Terminating Construction Contracts and Claiming Liquidated Damages in the Philippines
(A practitioner‑oriented overview — updated to July 2025)
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Construction disputes are fact‑sensitive; always consult counsel before deciding on termination or enforcing liquidated damages.
1. Foundational Legal Sources
| Sphere | Principal Authorities |
|---|---|
| General contract law | Civil Code of the Philippines (Arts. 1306, 1170‑1174, 1191, 1226‑1233, 1278‑1280, 1305‑1317, 1370‑1374, 1425, 2226‑2228) |
| Private construction | CIAP Document 102 – Uniform General Conditions of Contract for Private Construction (UGCC); CIAP Accreditation & Licensing Regulations (R.A. 4566 & IRR) |
| Government projects | R.A. 9184 & 2016 IRR (Government Procurement Reform Act) plus DPWH Standard Bidding Documents (SBD) & GPPB guidelines; older PD 1594 provisions still govern some pre‑2003 contracts |
| Public–private & BOT variants | R.A. 6957 as amended by R.A. 7718; NEDA Joint Venture Guidelines |
| Dispute resolution | Construction Industry Arbitration Commission (CIAC) Rules, Alternative Dispute Resolution Act 2004, Special ADR Rules (A.M. No. 07‑11‑08‑SC) |
| Insurance & surety bonds | Insurance Code (as amended); performance/payment bond conditions |
2. Key Concepts at a Glance
| Term | Philippine Meaning |
|---|---|
| Termination / Resolution | Bringing the contract to an end prospectively (extinguishes future obligations) or retroactively (restores parties to status quo ante). Governed primarily by Art. 1191 (reciprocal obligations) plus special rules in CIAP Doc 102 and R.A. 9184. |
| Cancellation | A form of termination focusing on future obligations only (Art. 1191, ¶2). |
| Liquidated Damages (LD) | A pre‑agreed sum (penal clause) payable upon specific breach, usually delay. Civil Code Arts. 1226‑1230 govern validity and reduction. Under CIAP Doc 102 §28 and R.A. 9184 IRR §68, LD is typically 0.10% of the contract price per calendar day of delay (≈ 1/10 of 1 percent) unless a different rate is stipulated. |
| Penalty Clause vs. LD | In Philippine doctrine, both are treated under penal clauses; LD is the practical label in construction, but the Civil Code terminology is “penalty.” |
| Force Majeure | Events beyond control that excuse delay and suspend LD (Art. 1174; UGCC §23.1). |
3. Grounds for Termination
3.1 Under the Civil Code (Art. 1191 & Art. 1657)
| Party | Typical Grounds |
|---|---|
| Employer / Owner | • Substantial breach (e.g., abandonment, serious defects, unjustified delay) ̶ • Failure to supply personnel, equipment or materials ̶ • Insolvency |
| Contractor | • Unjustified non‑payment of certified work ̶ • Owner’s interference or failure to provide site access ̶ • Suspension of work beyond 120 days (force majeure aside) |
Judicial vs. extrajudicial rescission: Philippine courts long required court action, but Canizares v. CA (G.R. 75524, 1991) and later cases allow pactum commissorium style extrajudicial rescission if the contract expressly says so and due process (notice‑to‑cure) is observed.
3.2 Private Projects (CIAP Doc 102)
| Section | Key Breach / Default | Cure Period |
|---|---|---|
| §27.1 | Delay beyond 10% of contract time | 15 days |
| §27.2 | Abandonment (work stoppage >15 days without cause) | Immediate |
| §27.3 | Bankruptcy, license suspension | Immediate |
| §27.4 | Repeated defective work | 15 days |
The contractor likewise may terminate (§27.6) if the owner suspends the project for 60 consecutive days or fails to pay two consecutive progress billings.
3.3 Government Contracts (R.A. 9184 IRR §69)
| Mode | Examples | Cure |
|---|---|---|
| Termination for Default | • Negative slippage ≥ 15% • Fraud • Violation of labor laws | 7‑day show‑cause notice |
| Termination for Convenience | Agency decision “best interest of the Government” | 30‑day notice |
| Termination by Contractor | • Government’s failure to pay within 60 days • Suspension of works >90 days not contractor’s fault | 15‑day notice |
The procuring entity issues a “Contract Termination Order” subject to GPPB appeal and, ultimately, arbitration.
4. Procedure Checklist (Best‑Practice Hybrid)
| Step | Private Works | Government Works |
|---|---|---|
| 1. Early Warning | Send Notice of Concern citing slippage/defects. | Issue Letter of Concern / Memo under Agency rules. |
| 2. Show‑Cause or Cure Notice | Min. 7–15 days (CIAP). | 7 days (IRR §69.1). |
| 3. Evaluate Reply & Evidence | Document site inspection reports, QA results, updated S‑curve. | Agency BAC evaluation; secure COA advice if necessary. |
| 4. Termination Letter / Order | Cite contractual clause + Art. 1191; state effectivity date; demand LD. | Issue Contract Termination Order with findings and computation of LD. |
| 5. Take‑Over / Step‑In Rights | Seize site, materials, equipment if title vests; involve surety. | Invoke takeover clause, call performance bond. |
| 6. Inventory & Measurement | Joint measurement of accomplished works; punch‑list. | Prepared by agency inspectorate; witnessed by COA. |
| 7. Payment/Offset | Prepare final account: progress payments due less LD, retention. | Same plus NCA adjustments (if DBM‑funded). |
| 8. Record & Register | Annotate with Registry of Deeds if notice of lien exists. | Archive with GPPB, COA, DBM. |
| 9. Dispute Resolution | CIAC arbitration (or court if opted‑out); 10‑day period to commence. | Mandatory CIAC arbitration (R.A. 9184 §59) unless agency opts for PSA. |
| 10. Surety/Security Calls | Call performance bond (usually 10–30% of contract price) and warranty bond. | Same; surety cannot invoke underlying dispute once demand is proper. |
5. Liquidated Damages: Computation & Enforcement
5.1 Statutory Framework
| Civil Code Provision | Essence | Key Cases |
|---|---|---|
| Art. 1226 | Penalty clause substitutes for indemnity & interest unless otherwise agreed. | Filipinas Textile (G.R. 83285, 1990) |
| Art. 1229 | Courts may reduce an iniquitous/unconscionable penalty or if principal obligation performed in part. | Spouses Chung (G.R. 185278, 2010) |
| Art. 2227 | Court may equitably reduce LD agreed upon by parties. | Makati Tuscany (G.R. 95546, 1992) |
5.2 Typical Industry Formulae
| Sector | Rate | Ceiling |
|---|---|---|
| CIAP Doc 102 §28 (private) | 0.10% × Contract Price × delay days | Up to 10% of contract price (unless modified) |
| R.A. 9184 IRR §68 (government) | Same 0.10% per day | Up to 10% (Automatic deduction from progress billing) |
| FIDIC‑adapted EPC | 0.05–0.07% per day | 5–10% |
| Design‑Build PPP | Tranches tied to milestones; may include cap on aggregate LD at 20% |
5.3 Defenses & Court (or CIAC) Interventions
- Force Majeure / Excusable Delay — Must be substantiated; burden on debtor.
- Owner‑Caused Delay / Concurrent Delay — LD may be apportioned or disallowed.
- Substantial Performance Doctrine — Art. 1230 allows proportional reduction.
- Unconscionability — Courts & CIAC routinely reduce LD if contractor finished 95‑99% of works (e.g., Freyssinet CIAC Case 11‑2008).
- Waiver or Estoppel — Accepting late performance without protest may bar LD (Art. 1270).
6. Surety Liability and LD
Performance Bonds (GSIS or private surety) are solidary. Upon contractor default, the surety must:
- Pay LD accrued up to bond cap;
- Complete the project (take‑over) or pay completion costs;
- Cannot require prior arbitration award (Supreme Court in Visayan Surety line of cases).
7. Arbitration & Litigation Landscape
| Forum | Speed | Appealability |
|---|---|---|
| CIAC (primary) | 6–12 months average; technical arbiters | Award final & executory; review only on questions of law (Rule 43 CA). |
| RTC Commercial Courts | Slower; risk of TROs | Appeal to CA; full factual review possible. |
| ICC / SIAC seated in PH | Contractual; costlier | Enforcement under 1958 NY Convention via court proceeding. |
Notable Supreme Court rulings:
- DM Consunji v. CA (564 SCRA 501, 2008) – LD may coexist with actual damages if expressly reserved.
- BF Corporation v. Court of Appeals (G.R. 160919, 2009) – Owner validly terminated after 15% negative slippage; contractor liable for LD despite partial work.
- Toyo Construction v. NRA (G.R. 137373, 2000) – Government’s unilateral termination upheld under PD 1594; LD recoverable from surety.
8. Drafting & Risk‑Management Tips
- Embed clear cure periods (7‑15 days) and progressive notices to prevent “surprise” termination.
- Distinguish LD for delay vs. performance penalties (quality/defect) to avoid double recovery issues.
- **Cap LD but link to an aggregate cap (e.g., 10% of contract price) instead of per‑milestone caps if you are the employer.
- Synchronize bond wording with termination clause—surety’s obligation should mirror LD cap.
- Document slippage with CPM schedules, photographic evidence, daily reports; these are decisive in CIAC.
- Agree on ADR venue; CIAC offers construction‑savvy arbitrators and quicker enforcement.
- When government is owner, align private‑sector joint venture/consortium agreements with R.A. 9184 step‑in and assignment restrictions.
9. Frequently Asked Practical Questions
| Question | Short Answer |
|---|---|
| Must I go to court to terminate? | No if your contract allows extrajudicial rescission and due process was observed; yes for public contracts you still need a Termination Order, but you don’t need a court order first. |
| Can the court increase LD? | No. Courts may only reduce LD if unconscionable or partly performed (Arts. 1229, 2227). |
| Does accepting partial payment waive LD? | Not automatically, but silence or acceptance without reservation may create waiver. |
| Do LD stop accruing after termination? | Usually yes; after termination further losses fall under actual damages or completion‑cost claims. |
10. Conclusion
Termination and liquidated damages in Philippine construction rest on a layered regime: Civil Code principles filtered through specialized rules (CIAP, R.A. 9184) and fortified by arbitration practice. Success in enforcing—or defending against—termination and LD turns on procedural rigor (notices, cure periods), contemporaneous documentation, and contract‑consistent remedies.
Stakeholders should integrate these legal contours at the drafting stage, maintain meticulous project records, and seek early expert advice when slippage looms. Doing so not only mitigates costly disputes but also aligns with the Philippine construction industry’s policy of expeditious, technical resolution via CIAC arbitration.