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KINDS/EFFECTS/GENERAL RULES OF A PENAL CLAUSE

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Ely Dameg

on 28 August 2013

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Transcript of KINDS/EFFECTS/GENERAL RULES OF A PENAL CLAUSE

KINDS/EFFECTS/GENERAL RULES OF A PENAL CLAUSE
WHAT IS A
PENAL CLAUSE?
It is an accessory obligation
attached to the principal obligation to assure greater responsibility in case of breach.
KINDS OF
PENAL CLAUSE
As to
Origin
Legal
Penal Clause - when it is provided by law;
As to its
Purpose
Compensatory
Penal Clause - when the penaly takes the place of damages.
When can a creditor may
recover damages
?
Conventional
Penal Clause - when it is provided for by stipulation of the parties.
Punitive
Penal Clause - when the penalty is imposed merely as punishment for breach.
Principal
Obligation
It can stand by itself and does not depend for its validity and existence upon another obligation
Accessory
Obligation
It is attached to a principal obligation and therefore cannot stand alone
As to
Effect
Subsidiary
Penal Clause - when only the penalty can be enforced.
Joint
Penal Clause - when both the principal obligation and penal clause can be enforced.
stipulated
by the parties
obligor
refuses
to pay the penalty
obligor is
guilty of fraud
EXAMPLE
PROBLEM
X promised to construct a house for Y. The contract carried a penalty that in case of breach, X would have to pay a penalty of P100,000.
Principal
Obligation
X promised to construct a house for Y.
Accessory
Obligation
The contract carried a penalty that in case of breach, X would have to pay a penalty of P100,000.
Effects of
Penal Clause
1. Substitute for indemnity for damages and
payment of interest. (
ART. 1226
)

EXCEPTION
: Unless there is a stipulation
to the contrary, e.g. becomes a facultative obligation
2.
Not
exempt debtor from performance. Based from
Art. 1227
, the debtor
cannot exempt himself
from the performance of the obligation by paying the penalty

EXCEPTION
: Where this right to substitute penalty has been expressly reserved for him
Based on the previous example, what will happen if X did not construct the house and as a consequence, Y suffered damages in the amount of P40,000 only?

a.
X will pay P40,000 only
b.
X will pay P100,000 penalty

ANSWER:
A
Penalty of P100,000 shall be paid. But Y cannot recover more than the penalty stipulated, even if the damages suffered by Y is only P40,000.
EXAMPLE
S is required to deliver to B certain products; otherwise he shall pay a penalty in the amount of P10,000.
Under Article 1227, S cannot just pay the penalty as substitute for noncompliance of the principal obligation except when he is expressly given the right by B to do so.
3. Creditor cannot demand both performance and penalty at the same time (
Art. 1227
)

EXCEPTION
: Unless this right has been clearly granted him
4. Creditor cannot collect other damages in addition to penalty (
Art. 1226
). Substitute the indemnity for damages and the payment of interest in case of non-fulfillment

EXCEPTIONS
:
1. There is an express provision to that effect.
2. Debtor refuses to pay the penalty
3. Debtor is guilty of fraud in the non-fulfillment of the obligation
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.
Iniquitous
- means unfair behaviour; immoral.
Unconscionable
- means unreasonably excessive; not right.
WHEN PENALTY MAY BE REDUCED BY THE COURTS
1. When there is partial or irregular performance

As a general rule, an obligation is not deemed performed unless the thing or service in which it consists has been
COMPLETELY
delivered or rendered.
EXAMPLE

X agreed to construct the house of Y within 4 months for P100,000 according to certain specifications. The contract stipulates that in case of noncompliance with the obligation, X will pay a penalty of P100,090. Except for some finishing touches, X practically completed the construction of the house

2. When the penalty agreed upon is uniquitous or unconscionable.

Here the penalty may be reduced even if there is
NO PERFORMANCE AT ALL
Example:
Suppose in the previous example, the value of the house is only P100,000. It is stipulated that for every day of delay, X must pay a penalty of P5,000.

The court in the exercise of its sound discretion, may reduce the penalty where, as in this case, it is clearly excessive and unconscionable.
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.
EFFECTS OF NULLITY OF THE PENAL CLAUSE
The general principle that the accessory follows the principal and not vice versa.

If only the penal clause is void, the principal obligation remains valid and demandable. The penal clause is just disregarded.
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 penalty.
EFFECTS 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.
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 noncompliance with the obligation, S would pay a penalty of P10,000.
REPORTER
: DAMEG, ELY JEZREEL C.
COE70 / C1
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