I. Introduction

Contracts are the backbone of private and commercial life. In the Philippines, contract law is primarily governed by the Civil Code, with important overlays from special laws (e.g., labor, consumer, construction, banking), jurisprudence, and procedural rules. A breach of contract occurs when a party fails to perform an obligation that has become due, or performs it in a manner inconsistent with what was agreed. Philippine law provides a structured set of remedies to protect the injured party, restore the value of the bargain, and in proper cases punish bad faith.

This article explains what constitutes breach, when a party is legally “in delay,” what remedies are available (judicial and extrajudicial), and how damages are computed and awarded in Philippine practice.

II. Foundations of Contract Law in the Philippines

A. Binding Force of Contracts

Under Philippine law, contracts have the force of law between the parties. Once validly formed, each party must comply in good faith with what was agreed, as well as with consequences that, according to their nature, may be in keeping with law, morals, good customs, public order, or public policy.

B. Essential Elements of a Valid Contract

A contract is generally valid if it has:

Consent of the parties;
Object certain and lawful; and
Cause/consideration that is lawful.

If any essential element is absent, the “breach” framework may not apply because the contract could be void, voidable, unenforceable, or rescissible—each having its own remedies.

C. Obligations and Performance

Contracts create obligations: to give, to do, or not to do. The nature of the obligation matters because remedies differ:

To give (e.g., deliver goods, pay money)
To do (e.g., render services, build a house)
Not to do (e.g., non-compete clauses)

III. What Counts as Breach of Contract?

A. Types of Breach

Total breach – complete non-performance.
Partial breach – incomplete performance.
Delayed performance – performance after due date.
Defective/Improper performance – performance not in accordance with agreed quality/specifications.
Anticipatory breach (repudiation) – a party clearly and positively refuses to perform before performance is due.

B. Substantial vs. Slight Breach

Philippine courts look at whether the breach is substantial (goes to the essence of the contract) or slight (minor deviation). Substantial breach can justify rescission; slight breach may only justify damages or specific performance.

C. Breach of Express and Implied Terms

A party may breach:

Express terms (written or verbal stipulations)
Implied terms arising from law, custom, or the nature of the agreement (e.g., duty to act in good faith)

IV. Delay (Mora) and Demand: When Damages Start Running

Delay is not presumed. For a party to be liable for delay, the law usually requires a demand unless demand is excused.

A. Kinds of Delay

Mora solvendi – delay by the debtor/obligor.
Mora accipiendi – delay by the creditor/obligee (e.g., refusing delivery).
Compensatio morae – both parties in delay in reciprocal obligations.

B. General Rule: Demand Is Required

The debtor is in delay only from the time the creditor demands fulfillment (judicially or extrajudicially).

C. Exceptions: Demand Not Required

Delay begins automatically when:

The obligation or law expressly declares that no demand is needed.
The date is the controlling motive for the contract (time is of the essence).
Demand would be useless (e.g., impossibility caused by debtor).
In reciprocal obligations, once one party performs, the other is in delay if they fail to perform.

D. Practical Impact

Interest on money claims often runs from demand.
Liability for fortuitous events can attach once the debtor is in delay.

V. Legal Remedies for Breach of Contract

A. Principal Remedies Under the Civil Code

1. Specific Performance

The injured party may compel the breaching party to perform what they promised.

Use when:

Performance is still possible.
Money damages are inadequate.

Examples:

Delivery of a specific property
Execution of a deed of sale
Completion of contracted services (when feasible)

Courts will not order specific performance if it would require continuous supervision, involve personal services where trust is essential, or be impossible.

2. Rescission (Resolution)

Rescission is cancellation of the contract due to substantial breach, restoring parties as if the contract had not been made (with mutual restitution).

Key points:

Applies mainly to reciprocal obligations (both parties owe each other something).
Requires substantial breach.
As a rule, rescission is judicial (must go to court), unless:
- the contract has a valid rescission clause allowing extrajudicial rescission, and
- the rescinding party follows contractual and legal requirements.

Rescission is without prejudice to damages.

3. Damages

Damages may be demanded with specific performance or rescission, unless incompatible with the remedy chosen.

4. Substitution / Performance by Another

If the breach is of an obligation “to do,” the injured party may have the work done by another at the breaching party’s cost, plus damages.

If the obligation is “not to do,” the injured party may demand that what was done be undone at the breaching party’s expense.

B. Remedies by Contract or Special Law

Parties can stipulate additional remedies so long as not contrary to law or public policy, including:

Termination clauses
Liquidated damages
Forfeiture of deposits
Acceleration clauses in loans
Penalty clauses

Special laws may provide unique relief:

Consumer Act for sales to consumers
Labor Code for employment contracts (with distinct standards)
Maceda Law for installment realty purchases
Insurance Code, Housing laws, etc.

C. Provisional / Ancillary Remedies

During litigation, plaintiffs may ask for:

Preliminary attachment
Temporary restraining order / injunction
Receivership
Replevin (recovery of personal property)

These secure rights while the lawsuit is pending.

VI. Damages in Breach of Contract

A. Overview

Damages are the monetary consequences of breach. Philippine law classifies them into several types. Whether they are awarded depends mainly on:

Existence of breach
Causation
Proof and reasonable certainty
Presence or absence of bad faith
Foreseeability

B. Actual or Compensatory Damages

Definition: Payment for proven pecuniary loss.

Requirements:

Must be proved with competent evidence (receipts, contracts, records).
Must be a natural and probable consequence of breach.

Includes:

Cost of repair/replacement
Lost amounts paid
Additional expenses caused by breach
Lost profits (if properly proven)

Courts do not award actual damages based on speculation.

C. Moral Damages

Definition: Compensation for mental anguish, besmirched reputation, anxiety, humiliation.

General rule: Not awarded for breach of contract unless:

The breach was in bad faith, and
The contract is of such nature that moral damages are foreseeable (e.g., passenger carriage, hotel services, contracts involving dignity or personal welfare).

Bad faith is more than negligence; it implies a dishonest purpose or conscious wrongdoing.

D. Nominal Damages

Definition: Small amount awarded to vindicate a right when breach is proven but no actual loss is shown.

Useful where breach is clear but proof of actual damages is weak.

E. Temperate or Moderate Damages

Definition: Awarded when actual loss occurred but cannot be proved with certainty.

Courts estimate an amount that is more than nominal but less than full actual damages.

F. Liquidated Damages

Definition: An amount agreed upon in advance by the parties to be paid in case of breach.

Rules:

Enforceable if not unconscionable.
May be reduced by courts if iniquitous or if there was partial/irregular performance.
May be demanded instead of actual damages unless the contract allows both (or unless law permits).

G. Exemplary (Punitive) Damages

Definition: Additional damages to deter and punish.

When awarded: Only when breach is attended by:

Fraud
Bad faith
Wantonness
Malevolence

Must be supported by other damages (e.g., actual or moral).

H. Interest on Monetary Obligations

Interest may be:

Conventional interest – rate agreed by parties, subject to rules on unconscionability.
Legal interest – imposed by courts when no valid rate is proven or when equitable.

Interest generally runs from demand, unless law or contract provides otherwise.

I. Attorney’s Fees and Costs

Attorney’s fees are not automatic. Awarded only in specific situations, e.g.:

When exemplary damages are awarded
When the defendant acted in gross and evident bad faith
When compelled to litigate to protect rights

Even then, the amount must be reasonable and justified in the decision.

VII. Defenses Against a Breach Claim

A party accused of breach may invoke:

A. No Valid Contract

Claiming the contract is void/voidable/unenforceable rescinds the “breach” basis.

B. Performance or Tender of Performance

Prove that the obligation was performed, or that valid tender was made but refused (creditor’s delay).

C. Lack of Demand / Not Yet Due

If demand is required and none was made, no delay damages can accrue.

D. Fortuitous Event (Force Majeure)

If performance became impossible due to an unforeseeable event beyond control, the obligor is not liable unless:

The law or contract makes them liable even for fortuitous events, or
They were already in delay at the time of the event.

E. Mutual Breach / First Breach Rule

In reciprocal contracts, the party who commits the first substantial breach typically cannot demand performance from the other.

F. Waiver, Estoppel, or Novation

Waiver: creditor intentionally renounced the right.
Estoppel: creditor’s conduct led debtor to believe strict compliance wouldn’t be enforced.
Novation: new agreement replaced the old one.

G. Prescription (Statute of Limitations)

Civil actions based on written contracts generally prescribe 10 years from accrual of the cause of action; oral contracts 6 years. (Special laws may vary.)

VIII. Procedure: How Breach Cases Are Filed and Proven

A. Cause of Action

Plaintiff must show:

Existence of a valid contract
Plaintiff’s performance or readiness to perform
Defendant’s breach
Resulting damage (except for nominal damages)

B. Burden of Proof

Plaintiff bears burden to prove breach and damages.
Bad faith must be specifically alleged and proven for moral/exemplary damages.

C. Evidence Typically Used

Contract documents, annexes, addenda
Receipts, invoices
Correspondence, emails, demand letters
Witness testimony
Expert evidence (construction, accounting, valuation)

D. Venue

Filed where:

Plaintiff or defendant resides, or
Where the contract was to be performed, depending on rules and stipulations.

E. Alternative Dispute Resolution

Many contracts include arbitration or mediation clauses. Courts generally respect these. Construction disputes and commercial contracts often require arbitration before litigation.

IX. Common Philippine Contract Scenarios

A. Sale of Goods / Services

Defects, late delivery, refusal to pay.
Remedies: rescission, replacement, damages, interest.

B. Lease

Non-payment of rent, premature termination, refusal to vacate.
Remedies: ejectment, collection, damages.

C. Loan / Credit

Default, misapplication of payments.
Remedies: collection, foreclosure, acceleration, interest.

D. Construction

Delay, substandard work, change orders.
Remedies: specific performance, substitution, liquidated damages, arbitration.

E. Employment Contracts

Handled under labor standards; remedies include reinstatement, backwages, separation pay, and damages under labor rules rather than ordinary civil breach principles.

X. Drafting Tips to Prevent or Manage Breach Risks

Define obligations clearly: scope, standards, milestones.
Include time-is-of-the-essence language if delays are critical.
Provide demand and cure periods: e.g., 15 days to remedy breach.
Set liquidated damages rationally to avoid reduction.
Force majeure clause: define events and notice duties.
Dispute resolution clause: mediation → arbitration → courts.
Attorney’s fees clause: still subject to judicial scrutiny, but helps.
Documentation discipline: written notices, change orders, receipts.

XI. Key Takeaways

Breach is a failure to perform a due obligation, including delay or improper performance.
Delay usually requires demand, unless demand is excused.
Main remedies: specific performance, rescission, damages, plus substitution for obligations “to do.”
Damages types are distinct; actual damages require proof, while moral/exemplary require bad faith.
Liquidated damages are enforceable but can be reduced if unconscionable.
Defenses include lack of contract validity, fortuitous events, first breach rule, and prescription.
Many disputes are shaped by the contract’s drafting, especially clauses on termination, penalties, and ADR.

If you want, I can draft a breach-of-contract demand letter template or a sample complaint structure tailored to a scenario you have in mind.