Article 1226

In obligations with a penal clause, the penalty shall substitute the

indemnity for damages and the payment of interest 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 fulfilment of the obligation.

The penalty may be enforced only when it is demandable in

accordance with the provisions of this Code.

Discussion:

Penalty clause is an accessory obligation or undertaking attached to a

principal obligation, which imposes an additional liability in case of breach
of the principal obligation, in order to secure the performance of the
principal obligation.

The penalty imposable is a substitute for the indemnity for damages and
payment of interest in case of breach of the obligation, unless there is
contrary stipulation, in which case, the additional damages may further be
recovered.

Case Illustration:

Ibarra vs Aveyro and Emiliano Pre 37 Phil 274 (1917)

Ponente: J. Torres

Facts:

On April 10, 1915, counsel for Alejandro Ibarra filed a complaint with the
Court of First Instance of Tarlac against Leopoldo Aveyro and Emiliano
Pre, for the purpose of recovering from them jointly and severally the sum
of P465 as principal, besides such additional sum as might be found owing
in accordance with the penal clause of the contract, at the rate of P5 a day
from the date of the maturity of the obligation.

The defendants denied the allegation. Aveyro purported that he sold a land
to Ibarra in the amount of P450 with the right to repurchase and that Ibarra
borrowed the land title and deed for the purpose of reselling it on a higher
price, and upon failing, returned the same. Ibarra again borrowed the title
and deed and in addition executed a promissory note in favor of Ibarra, with
the security of a solvent surety, for the amount of P450, and with a penal
clause, to be effective in case of delinquency in the payment, and that if the
sale should not be made, the borrowed deed should be returned. the sale
did not push through, and when Ibarra tried to return the deed, Averyo
refused.

Trial ensued and the court decided in favor of Averyo and Pre. However,
the penal clause was held to be null and void for being immoral, pursuant
to Article 1255 of the Civil Code

 Discussions:

The penal clause is an accessory undertaking to assume greater liability in

case of breach, to insure performance of the obligation.

Kinds of penal clause:

 According to source

1-Legal-legal-penalty imposed by law

2-conventional-penalty agreed upon by parties

 
 According to extent of liability
 Subsidiary or alternative- when only the penalty can be recovered in
case of non-performance of the obligation
 Joint or cumulative- when in case of non-performance of the
obligation both the principal obligation and the penalty can be recovered.

Case illustration:

Bachrach vs. Golingco

G.R. No. L-13660

November 13, 1918

1. BACHRACH,plaintiff-appellee,

vs.

VICENTE GOLINGCO, defendant-appellant.

Ramon Diokno for appellant

STREET, J.:

 
Facts:

Bachrach entered into a contract with Golingco, he sold a truck with the
latter which was secured by a promissory note and a chattel mortgage on
the truck. The promissory note provided that there would be payment of
25% attorney’s fees.

ISSUE:

If there is an express written contract for fees between an attorney and his
client, may the court still disregard the contract?

HELD:

Yes, because a contract for attorney’s fees is different from other contracts.
It may be disregarded if the amount fixed is unconscionable or
unreasonable, considering the value of the work accomplished.

A claim for attorney’s fees may be asserted either in the very action in
which the services in question have been rendered, or in a separate action.
If the first alternative is chosen, the court may pass upon said claim even if
its amount were less than the minimum prescribed by law for the
jurisdiction of the court over the subject matter of the case for so long as
the main action is within the jurisdiction of said court, upon the theory that
the right to recover attorney’s fees is but an INCIDENT of the case in which
the services of counsel have been rendered.