Breach of Contract by a Construction Contractor in the Philippines

How to Rescind, Demand Liquidated Damages, or Sue

This guide is Philippine-specific and written for owners, developers, PMs, and counsel handling private construction projects (houses, fit-outs, commercial builds). Public works have extra rules; where relevant, those differences are flagged. This is general information—not legal advice.

1) The legal backbone (plain-English map of the Civil Code)

Reciprocal obligations & rescission/resolution: When both parties owe things to each other (typical construction contracts), a substantial breach by one allows the other to cancel (rescind/resolve) or demand fulfillment, plus damages (Civil Code Art. 1191). Courts and practitioners often say “rescission” here even though the Code term is “resolution.”
Delay (mora): A contractor is in legal delay when performance is due and demand has been made (or demand is not needed because a date is fixed and time is of the essence), and it still fails (Arts. 1169, 1170).
Damages: Actual/compensatory (Arts. 2199–2200), interest (Art. 2209), moral (Art. 2217) in proper cases, exemplary (Art. 2232) for bad faith, attorney’s fees (Art. 2208) when allowed.
Liquidated damages (LD) / penalty clause: LD are pre-agreed damages, often a daily rate for delay. Courts may reduce LD if iniquitous or unconscionable (see penalty-clause rules Arts. 1226–1229 and definition of LD Art. 2226–2228). LD usually substitute for proof of actual loss unless the contract allows both.
Force majeure: A party is generally not liable for unforeseeable and unavoidable events (Art. 1174), unless the contract allocates the risk.
Suretyship: A performance bond makes the surety solidarily liable with the contractor up to the bond’s penal sum (Art. 2047).
Prescription: Actions on a written construction contract generally within 10 years from breach (Art. 1144). Oral contracts: 6 years (Art. 1145). Quasi-delict/defects sounding in tort: 4 years (Art. 1146).
Judicial vs. extrajudicial rescission: As a rule, courts cancel contracts under Art. 1191. Unilateral cancellation is valid only if clearly stipulated, and even then subject to judicial review for fairness.

2) What counts as a contractor’s “breach”?

Common categories:

Delay: Missing milestones/substantial completion without approved Extension of Time (EOT).
Defective or non-conforming work: Fails specs, drawings, code, or industry standards.
Abandonment: Walk-off, demobilization without cause, refusal to proceed.
Underperformance: Chronic slippage, inadequate supervision, unsafe work.
Payment misuse: Not paying subs/suppliers despite progress draws (can trigger lien disputes and bond calls).
Licensing/permits issues: Unlicensed (PCAB) contractor or work without required permits.
Fraud/bad faith: Fabricated accomplishments, falsified tests, substitution of inferior materials.

Tip: Different remedies can be mixed and matched: e.g., demand LD for delay, order rework, and reserve rescission if cure fails.

3) Decision tree: Rescind, demand LD, or sue?

Start with your contract (general conditions, special conditions, schedules):

Does it have a cure process (notice + days to cure)?
Is there an LD clause (daily rate, cap, exclusive remedy)?
Is there an arbitration clause (often to the CIAC or other institution)?
What bonds exist (performance, payment/labor, warranty/defects)?
Are there EOT/variation procedures (notice deadlines!)?

A. If the breach is mainly delay:

Compute LD from the contract completion date (plus any approved EOT).
Check concurrent delays (owner-caused delays reduce or bar LD).
If slippage is severe, you may terminate for default (after cure period) and take over the works.

B. If the breach is defective work:

Issue a non-conformance notice, require rework or replacement, and withhold retention.
If defects are major or persistent → terminate/rescind, engage a replacement contractor, and claim cost-to-complete plus damages.

C. If the contractor abandoned the project:

Immediate default notice → takeover → call performance bond → reprocure → sue/arbitrate for any shortfall + LD + damages.

D. If the amount is small or a single issue:

Consider negotiation/mediation; for amounts up to ₱1,000,000, Small Claims may be available (no lawyers required), though many construction disputes exceed this.

4) Step-by-step: Building your record (before you pull the trigger)

Baseline & paper trail
- Final drawings/specs, contract, change orders, instructions, site diary, QA/QC reports, RFI logs, test results, photographs, progress billings, payment proofs, EOT requests/approvals.
Formal Notice of Default / Notice to Cure
- Identify specific breaches (clauses, dates, instances).
- Give cure period per contract (e.g., 7–15 days).
- State that failure to cure allows LD, rescission/termination, bond call, and reprocurement.
Evaluate EOT and owner-caused delays
- If the owner delayed drawings, approvals, payments, or site access, expect offsets or reduction of LD.
Issue Notice of Termination/Rescission (if uncured)
- Cite Art. 1191 and the contract’s termination clause (if any).
- Declare takeover date, inventory on site, freeze on payments, and turnover of keys/docs.
Secure the site
- Joint inventory of materials/equipment; isolate hazardous areas; protect work-in-progress; box-up documentation.
Reprocure & mitigate
- Solicit proposals to complete/rectify. You must mitigate damages—choose a reasonable completion plan.
Compute claims
- See Section 6 below (LD, cost-to-complete, professional fees, temporary works, lost rents, etc.).
Call the bond (if any)
- Follow the bond’s conditions (default declaration, claim form, documents).
- Surety liability is typically up to the penal sum; you can still pursue the contractor for any excess.
Preserve expert evidence
- Get a licensed civil/structural engineer or quantity surveyor to document defects, value rework, and establish causation.

5) Liquidated damages (LD): How they work—and common pitfalls

What LD are: A pre-set amount (often per day of delay) agreed at contract signing. They simplify proof of loss.

To enforce LD, show:

A clear LD clause (daily rate, start/end triggers).
Contractor fault for the delay (no valid EOT; no force majeure).
Computation from due date to actual completion/turnover or takeover date.

Courts may reduce LD if:

The rate is excessive/unconscionable compared to project value and actual harm.
There is partial performance (substantial completion) before delay.
Owner’s contributory or concurrent delay exists.
The breach is not due to the contractor’s fault.

Drafting & enforcement tips

Keep rates proportionate (e.g., % of contract price per day with a cap, like 10%).
Clarify exclusive vs. cumulative: Can you claim both LD and actual damages? If you want both, say so.
Define events beyond control and notice windows for EOT.
Specify when LD stop (e.g., substantial completion or owner takeover, whichever first).
Maintain as-built evidence and a delay analysis (critical path).

6) What you can claim (damages menu)

Liquidated damages (if stipulated).
Cost to complete/rectify: Replacement contractor premium, rework, demolition, testing.
Owner’s additional costs: Temporary facilities, security, utilities, storage, extended consultant fees (architect/engineer/QS/PM), permits re-issuance.
Loss of use / lost rents: Reasonably certain rental income or business profits (prove via leases/financials).
Diminution in value: If defects permanently reduce market value.
Interest: 6% p.a. legal interest on liquidated amounts from date of demand or filing until full payment.
Attorney’s fees: If stipulated, or when the contractor acts in bad faith or forces you to litigate.
Exemplary damages: For gross negligence or wanton breach.
Costs: Filing and litigation/arbitration costs as awarded.

You must mitigate your loss: act promptly to reprocure and avoid avoidable escalation.

7) Rescission/termination mechanics (and when to use them)

When rescission makes sense

Abandonment, continual refusal to proceed, material non-compliance, or incurable defects.
Persistent safety violations.
Long, unjustified delay and missed milestones despite cure notices.

How to rescind (safely)

Follow the contract: issue notice to cure, wait out the cure period.
If not cured, issue Notice of Termination/Rescission, citing Art. 1191 and contractual grounds.
Offer to return what must be returned (e.g., unpaid but earned progress less offsets) to avoid accusations of inequity.
Takeover and reprocure.
Be prepared for the contractor to dispute your unilateral rescission—courts/arbitrators can affirm or nullify it. If the contract requires judicial rescission, file suit/arbitration to cancel.

After rescission

Compute LD up to takeover, cost-to-complete, and other damages.
Call bonds and pursue the contractor for any deficiency beyond the bond.

8) Where to file: Arbitration (CIAC) vs. Courts (and Small Claims)

Check your dispute-resolution clause first.

Arbitration—Construction Industry Arbitration Commission (CIAC):
- Many Philippine construction contracts refer construction disputes to CIAC.
- Faster timelines, technical arbitrators, site inspections common.
- Awards are immediately executory subject to appeal (Rule 43) but typically harder to derail than court judgments.
- Filing is by Request for Arbitration, not a court complaint.
Other arbitration forums (if your clause names them): PDRCI/PIArb, SIAC, ICC, etc. Party autonomy governs.
Courts:
- Metropolitan/Municipal Trial Courts (MTC): generally ≤ ₱2,000,000 claims (exclusive of interest/fees).
- Regional Trial Courts (RTC): > ₱2,000,000.
- Standard civil action for breach of contract and damages; injunctive relief (e.g., to stop illegal entries, secure site).
Small Claims (A.M. No. 08-8-7-SC, as amended):
- Money claims up to ₱1,000,000; no lawyers at hearing; no counterclaims beyond limit.
- Suitable for discrete, modest disputes (e.g., unpaid minor variations), not complex defect cases.

Barangay conciliation?

Generally not required if a party is a corporation or parties reside in different cities/municipalities, or when urgent injunctive relief is needed.

9) Suing or arbitrating the surety (performance/payment bonds)

Notify the surety immediately after declaring default—respect bond validity dates and conditions.
Provide: contract, bond, default and termination notices, progress records, cost-to-complete bids, and damages computation.
Surety’s liability is solidary up to the bond’s penal sum; it can assert defenses available to the contractor and those in the bond (e.g., lack of proper default declaration).
You can join the surety in arbitration/court if the bond has an arbitration ride-through or if the surety consents; otherwise, you may need a separate action in court.

10) Typical contractor defenses (and how owners rebut them)

Owner-caused delay / concurrent delay → Keep RFI logs, approval timestamps, payment dates.
Force majeure → Check if the event actually prevented critical-path work, and whether notice and mitigation were done.
Variation scope creep → Show formal change orders and agreed prices/time.
Payment withholding was wrongful → Tie withholdings to documented non-conformance and contract terms.
LD unconscionable → Be ready to justify the rate; if reduced, pursue actual damages as backup (if allowed).

11) Private vs public projects (quick contrasts)

Private: Governed by the Civil Code and your contract. Freedom to structure bonds, LD, dispute resolution.
Public (government): Special statutes and IRR (e.g., RA 9184) impose standard LD, retention rules, blacklisting, and COA audit constraints; disputes typically go to CIAC if there’s an arb clause or to proper quasi-judicial/court fora per procurement rules. When in public works territory, consult the government-specific playbook.

12) Evidence & experts

Delay analysis: As-built vs baseline schedules; identify critical path.
Quality: Test results, third-party lab reports, code/standard references, photos/videos (with dates), expert narratives.
Quantum: QS reports, market quotes, awarded reprocurement contracts, invoices/receipts.

13) Timelines & interest

Make a written demand (this pins the start of legal interest and proves delay).
In court, legal interest is generally 6% per annum on liquidated sums from demand or filing; after final judgment, 6% p.a. until paid.

14) Practical checklists

A. For LD (delay)

LD clause located and clear
Completion date & approved EOT verified
Critical-path delay attributable to contractor
Computation (dates × daily rate), apply any cap
Demand letter sent; reserve right to further damages

B. For rescission/termination

Notice to cure (with detailed breaches)
Cure period lapsed without satisfactory remedy
Termination notice citing contract + Art. 1191
Site secured; joint inventory taken
Bond claim initiated; reprocurement underway

C. For filing (court/arbitration)

Choose forum per dispute clause (CIAC or other)
Claims matrix (LD, cost-to-complete, other heads)
Witness list (PM, architect/engineer, QS, owner)
Expert reports ready or commissioned

15) Templates (simplified, adapt to your facts)

15.1 Notice to Cure / Default

Subject: Notice to Cure – [Project], Contract dated [date] Dear [Contractor], Under [Clause X] and Civil Code Art. 1191, you are in breach for: (1) [missed milestone], (2) [non-conforming works—attach NCRs], and (3) [safety violations]. You are given [__] days from receipt to fully cure. Failure will entitle the Owner to liquidated damages, rescission/termination, takeover, reprocurement, and bond claims, without prejudice to other remedies. Sincerely, [Owner/PM]

15.2 Notice of Termination/Rescission

Subject: Termination for Default – [Project] Dear [Contractor], The [date] Notice to Cure lapsed without satisfactory cure. Under [Clause X] and Art. 1191, the Owner rescinds/terminates the Contract effective [date/time]. A joint inventory will be conducted on [date/time]. The Owner will take over the site, call the performance bond, reprocure completion, and seek damages including LD up to takeover and cost-to-complete. Sincerely, [Owner/PM]

15.3 LD Demand (Delay)

Subject: Demand for Liquidated Damages – [Project] Dear [Contractor], Contract completion was due [date]. No EOT applies. LD at ₱[rate]/day accrue from [date] to [date] = [__] days = ₱[amount]. Pay within [__] days from receipt, plus 6% p.a. legal interest from this demand. We reserve all other remedies. Sincerely, [Owner/PM]

16) Frequently asked “what ifs”

What if there’s no written contract? You can still sue for breach of oral contract (6-year prescription) or recover via quantum meruit; proving terms and scope will be harder—gather emails, bids, drawings, and payment records.
Can I charge LD and also claim actual damages? Only if the contract allows it. Otherwise, LD usually replace proof of actual loss (penal clause rule), though courts may still award actuals for breaches beyond delay (e.g., defects).
Do LD stop when I take over? Commonly yes—LD for delay generally stop at substantial completion or owner takeover; afterward, claim cost-to-complete and other damages.
We agreed to arbitrate but I prefer court. Courts usually refer the case to arbitration if there’s a valid arbitration clause in a construction contract.

17) Final pointers to stay out of trouble next time

Use clear LD, EOT, and change-order clauses; adopt standard forms (and tailor them).
Require sufficient bonds (performance, payment, warranty) and contractor’s all-risk insurance (CAR).
Enforce documentation discipline from Day 1.
Set up a dispute ladder (PM → senior executives → mediation → arbitration).
Keep progress payments tied to verified accomplishments.

Quick summary

Document breaches and demand cure.
If uncured, rescind/terminate under Art. 1191, take over, reprocure, and claim LD + damages.
Call bonds and file in the agreed forum (CIAC arbitration or courts, jurisdiction by amount).
Expect defenses (EOT, force majeure, concurrent delay) and prepare expert evidence.
Mind prescriptive periods and interest; draft better next time.

If you want, tell me your contract’s LD clause, termination clause, bond details, and dispute-resolution clause, and I’ll tailor the steps and draft language to that exact setup.