Obligations with a Penal Clause

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Penalty as indemnity for damages – If there is no stipulation to the contrary, the penalty in obligations that carry a penal clause substitutes the indemnity for damages, as well the payment of interests in case of non-compliance.[1] This penalty is referred to as liquidated damages.[2] To be entitled to the penalty, the creditor is not required to show proof of actual damages.[3]

Damages for non-payment of penalty – In addition to the liquidated damages, the debtor is liable for damages if he refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.[4] However, it must be noted that the penalty is enforceable only if the same is demandable.[5]

Payment of penalty, no effect on obligation – The debtor cannot avoid the performance of his obligation by simply paying the penalty except if he has been expressly granted this as a matter of contractual right.[6] Conversely, the creditor cannot demand at the same time the fulfillment of the obligation and the satisfaction of the penalty except if he has been clearly granted this right as well.[7] If the creditor chose to require the fulfillment of the obligation and the same becomes impossible without his fault, the penalty may now be enforced against the debtor.[8]

Equitable reduction of penalty – The courts are mandated to equitably reduce the penalty after a determination that the principal obligation has been partly or irregularly complied by the debtor.[9] The courts may also reduce the penalty if it is iniquitous or unconscionable despite non-performance.[10]

Nullity of penal clause, no effect on principal obligation – If the penal clause is nullified by a court, the principal obligation remains valid.[11] If the principal obligation is nullified, the penal clause is likewise invalidated.[12]

[1] Ibid. Paragraph 1, Article 1226.

[2] Ibid. Article 2226.

[3] Ibid. Article 1228.

[4] Ibid. Paragraph 1, Article 1226.

[5] Ibid. Paragraph 2, Article 1226.

[6] Ibid. Article 1227.

[7] Ibid.

[8] Ibid.

[9] CIVIL CODE. Article 1229.

[10] Ibid.

[11] CIVIL CODE. Paragraph 1, Article 1230.

[12] Ibid. Paragraph 2, Article 1230.

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