Penal Clauses Digests.docx

CABARROGUIS VS. VICENTE FACTS: Antonia A. Cabarroguis, a registered nurse and midwife from Davao City, sustained physical injuries due to an accident when the jeep she was riding at hit another vehicle. She sustained injuries on her right forearm. To avoid court litigation, Telesforo B. Vicente, owner and operator of the jeep involved in the accident entered on July 13, 1955 into a compromise agreement with the victim Antonia A. Cabarroguis by paying her P2,500 "as actual and compensatory exemplary and moral damages. Vicente only paid P1,500.00 leaving P1,000 as unpaid. Compromise agreement provides if Vicente fails to complete payment within a period of sixty days, he would pay an "additional amount of P200.00 as liquidated damages." DAVAO MTC After repeated demands from Cabarroguis, Vicente did not comply with his obligation as he alleged that Cabbaroguis’s injury was not serious or consequential in order to make him pay the entire P2500 in the compromise agreement. Compromise agreement did not express the true intention of the parties thereto "by reason of mistake, fraud, inequitable conduct or accident" so that a reformation of the agreement was in order. Davao MTC ordered Vicente to pay 1200 pesos with legal interest. COURT OF APPEALS Vicente appealed that the lower court erred in sentencing him to pay interest on the amount of the judgment from the date of the filing of the complaint until full payment. Citing Article 1226 of the new Civil Code, he argued that in obligations with a penal clause, the penalty substitutes the indemnity for damages and payment of interest. ISSUE: Whether defendant is liable to pay for the entire penalty plus interest from the accident HELD: Yes. Article 1226 provides that the penalty shall substitute the indemnity for damages and the payment of interest, as a general rule. Exceptions to the Rule: (1) when the contrary is stipulated (2) when the debtor refuses to pay the penalty imposed in the obligation, in which case the creditor is entitled to interest on the amount of the penalty, in accordance with Article 2209 (3) when the obligor is guilty of fraud in the fulfillment of the obligation.

Since in the case at bar the penalty agreed upon took the place of the payment interest and the indemnity for damages, no stipulation to the contrary having been made, and while defendant was sued for breach of the compromise agreement, the breach was not occasioned by fraud, no interest can be awarded on the principal obligation of the defendant. HOWEVER, Article 2210 provides in the discretion of the court, interest may be allowed upon damages awarded for breach of contract. Defendant having refused to pay when demand was made by plaintiff, the latter clearly is entitled to interest on the amount of the penalty. This interest is recoverable from the date of demand. There being no showing as to when demand for payment was made, plaintiff must be considered to have made such demand only from the filing of the complaint. Interest shall be allowed only on the amount of the penalty of 200 pesos. FILINVEST LAND INC VS. CA FACTS: Filinvest Land, Inc., awarded to defendant Pacific Equipment Corporation the development of its residential subdivisions consisting of two parcels of land located at Payatas, Quezon City. Pacific posted two surety bonds in favor of Filinvest, issued by Philippine American General Insurance (PHILAMGEN), to guarantee faithful compliance. Pacific failed to finish the contracted works on time. On October 1979, Filinvest wrote to Pacific of its intention to takeover the project, holding Pacific liable for damages for the project. Filinvest submitted its claim against PHILAMGEN but PHILAMGEN refused because its principal, Pacific, refused to acknowledge liability. Pacific claims that its failure was due to inclement weather and the refusal of Filinvest to accept and pay for several items of finished work and change orders. The failure of Filinvest to pay its progressing bills estops it from demanding fulfillment of what is incumbent upon Pacific. The granting of three extensions for the work to be completed is a waiver of Filinvest's rights to claim any damages. The unilateral and voluntary action of Filinvest to prevent Pacific from completing the work has extinguished the obligation. PHILAMGEN claims that the amendments made to the principal contract without its written consent have released it from any or all liability. November 1984, the Court received Dimalanta's findings based on the construction documents. Based of billings of Pacific and payments made by Filinvest, the work accomplished by Pacific amounted to P11,788,282.40, with the exception of the last billing which Filinvest refused to pay in the amount of P844,396.42. The total amount of work left to be accomplished by Filinvest was amounted at P681,717.58. The alleged repairs made by Filinvest for construction deficiencies had no basis. Pacific had additional work done amounting to P477,000.00.

The trial court held that the findings of the commissioner should be conclusive, final and binding among the parties. The unpaid balance of work done by Pacific (P1,939,191.67) added to the additional work done (P475,000.00), and from this total, to deduct the cost to repair the deficiency or defect in the work done by Pacific (P532,324.01). Filinvest owes Pacific P1,881,867.66 ISSUE: Whether petitioner is liable to pay for the reduced penalty HELD: Yes. Article 1226 is taken and, in this case, read together with Article 1229 which states how the Court may reduce such penalty. A penal clause is an accessory undertaking to assume greater liability in case of breach. Although the penalty of P15,000.00 per day was mutually agreed upon by both parties, and is sanctioned by law, the Court ruled that the penalty charge was excessive. The Court reduced it to the same amount that Filinvest owed Pacific, considering the amount of work already finished and the fact that Filinvest consented to three extensions. The project was already 94.53% complete and the penalty was unconscionable (accdg to CA) because the project was not far from completion. The Court cited in Ligutan vs CA, pointed out that the question of penalty is reasonable or iniquitous can be partly subjective and partly objective. In this case, Pacific complied with their obligation in good faith which makes the full force of the penalty unconscionable. Pacific's delay was not due to negligence or was done in bad faith. Filinvest was also not free of blame because they did not pay Pacific P1,881,867.66 for work performed. COUNTRY BANKERS VS. CA FACTS: Petitioners seek a review on certiorari of the decision of the Court of Appeals in CAG.R. CV No. 09504 "Enrique Sy and Country Bankers Insurance Corporation v. Oscar Ventanilla Enterprises Corporation Oscar Ventanilla Enterprises Corporation (OVEC), as lessor, and thepetitioner Enrique F. Sy, as lessee, entered into a lease agreement over the Avenue, Broadway and Capitol Theaters and the land on which they are situated in Cabanatuan City, including their air-conditioning systems, projectors and accessories needed for showing the films or motion pictures The term of the lease was for six (6) years commencing from June 13, 1977 and ending June 12,1983. After more than two (2) years of operation of the Avenue, Broadway and Capitol Theaters, the lessor OVEC made demands for the repossession of the said leased properties in view of the Sy's arrears in monthly rentals and non-payment of amusement taxes. On August 8,1979, OVEC and Sy had a conference and by reason of Sy's request for reconsideration of OVECs demand for repossession of the three (3) theaters, the former was allowed to continue operating the leased premises upon his conformity to certain conditions imposed by the latter in a

supplemental agreement. In pursuance of their latter agreement, Sy's arrears in rental in the amount of P125,455.76 (as of July 31, 1979) was reduced to P71,028.91. However, the accrued amusement tax liability of the three (3) theaters to the City Government of Cabanatuan City had accumulated to P84,000.00. Hence, letters of demand dated January 7, 1980 and February 3, 1980 were sent to Sy demanding payment of the arrears in rentals and amusement tax delinquency. The latter demand was with warning that OVEC will re-enter and repossess the Avenue, Broadway and Capital Theaters on February 11, 1980 in pursuance of the pertinent provisions of their lease contract of June 11, 1977 and their supplemental letter-agreement of August 13, 1979. SY failed to pay the abovementioned amounts in full Consequently, OVEC padlocked the gates of the three theaters under lease and took possession thereof in the morning of February 11, 1980. ISSUE: Whether Sy is entitled to have reformation of the lease agreement HELD: No. As a general rule, in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance. This is specifically provided for in Article 1226, par. 1, New Civil Code. In such case, proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. However, there are exceptions to the rule that the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance with the principal obligation. They are first, when there is a stipulation to the contrary; second, when the obligor is sued for refusal to pay the agreed penalty; and third, when the obligor is guilty of fraud The repossession of the leased premises by OVEC after the cancellation and termination of the lease was in accordance with the stipulation of the parties in the said agreement and the law applicable thereto and that the consequent forfeiture of Sy's cash deposit in favor of OVEC was clearly agreed upon by them in the lease agreement. The court found no ambiguity in the provisions of the lease agreement. It held that the provisions are fair and reasonable and therefore, should be respected and enforced as the law between the parties. It held that the cancellation or termination of the agreement prior to its expiration period is justified as it was brought about by Sy's own default in his compliance with the terms of the agreement and not motivated by fraud or greed. PAMINUTAN VS COURT OF APPEALS FACTS Mariano Pamintuan had an agreement with Yu Ping Kun to sell plastic sheetings imported by Pamintuan from Japan through a barter license for the export of white flint corn. As the plastic

sheetings were arriving in Manila, Pamintuan told Yu Ping Kun’s president that he needed cash immediately for the plastic sheetings. The two parties fixed a price to the plastic sheetings by dividing the total price of the shipment with its aggregate quantity. After the 4 shipments arrived in Manila, Pamintuan only delivered 150 yards of the expected 339 yards, 440 yards of plastic sheetings he received to Yu Ping Kun’s Warehouse, also these sheetings were of inferior quality at a lesser price than what Yu Ping Kun had paid. Yu Ping Kun filed an action to enforce a provision in their contract of sale stating violation of contract stipulations shall entitle aggrieved party to damages of 10,000 pesos. ISSUE: Whether compensatory damages can be given for a breach of a contract of sale in addition to liquidated damages in a contract. HELD: Yes. Compensatory damages can be awarded for a breach of a contract of sale in addition to liquidated damages/stipulated penalites in the contract. Art. 1226 second sentence provides that damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of obligation. Lower courts rule that Pamintuan is guilty of fraud by not making a complete delivery of the plastic sheetings plus he overpriced the same as deemed conclusive by the Supreme Court. In case of fraud, the creditor, Yu Ping Kun, may only recover the difference between actual proven damages and the stipulated penalty. MAKATI DEVELOPMENT VS EMPIRE FACTS: On March 31, 1959, Makati Development Corporation sold a lot to Rodolfo P. Andal, in Urdaneta Village, Makati, Rizal, for P55,615. A so-called "special condition" contained in the deed of sale provides that the vendee shall construct and complete at least 50% of its residence on the property within two (2) years from March 31, 1959 to the satisfaction of the vendor and, in the event of its failure to do so, the bond which the vendee has delivered to the vendor in the sum of P11,123.00 to insure faithful compliance with the above special condition will be forfeited. Andal gave a surety bond on April 10, 1959 wherein he, as principal, and the Empire Insurance Company, as surety, jointly and severally, undertook to pay the Makati Development Corporation the sum of P12,000 in case Andal failed to comply with his obligation under the deed of sale. Andal sold the lot to Juan Carlos on January 18, 1960. As neither Andal nor Juan Carlos built a house on the lot within the stipulated period, the Makati Development Corporation, on April 3, 1961, after the lapse of the two-year period, sent a notice of claim to the Empire Insurance Co. advising it of Andal's failure to comply with his undertaking. Demand for the payment of P12,000 was refused, whereupon the Makati Development Corporation filed a complaint in the Court of First Instance against the Empire Insurance Co. to recover on the bond in the full amount, plus attorney's fees.

Indeed Andal admitted the execution of the bond but alleged that the "special condition" in the deed of sale was contrary to law, morals and public policy. He averred that, at any rate, Juan Carlos had started construction of a house on the lot. The lower court rendered judgment, sentencing the Empire Insurance Co. to pay the Makati Development Corporation the amount of P1,500, with interest at the rate of 12% from the time of the filing of the complaint until the amount was fully paid, and to pay attorney's fees in the amount of P500, and the proportionate part of the costs. The appellant argues that Andal became liable for the full amount of his bond upon his failure to build a house within the two-year period which expired on March 31, 1961 and that the trial court was without authority to reduce Andal's liability on the basis of Carlos' construction of a house a month after the stipulated period because there was no privity of contract between Carlos and the Makati Development Corporation ISSUE: Whether Andal is liable to pay for the full amount of the bond based upon his failure to comply with the stipulated condition HELD: No. Article 1229 provides that “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.” Payment of the full obligation is not required. The trial court found that Juan Carlos had finished more than 50 per cent of his house by April, 1961, or barely a month after the expiration on March 31, 1961 of the stipulated period. There was therefore a partial performance of the obligation within the meaning and intendment of article 1229. The stipulation in this case to commence the construction and complete at least 50 per cent of the vendee's house within two years cannot be construed as imposing a strictly personal obligation on Andal. To adopt such a construction would be to limit Andal's right to dispose of the lot. There is nothing in the deed of sale restricting Andal's right to sell the lot at least within the two-year period and we think it plain that a reading of such a limitation on one of the rights of ownership must rest on more explicit language in the contract. It cannot be left to mere inference. FLORENTINO vs SUPERVALUE FACTS: Florentino, sole proprietor of Empanada Royale, entered into 3 contracts to lease cart type stalls in SM, each with a term of 4 months renewable upon agreement. A month before the contract had expired, PET received 2 letters from RESP: (1) not opening on December 16 & 26, 1999,

increasing their price without RESP consultation, closing the store early due to lack of supply. (2) informing PET that RESP would not be renewing their contract A demand letter was given by PET asking RESP to return the security deposit (192,000) and release equipment and belongings confiscated. PET further avers that RESP refuses to return the security deposit, personal belongings and equipment after repeated demands. RESP reiterated that PET violated their contract and is also liable for utilities and confiscation was in exercise of its retaining lien as PET failed to settle obligations. ISSUE: Whether PET is entitled to retrieve her security deposit HELD: Yes. Only half of the security deposit. Art. 1229 provides that 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. The forfeiture of the security deposit is excessive for breaches were not of a degree that respondent was prejudiced. RESP should reimburse half the amount. Lessees improved the leased spaces and no misrepresentation from the lessor was committed in inducing the lesse from doing such. Hence, reimbursement may be received by PET, but only half the amount.