Navigating Force Majeure When Strikes Excuse Contractual Delays in Philippine Law

Force majeure is a legal principle that can excuse a party from liability when an unforeseen event—like a strike—prevents them from fulfilling a contractual obligation. But what happens when that excuse is used in a government bidding context? The Supreme Court's decision in National Power Corporation v. Philipp Brothers Oceanic, Inc. (G.R. No. 126204, November 20, 2001) provides important guidance on how force majeure operates, and equally important, on the limits of claiming damages against a government agency exercising its discretionary rights.

The Facts of the Case

In 1987, the National Power Corporation (NAPOCOR) awarded a contract to Philipp Brothers Oceanic, Inc. (PHIBRO) to supply 120,000 metric tons of imported coal for its Batangas thermal plant. The contract required delivery within 30 days after NAPOCOR opened a confirmed and workable letter of credit. However, from July to September 1987, Australia's coal industry was hit by strikes, overtime bans, and mine stoppages. PHIBRO informed NAPOCOR of these developments and even proposed sharing the cost of a "strike-free" clause in shipping contracts, which NAPOCOR refused.

When PHIBRO's delivery was delayed, NAPOCOR disqualified it from participating in subsequent biddings, citing a "seriously impaired" track record. PHIBRO sued for damages, arguing that NAPOCOR acted in bad faith. The trial court and Court of Appeals ruled in PHIBRO's favor, but the Supreme Court modified the decision.

When Strikes Constitute Force Majeure

The Court affirmed that strikes can indeed be a valid ground to excuse contractual delay. Under the Civil Code, no person is responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. The contract itself explicitly included "strikes" in its force majeure clause. Since PHIBRO was prevented from delivering on time by the Australian strikes—a fortuitous event—it could not be held liable for damages for non-performance.

However, the Court noted an important limitation: a fortuitous event must render performance impossible, not merely difficult or inconvenient. The debtor must show that the event truly prevented compliance in a normal manner.

The Government's Right to Reject Bids

The more significant part of the ruling concerns NAPOCOR's disqualification of PHIBRO. The Court held that NAPOCOR had expressly reserved its right to reject any bid, including bids from parties who previously failed to perform contracts on time. This reservation gives government agencies wide discretion in choosing bidders.

The Court ruled that a bidder cannot compel the government to accept its bid unless it can show unfairness or injustice. In this case, NAPOCOR acted on the honest belief that PHIBRO's track record was impaired—a belief the Court found reasonable, given that PHIBRO had not yet delivered the first shipment when the new bidding was announced. The Court applied the Civil Code principle requiring every person to act with justice, give everyone his due, and observe honesty and good faith. Since NAPOCOR acted without malice or intent to injure, it could not be held liable for damages.

Speculative Damages Are Not Recoverable

The Court also struck down the lower courts' award of actual damages to PHIBRO, which was based on projected profits from future biddings. The Court emphasized that actual damages must be proven with reasonable certainty—they cannot be based on speculation or conjecture. PHIBRO's claim that it "would have won" future tenders was deemed highly speculative, especially since the government retains the right to reject any bid. Similarly, the Court disallowed moral and exemplary damages, noting that corporations generally cannot claim moral damages since they have no feelings or reputation in the individual sense, and that exemplary damages require a prior entitlement to compensatory damages.

Practical Takeaways

• Strikes can be force majeure, but only if they genuinely prevent performance. Parties should document how the event made compliance impossible, not merely burdensome.
• Government agencies have broad discretion in accepting or rejecting bids. A losing bidder must show clear bad faith or arbitrariness to challenge a disqualification.
• Damages must be proven, not presumed. Claims for lost profits based on future opportunities are often too speculative to recover.
• Good faith matters. A party acting on a sincere, reasonable belief—even if mistaken—may not be liable for damages.
• Corporations cannot claim moral damages as a general rule, since they lack the capacity to suffer mental anguish.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.