4. Liquidated Damages

LIQUIDATED DAMAGES

Liquidated damages are fixed damages previously agreed by the parties to the contract and payable to the innocent party in case of breach by the other.

Liquidated damages are those that the parties agree to be paid in case of a breach. They may be intended as indemnity for a breach or as a penalty to secure performance (Civil Code, Art. 2227). As a precondition to such award, however, the breach contemplated by the liquidated-damages stipulation must be proved; if the stipulation covers delay, the delay must be proved. (Suatengco v. Reyes, G.R. No. 162729, December 17, 2008)

Updated: Courts must equitably reduce liquidated damages that are iniquitous or unconscionable, considering circumstances such as the injured party’s contribution to the delay (Chua v. Colorite Marketing Corporation, G.R. No. 152545, 5 July 2017).

Nature of Liquidated Damages

A stipulation on liquidated damages is a penalty clause where the obligor assumes a greater liability in case of breach of an obligation. The obligor is bound to pay the stipulated amount without need for proof on the existence and on the measure of damages caused by the breach. (Titan v. Uni-Field, G.R. No. 153874, March 1, 2007)

NOTE: Attorney’s fee is in the concept of actual damages except that when it is stipulated and therefore in the form of liquidated damages no proof of pecuniary loss is required. (NCC, Article 2216) (Santiago v. Dimayuga, G.R. No. L-17883, December 30, 1961)

Updated: Courts must equitably reduce liquidated damages that are iniquitous or unconscionable, notwithstanding the stipulated amount (Chua v. Colorite Marketing Corporation, G.R. No. 152545, 5 July 2017).

Liquidated damages v. Penalties

NOTE: Whether as a penalty or indemnity, it is necessary that there be a contract the violation of which gives rise to the stipulated liquidated damages.

Updated: Courts must equitably reduce iniquitous or unconscionable liquidated damages under Article 2227 of the Civil Code (Chua v. Colorite Marketing Corporation, G.R. No. 152545, 5 July 2017).

Liquidated damages may be equitably reduced when

• Iniquitous or unconscionable (NCC, Art. 2227)
• Partial or irregular performance

Rule governing in case of breach of contract

When the breach of contract committed by the defendant is not the one contemplated by the parties in agreeing upon the liquidated damages, the law shall determine the measure of damages, and not the stipulation. (NCC, Art. 2228)

Penalty as substitute for damages

General rule: the penalty fixed by the parties takes the place of all damages and interests in case of breach.