Breach of Contract in the Philippines: Remedies and Liabilities
1. Concept, Sources and Governing Law
| Key provision | What it establishes |
|---|---|
| Art. 1159, Civil Code | Contracts have the force of law and must be complied with in good faith. |
| Arts. 1170–1174 | Liability for fraud, negligence, delay, and fortuitous events. |
| Arts. 1191 & 1380–1391 | Resolution (rescission for breach of reciprocal obligations) and rescission of rescissible contracts. |
| Arts. 2200-2229 | Spectrum of damages (actual, moral, nominal, temperate, liquidated, exemplary). |
Other special statutes (e.g., the Consumer Act, Contractors’ License Law, Civil Aviation Act, Labor Code for employment contracts) overlay sector-specific duties, but the Civil Code supplies the general matrix.
2. What Constitutes a Breach
Substantial breach / positive violation – complete or material failure to perform the prestation.
Delay (mora)
- Mora solvendi – debtor’s delay after demand (Art. 1169).
- Mora accipiendi – creditor’s refusal to accept proper tender.
Fraud or dolo (Art. 1170) – intent to evade the normal fulfilment of the contract.
Negligence or culpa (Art. 1170) – breach caused by lack of due care.
Anticipatory breach – party makes performance impossible before the due date; recognised in jurisprudence although not textually in the Code.
A breach must be proved by a preponderance of evidence; documentary contracts enjoy a presumption of regularity unless overthrown by convincing proof (see Taok v. Conde, G.R. No. 254248, 29 Nov 2023).
3. Defences and Excuses
| Defence | Statutory basis | Practical notes |
|---|---|---|
| Fortuitous event / force majeure | Art. 1174 | Must be independent of debtor’s will, unforeseeable, and renders performance impossible. |
| Novation | Art. 1291 | Replaces the old obligation; extinguishes breach claims on the original contract. |
| Illegality / impossibility | Arts. 1306, 1347 | Performance becomes unlawful; contract void. |
| Estoppel, waiver, laches | Equity | Applies where the innocent party accepts late or defective performance without protest. |
4. Remedies of the Injured Party
| Remedy | Legal anchor | Requisites | Effect |
|---|---|---|---|
| Specific performance | Art. 1167 (to do), 1654 (vendor’s), Rule 62 ROC | Obligation is determinate/possible; plaintiff ready to perform. | Court compels exact fulfilment plus damages. |
| Resolution/Rescission | Art. 1191 (reciprocal contracts) | Substantial breach; mutual restitution. | Contract unmade ab initio; parties returned to status quo. |
| Rescissible/voidable actions | Arts. 1380, 1390 | Lesion or vice of consent. | Contract annulled; damages possible. |
| Damages | Arts. 2199-2229; Eastern Shipping Lines / Nacar doctrine | Actual loss or lost profits must be proven, except liquidated damages. | Monetary indemnity; interest rules apply (see § 5). |
| Injunction (interim or permanent) | Rule 58 ROC | Urgent, substantial right at stake. | Preserves status quo; often paired with arbitration. |
| Penalty / liquidated damages | Art. 1226 | Valid penal clause; may be reduced if iniquitous. | Fixed sum replaces proof of actual damages unless court reduces. |
5. Damages, Interest and Attorneys’ Fees
| Type of Damages | Highlights | Illustrative authority |
|---|---|---|
| Actual / Compensatory | Proven out-of-pocket loss or loss of probable profits. | Lara’s Gifts & Decors v. Midtown, G.R. No. 225433, 20 Sep 2022 (explains proof and interest layering). |
| Moral | Allowed for breach when defendant acted in bad faith (Art. 2220). | Philippine Village Hotel v. Ma. Victoria, G.R. No. 170923 (2009). |
| Exemplary | To set a public example; requires an award of compensatory damages first (Art. 2232). | Toyota Shaw v. CA, G.R. No. 116650 (1997). |
| Nominal / Temperate | Nominal vindicates a right without proof of loss (₱1-₱10k typical); temperate fills evidentiary gaps. | Barons Marketing v. CA, G.R. No. 126154 (1999). |
Interest rules (Eastern Shipping Lines as refined by Nacar, Circular 799-2013)
- Money obligation with stipulated rate → apply agreed rate; legal interest (6 % p.a.) begins on unpaid interest from date of judicial demand.
- Money obligation without rate → 6 % p.a. from demand.
- Non-money obligation → 6 % p.a. discretionary, counted from either demand (if liquidated) or judgment (if unliquidated).
- Post-judgment interest: 6 % p.a. on the adjudged amount until full satisfaction.
6. Liability of Multiple Debtors
- Joint vs. Solidary (Arts. 1207-1208). In the Philippines obligations are presumed joint; solidary liability arises only by law or clear stipulation (e.g., suretyship, partners, transport carriers).
- Corporate contracts. As a rule, only the corporation is liable; officers answer only if they signed in their personal capacity or engaged in bad-faith acts (see Alhambra Industries v. PCGG, G.R. No. 200028, 2022).
7. Procedural Roadmap
Demand letter / barangay conciliation (for parties in the same city/municipality, R.A. 7160 Katarungang Pambarangay).
Choice of forum
Regular courts:
- MTCs – actions up to ₱2 million (as of 2022 amendments).
- RTCs – above ₱2 million or actions incapable of pecuniary estimation (e.g., specific performance).
Arbitration / CIAC (for construction), PDRC mediation, or contractual ADR clauses (R.A. 9285).
Prescriptive periods (Art. 1144: written contract – 10 yrs; oral – 6 yrs; quasi-contract – 6 yrs).
Pre-trial / JDR – mandatory settlement efforts.
Judgment, appeal, execution – execution by motion within 5 yrs; thereafter action.
8. Sector-Specific Nuances
| Contract type | Special rule | Leading cases / laws |
|---|---|---|
| Common carrier (carriage of goods/persons) | Extraordinary diligence; presumption of fault for loss/injury (Arts. 1733-1753). | Phil. Airlines v. Spouses Tan (2024, CA). |
| Construction | CIAC jurisdiction; architects’ & engineers’ liability periods under the National Building Code. | D.M. Consunji v. CA, G.R. No. 137873 (2001). |
| Employment | Breach usually framed as illegal dismissal; Labor Arbiter jurisdiction; backwages & reinstatement. | Aragones v. AllTech (G.R. No. 251736, 2025).(Supreme Court of the Philippines) |
| Government procurement | RA 9184 permits suspension, termination and blacklisting for contract breach. | 2024 SC Guidelines on Pre-termination.(Supreme Court of the Philippines) |
9. Recent Supreme Court Trends
- Taok v. Conde (2023) – clarifies that oral modifications to a written sale are barred by the parol-evidence rule unless squarely pleaded; re-emphasises mutual restitution after rescission.
- Lara’s Gifts v. Midtown (2022) – exhaustively distinguishes conventional vs compensatory interest and affirms that interest-on-interest may be imposed when stipulated or judicially demanded.
- San Miguel Foods v. Fabie (2024) – although mainly evidentiary, re-states that supplier’s tight credit policies are not ipso facto bad faith. (PDF unavailable at time of writing; see SC press summary 9 May 2024.)
10. Practical Compliance Tips
- Draft with clarity: spell out period, manner, place of performance; insert a reasonable penalty clause.
- Keep all written exchanges—emails, receipts, demand letters—breach cases are document-centric.
- Include an ADR clause to avoid court congestion.
- Tender performance formally if you are debtor-side; valid tender stops interest from running (§ Art. 1256).
- Monitor the prescriptive clock; a demand letter does not interrupt prescription—only filing or extrajudicial written acknowledgment does.
11. Conclusion
Philippine law strikes a balance between pacta sunt servanda and equitable relief. The Civil Code supplies a comprehensive toolkit—specific performance, rescission, damages—with jurisprudence continuously refining calculation of interest, thresholds for substantial breach, and the scope of bad-faith liability. Mastery of both Code provisions and evolving case law is essential when advising clients, negotiating contracts, or litigating breach-of-contract suits in the Philippines.