Liquidated Damages

Art. 2226. Liquidated damages are those agreed upon by

the parties to a contract, to be paid in case of breach
thereof.

Art. 2227. Liquidated damages, whether intended as an

indemnity or a penalty, shall be equitably reduced if they
are iniquitous or unconscionable.
 REQUISITES AND
CHARACTERISTICS

(1) Liquidated damages must be validly stipulated.

(2) There is no need to prove the amount of actual
damages.
(3) Breach of the principal contract must be proved.
 RULES GOVERNING BREACH OF
CONTRACT
Art. 2228. When the breach of the 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.
 Liquidated damages differs from a penal clause in that
in the latter case the amount agreed to be paid may
bear no relation to the probable damages resulting from
the breach.
General Rule: The penalty shall substitute the indemnity for
damages and the payment of the interests in case of breach.

Exceptions :
(1) When there is a stipulation to the contrary.
(2) When the obligor is sued for refusal to pay the agreed penalty.
(3) When the obligor is guilty of fraud.

The amount can be reduced if:

(1) It is unconscionable and iniquitous as determined by the court.
(2) There is partial or irregular performance.
Atlantic Erectors, Inc. v. Court of
Appeals
Facts:
Respondent Herbal Cove Realty Corporation (Herbal Cove)
wanted to build a a subdivision project somewhere in Tagaytay
City. It hired petitioner Atlantic Erectors Inc. (Atlantic) to build
the project. The petitioner, however, failed to complete the
project despite having their request for extension approved.
Issue:
Whether or not Atlantic is liable for liquidated damages.
 Ruling:
Yes. The contract is the law between the parties and there are
provisions in the same contract which provide "the Contractor shall be
required to pay the Owner the liquidated damages in the amount
stipulated in the Contract Agreement, the said payment to be made as
liquidated damages, and not by way of penalty. The Owner may deduct
from any sum due or to become due the Contractor any sums accruing for
liquidated damages as herein stated." also, "Neither the taking over by the
Owner of the work for completion by administration nor the re-letting of the
same to another Contractor shall be construed as a waiver of the Owners rights
to recover damages against the original Contractor and/or his sureties for the
failure to complete the work as stipulated." Thus, under the contract, Herbal
Cove's right to liquidated damages is distinct from the right to terminate
contract.
Country Bankers Insurance
Corporation v CA
Facts:
Respondent and petitioner entered into a lease
agreement for the term six (6) years over the Avenue,
Broadway and Capitol Theaters and the land on which they
are situated. After more than two (2) years of operation, the
respondent lessor made demands for the repossession of
the said leased properties in view of the Sy's arrears in
monthly rentals and non-payment of amusement taxes.

Issue:
Whether or not Sy is entitled to reformation of the lease
agreement.
Whether or not Sys cash deposit will validly serve as payment for
 Ruling:
No. He is not entitled to reformation and; Yes. Sys cash
deposit will validly serve as payment for damages.. The
repossession of the leased premises by OVEC after the
cancellation and termination of the lease was in accordance
with the stipulation of the parties in the said
agreement and the law applicable thereto and that the
consequent forfeiture of Sy's cash deposit in favor of
OVEC was clearly agreed upon by them in the lease
agreement. The court found no ambiguity in the provisions of
the lease agreement. It held that the provisions are fair and
reasonable and therefore, should be respected and enforced
as the law between the parties. It held that the cancellation or
termination of the agreement prior to its expiration period is
justified as it was brought about by Sy's own default in his
compliance with the terms of the agreement and not