actual damages and put all employees upon the same footing, whether much or little was earned or was due when the breach occured, will be held to provide for as penalty (Tennessee Mfg. Co. vs. James, 15 L. R. A. 211.)

In all these cases, courts are given great discretion in regulating the measure of damages. They do not look upon forfeitures with favor. In a case in the Supreme Court of the United States, it was held, "It will be incumbent on the party who claims them as liquidated damages to show that it was so considered by the contracting parties. (Taylor vs. Sandiford, 7 Wheat. 13.) It must not be understood, however, that courts never enforce the damages stipulated by the parties. As was said in one case, "though courts do not look upon forfeiture with favor, and will, where the contract is susceptible of so doing, construe such a provision as a penalty rather than liquidated damages, such construction should be given as will carry out the intent of the parties, if such intent is clearly ascertainable from the contract. (Turner vs. City of Eremont, 15 Fed. 221.)

The reason of the American law of liquidated damages and penalty cannot perhaps be more forcibly illustrated than that was said by Judge Deady in Harris vs. Miller, 11 Fed. 118. Says he, "The law is peculiar and instead of giving effect to the contract of the parties according to their intentions, it assumes to control them according to its standard of justice." In a note to Spencer vs. Tilden, 5 Cow. 144 (cited in 106 Fed. 391) it was said, "The doctrine which converts damages apparently stipulated or fixed by the parties into a penalty came from the civil law through the courts of chancery, and has at length obtained a firm hold in the courts of common law. It is obvious that in order to enforce it, courts must disregard the particular expressions of the parties; for the moment we agree that a party may by calling a real penalty "liquidated damages" or throwing it into the form of an alternative in a contract, or substituting its payment for some specified default, secure the whole to himself without regard to the real damages, we bring back the oppressive rule of the common law. The gripping creditor will always use the particular form or phraseology of contract which will secure him his pound of flesh unless the courts interfere in all cases, and tell him that from the very nature and essence of his bond, whatever he claims and in whatever shape or upon whatever footing if it be in truth plainly beyond the legal amount of damages, so far it shall be no more than nominal."

PART II

PENALTY UNDER THE CIVIL LAW COMPARED With Liquidated Damages and PENALTY UNDER THE COMMON LAW

The question that will naturally be asked is whether what is known as "penalty" in the American courts has the same nature and effect has the Civil Law "penalty." We have seen that the American cases make distinction between liquidated damages and penalty. In cases of liquidated damages, the measure of damages enforced by the courts is that which is stipulated by the parties. When "penalty" is involved,

courts have the power to change the measure of damages, by taking into consideration the reasonableness of the contract, the intent of the parties, the circumstances, and so on, of the case.

The Supreme Court of the Philippine Islands has expressly laid down the doctrine that in this jurisdiction "there is no difference between a penalty and liquidated damages so far as the legal results are concerned. Whatever difference exists between them as a matter of language, they are treated the same legally. In either case the party to whom payment is to be made is entitled to recover the sum stipulated without the necessity of proving damages. (Lambert vs. Fox, 26 Phil. 590.)

In the Philippines, courts give much weight to the intention of the parties. The freedom of making contracts is given a wide sphere. Within the liberty to make contract, sanctioned by our laws, everyone is free to execute the contracts he may consider suitable, provided they are not contrary to law, morality and good customs (Gsell vs. Kock, Phil. 6). In this jurisdiction penalties provided in contracts of this character are enforced. It is the rule that parties who are competent to con tract may make such agreement within the limitation of the law and public policy as they desire, and that courts will enforce them according to their terms. (Fornow vs. Hoffmeister, 6 Phil. 33; Palacios vs. Municipality of Cavite, 12 Phil. 140; Gsell vs. Kock, 16 Phil.

.)

From a study of the two systems of law, we can deduce that the American liquidated damages is similar to that of obligations with a penal clause under the Civil Law, for in both cases courts enforce the amount stipulated, as the measure of damages in case of breach of the terms of the contract.

ELEMENTS COMMON TO BOTH SYSTEMS OF LAW

As to Sources.-Under the Spanish law. Penal clauses may proceed from obligation or law; from obligation, when parties in making contracts stipulate for liquidated damages in case of non-performance or delay; from law as in case of bonds required by the government. (8 Manresa, 244.)

Act No. 610, Sec. 24, provides, for the exaction of a bond from persons securing license for the use of fire arms. In the case of Insular Government vs. Punsalan (7 Phil., 546) the court ruled that the bond required by Act No. 610 partakes of the nature of an obligation with a penal clause. Upon breach of the conditions imposed by the government, the court adjudged the bond forfeited and the defendants had to pay the sum stated in the bond.

Under the American Law. Penal clauses may also proceed from obligation or law, as in the case of Spanish law (Bishop on Contracts, Sec. 1449). When a statute imposes a specified penalty for an omission of duty prescribed by statute, the amount of the penalty is the amount of damages (Waite vs. Dowley, 94 U. S. 527).

Purpose of the Penal Clause.-Under the Spanish law. The end of the penal clause is to reinforce the contractual tie and establish a conventional indemnity.

Its cause is founded on the fear of non-performance; its source is the freewill of the parties (Giorgi, Teoría de las Obligaciones, Vol. IV, p. 464).

Another purpose of the penal clause is to avoid the necessity of proving damages (Lambert vs. Fox, 26 Phil. 590; Palacios vs. The Municipality of Cavite, 13 Phil. 140; Sentence of Feb. 19, 1904, Supreme Court of Spain). By means of the penal clause an exact representation of losses and injuries which may flow from the breach of the contract is effected by the parties at the time of the celebration of the same. In this matter, litigations may be avoided; the difficult proof of the extent of losses and injuries is obviated.

Par. I, Art. 1152, Civil Code. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interest in case of a failure to comply therewith, if it has not been otherwise stipulated.

Art. 56, Code of Commerce. In a commercial contract containing an indemnification clause against the person who fails to comply therewith, the party aggrieved may take legal steps to demand the fulfillment of the contract or the indemnification stipulated; but in resorting to either of these two actions, the other one shall be annulled, unless there is an agreement to the contrary.

Under the American law. A contract for a penalty is an agreement to pay a stipulated sum in case of default, intended to coerce performance, to punish default or to secure payment of actual damages. (U. S. vs. Cutajar, 67 Fed. 530.)

In liquidated damages, proof of actual damage is unnecessary (Clark vs. Bernard, 108 U. S., 436; City of Salem vs. Anson, 56 L. R. A., 169.)

Under both systems, therefore, the purpose of the penal clause is to obviate the necessity of proving damages, to have the damages ascertained before hand in case of breach, and to coerce performance.

When is the Penalty Exigible.-Under the Spanish law. Art. 1152, par. 2. This penalty can only be made when it is exigible in accordance with the provision of this code.

Impossible conditions, those against good customs and those prohibited by law will annul the obligation which depend on them (Art. 1116, Civil Code).

Art. 1102. Liability arising from fraud is exigible in all cases. The renunciation of action to make it effective is null and void. Is this article in contradiction with Article 1152? Manresa says, no. This article does not authorize in any manner the impurity of fraud on account of previous agreement. The party who alleges fraud must prove injuries and losses in order that he can recover more besides the stipulated damages. (See Manresa's Commentary on Art. 1152.)

Just compen

Under the American law. The liquidation must be reasonable. sation for the injury sustained is the principle at which law aims and the parties will not be permitted by express stipulation, to set aside this principle applied that the liquidation provided by a contract may, as the circumstances show to be equitable in one case be upheld, and in another set aside (Myer vs. Hart, 40 Mich. 517, 523).

Generally speaking, in determining the reasonableness of the amount the court will take into consideration, the absence or presence of fraud or oppression and the purpose the agreements seeks to subserve (Note to Madler vs. Silverstone, N. S., 29). Exception from obligation. The debtor cannot exempt himself from the fulfillment of the obligation by paying the penalty, unless in case that such right has been expressly reserved to him. (Art. 1153, par. 1, Civil Code.)

Neither can the creditor jointly exact the fulfillment of the obligation and the payment of the penalty, unless such right has been granted to him. (Part II, 1153, C. C.)

But the creditor cannot ask for the fulfillment of the obligation and the penalty, unless the penalty has been stipulated for mere delay or that the payment of the penalty shall not extinguish the obligation. (Argentina, Art. 693, C. C.)

The reason of this is clear. The penalty is established as an accessory obligation. It cannot be admitted that instead of guaranteeing the performance of the principal obligation, the penalty should be substituted, leaving the principal obligation unperformed and depriving the creditor of the power to exacting its fulfillment. (8 Manresa, 239.)

Under the American law. A penal obligation being secondary to a primary one the performance of which it is intended to assure, the creditor cannot, except in two contingencies, avail himself of the double remedy on the event of his debtors failure to fulfill the primary obligation to accept the subsequent performance of that and exact the penalty at one and the same time; and those contingencies are: First, when the penalty is expressly stipulated for the mere delay; and second, when by a special stipulation the penalty may be exacted if the principal obligation is not executed (Barrow vs. Bloom, 18 La. Ann. 276).

Accrual of right. Spanish law. The debtor is obliged to pay the stipulated penalty when (1) by his negligence delay or non-performance results; (2) and the creditor demands the payment of the penalty.

The debtor is held liable for the penalty of absolute non-performance or contravention when for acts imputable to him the prestation to give or to do becomes impossible or the contravention not to do is consummated. If there is no term, delay will begin from the time of judicial demand in which the creditor asks for the penalty or demonstrate that the performance in specific form has become impossible by the default of the debtor (IV Georgi, 478).

Art. 1100, Civil Code. Persons obliged to deliver or to do something are in default from the moment on which the creditor exacts judicially or extrajudicially the compliance of their obligation.

However the intimation of the creditor, in order that default may exist, shall not be necessary:

1. When the obligation or law declares it expressly.

2. When from its nature and circumstances, it may appear that the fixing of the time on which the thing was to be delivered or the service was to be done, was a determinate cause to constitute the obligation. In reciprocal obligation, none of the obliged parties shall incur default, if the other does not comply with or does not submit to duly comply with what he is bound to do. From the moment on which one of the obligated parties complies with his obligation, the default begins for the other party.

Art. 1125, Civil Code. Obligations, the fulfillment of which has been fixed for a certain day, are exigible only when such day arrives.

Art. 1128. When the obligation does not fix a term, but it can be inferred from its nature and circumstances that there was an intention of granting it to the debtor, the courts shall fix the duration of such a term. The courts shall also fix the duration of a term when it may have been left at the will of the debtor.

American law. As a general rule, the right to claim damages as liquidated damages or a penalty accrues after an offer and refusal to perform the agreement, coupled with present ability to do so. In all cases however regard should be had to the term of the contract itself and to the intention of the parties and the surrounding circumstances under which the agreement was made. (Hammond vs. Gilmore, 14 Conn. 249; Thorndike vs. Locke, 98 Mass. 340.)

Once undertaking to do a thing on particular day is broken it, when the day pass, with no default in the other party and no excuse appearing it is not done (Marshall vs. Fergusson, 23 Cal. 65; Weeks vs. Little, 89 N. Y. 566).

When Performance Excused.-Under the Civil Law. Art. 1105, Civil Code. No one shall be liable for events which could not be foreseen or those, even when foreseen, were inevitable aside from the cases expressly stated by the law or those in which the obligation so declares. When the delay or non-performance is due to fortuitous events the obligor is not liable for the payment (Giorgi Teoría de las Obligaciones, Vol. IV, page 477).

Under the American law. Non-performance of an express covenant can be excused only by showing that its performance is unlawful, or has been rendered impossible by the intervention of causes beyond human control. (Morrow vs. Campbell, 31 American Dec., 704.)

Where condition of bond is to do a thing impossible or illegal the obligor is di3charged (Brown vs. Dillhunty, 43 American Dec. 499).

Under the Civil law. It is not necessary that the amount or importance of the losses and injuries should be established; if their existence is proven that is all is required. (Sentence of Feb. 19, 1914, Spain; Palacios vs. Municipality of Cavite, 12 Phil., 140.)

To ask for the penalty, the creditor (or obligee) is not obliged to prove that he has sustained damages and the debtor cannot exempt himself from paying by proving that the creditor has not suffered any damages (Argentina, Art. 690). The penalty