Can I cancel a contract if the other party does not perform their obligation?

The law calls it rescission, and it applies to reciprocal contracts

Article 1191 of the Civil Code says the power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. A reciprocal obligation is simply one where each side owes the other something under the same agreement — you deliver goods, they pay; you render a service, they compensate you. When the other party fails to do their part, the law does not force you to keep waiting on a deal that is only being honored on your end.

You get to choose: hold them to it, or walk away

Article 1191 gives the injured party a choice rather than only one path: the injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. That means non-payment does not automatically end the contract — you may still demand that the other party pay what they owe, or you may instead treat the contract as cancelled and seek damages for the loss the non-payment caused you. You may even ask for rescission after initially choosing fulfillment, if fulfillment later becomes impossible.

Cancellation is usually not automatic or unilateral

In most cases, you cannot simply declare the contract cancelled on your own and treat it as over; the law expects the matter to be brought before a court, which shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. That last phrase matters: a court can, instead of cancelling the contract outright, give the non-paying party a further period to comply if there is a good reason to do so. Whether that happens depends heavily on the specific facts, including how serious the non-payment is and whether the contract itself already spells out what happens on default.

Rescission does not erase third parties' rights

Article 1191 also makes clear that cancelling the contract between you and the non-paying party does not automatically undo transactions that innocent third parties have already entered into over the same property or subject matter, subject to the specific rules that protect such third persons. If property changed hands and someone else has since acquired rights over it in good faith, rescission may not simply reverse that. This is one of several reasons why the practical effect of cancelling a contract can be more complicated than the general rule suggests, and why the specific facts of who did what, and when, tend to matter a great deal.

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.

• Camp John Hay Development Corporation vs. Charter Chemical and Coating Corporation, G.R. No. 198849, August 7, 2019 — read the decision on LawPhil →
• The Wellex Group, Inc. vs. U-Land Airlines, Co., Ltd, G.R. No. 167519, January 14, 2015 — read the decision on LawPhil →
• Darrel Cordero, et al. vs. F.S. Management & Development Corporation, G.R. No. 167213, October 31, 2006 — read the decision on LawPhil →
• Heirs of Mary Lane R. Kim, represented by Kim Sung II, Janice Kim, G.R. No. 249247, March 15, 2021 — read the decision on LawPhil →

Related provisions

• Civil Code, Article 1191 — Rescission of Reciprocal Obligations