Obligations with a Penal Clause

If there is no stipulation to the contrary, the penalty in obligations that carry a penal clause substitutes the indemnity for damages, as well the payment of interests in case of non-compliance. This penalty is referred to as liquidated damages. To be entitled to the penalty, the creditor is not required to show proof of actual damages.

In addition to the liquidated damages, the debtor is liable for damages if he refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. However, it must be noted that the penalty is enforceable only if the same is demandable.

The debtor cannot avoid the performance of his obligation by simply paying the penalty except if he has been expressly granted this as a matter of contractual right. Conversely, the creditor cannot demand at the same time the fulfillment of the obligation and the satisfaction of the penalty except if he has been clearly granted this right as well. If the creditor chose to require the fulfillment of the obligation and the same becomes impossible without his fault, the penalty may now be enforced against the debtor.

The courts are mandated to equitably reduce the penalty after a determination that the principal obligation has been partly or irregularly complied by the debtor. The courts may also reduce the penalty if it is iniquitous or unconscionable despite non-performance.

If the penal clause is nullified by a court, the principal obligation remains valid. If the principal obligation is nullified, the penal clause is likewise invalidated.