Article 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 has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.
Artikulo 1229. Ang hukom ay makatuwiran babaan ang tubo kapag ang kabuuhan ng obigasyon ay bahagya o hindi natupad ng may pagkakautang. Ganun din kung hindi pa nakapagbayad, ang tubo ay maaring babaan ng hukuman kung ito at hindi makatarungan at patas.
JUDICIAL REDUCTION OF PENALTY
1. When the obligation has been partly complied with by the debtor. (Partial Performance)
The first refers to the extent of fulfillment, the latter, to the manner. The penalty should be more or less proportionate with the extent of the breach of the contract or of the damage suffered.
ILLUSTRATION
Pedro agreed to construct the house of Nene within four months for P 1,000,000 pesos according to certain specifications. The contract stipulates that in case of noncompliance with the obligation, Pedro will pay a penalty of P100,000. Except for some finishing touches, Pedro practically completed the construction of the house after four months.
This is a case of partial performance. It is clearly unfair for Pedro to exact the payment of the full amount of P100,000 as penalty. Since, Nene has been benefited by the partial performance the court may equitably mitigate the penalty, say to P20, 000. The penalty should be more or less proportionate with the extent of the breach of the contract or of the damage suffered.
An example of irregular performance is when Pedro completed the construction of the house but not in accordance with the specifications of the contract.
2. When the penalty is iniquitous or unconscionable, even if there has been no performance at all. (Unconscionable or Iniquitous).
Here, the penalty may be reduced even if there is no performance at all. Even if iniquitous or unconscionable, liquidated damages, whether intended as an indemnity or as a penalty, are not void, but subject merely to equitable reduction.
EXAMPLE
Suppose in the same example, the value of the house is only P100,000. It is stipulated that for everyday of delay, Pedro must pay a penalty of P5,000.
The court, in the exercise of its sound discretion, may reduce the penalty where, as in the case, it is clearly excessive and unconscionable. Contracts are enforced as they are read but it is true only when they are within the limitations of law and public policy.
Case:
CHUA GUI SENG V. GENERAL SALES SUPPLY CO., INC.
G.R. No. L-3974. April 28, 1952.
PARAS, C.J.
Facts:
On May 28, 1948, Chua Gui Seng, leased to the General Sales Supply Co., Inc., the corner door of a house situated at No. 674 Rizal Avenue, Manila, for a term of one year from June 1, 1948, at a monthly rental of P1,500 payable within the first five days of each month. The contract of lease stipulated that the lessee would deposit the sum of P3,000 upon its execution, to be applied to the monthly rentals corresponding to the last six months of the lease at the rate of P500 per month, but that in case the lessee failed to complete the term of the lease, said deposit would be forfeited in favor of the lessor. The defendant in fact deposited with the plaintiff the sum of P3,000.
The defendant failed to pay the monthly rentals for September and October, 1948, as a result of which Atty. Jesus B. Santos, as counsel for plaintiff, wrote on October 8, 1948, the following letter to the defendant, asking:
(a) that the terms of the contract be enforced, with the P3,000 being forfeited;
(b) but stating that if the back rentals (for 2 months) would be paid within 15 days, the deposit of P3,000 would not be forfeited.
Upon receiving the letter of demand, the defendant left the premises without paying the 2 months rental, on the belief that this could be charged to the P3,000 deposit.
Issue:
Whether or not the entire P3,000 be forfeited.
Ruling:
No, it is not proper that the entire P3,000 be forfeited for, after all, the lease had already existed for more than half of the period stipulated. Half of P3,000 may, however, be forfeited. It is unjust for the whole amount to be forfeited considering, aside from the partial performance, the following factors:
(a) The landlord could look for another tenant after the 15-day period of grace.
(b) The tenant did not leave in bad faith, for it honestly thought, from the letter of demand, that it was all right to leave, with the 2 months rent being merely deducted from the P3,000.
OBLIGATIONS AND CONTRACTS 