Penal clause

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A penal clause is an accessory undertaking to assume greater liability in case of breach. It 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. A penal clause is intended to prevent the obligor from defaulting in the performance of his obligation. Thus, if there should be default, the penalty may be enforced.[1] Article 1226 of the Civil Code provides:

Art. 1226. In obligations with a penal clause, he 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.

Now when is the penalty deemed demandable in accordance with the provisions of the Civil Code? We must make a distinction between a positive and a negative obligation. With regard to obligations which are positive (to give and to do), the penalty is demandable when the debtor is in mora; hence, the necessity of demand by the debtor unless the same is excused.[2]

Mere delinquency in payment does not necessarily mean delay in the legal concept.[3] To be in default "is different from mere delay in the grammatical sense, because it involves the beginning of a special condition or status which has its own peculiar effects or results."[4] In order that the debtor may be in default it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially and extrajudicially.[5] Default generally begins from the moment the creditor demands the performance of the obligation. [6] There are only three instances when demand is not necessary to render the obligor in default.[7] These are the following:[8]

  • (1) When the obligation or the law expressly so declares;
  • (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or
  • (3) When the demand would be useless, as when the obligor has rendered it beyond his power to perform.

References

  1. SSS vs. Moonwalk Development and Housing Corporation, G.R. No. 73345, 7 April 1993
  2. SSS vs. Moonwalk Development and Housing Corporation, G.R. No. 73345, 7 April 1993, quoting 4 E.P. CAGUIOA, COMMENTS AND CASES ON CIVIL LAW 280 (1983 ed.)
  3. SSS vs. Moonwalk Development and Housing Corporation, G.R. No. 73345, 7 April 1993, citing 4 TOLENTINO, CIVIL CODE OF THE PHILIPPINES 259 (1991 ed.)
  4. SSS vs. Moonwalk Development and Housing Corporation, G.R. No. 73345, 7 April 1993
  5. SSS vs. Moonwalk Development and Housing Corporation, G.R. No. 73345, 7 April 1993, citing 4 TOLENTINO, CIVIL CODE OF THE PHILIPPINES 259 (1991 ed.)
  6. SSS vs. Moonwalk Development and Housing Corporation, G.R. No. 73345, 7 April 1993
  7. SSS vs. Moonwalk Development and Housing Corporation, G.R. No. 73345, 7 April 1993
  8. Civil Code, Art. 1169
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