Legal Consequences of Breach of Contract Philippines

Legal Consequences of Breach of Contract under Philippine Law (Comprehensive overview; Civil Code unless otherwise indicated. Updated to 28 June 2025. For study only—always obtain professional advice for a specific case.)


1 | Foundations

Source Key Provisions
Civil Code of the Philippines Arts. 1156-1304 (Obligations), 1305-1422 (Contracts), 2199-2229 (Damages)
Special statutes Labor Code; Consumer Act (RA 7394); Government Procurement Reform Act (RA 9184); Alternative Dispute Resolution Act (RA 9285); Construction Industry Arbitration Law (EO 1008)
Jurisprudence Coca-Cola Bottlers v. CA (G.R. 110295, 1998); Unilever Phils. v. Court of Appeals (G.R. 111601, 1999); Philippine National Bank v. CA (G.R. 121582, 1998) et al.

Breach is any violation of the tenor of an obligation (Art. 1167) through:

  1. Intentional non-performance (dolo) – fraud or bad faith.
  2. Negligent non-performance (culpa) – fault or imprudence.
  3. Delay (mora solvendi or mora accipiendi) – failure to perform on time after demand (Arts. 1169-1170).
  4. Contravention of terms – performance in a manner different from that agreed (Arts. 1170-1171).

2 | Elements of an Action for Breach

  1. Valid, enforceable contract (offer, acceptance, object, cause).
  2. Defendant’s breach (act/omission, or delay after demand).
  3. Causation linking breach to loss.
  4. Damage or entitlement to a remedy (Art. 1170; Coca-Cola Bottlers).

Burden of proof: preponderance of evidence (Rule 133, Rules of Court).

Prescription:

  • Written contracts: 10 years (Art. 1144).
  • Oral/implied contracts: 6 years (Art. 1145).
  • Quasi-contracts/quasi-delicts: 4 years (Arts. 1145-1146).

3 | Principal Remedies

3.1 Specific Performance

  • Compels the defaulting party to do what was promised (Art. 1167).
  • Often coupled with damages and interest.
  • In reciprocal obligations court may order simultaneous performance (compensatio morae).

3.2 Rescission (Resolution) of Reciprocal Contracts

  • Allowed under Art. 1191 if one party substantially breaches.
  • Must generally be via judicial action; extrajudicial rescission valid only if expressly stipulated (Unilever).
  • Restitutio in integrum: parties return what they received (Art. 1385 by analogy).

3.3 Damages (Arts. 2199-2229):

Type Requisites / Notes
Actual or Compensatory Proven pecuniary loss (2199-2205)
Temperate (Moderate) Loss clearly suffered but impossible to quantify (2224)
Nominal Recognizes a right violated without loss (2221)
Liquidated Pre-agreed amount (1226-1230); courts may reduce if unconscionable or iniquitous
Moral Physical suffering, mental anguish, social humiliation, etc. (2217)
Exemplary (Punitive) In addition to other damages, if breach is wanton or attended by bad faith (2232-2234)
Attorney’s Fees Only when justified under Art. 2208 or by stipulation

Interest:

  • 6 % p.a. legal interest on money claims (BSP CB Circular 799, Nacar v. Gallery Frames, 716 SCRA 267 [2013]); 12 % p.a. if the obligation is a loan or forbearance incurred before 1 July 2013.

3.4 Penal Clauses

  • Penalty substitutes for damages and interest unless creditor opts otherwise (Art. 1226).
  • May still claim attorney’s fees and costs (Art. 1227).

3.5 Substituted Performance & Right to Have It Done

  • If an obligation to do is breached, obligee may have it executed at debtor’s cost (Art. 1167 ¶2).
  • If obligation is not to do, creditor may order undoing of what was wrongly done (Art. 1168).

4 | Special Contexts

  1. Sales of Goods (Civil Code Arts. 1595-1600; Sale of Goods Act not adopted).

    • Seller’s remedies: action for price (1595), damages for non-acceptance (1596).
    • Buyer’s options (1599): accept, rescind, seek specific performance, or claim damages.
  2. Construction & Engineering Contracts

    • Disputes typically fall under CIAC arbitration (EO 1008; MAMSAR v. Diamond Builders, 768 SCRA 372 [2015]).
    • Liquidated damages clauses customary (DPWH Standard Specs).
  3. Employment Contracts

    • Breach often framed as illegal dismissal or unfair labor practice; governed by Labor Code.
    • Remedies include reinstatement, back wages, moral/exemplary damages, separation pay.
  4. Government Procurement (RA 9184)

    • Penalties: liquidated damages (at least 1/10 of 1 % per day), blacklisting, forfeiture of bid/performance securities.
  5. Insurance

    • Uberrimae fides: Material concealment → rescission (Insurance Code, Sec. 27).
    • Delay in payment of proceeds → interest & damages (Sec. 249).
  6. Banking & Finance

    • Breach of fiduciary duty may entail exemplary damages; BSP may impose administrative sanctions.
  7. Consumer Transactions (RA 7394)

    • Consumer may demand repair, replacement, or refund; punitive damages possible for bad-faith sellers.

5 | Criminal Overlap

  • Estafa (Art. 315, Revised Penal Code) if breach involves deceit or misappropriation.
  • Bouncing Checks Law (BP 22) for dishonored checks issued in contractual payments.
  • Civil action for damages may be impliedly instituted with the criminal action unless waived.

6 | Alternative Dispute Resolution

Mode Statute / Rules Notes
Arbitration RA 9285; RA 876; Special ADR Rules; CIAC Rules Awards directly enforceable; limited judicial review
Mediation / Conciliation ADR Act; barangay Katarungang Pambarangay (RA 7160, Ch. VII) Barangay conciliation prerequisite for parties in the same locality
Negotiation & Contractual Escalation Clauses Valid and usually enforced; a condition precedent (Fujitsu Ten v. CA, G.R. 158232, 2005)

7 | Mitigation, Foreseeability & Good Faith

  • Injured party must mitigate losses (Art. 2199 last ¶; PNB v. CA).
  • Damages limited to those foreseeable at contract formation (Arts. 2201-2202).
  • Parties must observe good faith; bad faith enlarges liability (Art. 19, Solidbank v. CA, G.R. 144635, 2002).

8 | Conflict-of-Laws and Choice-of-Law Clauses

  • Philippine courts generally honor parties’ chosen foreign law if:

    1. The contract bears a substantial connection therewith; and
    2. Foreign law is proved as fact (Rule 132, Sec. 24).
  • Absent proof, Philippine law applies under the “processual presumption”.


9 | Drafting & Practical Tips

  1. Define default and cure periods clearly; provide for notice and opportunity to cure.
  2. Liquidated damages should be reasonable to avoid court reduction.
  3. Escalation (multi-tier ADR) clauses streamline dispute handling.
  4. Governing-law and venue clauses reduce uncertainty but must respect public policy.
  5. Force majeure clauses should align with Art. 1174 (fortuitous events) and recent pandemic jurisprudence (NIPPON Steel v. CE Casecnan, G.R. 192715, 2021).

10 | Conclusion

Breach of contract in the Philippines triggers a menu of consequences—specific performance, rescission, multifaceted damages, penal clauses, and even criminal exposure—tempered by doctrines of good faith, mitigation, and foreseeability. The Civil Code supplies the default framework, but sector-specific laws, Supreme Court precedent, and contractual stipulations shape each dispute. Draft with clarity, act in good faith, and exhaust ADR where feasible; litigation, though robust, should be a last resort.


© 2025. Prepared for educational purposes; not a substitute for individualized legal counsel.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.