Short answer. Yes. Although a penalty clause normally takes the place of damages, Article 1226 says damages shall still be paid if the obligor refuses to pay the penalty or is guilty of fraud in fulfilling the obligation. Your contractor's refusal and bad faith open the door to damages beyond the penalty.
What the law says
damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation
Civil Code, Article 1226 — Effect of a Penal Clause. Read the full provision →
A penalty clause usually replaces damages
The starting rule discourages piling remedies on top of one another. Article 1226 says that In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. A penalty clause is an agreed, pre-fixed sum that stands in for whatever damages the breach caused. Normally, then, you collect the penalty instead of proving and recovering actual damages and interest. The clause exists precisely to spare the parties that fight by settling the consequence of breach in advance. That is the default your contract carries unless you stipulated otherwise.
Two situations let you claim damages too
The article then names the exceptions that fit your case. It provides that damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. So the penalty stops being the ceiling in two circumstances: when the obligor refuses to pay the penalty he agreed to, and when he is guilty of fraud — bad faith — in performing. Your contractor is described as doing both. In that event you are not confined to the penalty alone; you may pursue actual damages in addition, because the law refuses to let a defaulter who stonewalls or acts fraudulently hide behind the very clause meant to simplify honest breaches.
Why bad faith changes the calculation
The exceptions reflect fairness. A penalty clause is a reasonable trade-off when both sides deal in good faith: the injured party gives up proving actual loss in exchange for a certain, ready sum. But that bargain breaks down when the obligor either flouts the penalty itself or commits fraud in performance. Allowing damages on top in those cases prevents the clause from becoming a shield for misconduct — a defaulter should not be able to cheat and then insist you accept only the modest penalty. The law thus reserves fuller compensation for the party wronged by refusal or fraud.
What you would still need to show
Opening the door to damages does not mean they are automatic. Beyond the penalty, actual damages generally must be proven — you would have to establish the loss you actually suffered, since the exception lifts the substitution but does not pre-fix the extra amount. The article also reminds that The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. Whether your contractor's conduct amounts to the refusal or fraud the article requires is a factual matter. Where it does, you may claim the penalty and, in addition, the actual damages you can prove.
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.
- Merrie Anne Tan vs. First Malayan Leasing and Finance Corp., New Unitedware Marketing Corp, G.R. No. 254510, June 16, 2021 — read the decision on LawPhil →
- Spouses Eduardo and Lydia Silos vs. Philippine National Bank, G.R. No. 181045, July 2, 2014 — read the decision on LawPhil →
- Edmerito Ang Gobonseng, et al. vs. Unibancard Corp, G.R. No. 160026, December 10, 2007 — read the decision on LawPhil →
- Ruby Shelter Builders vs. Romeo Y. Tan, G.R. No. 217368, August 5, 2024 — read the decision on LawPhil →