My contract has a penalty clause for late delivery — does collecting that penalty replace my right to also claim actual damages, or can I claim both?

The penalty is the damages, agreed in advance

Article 1226 of the Civil Code makes the substitution the default: In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. The trade is deliberate and cuts both ways. You are spared having to prove what the late delivery actually cost you, which in a commercial dispute is often the hardest and most expensive part of the case. In exchange you accept the agreed figure even when your real loss turns out to be considerably larger than the number you negotiated.

The three ways you can claim more

The article names the exceptions. The first is drafting: a stipulation to the contrary, meaning a clause providing that the penalty is without prejudice to damages, restores your right to claim both. The second and third are in the same sentence — damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. A supplier who simply will not pay what he agreed to, or who was dishonest in performing rather than merely slow, loses the shelter the clause gave him. Ordinary negligence and plain lateness are not fraud.

The penalty still has to have become demandable

A penal clause does not run by itself. Article 1226 closes by providing that the penalty may be enforced only when it is demandable in accordance with the provisions of the Code, which sends you back to whether the debtor is genuinely in default. Article 1169 is the usual gate: delay begins from the moment the creditor judicially or extrajudicially demands fulfilment, subject to the exceptions that article itself lists, including where the obligation or the law expressly declares that demand is unnecessary. If your contract fixes a firm delivery date and dispenses with demand, say so when you invoke the clause.

A court may still cut the figure down

The agreed number is not untouchable. Article 1229 allows the judge to equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor, and even where there has been no performance the penalty may be reduced if it is iniquitous or unconscionable. So a daily penalty that has compounded across months of delay on goods that were eventually delivered is exposed to reduction on both grounds. Before enforcing, work out what you would recover on proof of actual loss instead — that comparison usually tells you which route is worth taking.

Cases citing this provision

These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.

• Merrie Anne Tan vs. First Malayan Leasing and Finance Corp., New Unitedware Marketing Corp, G.R. No. 254510, June 16, 2021 — read the decision on LawPhil →
• Spouses Eduardo and Lydia Silos vs. Philippine National Bank, G.R. No. 181045, July 2, 2014 — read the decision on LawPhil →
• Edmerito Ang Gobonseng, et al. vs. Unibancard Corp, G.R. No. 160026, December 10, 2007 — read the decision on LawPhil →
• Ruby Shelter Builders vs. Romeo Y. Tan, G.R. No. 217368, August 5, 2024 — read the decision on LawPhil →

Related provisions

• Civil Code, Article 1226 — Effect of a Penal Clause
• Civil Code, Article 1227 — No Escape by Paying the Penalty
• Civil Code, Article 1228 — Penalty Without Proof of Damage
• Civil Code, Article 1229 — Equitable Reduction of the Penalty
• Civil Code, Article 1169 — Delay (Mora)