In the Philippine jurisdiction, a contract is defined under Article 1305 of the Civil Code as a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. Once a contract is perfected, it has the force of law between the parties (lex loci contractus), and they are bound to fulfill what has been expressly stipulated.
A breach of contract occurs when a party fails, without legal reason, to comply with the terms of the agreement. This failure may be partial or total, and it triggers specific legal remedies and penalties under the Civil Code of the Philippines.
1. The Nature of the Breach
Not every failure to perform constitutes a substantial breach. Philippine law distinguishes between:
- Substantial Breach: A breach so fundamental that it defeats the very object of the parties in making the agreement. This allows the injured party to rescind the contract.
- Casual Breach: A slight or technical violation that does not ground an action for rescission but may allow for a claim for damages.
Under Article 1170, those who in the performance of their obligations are guilty of fraud (dolo), negligence (culpa), or delay (mora), and those who in any manner contravene the tenor thereof, are liable for damages.
2. Primary Legal Remedies
When a breach occurs, the injured party generally has two main options under Article 1191 (specifically for reciprocal obligations):
I. Specific Performance (Fulfillment)
The injured party may demand that the breaching party fulfill their obligation as stipulated. This is common in sales of unique real property where monetary compensation is insufficient.
II. Rescission (Resolution)
The injured party may seek the cancellation of the contract. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest.
Note: These remedies are alternative, not cumulative. However, if fulfillment becomes impossible, the injured party may still seek rescission even after choosing fulfillment.
3. Classification of Damages
In the Philippines, the courts may award various types of damages, often remembered by the acronym M.E.N.T.A.L.:
| Type of Damage | Legal Basis & Purpose |
|---|---|
| Moral | For physical suffering, mental anguish, and besmirched reputation (Art. 2217). |
| Exemplary | Imposed by way of example or correction for the public good (Art. 2229). |
| Nominal | Awarded to vindicate a right that has been violated, where no actual loss is proven (Art. 2221). |
| Temperate | Awarded when some pecuniary loss has been suffered but its amount cannot be proved with certainty (Art. 2224). |
| Actual/Compensatory | For the value of the loss suffered (damnum emergens) and profits failed to be realized (lucrum cessans) (Art. 2199). |
| Liquidated | Agreed upon by the parties in the contract, to be paid in case of breach (Art. 2226). |
4. The Penal Clause
Parties often include a Penal Clause in their contracts. Under Article 1226, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, unless there is a stipulation to the contrary.
- Enforceability: The penalty may be reduced by the courts if it is iniquitous or unconscionable, or if the principal obligation has been partly or irregularly complied with (Art. 1229).
- Purpose: It serves both as a punishment for the breach and a pre-estimation of the damages to avoid the difficulty of proving actual losses in court.
5. Legal Interest and Delay (Mora)
A breach often involves a delay in payment or delivery. In the Philippines, Mora Solvendi (delay on the part of the debtor) begins from the moment the creditor judicially or extrajudicially demands fulfillment.
- Interest Rate: Following Nacar v. Gallery Frames, the legal interest rate for obligations not constituting a loan or forbearance of money is 6% per annum, calculated from the time of judicial or extrajudicial demand.
- Compounding: Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point (Art. 2212).
6. Defenses Against Liability
A party accused of a breach may avoid penalties if they can prove:
- Fortuitous Events (Caso Fortuito): Under Article 1174, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. (Exceptions: express stipulation, law, or when nature of the obligation requires assumption of risk).
- Prescription: The right to file a case expires. Written contracts must be enforced within 10 years, while oral contracts must be enforced within 6 years (Art. 1144 & 1145).
- Mora Accipiendi: The creditor was the one who delayed or refused the performance without just cause.
7. Summary of Consequences
The consequences of a breach in the Philippines are not merely financial. They involve:
- Extinguishment of Rights: The breaching party loses the right to demand performance from the other.
- Liability for Costs: Usually, the losing party is ordered to pay for Attorney's Fees and the costs of the suit, especially if the breach forced the injured party to litigate to protect their interests.
- Attachment of Property: During litigation, the injured party may seek a writ of preliminary attachment to freeze the assets of the breaching party to ensure any future judgment can be satisfied.