16th Apr 2013

Contracts

A contract is the bible to any arrangement. It sets out the obligations of all the parties to a transaction, and determines the extent to which a party may be liable if anything goes wrong. Thus, it should be effective, well-drafted, and “air-tight”.

An air-tight contract is one which takes into account all events which may or may not happen between the parties. It can be the saving grace of a businessman, especially when litigation is involved. Thus, making contracts air-tight is quintessential to a successful business.

For a contract to be valid between the parties, it should contain the essential elements of a transaction – a) consent of the parties, b) subject matter, and c) consideration. Aside from the above, other provisions are not essential for its validity. Of course, some provisions are there for the parties’ convenience, benefit or protection. Contrary to popular belief, notarization is not necessary for a contract’s validity. By way of exception, a contract involving real property (land) must be notarized to be valid.

If a corporation is a party, there must be a board resolution and authorization of the signatory before signing of the contract, otherwise, it will not be binding. For individuals, the signatory must be of legal age, and if married, the spouse must also sign otherwise, the contract may be void. Obviously, the subject matter must be legal because anything illegal cannot be the subject of a contract. Finally, the consideration or contract price must be clearly defined. If there is a term for payment, it must be stated. If there is interest to be paid, it must be express, otherwise, interest cannot be claimed in the absence of stipulation. While there is no usury law in the Philippines, interest in the contract must be reasonable otherwise, it will be void.

While not required for validity, a contract should neatly set out a preamble or “whereas” clause. The purpose of the preamble is that if the matter goes to litigation, there will be actual basis to interpret the ambiguity. If the underlying events which took place prior to the signing of the agreement can be included, this will be helpful.

There are instances when a party is unable to perform his end of the bargain. Thus, clauses concerning events of default should be included in an agreement. These must identify how or when a party is considered to have breached the agreement, including its effects such as cancellation of the contract, penalty interest, and the like.

For contracts with a fixed term or period, the term of the contract or its expiration must likewise be included. This is essential in lease agreements, for example, because in the absence of a specific term in a lease agreement, the provisions of the Civil Code will have to apply.

Always include a definitions clause in a contract. For example, when a contract says “within 7 days”, this could mean either calendar days or business days, hence a confusion, which could be easily resolved by a definitions clause.

Nicolas & De Vega Law Offices is a full service law firm in the Philippines. You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines. You may also call us at +632 4706126+632 4706130+632 4016392.

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