If the penalty clause in my contract turns out to be void, does that cancel the whole contract, or just the penalty?

The accessory falls, the principal stands

Article 1230 of the Civil Code states both halves of the rule in two sentences: The nullity of the penal clause does not carry with it that of the principal obligation. And: The nullity of the principal obligation carries with it that of the penal clause. The asymmetry follows from what a penal clause is. It exists to secure and reinforce a main obligation, so it depends on that obligation while the obligation does not depend on it. Strike out the security and the debt it was attached to is still owed; strike out the debt and there is nothing left for the security to secure.

What survives on your side of the contract

If the penalty falls away, you have not lost your remedy — you have lost the shortcut. Article 1226 makes the penalty a substitute for the indemnity for damages and the payment of interests, and Article 1228 dispenses with proof of actual damages where the penalty is demandable. Without a valid clause both advantages go, and you are back to proving what the breach actually cost you, in the ordinary way, with records. Delivery is still owed, the deadline still binds and default still has consequences. Only the pre-agreed figure disappears.

When the principal obligation is the one that fails

Run the same logic the other way and the consequence is harsher. Where the main undertaking is void, the penalty attached to it cannot be enforced either, which matters most to the party who thought the clause was his protection. A penalty stipulated to enforce something the law will not countenance is unenforceable along with it, and a creditor who relies on the penalty as his real security should be at least as careful about the validity of the principal obligation as about the wording of the clause itself.

Void is not the same as excessive

Most complaints about penal clauses are not about nullity at all. A clause that is merely too large is dealt with under Article 1229, which directs the judge to reduce the penalty equitably where the principal obligation has been partly or irregularly complied with, and allows reduction even without performance where the penalty is iniquitous or unconscionable. That is a reduction, not a nullification, and the clause continues to operate at the lower figure. Work out which you are actually arguing before you file, because the two lines of attack call for different evidence and produce different results.

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.

• Jose Menchavez, et al. vs. Florentino Teves Jr, G.R. No. 153201, January 26, 2005 — read the decision on LawPhil →

Related provisions

• Civil Code, Article 1230 — Nullity of the Penal Clause vs. the Principal
• Civil Code, Article 1226 — Effect of a Penal Clause
• Civil Code, Article 1228 — Penalty Without Proof of Damage
• Civil Code, Article 1229 — Equitable Reduction of the Penalty