OBLIGATIONS WITH A PENAL CLAUSE

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.

The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code. (1152a)

PENAL CLAUSE- is an accessory undertaking attached to an obligation to assume greater

liability on the part of the obligor in case of breach of the obligation.

PURPOSES OF PENAL CLAUSE

1. To ensure performance
2. Substitute the indemnity for damages and the payment of interests in case of
noncompliance
3. TO punish the debtor for the non-compliance of his obligation.

Example:

A promise to construct the house of B within 90 days for 1M pesos

“For every day’s delay after the stipulated 90 days, A would pay fine/penalty of 10K pesos.”

Obligation with Conditional Facultative Alternative

penal clause obligation obligation obligation

A promise B to give A promise B to pay A promise B to give A promise B to give

a diamond ring, and 500k pesos if he fails a diamond ring, and her, either a
if he fails to do so, to give the former a if the former desires, particular diamond
he must give A diamond ring. he can give B 500k ring, or 500k pesos
500K pesos. pesos.
Kinds of penal clause
1. As to its origin
a. Legal penal clause- provided by law
b. Conventional penal clause- by agreement of parties
2. As to its purpose
a. Compensatory penal clause- penalty takes to place of damages
b. Punitive penal clause-penalty is imposed merely as punishment of breach
3. As to its dependability or effect:
a. Subsidiary or alternative penal clause- only 1 or the penalty can be demanded
b. Joint or cumulative penal clause- both principal and the penalty can be demanded
Liability for penalty, damages, and/or interests.
(1) Penalty substitutes for damages and interests. — As a general rule, in an obligation with a penal clause, the
penalty takes the place of the indemnity for damages and the payment of interests in case of non-compliance.
(Art. 1226.) Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be
enforced. (Art. 1228.) Art. 1226 257
(2) Penalty and interests enforceable. — The law permits an agreement upon a penalty apart from the interest.
Should there be such an agreement, the penalty does not include the interest and as such, the two are different
and distinct things which may be demanded separately. A stipulation about payment of additional rate of
interest partakes of the nature of a penalty clause which is sanctioned by law. (Insular Bank of Asia and
America vs. Spouses Salazar, 159 SCRA 133 [1985].) A penalty to answer not only for attorney’s fees but for
collection fees as well, is in the nature of liquidated damages. (infra.) Where the attorney’s fees so provided are
awarded in favor of the litigant not his counsel, it is the litigant, not his counsel, who is the judgment creditor
entitled to enforce the judgment by execution. (Barons Marketing Corp. vs. Court of Appeals, 286 SCRA 96
[1998].)
(3) Penalty, damages and interests enforceable. — The creditor, in addition to the penalty, may recover
damages and interests: (a) When so stipulated by the parties; (b) When the obligor refuses to pay the penalty; or
(c) When the obligor is guilty of fraud in the fulfillment of the obligation.

Example:

1. A obliged himself to give B a specific car on Dec. 25, if he fails to do so, A will pay 100k
pesos
- Subsidiary/ alternative penal clause
2. A obliged himself to give B a specific car on Dec. 25, if he fails to do so, A, in addition
to the car must pay B 100K pesos
- Joint/cumulative obligation
 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.

The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code. (1152a)

The creditor, in addition to the penalty, may recover damages and interests:

(a) When so stipulated by the parties;

(b) When the obligor refuses to pay the penalty; or

(c) When the obligor is guilty of fraud- creditor need proof of fraud to claim damages

Last sentence- penalty may be enforced only when there is a breach of obligation, provided that
the penalty is not contrary to law, moral, good customs or public policy

ART. 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)

General Rule:

As a general rule, the creditor cannot demand the fulfi llment of the obligation and the
satisfaction of the penalty at the same time.
(1) Where there is performance. — Once the obligation is fulfi lled, this purpose is attained and, therefore, there is
no need for demanding the penalty.
(2) Where there is no performance. — In case of non-compliance, the creditor may ask for the penalty or
require specific performance
 WHEN PENAL CLAUSE JOINT

When penal clause joint. The debtor has the right to pay the penalty in lieu of performance
only when this right has been expressly reserved for him.

Example:

A obliged himself to construct the house pf B and to finish it withing 3 months, otherwise A is
going to pay B 100K pesos as penalty. What are the rights and obligations of the parties?

Answer.

A cannot just pay 100k and not construct the house of B unless there is an agreement
giving A an option – 1st sentence
B cannot demand to A to construct her house and at the same time pay her 100k pesos
unless it is agreed.- 2nd sentence
If B demand fulfillment, but the performance become impossible due to A’s fault,
without the fault of B, B can ask payment for penalty- last sentence

Debtor has an option only when it is expressly reserved for him

Creditor has a right to demand even the right is not expressly reserved.

ART. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the
penalty may be demanded. (n)

In any of the three exceptions when damages may be recovered in addition to the penalty (Art.
1227.), the creditor must prove the amount of such damages which he actually suffered
resulting from the breach of the principal obligation.

The only proof the creditor may present is the violation of the debtor and not the actual
damaged of the violation.

Example:
A promised to deliver a specific car to B. The contract carried a penal clause that in case of
noon-compliance, A would have to pay penalty of 20k pesos. A did not deliver the car and, as
consequence, B suffered damage in the amount of 15k pesos.

A will have to pay 20k pesos penalty even the amount suffered by B is only 15K pesos. That iis
because the agreement is to pay 20k penalty.

NOTE: Damages recoverable in addition to penalty must be proved .

ART. 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)

Talks about when agreed penalty can be reduced by the court.

1. When there is a partial performance

2. When there is irregular performance
3. If the penalty is iniquitous or unconsunable

Example:

1. A promises to deliver B 10 bottles of wine on Dec. 25, or upon failure to do so, to pay a
penalty of 5K.

If on Dec. 25 A only delivered 9 bottles, B cannot demand full penalty agreed because there is a
partial performance pf the obligation

2. A promises B to pay 10k on Dec. 25, or upon failure, to pay penalty of 50K pesos.

If A cannot give 10k on Dec. 25, B cannot demand 50K because it is iniquitous or
unreasonable. Penalty will be reduced by court even there is noncompliance because it is
unconsumable. the court will decide if the penalty is unreasonable.

ART. 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)
 Talks about the effect of the nullity of the principal obligation
If the penal clause is void but the principal obligation is not, the principal obligation will
be valid and demandable. Thus, the penal clause will be disregarded.
If the principal obligation is void, the penal clause will likewise be void. Because the
clause alone cannot stand without the principal obligation.

Example:

1. A obliged himself to construct a house for B within 3 months. In case A is not able to
perform his obligation within the stipulated period, A will give B a pack of shabu.
(Valid principal obligation, invalid penal clause)
2. A obliged himself to give B a pack of shabu, and in case of noncompliance,500K will be
forfeited from A. (invalid principal obligation and penal clause= both will be void)

EXTINGUISHMENT OF OBLIGATIONS
GENERAL PROVISIONS

ART. 1231. Obligations are extinguished:

(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;- CONDONATION
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of
a resolutory condition, and prescription, are governed elsewhere in this Code. (1156a)

Causes of extinguishment of obligations. In addition to those enumerated in Article 1231,

other causes are:
(1) Death of a party in case the obligation is a personal one (Art. 1311, par. 1.);
(2) Mutual desistance or withdrawal;
(3) Arrival of resolutory period (Art. 1193, par. 2.);
(4) Compromise (Art. 2028.);
(5) Impossibility of fulfillment (Art. 1266.); and
(6) Happening of a fortuitous event. (Art. 1174.)
SECTION 1. — Payment or Performance
ART. 1232. Payment means not only the delivery of money but also the performance, in any
other manner, of an obligation. (n)

There should be pre-existing obligation

Payment, in legal parlance, has a wider meaning including performance

Payment=performance

elements of payment are analyzed into:

(1) persons, who may pay and to whom payment may be made;

(2) thing or object in which payment must consist;

(3) the cause thereof; (4)

the mode or form thereof; 275 276 OBLIGATIONS

(5) the place and the time in which it must be made;

(6) the imputation of expenses occasioned by it; and

(7) the special parts which may modify the same and the effects they generally produce

ART. 1233. A debt shall not be understood to have been paid unless the thing or service in
which the obligation consists has been completely delivered or rendered, as the case may be.
(1157)

 Answers the question ‘when was debt considered paid?

Requisites:

1. Integrity of the prestation- the prestation must be fulfilled completely

Example: A bound himself to pay B 10k pesos

If A only pay 9k, B can refuse it because the fulfillment is not complete

Exception:

a. Substantial compliance in good faith

b. Waiver
 c. Application of payments if the debts are equally erroneous

2. Identity of the prestation- the very prestation must be delivered or performed

Example: If someone obliged himself to give a car, he cannot fulfill the obligation by giving a
house.

Burden of proving payment

Creditor- obligation exist

Debtor- proving payment through receipt

ART. 1234. If the obligation has been substantially performed in good faith, the obligor may
recover as though there had been a strict and complete fulfillment, less damages suffered by the
obligee. (n)

Substantial Performance in Good Faith Rule (one of the exceptions of the requisites of art. 1233
which is the integrity of the obligation)

Example: A obliged himself to sell 1k bags of cement to B

A can only deliver 900 bags due to cement shortage.

A can recover as though there had been complete delivery. The price will be reduced by 100
bags that he was unable to deliver. B cannot require A to deliver the complete quantity before
she pay because there is substantial compliance in good faith.

ART. 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed
fully complied with. (n)

One of the exceptions of the requisites of art. 1233

When there is irregularity in payment and the creditor did not express any complain, then the
obligation is deemed fully complied. – based on the principle of estoppel (meaning the
creditor is estopped to question because you didn’t complain in the first place)

- There no required certain form of protest

ART. 1236. The creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfillment of the obligation, unless there is a stipulation
to the contrary.

Whoever pays for another may demand from the debtor what he has paid, except that if
he paid without the knowledge or against the will of the debtor, he can recover only
insofar as the payment has been beneficial to the debtor. (1158a)

1st statement

Provide for the rule whose payment is the creditor bound to accept:

1. Debtor itself
2. Any person who has an interest in the obligation. Eg. Guarantor, preferred creditors,
owner of security surety, if the property is mortgage
3. Third person who has no interest in the obligation when there is stipulation that he can
make payment

2nd statement

Effect of the third person who has no interest on the obligation

If there is debtor’s consent, there is;

1. reimbursement or
2. subrogation- the payor steps into the shoes of the creditor

If there is no consent:

1. beneficial reimbursement, there is no subrogation

Example;

A owes B 1M pesos. C, who is the third person in the obligation offer B to pay the payment of
1M. B has a right to accept or NOT to accept the payment.

Suppose B accepted the payment from C, can C recover from A? If so, how much?

Ans. If there is no consent, C can ask for reimbursement to the amount of what she paid.
 If unknown to C that A already paid half of the amount which is 500k pesos, C can only
reimburse the remaining debt of A.

If there is a consent, C can recover from A with the rights of subrogation.

Example:

1. On May 1, A borrowed B 10k pesos, and mortgaged his land, payable on May 25.
However, on may 10, C, a third person paid B 10K pesos without the knowledge of A.
When the obligation falls due, A is already insolvent, he cannot reimburse C of what the
latter paid B.
A. Can X foreclose a mortgage property?
- No, because there is no consent.
B. Supposing X paid with D’s consent, will your answer be the same?
- X may now foreclose mortgage property because he has not the right of the creditor with
the right of subrogation

2. A owes B 1M. Later, A paid B 700K leaving a balance of 300k. C, a classmate of A, and
intending to surprise A, paid B the sum of 1M pesos, thinking that A still owe B that
amount. He did this without the knowledge/consent of A.
How much can C recover from A?
- C can recover only 300k pesos from A because it is only up to this amount which A
benefited. C can recover the remaining amount to B which in the first place should not
have accepted the complete payment.

Suppose that the payment by C has been made against the will of A, the answer will be the
same.

ART. 1237. Whoever pays on behalf of the debtor without the knowledge or against
the will of the latter, cannot compel the creditor to subrogate him in his rights, such as
those arising from a mortgage, guaranty, or penalty. (1159a)

If the third person paid against the will of the debtor, ha cannot compel creditor to subrogate
him in his right. There is no subrogation.

EXTUNGUISMENT OF SUBROGATION FROM REIMBURSEMENT

SUBROGATION REIMBURSEMENT
Recourse can be had to the mortgage or There is no recourse
guaranty or penalty

The debt is extinguished in one sense, but a New creditor has different rights
new creditor, with exactly the same right as
the old one, appears on the same

There is more than personal action of There is only a personal action to recover the
recovery amount

Similarity- There can be recovery of what the stranger/ third person has paid

Example:

A borrowed from B 1M pesos payable on Dec. 25,2020. The loan was secured by a
mortgage of A’s land. Without the knowledge of A, C paid B 1M pesos. A benefited to the
amount of 1M.

1. Can C claim reimbursement from A?

-yes
2. How much?
- 1M Pesos
3. If A cannot pay, may C foreclose the mortgage on A’s land?
- Yes, because C pays without the knowledge/consent of the debtor

ART. 1238. Payment made by a third person who does not intend to be reimbursed by the
debtor is deemed to be a donation, which requires the debtor’s consent. But the payment is in
any case valid as to the creditor who has accepted it. (n)

In order to perfect the donation, there should be ACCEPTANCE of the donee or the debtor.
Because no one should be compelled to accept the generosity of another.

Last sentence means if the creditor accepted the payment of the stranger, the donation shall be
valid.

Example:

A owes B 1M Pesos. C, in behalf of A, pays B 1M against the consent of B, although C had

previously told B that she has no intention of being reimbursement. B accepted the payment by
C in behalf of A.
 1. Is A obligation toward B extinguished?
- YES Because the creditor accepted it
2. May C recover from A?
- YES because there is no valid and real donation
3. Supposed that A accepted the donation of C, A is not liable for the reimbursement
because there is valid or real donation.

ART. 1239. In obligations to give, payment made by one who does not have the free
disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to
the provisions of Article 1427 under the Title on “Natural Obligations.’’ (1160a)

Talks about effects of payment by an incapacitated person--- the creditor (incapacitated person)
cannot be compelled to accept it

free disposal of the thing due- means thing to be delivered must not be subject to any claim

capacity to alienate- the person is not incapacitated to enter into a contract

ART. 1240. Payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive it. (1162a)

Answers the question “To whom payment must be made?”

1. in whose favor the obligation has been constituted- obligee/creditor

2. or his successor in interest- assignee
3. or any person authorized to receive it- a person authorized by the creditor and by law

If the payment is made to the wrong person, the obligation is not extinguished.

ART. 1241. Payment to a person who is incapacitated to administer his property shall be
valid if he has kept the thing delivered, or insofar as the payment has been beneficial to
him. Payment made to a third person shall also be valid insofar as it has redounded to the
benefit of the creditor. Such benefit to the creditor need not be proved in the following
cases:

(1) If after the payment, the third person acquires the creditor’s rights;

(2) If the creditor ratifies the payment to the third person;

 (3) If by the creditor’s conduct, the debtor has been led to believe that the third person
had authority to receive the payment. (1163a)

1st paragraph talks about payment to incapacitated person

- Payment to incapacitated person is valid only if:

a. The incapacitated person has kept the thing delivered
b. Insofar as the payment has been beneficial to him

Example:

A owes B 1M pesos. The time that A will pay B, B ended up being insane, thus, made her
incapacitated. However, the money is not spent and is still in the possession of B.

The obligation is still extinguished even B is already mentally ill because she kept the object.

Supposed that there is a fraud who ask B to give 1M in exchange to a ring worth 500k. The
payment is still valid but only up to the amount of 500k which is the amount of B has benefited
from B’s payment.

Who has the burden of proving that the payee benefited?

- The one who made the payment

Payment benefited the incapacitated payee when:

1. If the payment was used in benefit of the creditor, for example is payment for the hospital
bills

If the payment of the debtor of the 1M pesos was lost, the payment is NOT VALID

Thus, when B recovered from her illness, she can still demand B for the payment of 1M pesos.

OR even B doesn’t recover from her illness, her LEGAL REPRESENTATIVE OR

GUARDIAN may demand A for the amount of 1M pesos.

2ND Paragraph- Payment to a third part not really authorized

-SAME RULE AS 1ST PATAGRAPH (the payment is valid if it is redounded to the benefit of
the creditor)

The payment should be proved to be benefited the creditor except:

(1) If after the payment, the third person acquires the creditor’s rights;
 Example: There is a fraud agent which the debtor gave the payment without knowing that
the agent is an impostor. Then the impostor agent become the owner of the company, the
payment is valid.
(2) If the creditor ratifies the payment to the third person;
Example; If the collector of electric payment is unauthorized, but after your payment, the
company informs you that the payment is okay or has been made
(3) If by the creditor’s conduct, the debtor has been led to believe that the third person had
authority to receive the payment. (
Example: If an unauthorized collector wore the same uniform as the authorized collector.
The payment is valid because you have been led to false belief.

When benefit to creditor need not be proved by debtor. The debtor is relieved from
proving benefit to the creditor in case of:
(1) subrogation of the payer in the creditor’s rights;
(2) ratification by the creditor; or
(3) estoppel on the part of the creditor