Short answer. Yes. The Civil Code requires liquidated damages, whether meant as an indemnity or a penalty, to be equitably reduced if they are iniquitous or unconscionable. A court is not bound to enforce a penalty clause exactly as written when the amount is grossly disproportionate to the breach.
What the law says
Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.
Civil Code, Article 2227 — Reduction of Iniquitous Liquidated Damages. Read the full provision →
The rule covers penalty clauses either way they are framed
Article 2227 does not distinguish between liquidated damages meant to simply compensate a party for loss and those meant to punish or deter a breach — it covers both, whether intended as an indemnity or a penalty. Parties are generally free to agree in advance on what a breach will cost, and courts do not ordinarily second-guess that bargain. What this article does is put a ceiling on that freedom: however the clause is labeled or intended, it remains subject to equitable reduction if it crosses into being iniquitous or unconscionable.
"Iniquitous or unconscionable" is the threshold, not mere harshness
The article does not let a court rewrite every penalty a party later regrets agreeing to. The standard is that the amount be iniquitous or unconscionable — grossly excessive or shocking to a reasonable sense of fairness, not simply higher than the breaching party would prefer. A stiff penalty that still bears some reasonable relationship to the harm a breach could cause is different from one so disproportionate that enforcing it in full would work an injustice.
Reduction, not elimination
Article 2227 speaks of equitable reduction, not cancellation. Where a penalty clause is found excessive, the usual outcome is that the amount is scaled down to something proportionate, rather than the clause being struck out entirely and the non-breaching party left with nothing for the breach. The clause's basic validity as a pre-agreed measure of damages survives; what does not survive is the specific figure, when that figure is unconscionable.
What to gather if you are contesting a penalty clause
Whether a penalty crosses into unconscionability is assessed against the facts — the actual harm the breach caused, the relative bargaining position of the parties, and how far the stipulated amount departs from any reasonable estimate of loss. If you are facing a penalty you believe is excessive, document the real extent of the breach and what it actually cost the other side, since that comparison is what a court will use to decide whether, and by how much, the amount should be brought down.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Lara's Gifts & Decors, Inc. vs. Midtown Industrial Sales, Inc, G.R. No. 225433, September 20, 2022 — read the decision on LawPhil →
- William C. Louh, Jr. and Irene L. Louh vs. Bank of the Philippine Islands, G.R. No. 225562, March 8, 2017 — read the decision on LawPhil →
- Clarita D. Aclado vs. Government Service Insurance System, G.R. No. 260428, March 1, 2023 — read the decision on LawPhil →
- In the Matter of Urgent Petition for the Release of Prisoners on Humanitarian Grounds, G.R. No. 252117, July 28, 2020 — read the decision on LawPhil →