G.R. No. L-1598
JOSE PALACIOS, manager of the Sociedad de Electricidad en Comandita, plaintiff-appellee, vs. THE MUNICIPALITY OF CAVITE, defendant-appellant.
November 30, 1908

FACTS:
On November 11, 1901, Jose Palacios, representing the Sociedad de Electricidad en Comandita, entered into a contract with the Municipality of Cavite for the public lighting of the town by means of 200 incandescent lamps. The contract stipulated, among other things, that the Municipality would pay for the installation of the lamps, after which certain materials would become its property. Clause 11 of the contract provided that if the Municipality failed to comply with the contract before the expiration of its two-year term, it would indemnify the company by assigning to it all the materials used in the installation, to the amount of P3,200 previously paid by the Municipality.

Palacios’ company installed 70 lamps and was prepared to install the remaining 130, but the Municipality refused to allow further installation, citing a lack of funds. Consequently, Palacios filed a complaint seeking specific performance of the contract, monthly payments of P400, an additional P2,080, and other reimbursements.

The Municipality, in its defense, admitted refusing to allow the installation of the remaining 130 lamps due to lack of funds. It argued that under Clause 11, the plaintiff’s only recourse was to demand the cession of the installed materials.

The trial court found the Municipality in breach, ordered it to pay P2,132 (for unpaid installments), deliver the materials for the installations to the plaintiff, and declared the contract rescinded. The Municipality appealed.

ISSUE:
Whether the Municipality’s refusal to allow the installation of the remaining lamps constitutes a breach of contract covered by the penal clause (Clause 11), and what the legal consequences of such breach are.

RULING:
The Supreme Court AFFIRMED the lower court’s judgment.

The Court ruled that the Municipality of Cavite undeniably breached the contract by objecting to the installation of the remaining 130 lamps. It held that the “lack of funds was no excuse for the failure to comply with the agreement.”

The Court found that the Municipality had incurred the penalty prescribed by Clause 11 of the contract. Citing Article 1152 of the Civil Code, which states that “in obligations with a penal clause the penalty shall substitute indemnity for damages and the payment of interest in case of non-fulfillment,” the Court explained that the penal clause obviated the need for the plaintiff to prove actual losses or damages.

Regarding the interpretation of the penal clause, the Court rejected the Municipality’s argument that it applied only to default in monthly payments. It held that the “general terms employed therein… prove beyond all doubt that the non-fulfillment stipulated refers to everything that has been set forth and to all the matters agreed upon,” in accordance with Article 1281 of the Civil Code which mandates that clear contractual terms be literally observed.

Therefore, the Court held that the Municipality’s non-compliance triggered the penal clause in Clause 11, which stipulates that the Municipality shall indemnify the company by assigning (delivering) to it all the materials used in the installation. The Court affirmed the lower court’s order for the Municipality to deliver the installed materials to the plaintiff.