Liquidated damages

A contractual penalty is exactly the same as what is known as “liquidated damages” in Art. 2226.

Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof. Such damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. When the breach of the contract committed by the defendant is not the one contemplated by the parties in agreeing upon the liquidated damages, the law shall determine the measure of damages, and not the stipulation. (Article 2226-2228)In cases where there has been partial or irregular compliance, as in this case, there will be no substantial difference between a penalty and liquidated damages insofar as legal results are concerned and either may be recovered without the necessity of proving actual damages and both may be reduced when proper. (Filinvest v. Court of Appeals, G.R. No.138980, September 20, 2005)

In one case, the Supreme Court lamented that "(t)here is no justification for the Civil Code to make an apparent distinction between a penalty and liquidated damages because the settled rule is that there is no difference between penalty and liquidated damages insofar as legal results are concerned and that either may be recovered without the necessity of proving actual damages and both may be reduced when proper." (Pamintual v. Court of Appeals, 94 Phil. 556, 1979)