Topic: Article 1226 - In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case cas e 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. The penalty may be enforced e nforced only when it is demandable in accordance with the provisions of this Code Title: Filinvest Land, Inc. vs CA Facts: - Filinvest Land, Inc., a corporation engaged in the development and sale of residential subdivisions, awarded to defendant Pacific Equipment Corporation the development of its residential subdivisions consisting of two parcels of land located at Payatas, Quezon City, the terms and conditions of which are contained in an agreement. Pacific posted two surety bonds in favor of Filinvest, issued by Philippine American General Insurance (PHILAMGEN), to guarantee faithful fa ithful compliance. - Pacific failed to finish the contracted works and on October 1979, Filinvest wrote to Pacific of its intention to takeover the project, holding Pacific liable for damages which it had incurred and will incur to finish the project. Filinvest submitted its claim against PHILAMGEN but PHILAMGEN refused because its principal, Pacific, refused to acknowledge liability. - Pacific claims that its failure was due to inclement weather and the refusal of Filinvest to accept and pay for several items of finished work and change orders. The failure of Filinvest to pay its progressing bills estops it from demanding fulfillment of what is incumbent upon Pacific. The granting of three extensions for the work to be completed is a waiver of Filinvest's rights to claim any damages. The unilateral and voluntary action of Filinvest to prevent Pacific from completing the work has extinguished the obligation. - PHILAMGEN claims that the amendments made to the principal contract without its written consent have released it from any or all liability. - The parties agreed to appoint a commissioner to assist the court in resolving the issue. Architect Antonio Dimalanta was appointed as Court Commissioner to conduct an ocular inspection and to determine det ermine the amount of work accomplished by Pacific and the amount of work done by Filinvest to complete the project. - November 1984, the Court received Dimalanta's findings based on the construction documents. Based of billings of Pacific and payments made by Filinvest, the work accomplished by Pacific amounted to P11,788,282.40, with the exception of the t he last billing which Filinvest refused to pay in the amount of P844,396.42. The total amount of work left to be accomplished by Filinvest was amounted at P681,717.58. (P12,470,000, original contract, minus work accomplished by Pacific). The alleged reapirs made by Filinvest for construction deficiencies had no basis. Pacific had additional work done amounting to P477,000.00. - The trial court held that the findings of the commissioner should be conclusive, final and binding among the parties. The unpaid balance of work done by Pacific (P1,939,191.67) added to the additional work done (P475,000.00), and from this total, to deduct the cost to repair the deficiency or defect in the work done by Pacific (P532,324.01). Filinvest owes Pacific P1,881,867.66. - The trial court, however, took note that Pacific was in delay since April 1979. The third extension agreement of September 1979 was clear that they should complete
all unfinished works by October 15, 1979, otherwise, Pacific will be liable to pay the penalty up to the time all contracted works shall have been actually finished, in addition to other damages. Pacific became liable for delay when it did not finish the project on October 15, 1979. The court finds the claim of P3,990,000.00 penalty (P15,000 per day from April 25, 1979 to January 15, 1980) to be excessive and held that a forfeiture of the amount due to Pacific from Filinvest is a reasonable penalty considering the amount of work already performed by Pacific. The Court of Appeals affirmed this decision. Issue: - Whether the liquidated damages agreed upon should s hould be reduced Held: - Yes Article 1226 is taken and, in this case, read together with Article 1229 which states how the Court may reduce such penalty. A penal clause is an accessory undertaking to assume greater liability in case of breach. Although the penalty of P15,000.00 per day was mutually agreed upon by both parties, and is sanctioned by law, the Court ruled that the penalty charge was excessive. The Court reduced it to the same amount that Filinvest owed Pacific, considering the amount of work already finished and the fact that Filinvest consented to three extensions. The project was already 94.53% complete and the penalty was unconscionable (accdg to CA) because the project was not far from completion. Filinvest, however, cites the case of Laureano vs Kilayco, wherein the courts where cautioned to distinguish distinguish between two kinds of penalty clauses, clauses, in order to better apply their authority in reducing the amount recoverable; the first is where an indemnity is provided as a mere penalty having for its principal object the enforcement of compliance with the contract, while the t he second is where the purpose pur pose of the indemnification is to provide for the payment of actual anticipated and liquidated damages rather than penalization of a breach of contract. Filinvest claims that the penalty clause in their agreement falls under the second type, and argues that had Pacific completed the project on time, they could have sold the lots sooner and earned its projected income that would have been used for its other projects. This doctrine, however, should be applicable only to cases where there has been neither partial nor irregular compliance. In cases where there has been partial or irregular compliance, as in this case, there will be no difference between a penalty and liquidated damages. The Court, in Ligutan vs CA, pointed out that the question of penalty is reasonable or iniquitous can be partly subjective and partly objective. In this case, Pacific complied with their obligation in good faith which makes the full force of the penalty unconscionable. Pacific's delay was not due to t o negligence or was done in bad faith. Filinvest was also not free of blame because they did not pay Pacific P1,881,867.66 for work performed. *sorry, the held focused more on 1229 rather than 1226
