Short answer. Yes. Article 2227 provides that liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. The clause is not struck out; the court trims it to a figure that is not oppressive on the facts.
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 verb, and the words that close the escape route
Two things in the wording do a great deal of work. The verb is shall, so reduction is not a favour a court grants when it feels generous; where the figure is iniquitous or unconscionable it is to be brought down. And the power reaches liquidated damages whether intended as an indemnity or a penalty, which closes the obvious drafting escape. Calling the clause a penalty, or reciting that the parties agreed the sum was reasonable and waived any right to question it, does not put it beyond the article.
Iniquitous is a comparison, not a size
What makes a figure unconscionable is its relation to everything around it: the value of the contract, the extent of the breach, the loss actually suffered, how much of the obligation was performed, and how the parties stood relative to each other when the clause was agreed. A sum that is a sensible pre-estimate on a large contract may be indefensible where the default was brief and promptly cured. So the argument is comparative. Set the penalty beside the real consequences of what happened, and the gap between them is the case.
The companion power over penal clauses
Article 1229 provides that the judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor, and that even where there has been no performance at all the courts may reduce a penalty that is iniquitous or unconscionable. Partial performance is the ground most often overlooked. Where you delivered most of what you promised, or were late rather than absent, that is a distinct and frequently stronger argument than unconscionability standing on its own.
Do not simply refuse to pay and wait
Put the actual figures on paper: what the contract was worth, what was performed, what the other side genuinely lost, and what the clause demands. Keep the record of performance — deliveries, milestones, acceptances, payments — because reduction under Article 1229 turns on exactly that. Note too that Article 1226 makes the penalty substitute for the indemnity for damages and the payment of interest where there is no stipulation to the contrary, so the other side is not ordinarily entitled to both the penalty and damages.
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 →
Related provisions
- Civil Code, Article 1229 — Equitable Reduction of the Penalty
- Civil Code, Article 2228 — Partial or Irregular Performance