liquidated damages – damages agreed upon by the parties to a contract, to be paid in case of breach of the contract (Civil Code, art. 2226).
ART. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. (Civil Code)
Under the Civil Code, the party who claims entitlement to liquidated damages need not prove loss or damage (Civil Code, art. 2216). The provision in the contract for the payment of liquidated damages entitles the claimant to liquidated damages in case of breach of contract by the other contracting party. However, the court may reduce the amount of liquidated damages payable under the contract if the amount is excessive.
Under the construction contract between A and B, A agreed to construct a building for B at a contract price of PhP16 million. The parties also agreed that a party in breach must pay the other party PhP4 million in liquidated damages. A did not construct the building according to the agreed plans. Can B refuse to pay the remaining balance of the contract price to A and at the same time claim liquidated damages of PhP4 million? (see Comments and Cases on Torts and Damages, pp. 742-743 ).