Obligations 11: Obligations with A Penal Clause

Summary

In this video, the attorney discusses obligations with a penal clause in law, explaining key concepts such as principal and accessory obligations. A penal clause serves as an accessory obligation to ensure the performance of the principal obligation, compensates the creditor for damages, or punishes the debtor for breach. The video also covers rules about the enforceability of penal clauses, exceptions, and the circumstances under which courts may reduce the penalty. The importance of good faith performance by the debtor and the limits of damage recovery are also emphasized.

Takeaways

• 😀 Principal obligations can stand on their own, whereas accessory obligations depend on a principal obligation.
• 😀 Obligations with a penal clause include an accessory obligation to pay a set indemnity in case of breach.
• 😀 The penal clause serves three functions: to coerce performance, to liquidate damages, and to punish the debtor for breach.
• 😀 Generally, the penalty serves as a substitute for damages and interest, preventing the creditor from claiming them separately.
• 😀 Exceptions to this general rule include when the parties agree otherwise, the debtor refuses to pay the penalty, or there is fraud in performance.
• 😀 The penalty is only enforceable if there is a breach of the principal obligation, and it cannot be contrary to law, morals, or public policy.
• 😀 As a general rule, a debtor cannot avoid performing the principal obligation by simply paying the penalty, unless expressly granted the right to do so.
• 😀 The creditor generally cannot demand both performance of the obligation and the penalty at the same time, unless explicitly allowed.
• 😀 Courts can reduce the penalty if the principal obligation was partially or irregularly performed, or if the penalty is deemed unconscionable.
• 😀 The nullity of the principal obligation also nullifies the penal clause, but the reverse is not true: the nullity of the penal clause does not affect the principal obligation.

Q & A

What is the main difference between principal obligations and accessory obligations?

Principal obligations are independent and can exist by themselves, whereas accessory obligations depend on the existence of a principal obligation and cannot stand alone.

What is a penal clause and how does it function?

A penal clause is an accessory obligation that requires a debtor to pay a previously agreed-upon penalty if the principal obligation is breached. It serves as a means to ensure performance, act as liquidated damages, and punish the debtor for non-compliance.

What are the three main functions of a penal clause?

The three main functions of a penal clause are: (1) to ensure performance of the principal obligation (coercive function), (2) to serve as a predetermined amount of damages in case of breach (liquidatory function), and (3) to punish the debtor for breach of the obligation (punitive function).

When can a creditor demand damages or interest in addition to a penalty?

A creditor can demand damages or interest in addition to the penalty if: (1) the parties expressly agree to it, (2) the debtor refuses to pay the penalty, or (3) the debtor is guilty of fraud in performance.

Under what conditions is a penal clause enforceable?

A penal clause is enforceable only if the principal obligation is breached. Additionally, the penal clause must not be contrary to law, morals, public order, or public policy.

Can the debtor simply pay the penalty instead of performing the principal obligation?

As a general rule, the debtor cannot excuse themselves from performing the principal obligation by just paying the penalty, unless expressly allowed by agreement between the parties.

Can the creditor demand both performance and the penalty at the same time?

The creditor cannot demand both performance and the penalty at the same time unless explicitly permitted by the contract. In the absence of such permission, the creditor must choose either performance or the penalty.

What happens if the creditor has already demanded performance but it becomes impossible?

If the creditor has demanded performance but fulfilling the obligation becomes impossible through no fault of the creditor, they may demand the penalty instead.

Is proof of actual damages necessary for a creditor to demand the penalty?

No, proof of actual damages is not necessary for a creditor to demand the penalty. The creditor only needs to prove that the principal obligation was breached. However, if the creditor decides to prove actual damages, they cannot claim more than the agreed penalty amount unless fraud is involved.

Under what circumstances can a court reduce the penalty stipulated in the contract?

A court can reduce the penalty if: (1) the principal obligation was partially or irregularly fulfilled, (2) the penalty amount is deemed unconscionable, or (3) the penalty is shocking to the conscience and grossly unfair.