Article 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)
Penalty Clause
-an accessory obligation or undertaking
attached to a principal obligation, which
imposes an additional liability in case of
breach of the principal obligation
-in effect, it is a moral coercion for the
debtor to perform his obligation faithfully
and promptly within the period agreed
upon; otherwise, he suffers a fixed civil
penalty without need of proving the
damages of the other party
-attached to secure performance of
obligation; if such stipulation is found
contrary to law for being usurious, it can
be nullified by the courts without affecting
the principal obligation
No Need To Prove Damages
-penalty stipulated is the means of
repairing the losses and damages
sustained by the injured party, and it is
sufficient for the latter to prove that there
was a breach of contract to entitle him to
the said penalty
When Additional Damages May Be
Recovered Aside From The Stipulated
Penalty
GR: penalty takes the place of indemnity
for damages and for payment of interests
XPN:
1. Obligor refuses to pay penalty
2. Obligor is guilty of fraud in the
fulfillment of obligation; difference
between the proven damages and
the stipulated damages may be
recovered
3. If there is an express stipulation
that other damages or interests are
demandable in addition to the
penalty in the penal clause
Penalty Clause Compared With Liquidated
Damages
-penalty clause is strictly penal in nature
or cumulative in character and does not
partake the nature of liquidated damages;
legal results- no difference

Nature Of The Penalty Obligation with a Obligation with

-penalty imposable is a substitute for the Penal Clause Suspensive
indemnity for: Condition
a. damages There is already an No obligation yet
b. payment of interests in case of breach existing obligation until condition has
of the obligation unless there is a contrary been fulfilled
stipulation, additional damages may Accessory Principal obligation
further be recovered-money or anything obligation is is dependent upon
agreed upon dependent upon the happening of
non-performance the condition
Purposes Of Penalty of the principal
-ensure faithful compliance by the obligor
of his obligation, and in case of breach, to Obligation with a Alternative
stand as substitute for damages and Penal Clause Obligation
payment of interests-without need of Only one principal Two or more
proving damages obligation, the obligations,
-intended to create an effective deterrent non-performance fulfillment of one
against breach of obligation, by making of which makes satisfies the
consequences of such breach as onerous the stipulated obligation
as may be possible penalty
-partial performance, penalty may be enforceable
mitigated Impossibility of the Impossibility of
principal one of the
extinguishes the obligations, General Rule On Penalty; Exception
penalty without fault of the GR: a debtor cannot shirk from the
debtor, leaves the payment of his principal obligation by
other prestation choosing to pay the penalty stipulated
subsisting XPN: debtor is expressly granted the right
Obligor cannot Obligor can choose to substitute the penalty for the principal
choose to pay the which prestation or obligation
penalty to excuse obligation to fulfill
himself from the Restriction On The Right Of The Creditor
principal GR: creditor cannot demand the fulfillment
obligation, unless of the principal obligation and the
given the right stipulated penalty
explicitly XPN:
a. When the creditor was clearly
Obligation with a Facultative given the right to enforce both the
Penal Clause Obligation principal obligation and the penalty
Obligor cannot Power of the b. When the creditor has demanded
substitute the obligor to make fulfillment of obligation, but the
payment of substitution is same could no longer be fulfilled
penalty for the absolute due to debtor’s fault, he may
principal demand penalty agreed upon
obligation, unless -fault is due to the creditor’s act, he
expressly allowed cannot claim the penalty
Creditor may Creditor cannot -impossibility of the fulfillment is due to
demand both the demand both fortuitous events, both the principal
principal and obligation and the penalty shall be
accessory extinguished
obligations

Are Alll Penalties Inserted In Contracts
Demandable Or Recoverable?
-penalty may be enforced only when it is
demandable in accordance with the
provisions of this Code
-penalty imposed is unlawful, immoral or
against public order it should not be
enforced
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. (1153a)
Article 1228. Proof of actual damages
suffered by the creditor is not
necessary in order that the penalty
may be demanded. (n)
Proof Of Actual Damages Not Necessary
-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; penalty and
unliquidated damages are the same
-when the debtor refuses to pay the
agreed penalty despite demands and the
creditor was compelled to litigate to
collect the penalty, additional damages
may be claimed by the creditor; latter
damages must be proved with sufficient
evidence to justify their grant by the court
-effect that there is no difference between
penalty clause and liquidated damages
applies only in cases where there is no
partial or irregular performance by the
debtor
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. (1154a)
Judicial Reduction Of Penalty, When Proper
Court can order the reduction of penalty
agreed upon by the contracting parties
under the following circumstances:
1. when the principal obligation had
been partly complied with by the
debtor
2. when the principal obligation had
been complied with but not in
accordance with the tenor of the
agreement thus rendering the
compliance irregular
3. when, although there is no
performance, the penalty is
iniquitous or unconscionable
4. 3% penalty is patently iniquitous
and unconscionable as to warrant
the exercise by the SC of its judicial
discretion
Limitation Of The Judge’s Power To Reduce
Penalties
-power of the judge to reduce penalties
applies only to penalties agreed upon in
private contracts
When Penalty Is Iniquitous Or
Unconscionable
-penalty is iniquitous when it is revolting
to the conscience or common sense, or
when it is grossly disproportionate to the
damage suffered; contract is not void,
penalty must be reduced
-in exercising the power to determine what
is iniquitous and unconscionable, courts
must consider the circumstances of each
case
Situations When Penalty Is Not
Enforceable
1. Principal obligation has become
impossible of performance due to
FE
2. Debtor is prevented by the creditor
to fulfill the obligation
3. Penalty agreed upon is contrary to
morals or good customs
4. Both parties are guilty of breach of
contract
5. None of the contracting parties
committed any willful or culpable
violation of the agreement, no one
can invoke the penalty against the
other
6. Breach of contract is committed by
the creditor
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. (1155)
Effect Of Nullity Of Principal Obligation
-nullity of the principal obligation carries
with it the nullity of the penal clause;
latter is just an accessory
Effect Of Nullity Of The Penal Clause Upon
The Principal Obligation
-penal clause is void, the principal
obligation will remain subsisting; the
nullity of the penal clause does not carry
with it the nullity of the principal
obligation