PRYCE CORP VS PAGCOR(458 s 164)

FACTS:Pryce executed a contract of lease with Pagcorcasino operation

involving the ballroom of the hotel fora period of 3yrs starting Dec. 1992
until Nov. 30, 1995.On Dec. 18, 1992, just hours before the actualopening of
Casino operation public rally was staged byPagcor was constrained to
suspend casino operations.On July 15, 1993 Pagcor resumed casino
operationbut were later on indenitely suspended due to thedemonstrations.
And as per verbal advice from theOce of the President, Pagcor decided
to stop itsoperation prior to Sept. 1993.Now, Pryce was asking for the
payment of the fullrentals of the remaining term plus damages
andpenalties.
ISSUES:1)WON the penal clause attached in the obligationsubstituted the
indemnity for damages and thepayment of interest? NO2)WON can the
courts reduce the penal clause? YES
HELD:1)In obligations with penal clause, the general rule isthat the penalty
serves as a substitute for theindemnity for damages and the payment of
interest incase of non-compliance; that is, if there is no stipulation to
the contrary, in which case proof of actualdamages is not necessary for
the penalty to bedemanded. There are exceptions to the rule,
asenumerated in par. 1 of Art 1226:a.when there is stipulation to the
contrary;b.when the obligor issued for refusal to pay the agreed
penalty;c.when the obligor is guilty of fraud.-In the present case, the
1stexception applies bec.The stipulation provided that aside from the
paymentof the rentals, the lessee shall also be liable for any andall damages,
actual or consequential, resulting fromsuch default and termination of the
contract.Pagcormust be held bound to its obligation the liability for thefuture
rentals plus damages due to stipulation of parties in the penal clause.Penal clause is an accessory obligation which theparties attach to a
principal obligation for the purposeof insuring the performance thereof by
imposing on the debtor a special prestation in case the obligation is
notfulFlled or is irregularly or inadequately fulFlled.2)The courts can reduce
the penalty if such penaltyis iniquitous or unconscionable to the sound
discretionof the courts. To be considered in Fxing the amount ofpenalty are
factors such as but not limited to:a.b.Nature of obligationc.Mode of breach &
its consequencesd.The supervening realitiese.In this case, Pagcors breach
was occasioned by eventspressing. Because of the interruptions and
stoppages,Pagcor suered tremendous loss of expected revenues,not to

mention the fact that it had fully operated underthe contract only for a
limited time