I. Why this matters

In Philippine service contracts—repair and maintenance, logistics, construction, ICT managed services, even professional engagements—the biggest fights after a loss (e.g., damaged or lost property) are rarely about fault and mostly about how much the liable party must pay. Two valuation methods routinely surface:

Fair market value (FMV) at the time and place of loss; and
Depreciated value (often expressed as “replacement cost less depreciation” or “actual cash value”).

This article lays out the governing rules, how courts typically approach valuation, practical drafting options, and worked examples you can lift straight into negotiations or pleadings.

II. Legal foundations

1) Obligations & damages (Civil Code)

Culpa contractual governs when the loss arises from breach of a service obligation. The debtor in good faith is liable for foreseeable damages (Arts. 1170, 2201), while bad faith broadens liability.
Compensatory damages (Arts. 2199–2200) aim to indemnify for the loss actually sustained and profits that the obligee failed to obtain, provided they are proven with a reasonable degree of certainty.
Actual or compensatory damages must be competently proven (receipts, appraisals, expert testimony). Courts will not speculate.
Interest: Monetary awards generally earn 6% per annum legal interest from the time the amount is judicially demanded or adjudged, depending on when the sum became ascertainable.
Attorney’s fees may be awarded only in the instances allowed by law (Art. 2208), often when the defendant’s act or omission compelled the plaintiff to litigate.

2) Freedom of contract (Arts. 1306, 1159)

Parties may stipulate valuation rules (e.g., FMV vs. depreciated value), caps, exclusions, or penalties, provided they are not contrary to law, morals, good customs, public order, or public policy.
Limitation-of-liability clauses are generally respected in commercial contracts if clear, fairly agreed, and not unconscionable. Clauses that totally exempt a party from liability for gross negligence or willful acts are vulnerable.

3) Special frameworks that may influence valuation

Consumer protection regimes (e.g., transport, courier, repair shops) may impose statutory duties and invalidate unfair terms.
Insurance analogies: Though not controlling in a pure services dispute, Philippine courts often reference “actual cash value” concepts (FMV or replacement cost less depreciation) to avoid unjust enrichment.

III. The two dominant valuation paradigms

A. Fair Market Value (FMV)

Definition: The price a willing buyer would pay and a willing seller would accept, in an arm’s-length transaction, at the time and place of loss.

When courts gravitate to FMV

Total loss of personal property (e.g., a courier loses an item; a contractor destroys a client’s machine beyond economic repair).
Second-hand equipment markets with observable prices (e.g., vehicles, laptops, heavy tools).
To prevent windfalls: If paying replacement cost would put the claimant in a better position than before the loss, courts prefer FMV.

Proof of FMV

Comparable sales (ads, dealer quotations, secondary market listings), expert appraisal, books of account, or company asset registers if properly authenticated.
For real property fixtures damaged during services, FMV may be supported by assessor’s values and independent appraisals, but the focus remains on the actual diminution in value or cost of restoration, whichever is less, adjusted for condition/age.

B. Depreciated Value (Replacement Cost Less Depreciation / “Actual Cash Value”)

Definition: Start with the cost to replace with new of like kind and quality, then deduct depreciation to reflect age/usage/obsolescence.

When this is used

Replacement is necessary for the service recipient to continue operations, but the damaged item was not new.
The contract expressly adopts “actual cash value” or “replacement cost less depreciation” (common in logistics master service agreements, maintenance contracts, data center SLAs).
Total or constructive total loss where repair is uneconomical, and parties want an objective, formula-based approach.

How depreciation is determined

Straight-line over useful life (often aligning with BIR tables for tax depreciation as a proxy).
Accelerated for tech gear with high obsolescence.
Salvage value is credited where applicable.

Proof of replacement cost & depreciation

Supplier quotations for like-for-like replacement.
Accounting records on acquisition cost, age, remaining useful life, and residual value.
Expert technical reports (for obsolescence/functional depreciation).

IV. Choosing between FMV and Depreciated Value

Scenario	Recommended Baseline	Why
Lost package (consumer courier)	FMV at loss	Quick to prove via retail/second-hand prices; avoids overcompensation.
Damaged specialized equipment (B2B)	Replacement less depreciation	Reflects operational reality and avoids giving brand-new value for an old asset.
Repairable item with clear cost-to-repair	Cost of repair (capped at FMV)	Classic rule: repair cost proven by receipts, not exceeding FMV at loss.
Software licenses / data loss	Proven remediation cost + provable consequential loss if allowed	No “FMV” of data; use reasonable mitigation/forensics/restoration costs; consequential limits often negotiated.

Key guardrails

No unjust enrichment: The claimant should be restored, not improved.
Mitigation: The injured party must take reasonable steps to reduce loss (e.g., procure temporary replacement, salvage parts).
Foreseeability: Lost profits and business interruption are recoverable only if foreseeable at contracting and sufficiently proven.

V. Contract drafting strategies

1) Value standard clause

Valuation of Loss. For any loss, destruction, or non-repairable damage to Client Property arising from Service Provider’s breach or negligence, the measure of compensation shall be the lesser of: (a) the fair market value at the time and place of loss (net of salvage), or (b) the replacement cost of like kind and quality, less depreciation calculated on a straight-line basis over the asset’s useful life with a residual value of 10%. If repairable, compensation shall be the reasonable and documented cost of repair, not to exceed FMV.

2) Evidentiary protocol

The parties shall, within 10 business days of the incident report, exchange three independent quotations and/or an appraisal by a mutually acceptable expert; refusal without justified cause allows the requesting party to designate the expert whose assessment will be presumptive evidence subject to rebuttal.

3) Consequential damages

Consequential damages (e.g., lost profits, business interruption) are recoverable only if (i) specifically listed in the Order Form or SOW, (ii) foreseeable at the time of contracting, and (iii) proven with reasonable certainty. Otherwise, they are excluded.

4) Liability caps and carve-outs

Aggregate liability in any Contract Year shall not exceed 100% of fees paid for the 12 months preceding the claim, except for (i) willful misconduct or gross negligence, (ii) personal injury, (iii) IP infringement, and (iv) breach of confidentiality (subject to a higher cap or uncapped, as negotiated).

5) Interest; fees

All sums due under this clause shall earn legal interest at 6% per annum from the date of written demand until full payment. Attorney’s fees are recoverable only as provided by law or when the prevailing party is compelled to litigate by the other party’s unjustified refusal to pay.

VI. Litigation & proof playbook

Establish liability theory: breach of the service obligation (SOW/SLA), negligence in performance, causation, and foreseeability of downstream loss.
Prove the quantum with receipts, appraisals, technical reports, market comps, and (for lost profits) business records showing historical performance and the causal link.
Elect valuation method consistent with your pleadings and contract text:
- FMV: file market comparables at the time/place of loss; show salvage credit.
- Depreciated value: file replacement quotes + depreciation schedule; justify useful life and residual.
Address mitigation: document efforts to reduce downtime (temporary rentals, patch repairs).
Compute legal interest and, where justified, attorney’s fees.
Prepare for defenses: invalidity or ambiguity of valuation clause, force majeure, sole negligence of claimant, failure to mitigate, or limitation cap.

VII. Computation examples

Example 1: FMV for total loss (courier misdelivery)

Item: DSLR camera, acquired 3 years ago.
Evidence of FMV at loss: ₱38,000 (secondary market comps in Metro Manila).
Salvage: none (item lost).
Recoverable amount: ₱38,000
Interest: 6% p.a. from written demand.

Example 2: Replacement cost less depreciation (B2B equipment)

Asset: Industrial pump.
New replacement cost (like-for-like): ₱480,000 (three supplier quotes).
Useful life: 8 years; Age at loss: 3 years. Straight-line depreciation; residual 10%.
Depreciable base = ₱480,000 × (1 − 10%) = ₱432,000
Accumulated depreciation = ₱432,000 × (3/8) = ₱162,000
Depreciated value = ₱480,000 − ₱162,000 = ₱318,000
Salvage value (recoverable parts): ₱20,000 credit.
Recoverable amount: ₱298,000
If repairable: compare with documented repair cost; pay the lower amount.

Example 3: Repair cost cap at FMV (vehicle in repair shop damaged by mechanic)

FMV at loss (comps/appraisal): ₱420,000
Documented repair estimate: ₱460,000
Recoverable = ₱420,000 (repair cost capped at FMV).

VIII. Sector notes

Logistics & couriers: Standard terms often impose declared value limits. If a client underdeclares value, recovery may be limited to the declared amount plus statutory or contractual minima, unless the limitation is voided for bad faith or gross negligence.
IT & cloud services: Hardware loss tends to follow replacement less depreciation; data loss is valued via restoration cost and narrowly-tailored consequential damages tied to SLAs.
Construction & fit-out: Damage to fixtures is usually measured by cost of restoration not exceeding diminution in value; specify this in the contract to avoid debate.
Professional services: Loss is seldom about chattels; negotiate caps and carve-outs for negligent advice causing quantifiable client losses.

IX. Practical checklists

For claimants

Gather purchase docs, maintenance logs, photos, and serial numbers.
Obtain 3 replacement quotes and 1 appraisal for FMV comparisons.
Compute both FMV and depreciated value; plead the higher consistent with contract language, but be ready to accept the lesser of rule to avoid unjust enrichment arguments.
Send a written demand with a clear computation to start interest running.

For service providers

Preserve evidence; commission your counter-appraisal fast.
Assert caps, exclusions, and mitigation failures.
Pay undisputed amounts promptly to stop interest accrual and signal good faith.
For recurring engagements, propose a standing valuation schedule (useful life table + residuals) attached to the SOW.

X. Model clause set (put in your MSA or SOW)

10.1 Definitions. “FMV” means the price a willing buyer would pay and a willing seller would accept for the Property at the time and place of loss. “ACV” means actual cash value, equal to Replacement Cost less Depreciation and net of Salvage. “Replacement Cost” means the cost to replace with like kind and quality (inclusive of delivery, taxes, and installation). “Depreciation” follows straight-line over the useful life in Schedule A with a 10% residual, unless the parties agree to a different schedule for specific assets.

10.2 Measure of Compensation. For total loss, compensation is the lesser of FMV or ACV. For partial loss, compensation is documented repair cost, not exceeding FMV.

10.3 Evidence. The claiming party shall submit receipts, appraisals, and quotations; the other party may procure counter-quotes within 10 business days. The parties may jointly appoint an independent appraiser whose written determination is prima facie evidence.

10.4 Consequential Loss. Consequential or special damages are recoverable only if expressly listed in the SOW and foreseeable at contract formation, and must be proven with reasonable certainty.

10.5 Interest. Any sum due bears 6% per annum legal interest from written demand until fully paid.

10.6 Salvage. Salvage belongs to the paying party unless otherwise agreed; its value is credited in the computation.

XI. Takeaways

The default judicial instinct is to put the injured party back where they were—no better, no worse.
FMV at the time/place of loss is the most neutral baseline, but replacement less depreciation is practical and fair in many B2B contexts.
The strongest position is contractual clarity: define the valuation method, proof, caps, interest, and carve-outs.
In disputes, prove the numbers meticulously and compute interest—small percentages become meaningful over time.

This overview is intended for drafting and dispute strategy in the Philippine context. For high-stakes matters, evaluate the precise contract text, industry regulations, and the evolving jurisprudence applicable to your fact pattern.