What is a penal clause?

It is an accessory obligation attached to the principal obligation to assure greater responsibility in case of breach.

Note: Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. (Art. 1228, NCC)

What is the effect of incorporating a penal clause in an obligation?

General Rule:

The penalty fixed by the parties is a compensation or substitute for damages in case of breach.

Exceptions:

Damages shall still be paid even if there is a penal clause if:

1. there is a stipulation to the contrary

2. the debtor refuses to pay the agreed penalty

3. the debtor is guilty of fraud in the fulfillment of the obligation. (Art. 1126, NCC)

Note: The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the principal obligation carries with it that of the penal clause. (Art. 1230, NCC)

When may penalty be reduced by the courts?

1. Partial performance of the obligation;

2. Irregular performance of the obligation; or

3. Penalty is Unconscionable even if there has been no performance.