SECTION 6
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)
Obligations with a Penal Clause
Principal Obligation Accessory Obligation
One which can stand by itself and does One which is attached to a principal
not depend for its validity and existence obligation and therefore cannot stand
upon another obligation. alone.
Obligation with a penal clause contains an accessory undertaking.
Meaning of Penal Clause:
A penal clause is an accessory undertaking attached to an obligation to assume greater
liability in case of a breach.
Purposes of Penal Clause:
1. To insure the performance of the obligation (general).
2. To liquidate the amount of damages to be awarded to the injured party in case of
breach of the principal obligation (compensatory).
3. In certain exceptional cases, to punish the obligor in case of breach of the
principal (punitive).
Kinds of Penal Clause
As its origin:
a. Legal penal clause When it is provided by law.
b. Conventional penal clause When it is provided for by stipulation of
the parties.
As to its purpose:
a. Compensatory penal clause When the penalty takes the place of
damages.
b. Punitive penal clause When the penalty is imposed merely as
punishment for breach.
As to its demandability or effect:
a. Subsidiary or alternative penal When only the penalty can be enforced.
clause
b. Joint or cumulative penal clause When both the principal obligation and
the penal clause can be enforced.
General Rule: In obligation with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of non-compliance.
Exceptions:
1. When there is a stipulation to the contrary.
2. When the obligor is sued for refusal to pay the agreed penalty.
3. When the obligor is guilty of fraud.
In all of the exceptions above stated, the purpose of the penalty is to punish the obligor
(debtor) Hence, the obligee (creditor) can recover from him not only the penalty but also
the damages resulting from the breach of the principal obligation.
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)
Exception to the Rule:
1. When the creditor was clearly given the right to enforce both the principal
obligation and the penalty.
2. When the creditor has demanded fulfillment of the obligation, but the same could
no longer be fulfilled due to the debtor’s fault, he may demand the penalty agreed
upon.
If fault due to the creditor's act – he cannot claim the penalty.
If the impossibility of fulfillment is due to fortuitous events – both the principal obligation
and the penalty shall be extinguished.
Article 1228. Proof of actual damages suffered by the creditor is not necessary in
order that the penalty may be demanded. (n)
Penalty is always demandable without proof of actual damages.
Damages recoverable in addition to penalty must be proved.
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)
Circumstances when penalties may be reduced by the courts:
1. When the obligation has been partly complied with by the debtor. (Partial
Performance)
The first refers to the extent of fulfillment, the latter, to the manner. The penalty
should be more or less proportionate to the extent of the breach of the contract or
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.
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)
Nullity of the penal clause does not carry with it the nullity of the principal obligation.
Effect of nullity of the penal clause:
The nullity of the penal clause will not necessarily invalidate the principal obligation.
Because the principal obligation can stand alone such that if only the penal clause is
void, it remains valid and demandable. The penal clause is just disregarded. The injured
party may recover indemnity for damages in case of non-performance of the obligation
as if no penalty has been stipulated.
Example: S agreed to sell merchandise to B. It is provided in their agreement that in
case of default, S will deliver a prohibited drug as a penalty.
Here, the obligation to sell merchandise is valid but the penalty to deliver the prohibited
drug is void. For failure of S to comply with his obligation, B may recover damages.
Nullity of the principal obligation carries with it that of the penal clause.
Effect of nullity of the principal obligation:
If the principal obligation is void, the penal clause is likewise void. The reason is that the
clause cannot stand alone without the principal obligation to which it is subordinated.
But if the nullity of the principal obligation is due to the fault of the debtor, who acted in
bad faith, by reason of which the creditor suffered damages, on equitable grounds, the
penalty may be enforced.
Example: S agreed to deliver to B two grams of prohibited drugs. The contract carries a
penal clause to the effect that in case of non-compliance with the obligation, S would
pay a penalty of P10,000.
Here, the nullity of the principal obligation carries with it that of the penal clause
although it is itself valid.
Sources:
NA. (2016, March 27). Section 6: Obligations with a Penal Clause – Page 2. Retrieved
December 18, 2020, from [Link]
obligations/chapter-3-different-kinds-of-obligations/section-6-obligations-with-a-penal-
clause/page/2/
S., D. L., & Jr, D. L. (2014). The Law on Obligations and Contracts. Manila: Rex
Book Store.
University, L. (2019, February 21). SECTION 6. OBLIGATIONS WITH A PENAL
CLAUSE. Retrieved December 18, 2020, from
[Link]
clause/
