Article 1226 – Obligation with a Penal Clause
damages.
1. Principal Obligation
- One which can stand by itself and does not
depend for its validity and existence upon
another obligation. It is an independent
obligation.
2. Accessory Obligation
- One which is attached to a principal obligation
therefore can not stand alone.
An obligation with a penal clause
- Is one which contains an accessory
undertaking to pay a previously stipulated
indemnity in case of breach of principal
prestation, intended primarily to induce its
fulfillment.
Penal Clause
- An accessory undertaking attached to the
obligation to assume greater liability in case of
breach.
Purposes of PENAL CLAUSE:
(Reparation and Punishment)
1. To insure their performance by creating an
effective deterrent against breach, making
the consequences of such breach as onerous
as it may be possible. This is the general
purpose of a penal clause.
2. To substitute a penalty for the indemnity for
damages and the payment of interest in case
of non-compliance; or to punish the debtor
for the non-fulfillment or violation of his
obligation.
*In the first case, the purpose is reparation and the
second case, it is punishment.
KINDS of PENAL CLAUSE:
1. As to ORIGIN:
a. Legal
- When it is provided by law.
b. Conventional
- When it is provided for by stipulation
of the parties.
2. As to PURPOSE:
a. Compensatory
- When the penalty takes the place of
b. Punitive
- When the penalty is imposed
merely as punishment of breach.
3. As to DEMANDABILITY or EFFECT:
a. Subsidiary or alternative
- When only the penalty can be
enforced.
b. Joint or cumulative
- When both the principal obligation
and the penal clause can be
enforced.
*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 interest
in case of non-compliance. PROOF of actual
damages suffered by the CREDITOR is not
necessary in order that the penalty maybe enforced.
The CREDITOR has only to prove that there is
VIOLATION OF THE OBLIGATION.
When CREDITOR may RECOVER DAMAGES:
(Exemptions)
1. When stipulated by the parties;
2. When the OBLIGOR refuses to pay the
penalty, in which case the CREDITOR may
recover LEGAL INTEREST thereon;
3. When the OBLIGOR is guilty of FRAUD in
the fulfillment of the obligation, in which
case the CREDITOR may recover damages
caused by such fraud.
*The penalty as a stipulation in a contract is
demandable only if there is breach of the obligation
and it is not contrary to law, morals, good customs,
public order or public policy. Thus if the obligation
cannot be fulfilled due to fortuitous event, the
penalty is NOT DEMANDABLE.
Article 1227 – As a GENERAL RULE, the debtor
cannot just pay the penalty instead of performing
the obligation. Precisely, the PURPOSE of the
penalty is to SECURE COMPLIANCE with his
obligation. If the debtor is allowed to pay the
penalty, this would in effect make the obligation
ALTERNATIVE ONE.
*The debtor can exempt himself from the non-
fulfillment of his obligation only when this right has
been expressly reserved to him.
*As a GENERAL RULE, the creditor CANNOT
demand the fulfillment of the obligation and the
satisfaction of the penalty at the SAME TIME.
(Exception: when this right has been clearly granted
the creditor)
*GENERAL RULE: a penal clause is
SUBSIDIARY and NOT JOINT. Where there is no
performance, the creditor may ask for penalty OR
require specific performance. These remedies are
ALTERNATIVE and NOT CUMULATIVE NOT
SUCCESSIVE, subject to the exception that penalty
maybe enforced it after the creditor has decided to
require fulfillment, the same should become
impossible without his fault. If there is FRAUD in
the part of the debtor, the creditor may recover the
penalty as well as damages for non-fulfillment.
REMEMBER:
1. The DEBTOR has the right to pay the
penalty instead of performing his obligation
only when this right has been EXPRESSLY
RESERVED to him.
2. With respect to the creditor, he has the right
to demand performance and payment jointly
when this right has been CLEARLY
GRANTED to him.
Article 1229 – Penalty may be reduced by the
courts:
1. When there is partial or irregular
performance.
2. When the penalty agreed upon is iniquitous
or unconscionable.
Article 1230 – The nullity of the penal clause foes
not carry with it that of the principal obligation. The
nullity of the principal obligation carries with it that
of the penal clause.
*BASIS: The GENERAL PRINCIPLE that
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. The
injured party may recover indemnity for damages in
case of non-performance of the obligation as if no
penalty has been stipulated
*If the PRINCIPAL OBLIGATION IS VOID, the
penal clause likewise is void. 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.
Article 1231 – Obligations are extinguished by:
1. Payment or performance
2. Loss of the thing due
3. Condonation or remission of the debt
4. Confusion or merger of the rights of the
creditor and debtor
5. Compensation
6. Novation
7. Other causes of extinguishment of
obligations (annulment, rescission,
fulfillment of a resolutory condition and
prescription)
OTHER CAUSES:
1. Death of a party in case the obligation is a
personal one.
2. Mutual desistance or withdrawal
3. Arrival of a resolutory period
4. Compromise
5. Impossibility of fulfillment
6. Happening of fortuitous event
Article 1232 – Payment means not only the delivery
of money but also the performance in any manner
on an obligation.
*Payment consists not only in the delivery of
money but also giving of a thing (other than
money), the doing of an act or not doing an act.
When the debtor pays damages or penalty in lieu of
the fulfillment of an obligation, there is also
payment.
Article 1233 – When DEBT is considered paid:
1. Integrity of prestation
2. Identity of prestation
Article 1234 – EXCEPTION in Art. 1233:
substantial compliance or performance in good faith
by the obligor, he can recover as though there had
been a strict and complete fulfillment less damages
suffered by the oblige.
REQUISITES:
1. There must be substantial compliance;
2. The obligor must be in good faith.
Article 1235 – When the obligee accepts
performance knowing that it is incomplete or
irregular and the obligee did not express any protest
or objection, the obligation is deemed fully
complied with. This is founded on the principle of
estoppel.
REQUISITES:
1. The oblige knows that the performance is
incomplete or irregular;
2. He accepts the performance without
expressing any protest or objection.
Article 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 on the contrary.
Whoever pays for another may demand from the
debtor what he has paid, except that f he paid
without knowledge or against the will of the debtor,
he can recover only insofar as the payment has been
beneficial to the debtor.
PERSONS FROM WHOM THE CREDITOR
MUST ACCEPT PAYMENT:
1. Debtor
2. Any person who has interest in the
obligation
3. A third person who has no interest in the
obligation where there is a stipulation that he
can make payment.
EFFECT OF PAYMENT BY A THIRD PERSON:
(2nd article of Art 1236) - payment or performance
made by any person not incapacitated, even without
the knowledge or against the will of the debtor and
although he has absolutely no interest in the
obligation:
1. If made without the knowledge or against
the will of the debtor, the payer can recover
from the debtor only insofar the payment has
been beneficial to the latter
Example:
A owes B P1,000.C, a stranger paid the obligation
without the knowledge or against the will of A. C
can ask reimbursement for the P1,000 from A. But
if P400 has already been paid by A, then C is
entitled to be reimburse to the amount of P600
because it is only to that amount that A has been
benefitted. C can recover P400 from B who should
not have accepted it. If B acted in bad faith, he is
liable for interest in lieu of damages.
2. If made with knowledge of the debtor, the
payer shall have the rights of reimbursement
and subrogation, that is to recover what he
has paid and to acquire all rights (mortgage,
guaranty, penalty) of the creditor.
Example:
In the given example, if payment was made by C
with the knowledge of A, C can recover P1,000
with all the rights of subrogation to the accessory
obligations such as mortgage, guaranty, or penalty.
Article 1237 – Whoever pays on behalf of the
debtor is entitled to subrogation, if the payment is
with consent of the latter. If without the consent of
the debtor the third person cannot compel the
creditor to subrogate him in the latter’s accessory
rights of mortgage, guaranty or penalty.
Subrogation versus Reimbursement:
Subrogation
- The person who pays for the debtor is put into
the shoes of the creditor and the person who
pays for the debtor acquires not only the rights
to be reimbursed for what he has paid but also
other rights which the creditor could have
exercised pertaining to the credit, either
against the debtor or against third persons. In
subrogation, however, there is no real
extinction of the obligation but change of
creditor.
Reimbursement
- The third person entitled by reason of payment
has merely the bare right to be refunded to the
extent provided in the second paragraph of Art
1236 without the right to the guarantees or
securities of the original obligation.
Example:
A borrowed from B P20,000. C is the guarantor.
Without the knowledge or consent of A, D paid
P20,000.In this case, D can claim reimbursement
from A for the whole amount since A was
benefitted up to that amount. If A cannot pay D, D
cannot proceed against C, the guarantor because
having paid without the consent of A, D is not
entitled to subrogation. But if the payment was
made with the express or tacit approval of A, D is
entitled not merely to full reimbursement but also to
subrogation. Suppose the obligation of A is secured
by a mortgage of a land owned by A, payment by D
without the knowledge or against the will of A
cannot give D the right to subrogation. D can
recover only insofar as the payment has been
beneficial to A.
Article 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.
Example:
A borrowed from B P20,000. Without the intention
of being reimbursed, C paid A’s obligation. A has
previously accepted the generosity of C. In this
case, A is not liable to C and his obligation is
extinguished. But if A did not consent to the
donation, C may recover from A since there has
been no donation, although originally C did not
intend to be reimbursed. Nevertheless, the
obligation of A to B is extinguished because the
payment is valid as to B who accepted it.
Article 1239 – In obligations to give, payment by
one who does not have the free disposal of the thing
due and capacity to alienate it shall not be valid
(GENERAL RULE)
Free disposal of the thing due and Capacity to
alienate
Free disposal of the thing due
- That the thing to be delivered must not be
subject to any claim or lien or encumbrance of
a third person
Capacity to alienate
- That the person is not incapacitated to enter
into contract and for that matter to make a
disposition of the thing due.
Example:
A agreed to give a diamond ring to B. If the ring
delivered by A belongs to C, the same can be
recovered by C because the payment is not valid. A
does not have free disposal of the ring. The same
right of recovery exists although the ring belongs to
D, a minor and therefore he has no capacity to
alienate it.
Article 1240 – Person to who payment shall be
made:
1. Creditor or oblige
2. His successors-in-interest (heirs)
3. Any person authorized to receive it – not
only a person authorized by the creditor but
also a person authorized by law to receive
payment. (administrators, executors, and
guardian)
Article 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 to be proved in case there is subrogation
by the creditor or there is estoppel on the part
of the creditor such that the creditor’s conduct
had led to believe that the third person had
authority to receive payment. (2nd paragraph)
Example:
A delivers P20,000 to B, a minor under
guardianship in payment of debt. B loses P5,000 of
money in nightclubbing. In this case, payment
should considered as made only to the extent of
P15,000.On the other hand, if B kept the money
paid or spent it for purposes useful to him, the
payment shall be valid; otherwise, B would be
unduly enrich himself at the expenses of A.
Article 1242 – Payment made in good faith to any
person in possession of the credit shall be release
the debtor.
*This is another situation when there is valid
payment to a third person.
*Possession of the credit and not merely the
document or instrument evidencing the credit.
Furthermore, the payer must act in good faith that is
in the honest belief that he si making a valid
payment and the payee is the owner of the credit.
Example:
A owes B in the amount of P20,000. A issued
promissory note as an evidence of the obligation. B
lost the promissory note and was found by C who
now demanded payment from A. Here, payment to
C is not valid because C is just a possessor of the
promissory note and not the credit itself.
Now, if for example the same note was indorsed by
B to D, under a private agreement that D will not
collect from A. Payment by A in good faith to D
will extinguish the obligation. The right of B will be
against D.
Article 1243 – Payment made to the creditor by the
debtor after the latter has been judicially ordered to
retain the debt shall not be valid.
Example:
A owes B P20,000. C in turn owes A P20,000.In an
action filed by B against A, C, upon the petition of
B, maybe ordered by the court not to pay A and to
retain the debt in the meantime. In this case, the
debt of C is said to be garnished or subjected to
payment to B. Any payment made by C to A in
violation of the judicial order is considered invalid.
In other words, B may still hold C liable for the
debt. Should C be made to pay B, a quasi-
contractual obligation on the part of A is created,
which is to return the amount he has received from
C. The payment by C to shall extinguish the
obligation of A to C.
Article 1244 – The debtor of a thing cannot compel
the creditor to receive a different one, although the
latter may be of the same value as, or more valuable
than that which is due.
*In obligation to do or not to do, any act or
forbearance cannot be substituted by another act or
forbearance against the obligee’s will.
Example:
A obliged himself to deliver a specific car to B. A
cannot require B to accept another car although it
commands a higher price, neither can B require A to
deliver another car belonging to A although it can
be sold only at a lower price.
*EXCEPTIONS: Substitution can be made if the
oblige consent. In facultative obligation, the debtor
is given the right to render another prestation in
substitution. In case of waiver by the creditor or
substitution is allowed by stipulation with the
consent of the creditor.
Article 1245 – Dation in payment is the conveyance
of ownership of a thing as an accepted equivalent of
performance.
*It is a special form of payment because its is not
the ordinary way of extinguishing an obligation. An
existing debt in money is satisfied not by payment
of money but by alienation of the property.
*The law on sales governs because dation in
payment may be considered a specie of sale in
which the amount of money debt becomes the price Article 1247 – Extrajudicial expenses shall be borne
of the thing alienated. by the DEBTOR, unless otherwise stipulated by the
parties.
Special forms of payment:
*Does not apply to expenses incurred by the
1. Dation in payment
creditor in going to the debtor’s domicile to collect.
2. Application of payments
3. Payment by cession *JUDICIAL COSTS are the statutory amounts
4. Tender of payment allowed to a party in action for the expenses
incurred in the action. It shall be paid by the losing
Example:
party (RULES OF COURT)
A owes B P20,000. To fulfill the obligation, A with
Article 1248 – Unless there is and express
the consent of B delivers a narra set. If the narra set
stipulation to that effect, the creditor cannot be
is however less than P20,000, the conveyance must
compelled partially to receive the prestations in
be deemed to extinguished the obligation to the
which the obligation consists. Neither may the
extent only of the value agreed upon unless, the
debtor be required to make partial payments.
parties by their agreement have considered the narra
set as full payment in which case the obligation is - However, when the debt is in part liquidated
totally extinguished. and in part unliquidated, the creditor may
demand and the debtor may effect the payment
Article 1246 – When the obligation consists in the
of the former without waiting the liquidation
delivery of an indeterminate or generic things,
of the latter.
whose quality and circumstances have not been
stated, the creditor cannot demand a thing of *There is only one debtor and one creditor
superior quality. Neither can the debtor deliver a
*There should be complete prestation in order that
thing of inferior quality. The purpose of the
the obligation is extinguished neither the debtor can
obligation and other circumstances shall be taken
be compelled to make partial payments if he does
into consideration.
not wish to do since he has the duty to comply with
Example: the whole obligation, subject to certain exceptions:
A binds himself to deliver a horse. B cannot compel a. Express stipulation
A to deliver a price winning race horse. Neither can b. Debt is in part liquidated and in part
A require B to accept an old sickly horse. unliquidated.
Example:
a. If B owns a stable race horses and horse
A owes B P20,000 plus the share of
racing is his main diversion in life, in which
B from a profit of the business which
fact is known to A, and the price agreed
however, is not yet determined, B
upon is the reasonable price of a racehorse,
may demand and A may effect of the
then A must deliver a race horse.
payment of P20,000, which is
b. If B happens to be a calesa driver and B
already known.
agreed to pay A for the horse an amount
c. When the different prestations in
which is the reasonable price of a horse for
which the obligation consists are
calesa, then that kind of horse maybe
subject to different terms or
delivered.
conditions which affect some of
c. If B is a veterinary doctor and his only
them.
purpose in buying a horse is to examine its
Example:
organs in connection with his work, this and
A owes B P20,000, P10,000 of
other relevant circumstances that the old
which is due today and P10,000 due
sickly horse was intended by the parties to
be delivered.
 tomorrow. The obligation can be creditor must cash the instrument that he can
complied partially. bring an action for non-payment of debt.
2. Payment by means of mercantile document
Article 1249 – The payment of debts in money shall
does not extinguish the obligation:
be made in the currency stipulated and if not
a) Until they have been cashed;
possible to deliver such currency, then in the
b) Unless they have been impaired
currency which is the legal tender in the Philippines.
through the fault of the creditor (as
Legal Tender and Legal Tender power of Currency when he has delayed in presenting
the check of payment for
Legal Tender unreasonable length of time and the
- That currency which a debtor can legally check lost its value by reason of the
compel a creditor to accept in payment of debt insolvency of the bank.
in money when tendered by the debtor in the
right amount.
Legal Tender Power of Currency
- Means that when a currency is offered for
payment of a debt, public or private, the same
must be accepted.
LEGAL TENDER IN THE PHILIPPINES
Debts in money shall be paid in the currency
stipulated. If it is not possible such currency, then
payment shall be made in the currency which is the
legal tender in the Philippines.
*Philippine currency notes have no limit to their
legal tender power.
NOTE:
- Per BSP Circular No. 537 series of 2006,
COINS IN DENOMINATION OF:
- 1 piso, 5 piso, and 10 piso- they shall be legal
tender in the amount not exceeding P1,000.
- 1,5,10,and 25 centimo shall be legal tender in
the amount not exceeding P100.
PAYMENTS BY MEANS OF INSTRUMENTS
OF CREDITS (mercantile documents)
1. A creditor has the right to refuse or accept
promissory notes, checks, bills of exchange
and other commercial documents since they
are not considered legal tender. The creditor
may accept them if he chooses without the
acceptance producing the effect of payment.
In the meantime, the demandability of the
original obligation is suspended. The