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:
- Intentional non-performance (dolo) – fraud or bad faith.
- Negligent non-performance (culpa) – fault or imprudence.
- Delay (mora solvendi or mora accipiendi) – failure to perform on time after demand (Arts. 1169-1170).
- Contravention of terms – performance in a manner different from that agreed (Arts. 1170-1171).
2 | Elements of an Action for Breach
- Valid, enforceable contract (offer, acceptance, object, cause).
- Defendant’s breach (act/omission, or delay after demand).
- Causation linking breach to loss.
- 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
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.
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).
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.
Government Procurement (RA 9184)
- Penalties: liquidated damages (at least 1/10 of 1 % per day), blacklisting, forfeiture of bid/performance securities.
Insurance
- Uberrimae fides: Material concealment → rescission (Insurance Code, Sec. 27).
- Delay in payment of proceeds → interest & damages (Sec. 249).
Banking & Finance
- Breach of fiduciary duty may entail exemplary damages; BSP may impose administrative sanctions.
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:
- The contract bears a substantial connection therewith; and
- Foreign law is proved as fact (Rule 132, Sec. 24).
Absent proof, Philippine law applies under the “processual presumption”.
9 | Drafting & Practical Tips
- Define default and cure periods clearly; provide for notice and opportunity to cure.
- Liquidated damages should be reasonable to avoid court reduction.
- Escalation (multi-tier ADR) clauses streamline dispute handling.
- Governing-law and venue clauses reduce uncertainty but must respect public policy.
- 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.