Sec.
6 – OBLIGATIONS WITH A PENAL CLAUSE and sometimes jointly with
(Arts. 1226 to 1230)
Concept:
(Art. 1226)
Principal Obligation vs. Accessory Obligation:
Principal Obligation Accessory Obligation
The obligation can stand by The obligation is attached to
itself and does not depend a principal obligation and
for its validity and existence cannot stand alone.
upon another obligation.
What is an obligation with a penal clause?
- The obligation contains an accessory undertaking to
pay a previously stipulated indemnity in case of
breach of breach of the principal object or prestation
intended primarily to induce its fulfillment.
What is a “Penal Clause”?
- It is an accessory undertaking attached to an
obligation to assume greater liability on the part of
the debtor in case of breach of the obligation.
Purpose of a penal clause:
1. To insure the performance of the parties by creating
an effective determent against breach, making the
consequences of such breach as onerous as it may
be possible;
2. To substitute a penalty for the indemnity for
damages and the payment of interests in case of
non-compliance; [Reparation] or
3. To punish the debtor for the non-fulfillment or
violation of his obligation. [Punishment]
Function of a penal clause:
1. It strengthen the coercive force of the obligation by the
threat of greater liability in the event of breach and;
2. To provide (in effect) for what would be the liquidated
damages resulting from such a breach.
The debtor would then be bound to pay the stipulated
indemnity without the necessity of proof on the existence
and on the measure of damages caused by the breach.
Whether the purpose of the penal clause is punishment or
reparation, the mere non-performance of the principal
obligation gives rise to the right to the penalty.
The penalty clause constitutes an exception to the
general rules on the recovery of losses and damages.
Penal Clause vs. Condition
Penal Clause Condition
It is an obligation, although It is not an obligation
accessory
This may become This is never demandable.
demandable in default of
the unperformed obligation
it
Penalty generally resolves the question of damages:
 When the purpose of the penal clause is reparation or
compensation  the matter of damages is generally
resolved and the creditor is not obliged to prove them.
o The penalty being considered an anticipated
valuation of the damages which may be suffered
by the creditor if the obligation is not complied
with.
 When the purpose of the penalty clause is punishment
 The penalty does not resolve the question of
damages.
o Damages may become recovered in
addition to the penalty.
General Rule under Art. 1226: The penalty serves as means of
repairing the damages which is presupposes.
- A breach of contract entitles the other party to damages
even if no penalty in such breach is prescribed in the
contract.
Obligations with a penal clause strictly construed:
 Obligations imposing penalties and forfeitures are
strictly construed.
 Sureties are only chargeable according to the strict
terms of the bond.
Obligation with a penal clause vs. Conditional Obligation
Obligation with a penal Conditional Obligation
clause
There is already an existing There is no obligation before
obligation (which is the the suspensive condition
principal obligation) from the happens; it is the fulfillment
very beginning. of the condition that gives
rise to the obligation.
It is the accessory obligation The principal obligation itself
(penal clause or penalty) is dependent upon an
which is dependent upon the uncertain event
non-performance of the
principal obligation.
Obligation with a penal clause vs. Alternative Obligation:
Obligation with a penal Alternative Obligation
clause
There is only one prestation 2 or more obligations are due
and it is only when this is not but the fulfillment of one of
performed (the principal them is sufficient.
obligation) that the penal
clause is enforceable.
The impossibility of the The impossibility of one of
principal obligation the obligation (without the
extinguishes also the penalty fault of the debtor) still
or penal clause. leaves the other subsisting.
The debtor cannot choose to The debtor can choose which
pay the penalty to relieve prestation to fulfill.
himself of the principal
1
obligation unless the right is Subsidiary or When only the penalty can be
As to
expressly granted to him. alternative enforced
dependa
Example: When both the principal
bility or Joint or
X binds himself either to deliver a horse or to pay obligation and the penal
effect Cumulative
Php500.00 to Y  this is an alternative obligation. clause can be enforced.
However, if X binds himself to deliver a horse to Y, and in
case he fails he will pay Php500.00  the obligation is one Liability for penalty, damages, and/or interests:
with a penal clause. 1. When the Penalty substitutes for damages and
interests:
Obligation with a Penal Clause vs. Facultative Obligation - Generally, in an obligation with a penal clause, the
Obligation with a penal Facultative Obligation penalty takes the place of the indemnity for
clause damages and the payment of interest in case of
The payment of the penalty The power of the debtor to non-compliance.
in lieu of the principal make the substitution is - Proof of actual damages suffered by the creditor is
obligation can be made only absolute not necessary in order that the penalty may be
by express stipulation. enforced.
The creditor may demand The creditor can never 2. When the Penalty and interest are enforceable:
both prestations. demand both prestations - The law permits an agreement upon a penalty apart
from the interest.
Obligation with a penal clause vs. Guaranty o Should there be such an agreement, the
Obligation with a Guaranty penalty does not include the interest and as
penal clause such, the two are different and distinct things
Similarities Both are intended to insure performance of which may be demanded separately.
the principal obligation. - A stipulation about payment of additional rate of
Both are accessory and subsidiary interest partakes of the nature of a penalty clause
obligations which is sanctioned by law.
If the penal clause is assumed by a third - A penalty to answer not only for attorney’s fees but
person, the same principle will apply in the for collection fees as well, is in the nature of
case of guaranty liquidated damages.
Differences The obligation to The object of the o Where the attorney’s fees s provided are
pay the penalty is obligations if the awarded in counsel, who is judgment creditor
different from the principal debtor and entitled to enforce the judgment by
principal obligation the guarantor is the execution.
same. 3. When the penalty, damages and interests are
enforceable: - [Three cases when damages and interest
The principal The principal debtor
may be recovered in addition to the penalty]:
obligation and the cannot be a
penalty can be guarantor of the a. When so stipulated by the parties;
b. When the debtor refuses to pay the penalty; or
assumed by the same obligation.
c. When the debtor is guilty of fraud in the
same person
fulfillment of the obligation.
The penalty clause is The guaranty
Note: When both the penalty and the damages or interests
extinguished by the subsists even when may be recovered  it is evident that the purpose of the
nullity of the the principal penal clause is the punishment of the debtor for his breach of
principal obligation, obligation is voidable the principal obligation.
except when the or unenforceable or
penal clause is is a natural one
assumed by a third Example:
person. S promised to deliver a specific car to B. The contract carried
a penal clause that in case of non-compliance, S would have to
Kinds of penal clause:
pay a penalty of 20k. S did not deliver the car and, as a
Legal When it is provided for by law consequence, B suffered damage in the amount of 15k.
As to
When it is provided for by the  In this case, the penalty of 20k shall be paid. B cannot
origin Conventional
stipulation of the parties recover more than 20k (the penalty stipulated) even if he
When the penalty takes the proves that the damages suffered by him is 25k.
Compensatory  The penalty substitutes the indemnity for the damage of 15k
place of damages
As to unless there is a stipulation to the contrary in which case, B
When the penalty is imposed
purpose may also recover the damages proved by him.
Punitive merely as a punishment for
 If S refuses to pay the penalty  B may recover legal
breach. interest thereon (the interest representing new damages

2
 brought about by the non-payment of the penalty). in case of delay  it partakes of the nature of a penalty
 If S is guilty of fraud (not mere fault) in the fulfillment of his clause.
obligation  he is also liable for the damages caused  The attorney’s fees provided in the contract are in the
thereby in conformity with Art. 1171. Proof of the fraud and
form of a penal clause and therefore the plaintiff (or
the existence and amount of damages is incumbent upon B.
But B need not prove fraud to recover the penalty.
creditor) can collect them besides the interest
adjudicated to him.
4. Requirements to make the penalty enforceable:
Enforcement of Penalty:
 The penalty may be enforced only when it is
 It can be demanded by the creditor only when the non-
demandable in accordance with the provisions of the
performance is due to the fault or fraud of the debtor.
Civil Code.
 The non-performance gives rise to the presumption of
 Interpretation: The penalty (as stipulated in the
fault  in order to avoid the payment of the penalty, the
contract) is demandable only if there is a breach of the
debtor has the burden of proving whether such failure of
obligation and it is not contrary to law, morals, good
the performance was due to a fortuitous event or acts of
customs, public order, or public policy.
the creditor thereof.
 If the obligation cannot be fulfilled due to a fortuitous
event  the penalty is not demandable.
When there are several debtors in an obligation with a
o Under Art. 1229, the penalty may be reduced if it
penal clause:
is iniquitous or unreasonable or incase there is a
- The divisibility of the principal obligation among the
partial or irregular fulfillment.
debtors does not necessary carry with it the divisibility of
the penal clause among them.
Additional Notes: [Tolentino Book]
- The principal obligation may be joint and the penal clause
Liquidated Damages:
may be either joint or solidary, depending upon the
- There is no difference between a penalty and liquidated
agreement of the parties.
damages so far as legal results are concerned.
o If the penal clause is joint  each debtor responds
o Whatever difference exists between them as a
only for his own failure to perform, and in proportion
matter of language, they are treated the same
to his share in the penalty.
legally.
o If the penal clause is solidary  the penalty may be
- The party to whom payment is to be made is entitled to
enforced against any debtor for the non-
recover the sum stipulated without the necessity of
performance of another debtor.
proving damages.
- If the principal obligation is solidary  the penalty
- One of the primary purposes in fixing a penalty or in
clause must be enforced in its entirety since the penalty is
liquidating damages  is to avoid such necessity.
just a substitute for losses and damages suffered by the
o A bond (penal in nature) may be forfeited for its full
creditor.
amount, although the amount involved in
connection with its violation is considerably much
less.
- The creditor cannot recover more than the penalty
stipulated, even if he proves that the damages suffered
by him exceed in amount such penalty.
o A party to a building contract who is given the
benefit of liquidated damages for breach of
contract on the part of the other party cannot be
awarded additional damages at large for the same
breach.

Express stipulation:
 If the contract expressly stipulates that the obligation shall
bear interest a a given rate from its date until paid, and in
addition there is an agreement for the payment of a
penalty of a certain amount in case of failure to pay the
obligation  Both the penalty and the interest can be
collected in case of breach.
o The penalty in such case does not substitute the
payment of interest after maturity  because
there is an express agreement that both shall be
paid.
 The stipulation of payment of additional rate of interest
3
 Rights of Debtor/Creditor in an Obligation with a Penal
Clause
(Art. 1227)
Right of Debtor in an Obligation with a Penal Clause:
 Gen. Rule: The debtor cannot avoid performance of the
principal obligation by offering to pay the penalty.
o The penalty (the object of which is to secure
compliance with the obligation) cannot serve as a
defense for the purpose of leaving the principal
obligation unfulfilled.
 Exception: this said right to substitute the penalty for
the principal obligation may be expressly granted to the
debtor.
Right of Creditor in an Obligation with a Penal Clause:
 Gen. Rule: the creditor cannot demand the
performance of the principal obligation and the penalty
at the same time.
o Where the contract gives the creditor the choice
of enforcing the principal obligation on availing
himself of the forfeiture the penalty  the
creditor cannot have both.
o A building contract where the contractor was
negligent in the construction  it was held that
the owner could not claim the stipulated penalty
and at the same time confiscate or retain the
balance of the contract price not yet paid to the
contractor.
 The court set off the stipulated damages to
which the owner was entitled against the
portion of the contract price retained by
him.
 Exceptions:
1. The creditor may enforce both the principal
obligation and the penalty when the right is clearly
granted to him.
o In obligations for the payment of a sum of
money, when a penalty is stipulated for default
 both the principal obligation and the penalty
can be demanded by the creditor.
o It should be noted that to permit the debtor to
pay the penalty as a substitute for the
performance  the right must be expressly
given to him.
o In order to allow the creditor to demand both the
fulfillment of the obligation and the payment of
the penalty  it is not necessary to be expressly
given but it is sufficient that has been CLEARLY
GRANTED to him.
 Admitting an implied grant and
authorizing inferences and
presumptions, provided they are based
on evidence.
2. Where the creditor has demanded fulfillment of
the principal obligation but it cannot be performed,
in this case, he may demand the penalty.
“Performance thereof should become impossible without
his (creditor’s) fault” clause:
- This refers to impossibility due to fortuitous events,
in which case the principal obligation would be
extinguished as well as the penal clause.
Penalty demandable without
proof of actual damages
(Art. 1228)
Penalty demandable without proof of actual damages:
 In an obligation with a penal clause all that the creditor
has to prove (in order to enforce the penalty) is the
violation of the obligation by the debtor.
 It is not necessary to adduce evidence to prove losses
and damages suffered by the creditor or the extent of
the same.
 The creditor may enforce the penalty whether he
suffered damages or not. But he cannot recover more
than the stipulated penalty even if he proves that the
amount of his damages exceeds the penalty.
Damages recoverable in addition to penalty must be
proved:
 Art. 1228 applies only where the penalty is fixed by the
parties to substitute the indemnity for damages.
When the penalty may be reduced by the courts
(Art. 1229)
Partial Performance  refers to the extent or quantity or
fulfillment.
Irregular Performance  refers to the form.
Rule on Partial or Irregular Performance:
- Where there has been partial or irregular compliance with
the provisions of a contract with a penal clause  the
courts will rigidly apply the doctrine of strict construction
against the enforcement in its entirety of the penalty
(where it is clear from the terms of the contract that the
indemnity has been fixed without regard to the probable
damages which might be anticipated from the breach of
the contract;
- Where the principal purpose of the penalty appears to
have been to provide for the payment of anticipated
actual and liquidated damages rather than punishment
for a breach of contract.
- However, the power of the judge to reduce the penalty 
refers only to penalties prescribed in contracts.it does not
cover the collection of the surcharge on taxes that are due
which is mandatory on the collector.
Rule on Iniquitous or Unconscionable Penalty:
 A penalty may become iniquitous by a supervening
change of circumstances, which makes the amount
4
 grossly disproportionate to the damage suffered by the
creditor.
 In these cases, the court may reduce the amount of the
penalty.
 The amount of the penalty is not determined by the
injury suffered by the creditor but what has been agreed
upon by the parties who are free to determine such
amounts.

Interest of the Creditor:

 The interest of the creditor is not limited to the manifest
patrimonial injury that he suffers but includes interests
which are intangible and not subject to concrete proof,
such as the sentimental value which he attaches to the
performance of the obligation.

No Damage Suffered by the creditor:

 The court is not authorized to reduced or rescind (under
this article) the penalty if the plaintiff or creditor suffers
no damage.

Attorney’s Fees:
 While the parties may agree to the penalty that the
debtor must pay in case of non-fulfillment of the
obligation and if this includes attorney’s fees and costs
 the court has jurisdiction to determine the
reasonableness of the sum stipulated, and to reduce the
same if excessive.

Effect of nullity of principal obligation and penal clause

(Art. 1230)

Nullity of the Principal Obligation:

 Gen. Rule: the nullity of the principal obligation also
nullifies the penal clause because the latter is only an
accessory to the principal obligation.
 Exceptions:
1. when the penalty is undertaken by a third person
precisely for an obligation which is unenforceable,
voidable, or natural, in which case it assumes the
form of a guaranty which is valid under Art. 2051,
CC.
2. when the nullity of the principal obligation itself
gives rise to liability of the debtor for damages, such
as when the vendor knew that the thing was
inexistent at the time of the contract.

Nullity of the Penal Clause:

- When the penal clause is void and the principal
obligation is valid  the principal obligation shall be
enforced and exists because the penal clause is only
an accessory obligation.
- The accessory does not carry the principal
obligation.

5
 Chapter 4
EXTINGUISHMENT OF OBLIGATIONS
(Arts. 1231 to 1304)
GENERAL PROVISIONS
(Art. 1231)
How are obligations extinguished? (under Art. 1231):
1. By payment or performance;
2. By the loss of the thing due;
3. By the condonation or remission of the debt;
4. By the confusion or merger of the rights of creditor
and debtor;
5. By compensation;
6. Novation
7. Other causes (annulment, rescission, fulfillment of a
resolutory condition, and prescription)
Additional causes of extinguishment of obligations:
a. Death of a party in case the obligation is a personal
one (Art. 1311, par. 1)
b. Mutual desistance or withdrawal;
 It is a concept that derives from the principle that
since mutual agreement can create a contract 
mutual disagreement by the parties can cause its
extinguishment.
 Where after the approval of his loan, the
borrower (instead of insisting for its release)
asked that the mortgage given by him as a
security be cancelled and the creditor (DBP)
acceded thereto  the action thus taken by both
parties is held as in the nature of mutual
desistance.
c. Arrival of resolutory period (Art. 1193, par. 2)
d. Compromise (Art. 2028, CC)
e. Impossibility of fulfillment (Art. 1266); and
f. Happening of a fortuitous event (Art. 1174)
Section 1. PAYMENT OR PERFORMANCE
(Art. 1232 to 1261)
Concept
(Art. 1232)
Meaning of Payment:
- Refers not only the delivery of money but also the
performance, in any other manner, of an obligation.
Elements of payment:
1. Persons, who may pay and to whom payment may be
made;
2. Thing or object in which payment must consist
3. The cause thereof;
4. The mode or form thereof;
5. The place and the time in which it must be made;
6. The imputation of expenses occasioned by it; and
7. The special parts which may be modify the same and
the effects they generally produce.
Burden of proving payment:
 Generally, the debtor has the burden of proving the
extinguishment of payment.
 Only when the debtor introduces evidence that the
obligation has been extinguished does the burden shift
to the creditor.
 A receipt of payment is deemed to be the best evidence
of payment.
o A receipt is a written and signed acknowledgment
that money has or goods have been delivered.
o A voucher is an acceptable documentary record of
business transaction, however it is not an evidence
of payment.
When a debt is considered paid
(Art. 1233)
What is a debt?
- It is an obligation to delivery money, to deliver a
thing (other than money), to do an act, or not to do
an act.
Requirement of when a debt is considered paid:
a. Integrity of the prestation
b. Identity of the prestation.
“Integrity of the prestation”:
 This means that the prestation or object must be fulfilled
completely.
 A debt to deliver a thing or to render service is not paid
unless the thing or service has been completely delivered
or rendered.
 Partial or irregular performance will not produce the
extinguishment of an obligation, neither a late partial
payment forestall a long-expired maturity date.
“Identity of the prestation”:
 It means that the very prestation or object that is due
must be delivered or performed.
When recovery is allowed in case of Substantial
performance in Good Faith:
(Art. 1234)
Notes:
 Art. 1234 is the first exception to the rule in Art. 1233.
 Rationale for this:
o In case of substantial performance, the creditor is
benefited. Therefore, the debtor should be allowed
to recover as if there has been a strict and complete
fulfillment less damages suffered by the creditor.
(report from Code Comission)
Requisites for the Application of Art. 1234:
6
 1. There must be substantial performance
- it depends upon the circumstnaces of each
particular case.
- There is substantial performance or compliance
when there is “compliance with the essential
requirements, whether of a contract or statute”
- If the breach is of inconsequential in nature that
causes no serious harm to the creditor  the
law deems the performance as substantial,
making it the creditor’s duty to pay.
- If there exist a material breach or contract 
there is no substantial performance.
2. The debtor must be in good faith.
Recovery allowed when there is an incomplete or irregular
performance waived:
(Art. 1235)
Notes:
 Art. 1235 is another exception to Art. 1233.
 It is founded on the principle of estoppel
 In case of acceptance, the law considers that the creditor
waives his right.  The whole obligation is extinguished.
 If the payment is incomplete or irregular  the creditor
may properly reject it.
Requisites for the application of Art. 1235:
1. The creditor knows that the performance is
incomplete or irregular; and
2. The creditor accepts the performance without
expressing any protest or objection.
Meaning of the word “Accept” as used in Art. 1235:
 It means “satisfactory or sufficient”, or to “give assent
to” or to “agree” or “accede” to an incomplete or
irregular performance.
 The mere receipt of partial payment is not equivalent to
acceptance of performance within the purview of Art.
1235 sd would extinguished the whole obligation.
 When a creditor receives partial payment  he is not
ipso facto deemed to have abandoned his prior demand
for full payment.
o To imply that a creditor accepts partial payment as
complete performance  his acceptance must be
made under circumstances that indicate that his
intention to consider the performance complete
and to renounce his claim arising from the defect.
o However if the debtor continues to pay and the
creditor kept on receiving the original rent fee
without any protest or reservation from the latter
 this is partial performance and the creditor is
estopped under Art. 1235 from seeking recovery of
the amount claimed.
Form of protest of creditor.
- Under Art. 1235  There is no particular form,
manner or time the protest or the objection of the
creditor shall be made.
- The general rule is that  So long as the acts of the
creditor, at the time of the incomplete or irregular
payment by the debtor, or within a reasonable time
thereafter, revealed that the creditor is not satisfied
or agreeable to said payment or performance  the
obligation shall not be deemed extinguished .
Payment or performance by a Third Person
(Art. 1236
Persons from whom the creditor must accept payment:
1. The debtor;
2. Any person who has an interest in the obligation
(guarantor or surety); or
3. A third person  only if he has no interest in the
obligation and there is a stipulation that he can
make payment.
Creditor may refuse to accept payment from a third
person:
 Creditor have the right to insist on the liability of the
debtor.
 Creditor should not be compelled to accept payment
from a third person whom he may dislike or distrust.
 Creditor may not (for personal reason) desire to have any
business dealings with a third person; or
 The creditor may not have confidence in the honesty of
the third person who might deliver a defective thing or
pay with a check which may not be honored.
Effects of payment by a third person:
1. If the payment by a third person is made without
the knowledge or against the will of the debtor:
- The payer can recover from the debtor only in so
far as the payment has been beneficial to the
debtor.
- The recovery is only up to the extent or amount
of the debt at the time of payment.
- The third person is not subrogated to the rights f
the creditor (such as those arising from a
mortgage, guarantee, or penalty)
2. If the payment by a third person is made with the
knowledge of the debtor:
- The payer shall have the rights of reimbursement
and subrogation, that is, to recover what he has
paid (not necessarily the amount of the debt)
and to acquire all the rights of the creditor.
Payment with/without the knowledge or against the will
of the debtor:
1. Payment is without the knowledge of the debtor:
- The provision that the payor “can recover only
insofar as the payment has been beneficial to
7
 the debtor” when made without the
knowledge of the debtor  this is a defense
availed by the debtor only.
- Once the creditor has accepted the payment
by a third person without the knowledge of the
debtor  his status and rights become
automatically extinguished
2. Payment is with the knowledge of the debtor:
- The debtor must oppose the payment before
or at the time the payment by the third person
is made  in order that the rights of the payor
may be subject to the above provision.