Philippines - What Makes A Contract Valid?
Legal News & Analysis - Asia Pacific - Philippines - Dispute Resolution
2 August, 2019
I have conducted a few lectures on Obligations and Contracts, in partnership with the Department of Trade and Industry, to businesspeople with startups. I noticed that one of the most common misconceptions is that “contracts must always be in writing, otherwise there is no contract to speak of.”
To correct this misconception, one has to understand the elements of a valid contract and know which contracts have to be in writing.
The Civil Code defines a contract as “a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.” For there to be a valid contract, these three elements must be present: consent, object, and cause.
The element of consent is satisfied once the parties agree on the terms of the contract. In practice, it is a situation where one party makes an offer and the other party accepts it.
However, if a party responds to an offer by proposing some form of modification to the offer, this proposal is called a “counter-offer” and there is then still no legal contract to speak of. In the second scenario, the responsibility to accept, decline, or propose another counter-offer shifts to the original offeror.
All things which are not outside the commerce of men may be the object of a contract. Similarly, all services which are not contrary to law, morals, good customs, public order, or public policy may be the object of a contract. This is why public bridges, rivers, illegal drugs, and sexual services may not be the object of a valid contract.
Cause or consideration is the essential reason which moves the parties to enter into a contract. This is the “why of the contract” which dictates the nature of the contract. For onerous contracts, this involves the promise of a service or thing by a party which need not be monetary but could entail other things or undertakings of value. For remuneratory contracts, the cause is a service or benefit which does not arise out of any legal obligation. For gratuitous contracts, the cause is the liberality or generosity of a party. Essentially, the latter involves contracts of donation.
Again, a written appearance or any form of documentation is not an element of a valid contract. As long as an agreement satisfies all of the aforesaid three elements, then there exists a valid contract regardless of whether or not it is in writing.
For this reason, a contract is a contract in whatever form it may be, unless the law requires that it be in writing for it to be valid or enforceable. Thus, an employment contract, or transactions over our day-to-day necessities need not be in writing.
Which brings us to the question: What contracts are required to be in writing?
For their enforceability, the following contracts must appear in a public document, that is, a document executed or acknowledged before a notary public: 1.) acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; 2.) cession, repudiation or renunciation of hereditary rights or those of conjugal partnership of gains; 3.) the power to administer property or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; and, 4.) the cession of actions or rights proceeding from an act appearing in a public document.
In turn, for their enforceability, the following contracts covered by the statute of frauds must be in, at least, a private instrument: 1.) an agreement that is not to be performed within a year from its making; 2.) a special promise to answer for the debt, default, or miscarriage of another; 3.) an agreement made in consideration of marriage, other than a mutual promise to marry; 4.) an agreement for the sale of goods, chattels or things in action, at a price not less than P500; 5.) an agreement of the leasing for a longer period than one year, or for the sale of real property; and, 6.) a representation as to the credit of a third person.
When the law requires a contract to be in a public or private document for its enforceability, this means that the form is not required in order to validate the contract but merely to ensure its efficacy. Thus, the above-mentioned contracts are valid as between the parties, even when the contract has not been reduced to public or private documents.
In contrast, donations of real property, and contracts of partnership where real property or rights are contributed, or when the capital contribution is P3,000 or more, must be in a public document in order to be valid.
On the other hand, for their validity, the following contracts must be in, at least, a private instrument: 1.) donation of personal property, and its acceptance, when the value thereof exceeds P5,000; 2.) agency to sell land or any interest therein; 3.) contract of antichresis; 4.) stipulations to pay interest on loans; and, 5.) stipulations to reduce common carrier’s extraordinary diligence and to limit its liability.
While not all contracts are required to be in writing for their validity or enforceability, it is still best practice to reduce all agreements in writing. This will help the parties avoid any ambiguity in their agreements and ensure that all parties understand their obligations. With a written contract, it is also easier to prove one’s position in case of a dispute and avoid a “he said, she said” scenario. A well-crafted contract which outlines the consequences of a breach and the remedies thereto may help avoid costly litigation and maintain the harmony between the parties.
For further information, please contact:
Martin Luigi G. Samson, Angara Abello Concepcion Regala & Cruz (ACCRALAW)