G.R. No. L-21780 June 30, 1967
MAKATI DEVELOPMENT CORPORATION, plaintiff-appellant, vs. EMPIRE INSURANCE CO., defendant-appellee. RODOLFO P. ANDAL, third-party defendant-appellee.

FACTS

On March 31, 1959, Makati Development Corporation (MDC) sold a lot to Rodolfo P. Andal. The deed of sale contained a “special condition” requiring Andal to commence and complete at least 50% of his residence on the property within two years from March 31, 1959. Failure to comply would result in the forfeiture of a P11,123.00 cash bond. To secure this obligation, Andal, as principal, and Empire Insurance Company, as surety, executed a surety bond on April 10, 1959, undertaking to pay MDC P12,000 in case of Andal’s failure. Andal did not build a house; instead, he sold the lot to Juan Carlos on January 18, 1960. Neither Andal nor Carlos built a house within the stipulated period. On April 3, 1961, MDC sent a notice of claim to Empire Insurance. Upon refusal of payment, MDC filed a complaint to recover the full bond amount. Empire Insurance filed a third-party complaint against Andal. Andal admitted the bond but alleged the “special condition” was contrary to law, morals, and public policy, and averred that Carlos had started construction. The trial court found that while no building was constructed by March 31, 1961, the lot was fenced, building materials were stocked, and by the end of April 1961, Juan Carlos had finished more than the required 50%. The court reduced Andal’s liability from P12,000 to P1,500. MDC appealed directly to the Supreme Court.

ISSUE

Whether the trial court correctly reduced the penalty stipulated in the surety bond despite the breach of the obligation to build within the two-year period.

RULING

Yes, the trial court’s decision is affirmed. The Supreme Court held that the so-called “special condition” was in reality an obligation with a penal clause. While Article 1226 of the Civil Code provides that a penalty substitutes for damages and interest and is recoverable without proof of damage, Article 1229 allows the judge to equitably reduce the penalty when the principal obligation has been partly or irregularly complied with, or if the penalty is iniquitous. Here, the Court found there was partial performance of the obligation, as Juan Carlos had finished more than 50% of the house by April 1961, barely a month after the deadline. The penal clause was inserted not to indemnify MDC for damages but to compel performance and encourage home building. The substantial, though tardy, performance justified the reduction. The Court rejected MDC’s argument that Carlos’s construction could not be considered partial performance due to lack of privity, citing the analogous case of Insular Gov’t. vs. Amechazurra. It also held that the obligation to build was not strictly personal to Andal and did not restrict his right to sell the lot. Therefore, the reduction of the penalty was proper.