Cabarrouis vs. Vicente

In obligations with a penal clause, the penalty stipulated substitutes for the indemnity for damages and the payment of interest on the principal obligation, but where the debtor refuses to pay the penalty itself, the creditor is entitled to legal interest on the amount of the penalty from the time of demand.

Antonia A. Cabarroguis, a registered nurse and midwife residing in Davao City, was a passenger in an AC "jeepney" owned and operated by Telesforo B. Vicente. The relationship between the parties arose solely from the vehicular accident and the subsequent compromise agreement they executed to settle the resulting personal injury claim. The legal question turned on the interaction between Articles 1226, 2209, and 2210 of the new Civil Code governing penal clauses and the award of interest in monetary obligations.

On March 15, 1955, Antonia A. Cabarroguis, a registered nurse and midwife residing in Davao City, was riding as a passenger in an AC "jeepney" when the vehicle collided with another vehicle at a street corner in the city. The accident caused, among other injuries, permanent partial disability to her right forearm. The jeepney was owned and operated by Telesforo B. Vicente.

To avoid court litigation, the parties entered into a compromise agreement on July 13, 1955, under which Vicente obligated himself to pay Cabarroguis the sum of ₱2,500 "as actual and compensatory, exemplary and moral damages suffered by (her) . . . from the said accident." The agreement further stipulated that should Vicente fail to complete payment within a period of sixty days, he would pay an "additional amount of ₱200.00 as liquidated damages." Vicente paid a total of ₱1,500, leaving an unpaid balance of ₱1,000 plus the ₱200 penalty.

Despite repeated demands, Vicente failed and refused to comply with his remaining obligation under the agreement. Cabarroguis, assisted by her husband, thereupon brought suit in the Municipal Court of Davao City. In his defense, Vicente alleged that the injury sustained by Cabarroguis was not serious or consequential enough to entitle her to the stipulated amount, and that the agreement did not express the true intention of the parties "by reason of mistake, fraud, inequitable conduct or accident," such that a reformation of the agreement was in order. The municipal court overruled these defenses and rendered judgment in Cabarroguis's favor. Vicente appealed to the Court of First Instance, which found his challenge to the agreement to be "a mere afterthought, prompted by a desire to evade payment of an obligation, voluntarily assumed and for valid consideration," and on May 24, 1956, sentenced him to pay ₱1,200.00 with legal interest from the date of filing of the complaint until full payment, plus costs.

Vicente appealed to the Court of Appeals, raising a single assignment of error: that the lower court erred in sentencing him to pay interest on the judgment amount from the date of filing of the complaint until full payment. Citing Article 1226 of the new Civil Code, he argued that in obligations with a penal clause, the penalty substitutes the indemnity for damages and the payment of interest. Because the question was purely one of law, the Court of Appeals certified the case to the Supreme Court.

• Interest on the Principal Obligation: Whether legal interest may be awarded on the principal obligation of ₱1,000 in an obligation that includes a penal clause, given that Article 1226 provides the penalty substitutes for indemnity of damages and payment of interest.
• Interest on the Penalty: Whether legal interest may be awarded on the penalty of ₱200 when the debtor refuses to pay the penalty itself.

• Interest on the Principal Obligation: No. The stipulated penalty of ₱200 substitutes for both the indemnity for damages and the payment of interest on the principal, pursuant to Article 1226 of the Civil Code, no contrary stipulation having been made and no fraud in fulfillment having been shown.
• Interest on the Penalty: Yes. Where the debtor refuses to pay the penalty stipulated for default, the creditor is entitled to legal interest on the amount of the penalty under Article 2209, recoverable from the time of demand; absent proof of extrajudicial demand, interest runs from the filing of the complaint.

• Interest on the Principal Obligation: Article 2209 of the Civil Code establishes the general rule that in obligations consisting of a sum of money, the only damage a creditor may recover when the debtor is in delay is the payment of agreed or legal interest, unless the contrary is stipulated. However, Article 1226 provides that in obligations with a penal clause, the penalty substitutes for the indemnity of damages and the payment of interest. The Court identified three exceptions: (1) when the contrary is stipulated; (2) when the debtor refuses to pay the penalty, in which case the creditor is entitled to interest on the amount of the penalty under Article 2209; and (3) when the obligor is guilty of fraud in the fulfillment of the obligation. None of these exceptions applied to the principal obligation: no contrary stipulation was made, the breach was not occasioned by fraud, and the refusal to pay related to the penalty, not the principal. Accordingly, the ₱200 penalty took the place of interest and damages on the ₱1,000 principal, and no separate interest could be awarded thereon.
• Interest on the Penalty: The Court reasoned that in obligations for the payment of a sum of money where a penalty is stipulated for default, both the principal obligation and the penalty may be demanded by the creditor, citing Government vs. Lim and Luneta Motor Co. vs. Moral. Because Vicente refused to pay the penalty when demand was made, Cabarroguis was entitled to interest on the penalty amount under Article 2209. The Court further invoked Article 2210, which provides that in the discretion of the court, interest may be allowed upon damages awarded for breach of contract, recoverable from the time of delay — that is, from the date of judicial or extrajudicial demand. Since there was no showing of when extrajudicial demand was made, demand was deemed to have been made only from the filing of the complaint. Interest was therefore awarded on the ₱200 penalty from the date of filing of the complaint.

• Penal Clause as Substitute for Damages and Interest (Article 1226, Civil Code) — In obligations with a penal clause, the penalty stipulated substitutes for the indemnity for damages and the payment of interest on the principal obligation. Three exceptions exist: (1) when the contrary is stipulated; (2) when the debtor refuses to pay the penalty, in which case the creditor is entitled to interest on the amount of the penalty pursuant to Article 2209; and (3) when the obligor is guilty of fraud in the fulfillment of the obligation. The Court applied this doctrine by holding that no interest could be charged on the ₱1,000 principal because the ₱200 penalty substituted for both damages and interest, and none of the exceptions pertained to the principal obligation.
• Interest on Damages for Breach of Contract (Article 2210, Civil Code) — Interest may, in the discretion of the court, be awarded upon damages awarded for breach of contract, recoverable from the time of delay, i.e., from the date of demand, whether judicial or extrajudicial. The Court applied this provision to allow interest on the penalty amount, treating the penalty as a form of damages for breach, with interest running from the filing of the complaint in the absence of proof of prior extrajudicial demand.

• "In obligations with a penal clause, however, as provided in Article 1226 of the new Civil Code, the penalty shall substitute the indemnity for damages and the payment of interests." — This passage states the core ratio decidendi: the penalty clause's substitutive effect on both damages and interest under Article 1226.
• "The exceptions to this rule, according to the same article, are: (1) when the contrary is stipulated; (2) when the debtor refuses to pay the penalty imposed in the obligation, in which case the creditor is entitled to interest on the amount of the penalty, in accordance with Article 2209; and (3) when the obligor is guilty of fraud in the fulfillment of the obligation." — This enumerates the three recognized exceptions to the substitutive rule, a formulation frequently cited in subsequent jurisprudence on penal clauses.
• "It has been held that in obligations for the payment of a sum of money when a penalty is stipulated for default, both the principal obligation and the penalty can be demanded by the creditor." — This establishes the principle that the penalty and the principal are cumulatively demandable, distinguishing the penalty's role as a substitute for interest on the principal from its independent enforceability as a separate obligation.

• Reyes vs. Yatco, 100 Phil. 964 (1956) — Cited for the proposition that in monetary obligations, the creditor may recover not only interest but also moral or exemplary damages in addition, the award of which is left to the discretion of the court.
• Government vs. Lim, 61 Phil. 737 (1935) — Cited for the rule that in obligations for payment of a sum of money with a stipulated penalty for default, both the principal obligation and the penalty may be demanded by the creditor.
• Luneta Motor Co. vs. Moral, 73 Phil. 80 (1941) — Cited alongside Government vs. Lim for the same proposition regarding the cumulative demandability of principal and penalty.

• Article 1226, Civil Code of the Philippines — Provides that in obligations with a penal clause, the penalty substitutes for the indemnity of damages and the payment of interest, with exceptions for contrary stipulation, refusal to pay the penalty (entitling the creditor to interest on the penalty under Article 2209), and fraud in fulfillment. Applied to bar interest on the principal obligation while allowing interest on the penalty.
• Article 2209, Civil Code of the Philippines — Provides that if the obligation consists in the payment of a sum of money and the debtor incurs delay, the damage recoverable is the agreed or legal interest, unless otherwise stipulated. Applied to justify interest on the penalty amount when the debtor refused to pay it.
• Article 2210, Civil Code of the Philippines — Provides that interest may, in the court's discretion, be allowed upon damages awarded for breach of contract, recoverable from the time of delay. Applied to fix the commencement of interest on the penalty at the date of demand, deemed to be the filing of the complaint.
• Articles 2196 and 2197, Civil Code of the Philippines — Cited for the principle that the creditor may also claim moral or exemplary damages in addition to interest, the award of which is left to the discretion of the court.

Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Endencia, and Barrera, JJ., concurred.