interest and the indemnity for damages. No
stipulation to the contrary was made and while defendant was sued for breach of the
compromise agreement, the breach was not caused by fraud.
This case, however, takes a different aspect with respect to the penalty attached to the
principal obligation. It has been held that in obligations for the payment of a sum of
money when a penalty is stipulated for default, both the principal obligation and the
penalty can be demanded by the creditor. Defendant having refused to pay when demand
was made by plaintiff, the latter clearly is entitled to interest on the amount of the
penalty.
Article 2210 of the Civil Code provides that in the discretion of the court, interest may be
alleged upon damages awarded for breach of contract. This interest is recoverable from
the time of delay that is to say, from the date of demand, either judicial or extrajudicial.
And if there is no showing as to when demand for payment was made, plaintiff must be
considered to have made such demand only from the filing of the complaint.