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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
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.
According to the case of FILINVEST LAND, INC. vs. HON. COURT OF APPEALS, G.R. NO. 138980, September 20, 2005, a penal clause is an accessory undertaking to assume greater liability in case of breach. It is attached to an obligation in order to insure performance and has a double function:
(1) to provide for liquidated damages, and
(2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach.
In the case of MERRIE ANNE TAN vs. FIRST MALAYAN LEASING AND FINANCE CORP. G.R. No. 254510, June 16, 2021, the Court cited the case of D.M. Ragasa Enterprises, Inc. v. Banco De Oro, Inc to further expound on the nature, source and purposes of a penalty under a contract in order to deduce the true nature of a penalty clause, to wit:
A penal clause is an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by imposing on the debtor a special prestation (generally consisting in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled. Quite common in lease contracts, this clause functions to strengthen the coercive force of the obligation and to provide, in effect, for what would be the liquidated damages resulting from a breach.
A penal clause has a three-fold purpose:
(1) a coercive purpose or one of guarantee — this is to urge the debtor to the fulfillment of the main obligation under pain of paying the penalty;
(2) to serve as liquidated damages this is to evaluate in advance the damages — that may be occasioned by the non-compliance of the obligation; and
(3) a strictly penal purpose — this is to punish the debtor for non-fulfillment of the main obligation. While the first purpose is always present, the second purpose is presumed and the third purpose must be expressly agreed upon.
Stated otherwise, the purposes of penalty or penal clause are:
(1) funcion coercitiva o de guarantia or to insure the performance of the obligation;
(2) funcion liquidatoria or to liquidate the amount of damages to be awarded to the injured party in case of breach of the principal obligation; and
(3) funcion estrictamente penal or to punish the obligor in case of breach of the principal obligation, in certain exceptional cases.
The second is evidently compensatory and the third is punitive in character, while the first is the general purpose regardless of whether the penalty is compensatory or punitive.
Evidently, the penal clause may be considered either reparation, compensation or substitute for damages, on one hand, or as punishment in case of breach of the obligation, on the other. When considered as reparation or compensation, the question as to the appropriate amount of damages is resolved once and for all because the stipulated indemnity represents a legitimate estimate made by the contracting parties of the damages caused by the nonfulfillment or breach of the obligation. Proof of actual damages is, consequently, not necessary in order that the stipulated penalty may be demanded. When considered as a punishment, the question of damages is not yet resolved inasmuch as the right to damages, besides the penalty, still subsists. Thus, if the injured party desires to recover the damages actually suffered by him in addition to the penalty, he must prove such damages.
Penal clause may be classified into:
(1) according to source:
(a) legal (when it is provided by law) and
(b) conventional (when it is provided for by stipulation of the parties);
(2) according to demandability:
(a) subsidiary (when only the penalty may be enforced) and
(b) complementary (when both the principal obligation and the penalty may be enforced); and
(3) according to purpose:
(a) cumulative (when damages may be collected in addition to penalty) and
(b) reparatory (when the penalty substitutes indemnity for damages).
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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 0917-5772207/ 09778050020.
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