PENAL CLAUSE
77197 and 92744 to the intervenor, and that as the latter did not sign
1. Bachrach v Espiritu
Facts:
1. This is a consolidated case(Cases no. 28497 and 28948)
involving two separate sale transactions. One made in Feb. 18, 1925
(case 28498), when the defendant earlier bought a truck on instalment
from the petitioner and said truck was mortgaged together with the
two others (no. 77197 & 92744 in the the subsequent sale transaction
dated July 28, 1925. The said two of the other trucks were also
purchased (but already paid previously) from the plaintiff. The
defendant failed to pay the balance. In July 1925, defendant again
purchased another truck from Bachrach. The said truck, together with
the 3 other vehicles were mortgaged to the plaintiff to secure the
remaining balance. The defendant failed to pay the balance for the
latest truck obtained.
2. It was agreed in both sales that 12% interest will be paid on the
unpaid price, and in case of the non-payment of the total debt at
maturity, 25% shall be the penalty. The defendant also signed a
promissory note solidarily with his brother Rosario (acting as
intervenor), the sums secured by the mortgages. Rosario is alleged to
be the owner of the two white trucks no. 77197 & 92744 mortgaged.
3. While these two cases were pending in the lower court the
mortgaged trucks were sold by virtue of the mortgage, all of them
together bringing in, after deducting the sheriff's fees and
transportation charges to Manila, the net sum of P3,269.58.
4. The lower court ordered the defendants and the intervenor to
pay plaintiff in case 28497 the sum of P7,732.09 with interest at the
rate of 12 per cent per annum from May 1, 1926 until fully paid, and
25 per cent thereof in addition as penalty. In case 28498, the trial
court ordered the defendant and the intervenor to pay plaintiff the sum
of P4,208.28 with interest at 12 per cent per annum from December 1,
1925 until fully paid, and 25 per cent thereon as penalty.
5. The appellants contend that trucks 77197 and 92744 were not
mortgaged, because, when the defendant signed the mortgage deeds
these trucks were not included in those documents, and were only put
in later, without defendant's knowledge. Appellants also alleged that
on February 4, 1925, the defendant sold his rights in said trucks Nos.
the mortgage deeds, such trucks cannot be considered as mortgaged.
6. But there is positive proof that they were included at the time
the defendant signed these documents. Besides, there were
presented two of defendant's letters to Hidalgo, an employee of the
plaintiff's written a few days before the transaction, acquiescing in the
inclusion of all his White trucks already paid for, in the mortgage
(Exhibit H-I).
Issue: W/N the 25% penalty upon the debt in addition to the 25% p.a.
is usurious
Ruling: No, Article 1152 of the Civil Code permits the agreement upon
a penalty apart from the interest. Should there be such an agreement,
the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil.,
631), does not include the interest, and which may be demanded
separately. The penalty is not to be added to the interest for the
determination of whether the interest exceeds the rate fixed by the
law, since said rate was fixed only for the interest. But considering
that the obligation was partly performed, and making use of the power
given to the court by article 1154 of the Civil Code, this penalty is
reduced to 10 per cent of the unpaid debt. The penalty is however
reduced from 25 % upon the sum owed, the defendants need pay
only 10 % thereon as penalty. (Judgment appealed from is affirmed in
all other respects).
2. Robes-Francisco v CFI
FACTS:
This is an appeal from the decision of the CFI of Rizal
rendering judgment against Robes-Francisco Corporation to register
the deed of absolute sale in favor of Millan with the Register of Deeds
of Caloocan City and secure the corresponding title within ten days
and if not possible said Corporation shall pay Millan the total amount
she paid P5,193.63 with interest at 4% per annum from June 22, 1972
until fully paid. In either case Robes Corporation is sentenced to pay
Millan nominal damages of P20,000.00 plus P5,000.00 attorney’s
fees.

Petitioner Corporation questions the award of P20,000.00
nominal damages and P5,000.00 attorney’s fees alleging such to be
excessive and unjustified.
In May 1962, Robes Corporation entered into a contract of
sale with Millan for a parcel of land in the amount of 3,864.00 payable
in installments. Millan complied with her obligation and made her final
payment on December 22, 1971 for a total payment of P5,193.63
including interests and expenses for registration of title. On March 2,
1973 the deed of absolute sale was executed but the transfer
certificate of title could not be executed because the parcel of land
conveyed to Millan was included among other properties of the
corporation mortgaged to GSIS to secure an obligation of P10 million,
hence, the owner’s duplicate certificate of title of the subdivision was
in the possession of the GSIS.
ISSUE:
Is the 4% interest provision of the contract a penal clause?
RULING:
No. Said clause does not convey any penalty, for even
without it, pursuant to Article 2209 of the Civil Code, the vendee would
be entitled to recover the amount paid by her with legal rate of interest
which is even more than the 4% provided for in the clause.
A penal clause is an accessory undertaking to assume greater
liability in case of breach. From this alone, the 4% provision does not
come to be penal in character, hence, Robes Corporation’s contention
that the penalty shall substitute the indemnity for damages and the
payment of interest in case of non-compliance does not hold water.
Unfortunately, Millan failed to show the actual damages she
suffered as a result of the nonperformance. Nonetheless, the facts
show that the right of the vendee was violated and this entitles her at
the very least to nominal damages.
“In the situation before Us, We are of the view that the amount
of P20,000.00 is excessive.” Bad faith can not be
presumed. Petitioner Corporation expected that arrangements were
possible for the GSIS to make partial releases of the subdivision lots
from the overall real estate mortgage. It was only unfortunate for it
not to succeed in that regard. Hence, the sum of ten thousand pesos
by way of nominal damages is fair and just.
3. Pamintuan v CA
FACTS:
Mariano Pamintuan was in an agreement with Yu Ping Kun
Co., Inc. to sell plastic sheetings imported by the former from Japan
through a barter license he had for the export of white flint corn to
Toyo Menka Kaisha, Ltd. While the plastic sheetings were arriving in
Manila, Pamintuan informed the President of Yu Ping Kun that he was
in dire need of cash and requested that he be paid immediately for the
plastic sheetings. Consequently, the two parties fixed a price to the
plastic sheetings regardless of the kind, quality or actual invoice value
thereof and based it on dividing the total price of the shipment with its
aggregate quantity. After the shipments arrived in Manila (4 shipments
in total), Pamintuan only delivered a portion or 224, 150 yards of the
expected 339, 440 yards of plastic sheetings he received to Yu Ping
Kun's warehouse. Furthermore, he delivered plastic sheetings of
inferior quality that were valued at a lesser price than what Yu Ping
Kun had paid. Subsequently, Yu Ping Kun filed an action to enforce a
provision in their contract of sale which states that any violation of the
stipulations of that contract would entitle the aggrieved party to
liquidated damages in the amount of 10, 000 Php from the offending
party.
ISSUE:
Whether or not compensatory damages may be awarded for
breach of a contract of sale in addition to liquidated
damages/stipulated penalty in the said contract.
HELD:
Yes, compensatory damages may be awarded for breach of a
contract of sale in addition to liquidated damages/stipulated penalty in
the said contract. Paragraph 1 of Article 1226 of the New Civil Code
states that:
“In obligations with a penal
clause, the 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.”
Thus, as a general rule, the penalty takes the place of the
indemnity for damages and the payment of interest. However
there are exceptions to this rule under the Civil Code, and one of
them is; when the obligor is guilty of fraud in the fulfillment of
the obligation, indemnity for damages may be awarded in
addition to and apart from the penalty stipulated.
The factual findings of the lower courts that Pamintuan
was guilty of fraud because he did not make a complete delivery
of the plastic sheetings and he overpriced the same is
conclusive upon the Supreme Court. Hence, based on this fact,
Pamintuan should pay damages. However, in case of fraud the
creditor (in this case Yu Ping Kun), in addition to and apart from
the stipulated penalty, may only recover the difference between
the actual proven damages and the stipulated penalty.
4. Country Bankers v CA
Nature Petition for certiorari to review the decision of the Court of
Appeals.
FACTS
- The CA affirmed the RTC’s decision, to wit:
 “WHEREFORE, THE
COMPLAINT OF THE PLAINTIFF Enrique F. Sy is dismissed,
and on the counterclaim of the defendant O. Ventanilla Enterprises
Corporation, judgment is hereby rendered:
‘1. Declaring as lawful, the cancellation and termination of the Lease
Agreement (Exh. A) and the defendant’s re-entry and repossession of
the Avenue, Broadway and Capitol theaters under lease on February
11, 1980;
‘2. Declaring as lawful, the forfeiture clause under paragraph 12 of the
said Lease Agreement, and confirming the forfeiture of the plaintiff’s
remaining cash deposit of P290,000.00 in favor of the defendant
thereunder, as of February 11, 1980;
‘3. Ordering the plaintiff to pay the defendant the sum of P289,534.78,
representing arrears in rentals, unremitted amounts for amusement
tax delinquency and accrued interest thereon, with further interest on
said amounts at the rate of 12% per annum (per lease agreement)
from December 1, 1980 until the same is fully paid;
‘4. Ordering the plaintiff to pay the defendant the amount of
P100,000.00, representing the P10,000 portion of the monthly lease
rental which were not deducted from the cash deposit of the plaintiff
from February to November, 1980, with interest thereon at the rate of
12% per annum on each of the said monthly amounts of P10,000.00
from the time the same became due until it is paid;
‘5. Ordering the plaintiff to pay the defendant through the injunction
bond, the sum of P100,000.00, representing the P10,000.00 monthly
increase in rentals which the defendant failed to realize from February
to November 1980 resulting from the injunction, with legal interest
thereon from the finality of this decision until fully paid;
‘6. Ordering the plaintiff to pay the defendant the sum equivalent to
ten per centum (10%) of the above-mentioned amounts of
P289,534.78, P100,000.00 and P100,000.00, as and for attorney’s
fees; and
‘7. Ordering the plaintiff to pay the costs.’”
 -Respondent Oscar
Ventanilla Enterprises Corporation (OVEC), as lessor, and the
petitioner 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. The term of the lease was
for six years from June 13, 1977 to June 12, 1983. After more than
two years of operation of the theaters, the lessor OVEC
made demands for the repossession of the said leased properties in
view of 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, he was
allowed to continue operating the leased premises upon his
conformity to certain conditions imposed by the latter in a
supplemental agreement dated August 13, 1979.
- In pursuance to their latter agreement, Sy reduced his arrears in
rental. However, the accrued amusement liability tax had accumulated
to 84,000.00 despite the fact that Sy had been deducting amounts
from his monthly rental with the obligation to remit said deductions to
the city government. 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 the warning that OVEC will repossess the theaters on
February 11, 1980 in pursuance with their lease contract and their
supplemental letter-agreement. But notwithstanding the said demands
and warnings Sy failed to pay the above- mentioned amounts in full.
Consequently, OVEC took possession thereof in the morning of
February 11, 1990.
- Sy filed the present action for reformation of the lease agreement,
damages and injunction. And by virtue of a restraining order dated
February 12, 1980 followed by an order to issue a writ of preliminary
injunction, Sy regained possession of the theaters.
Petitioners' Claim
- Sy alleged that the amount of deposit—P600,00.00 as agreed upon,
P300,000.00 of which was to be paid on June 13, 1977 and the
balance on December 13, 1977— was too big; and OVEC assured
him that said forfeiture will not come to pass.
 - Sy sought to recover
from OVEC the sums of P100,000.00 for repairs in the Broadway
theater; P48,000.00 for electrical cost of OVEC’s “illegal connection”
in the Capitol theater; and P31,000.00 for electrical cost of OVEC’s
“illegal connection” in the Broadway theater and for damages suffered
by SY as a result of each connection.
- It is also alleged that on February 11, 1980, OVEC had the three
theaters padlocked with the use of force, and as aresult, Sy suffered
damages at the rate of P5,000 a day because of his failure to go thru
the contracts with movie and booking companies for the showing of
movies.
- Finally, Sy prayed for the issuance of a restraining order/ preliminary
injunction to enjoin OVEC from entering and taking possession of the
theaters upon Sy’s filing of a P500,000.00 bond supplied by Country
Bankers Insurance Corporation (CBISCO). Respondents'
Counterclaim
- By reason of Sy’s violation of the lease agreement, OVRC became
authorized to enter and possess the theaters as well as to terminate
said agreement so the balance of deposits given by Sy had thus
become forfeited.
 - OVEC would be losing P50,000.00 for every
month that the possession and operation of the theaters remain with
Sy.
- OVEC incurred P500,000.00 for attorney’s fees.
ISSUE
 WON respondent is unjustly enriched at the expense of
petitioners
HELD
NO.
Ratio 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. However, there are exceptions:
1) when there is a stipulation to the contrary
 2) when the obligor is
sued fro refusal to pay the agreed penalty 3) when the obligor is guilty
of fraud
Reasoning The forfeiture clause in the lease agreement would not
unjustly enrich OVEC at expense of Sy and CBISCO—contrary to law,
morals, good customs, public order or policy. A penal clause is an
accessory obligation which the parties attach to a principal obligation
for the purpose of insuring the performance thereof by imposing on
the debtor a special prestation (generally consisting in the payment of
a sum of money) in case the obligation is not fulfilled or is irregularly
or inadequately fulfilled.
In the case at bar, the penalty cannot substitute for the P100,000.00
supposed damage suffered by OVEC from opportunity cost. It
represents the P10,000 per month in additional rental during the ten
months of injunction period. Thus, it must be applied against the
injunction bond.
Disposition ACCORDINGLY, finding no merit in the grounds relied
upon by petitioners in their petition, the same is hereby DENIED and
the decision dated June 15, 1988 and the resolution dated September
21, 1988, both of the respondent Court of Appeals are AFFIRMED
5. Heirs of Manuel Uy v Meer Castillo
FACTS:
Respondents in this case were petitioners in a civil case to annul the
title of PMPCI over respondents’ land. Respondents entered into an
AGREEMENT whereby in exchange for the legal services of Atty.
Zepeda and the financial assistance of MANUEL UY EK LIONG, in
the event of a favorable decision in the civil case, Atty Zepeda and
Manuel would be entitled to 40% of the realties and/or monetary
benefits which may be adjudicated in favor of the respondents.
Respondents, on the same day entered into a Kasunduan, agreeing
to sell the remaining 60% share in the land in favor of Manuel for the
sum of 180k. Manuel would pay a 1K down payment upon execution
of the Kasunduan. They agreed that any party violating the
Kasunduan would pay the aggrieved party a penalty fixed in the sum
of P50K, together with the attorney’s fees and litigation expenses
incurred should a case be subsequently filed in court.
The respondents won in the CIVIL CASE. The land was divided in
accordance with the Agreement but the respondents refused to
comply with the KASUNDUAN, despite Manuel’s offer to pay the
remaining 179K balance, claiming that the same was void ab initio for
being violative violative of Art 1491 of the NCC and the Canons of
Professional Responsibility. Article 1491 prohibits lawyers from
acquiring by purchase or assignment the property /rights involved in
the litigation in which they intervene by virtue of their profession.
Manuel instituted an action for Specific Performance and Damages
against respondents.
ISSUE: w/n the Kasunduan should be given effect
HELD: The Kasunduan is valid. The prohibition applies only during the
pendency of the suit and generally does not cover contracts for
contingent fees where the transfer takes effect only after the finality of
a favorable judgment. The Agreement and the Kasunduan are not
independent contracts, with parties, objects and causes different from
that of the other. Obligations arising from contracts have the force of
law between the contracting parties. When the terms of the contract
are clear and leave no doubt as to the intention of the parties, the
literal meaning of its stipulation should govern.
The Kasunduan contained a penal clause which provides that a party
who violates any of its provisions shall be liable to pay the aggrieved
party a penalty fixed at P50K, together with the attorney’s fees and
litigation expenses incurred by the latter should judicial resolution of
the matter becomes necessary. The obligor would then be bound to
pay the stipulated indemnity without the necessity of proof of the
existence and the measure of damages caused by the breach. The
penalty clause generally substitutes the indemnity for damages
and the payment of interests in case of noncompliance. The rule
is settled that a penal clause is not limited to actual and
compensatory damages.
The RTC’s award of attorney’s fees in the sum of P50,000.00 is,
however, proper. Aside from the fact that the penal clause included a
liability for said award in the event of litigation over a breach of the
Kasunduan, petitioners were able to prove that they incurred said sum
in engaging the services of their lawyer to pursue their rights and
protect their interests.
6. Lo v CA (wala case digest sa net)
ANTONIO LO, petitioner, vs. THE HON. COURT OF APPEALS
AND NATIONAL ONIONS GROWERS COOPERATIVE
MARKETING ASSOCIATION, INC., respondents.
DECISION
CORONA, J.:
Assailed in the instant petition for review on certiorari under Rule
45 of the Rules of Court is the May 26, 1998 decision[1] of the Court of
Appeals modifying the decision of the Regional Trial Court of
Malabon, Branch 74:
WHEREFORE, the assailed decision is hereby AFFIRMED with the
MODIFICATION that the penalty imposed for each day of delay in
surrendering the leased property is reduced fromP5,000.00
to P1,000.00 per day of delay.[2]
 At the core of the present controversy are two parcels of land
measuring a total of 2,147 square meters, with an office building
constructed thereon, located at Bo. Potrero, Malabon, Metro Manila
and covered by TCT Nos. M-13166 and M-13167.
Petitioner acquired the subject parcels of land in an auction sale
on November 9, 1995 for P20,170,000 from the Land Bank of the
Philippines (Land Bank).
Private respondent National Onion Growers Cooperative
Marketing Association, Inc., an agricultural cooperative, was the
occupant of the disputed parcels of land under a subsisting contract of
lease with Land Bank. The lease was valid until December 31, 1995.
Upon the expiration of the lease contract, petitioner demanded
that private respondent vacate the leased premises and surrender its
possession to him. Private respondent refused on the ground that it
was, at the time, contesting petitioners acquisition of the parcels of
land in question in an action for annulment of sale, redemption and
damages.
On February 23, 1996, petitioner filed an action for ejectment
before the Metropolitan Trial Court of Malabon, Branch 55. He
asked, inter alia, for the imposition of the contractually stipulated
penalty of P5,000 per day of delay in surrendering the possession of
the property to him. On September 3, 1996, the trial court decided the
case in favor of petitioner:
WHEREFORE, premises considered, the Court considers the
allegations of the complaint to be true and duly substantiated except
as to the amount of damages and attorneys fees, which are reduced
accordingly, a decision is hereby rendered in favor of the plaintiffs and
against the defendant, ordering the latter and all persons claiming
rights under it:
1) To vacate the leased premises immediately and turn over
the same peacefully to the plaintiffs;
2) To pay plaintiff Antonio Lo the sum of P5,000.00 for every
day of delay from the time defendant is supposed to
have vacated the premises;
3) To pay the sum of P36,000.00 a month from January 1996
until it finally vacates the premises as payment for
reasonable compensation for the use and occupancy
thereof;
4) To pay the sum of P20,000.00 by way of reasonable
attorneys fees; and
5) To pay the costs of suit.[3]
On appeal to the Regional Trial Court of Malabon, Branch 74, the
MTC decision was affirmed in toto on August 29, 1997.[4] Private
respondents subsequent motion for reconsideration of the RTC
decision was denied on November 26, 1997.
From the adverse decision of the trial court, private respondent
elevated the case to the Court of Appeals via a petition for review.
On May 26, 1999, the Court of Appeals rendered its assailed
decision affirming the decision of the trial court, with the modification
that the penalty imposed upon private respondent for the delay in
turning over the leased property to petitioner was reduced
from P 5,000 to P 1000 per day.
Unsatisfied with the decision of the Court of Appeals, petitioner
filed the instant petition for review, raising the sole issue of the alleged
lack of authority of the Court of Appeals to reduce the penalty
awarded by the trial court, the same having been stipulated by the
parties in their Contract of Lease.
The petition has no merit.
Generally, courts are not at liberty to ignore the freedom of the
parties to agree on such terms and conditions as they see fit as long
as they are not contrary to law, morals, good customs, public order or
public policy. Nevertheless, courts may equitably reduce a stipulated
penalty in the contract if it is iniquitous or unconscionable, or if the
principal obligation has been partly or irregularly complied with.[5]
This power of the courts is explicitly sanctioned by Article 1229 of
the Civil Code which provides:
Article 1229. 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 question of whether a penalty is reasonable or iniquitous is

addressed to the sound discretion of the court and depends on
several factors, including, but not limited to, the following: the type,
extent and purpose of the penalty, the nature of the obligation, the
mode of breach and its consequences, the supervening realities, the
standing and relationship of the parties.[6]
In this case, the stipulated penalty was reduced by the appellate
court for being unconscionable and iniquitous. As provided in the
Contract of Lease, private respondent was obligated to pay a monthly
rent of P30,000. On the other hand, the stipulated penalty was
pegged at P5,000 for each day of delay or P150,000 per month, an
amount five times the monthly rent. This penalty was not only
exorbitant but also unconscionable, taking into account that private
respondents delay in surrendering the leased premises was because
of a well-founded belief that its right of preemption to purchase the
subject premises had been violated. Considering further that private
respondent was an agricultural cooperative, collectively owned by
farmers with limited resources, ordering it to pay a penalty
of P150,000 per month on top of the monthly rent of P30,000 would
seriously deplete its income and drive it to bankruptcy. In Rizal
Commercial Banking Corp. vs. Court of Appeals,[7] the Court tempered
the penalty charges after taking into account the debtors pitiful
financial condition.
Accordingly, we rule that the Court of Appeals did not commit any
reversible error in the exercise of its discretion when it reduced the
award of penalty damages fromP5,000 to P1,000 for each day of
delay.
WHEREFORE, petition is hereby DENIED. The decision of the
Court of Appeals reducing the amount of penalty damages against
private respondent is AFFIRMED.
SO ORDERED.