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Makati Development Corp. v. Empire Insurance June 30, 1967 Castro, J.

Facts: Makati Development Corporation (MDC) sold to Andal a lot in the Urdaneta Village, Makati, Rizal. The Deed of Sale included a special condition provided that: o the vendee (Andal) shall commence the construction of at least 50% of his/her/their/its residence on the property within two (2) years from March 31, 1959 (the date of the sale) to the satisfaction of the VENDOR (MDC); o and in the event of failure to do so, the P11,123-bond delivered by the Andal to the MDC will be forfeited in favor of the MDC by the mere fact of failure of Andal to comply with the special obligation. Andal gave a surety bond, backed by the Empire Insurance Company (Empire,) to pay P12,000 in case Andal failed to comply with his obligation under the deed of sale. Andal did not build his house, instead, he sold the lot to Carlos. Neither of them built a house on the lot within the stipulated period. Three days after the lapse of the 2-year period, the MDC sent a notice of claim to Empire due to Andals failure to comply with his undertaking. Empire refused to pay, whereupon MDC instituted a complaint against the same at the CFI. CFI rendered judgment sentencing Empire to pay the MDC (P1500 @ 12% interest, from the time the complaint was filed until the amount was fully paid, as well as P500 in attorneys fees.) Also, it was directed that should Empire pay, Andal should in turn pay Empire in the same manner. In effect, the CFI reduced Andals liability for breaching the undertaking, from P12,000 as stipulated in the bond, to P1,500. MDC appealed directly to the SC. Issue(s): Whether Andal was liable for the full amount of the bond upon his failure to build a house within the two-year period. Decision: AFFIRMED. Ratio Decidendi: Whether Andal was liable for the full amount of the bond upon his failure to build a house within the twoyear period:
Appellant MDC: YES. The CFI had no authority to reduce Andals liability on the basis of Carlos building of a house as there was no privity of contract between MDC and Caros. CFI: NO. Even before March 31, 1961 (when the 2 year period was to lapse), the entire area was fenced with a stone wall, and building materials were also stocked. These indicated the owners desire to construct. There was only a little delay. 1) SC: NO. The special condition is in reality an obligation to build a house at least 50% of which must be finished within two years. It was to secure the performance of the obligation that a penal clause was inserted. Generally, in obligations with a penal sanction, the penalty takes the place of damages and the payment of interest in case of non-compliance, and the oblige is entitled to recover upon breach without proving damages. However, there are instances in which a mitigation of the obligors liability is allowed. CC 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 is no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. Here, the CFI found that more than 50% of the house was done by April 1961, barely a month after the lapse of March 31. This constitutes partial performance, within the meaning of CC 1229. General Ins. & Surety Corp. v. Republic does not apply because in that case, there was no performance at all. Where there is partial compliance with the provisions of a contract for special indemnification in the event of breach, courts will apply strict construction against the enforcement of such, where it is clear from the contract that the indemnity is fixed without regard to probable damages which might be anticipated as a result of breach. The penal clause was not inserted to indemnify MDC for any

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damages it might suffer. Rather, it is to compel performance of the special condition to encourage home-building. Considering that a house had been built shortly after the stipulated period, in view of the penal clauses purpose, the CFI was justified in reducing the penalty. That it was Carlos, having no contractual relation with MDC, who is building is of no importance to the case at bar. There is nothing in the deed of sale restricting Andals right to sell the lot. If it were intended, it should have been explicitly stated in the contract.