General rules for making a contract in the Philippines

1) What mandatory elements must a contract between two residents contain?

A contract between two residents must contain the mandatory elements of consent, object, and cause (Article 1318, New Civil Code). The contracting parties’ consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute a contract (Article 1319, New Civil Code). Object certain is the subject matter of the contract (Article 1318, New Civil Code). Cause or consideration is the essential reason which moves the contracting parties to enter into the contract (Uy vs. CA, G.R. No. 120465, 09 September 1999). However, real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation (Article 1316, New Civil Code).

2) Is notarization or state registration required for B2B contracts?

Notarization or state registration is not required for B2B contracts. Contracts are obligatory regardless of whatever form they may have been entered into, provided the mandatory elements of consent, object, and cause are present. However, when the law requires that a contract be in some form so that it may be valid and enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable (Article 1356, New Civil Code). For instance, Article 1358 of the New Civil Code enumerates the contracts which must appear in a public document.

3) What are the general requirements for the form and language of a contract between residents?

Contracts are obligatory regardless of whatever form they may have been entered into, provided the mandatory elements of consent, object, and cause are present (Article 1356, New Civil Code). However, when the law requires that a contract be in some form so that it may be valid and enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable (Article 1356, New Civil Code). Likewise, the contracting parties are free to agree on the language they will use in drafting the contract. In the Philippines, most contracts are drafted in English which is one of the country’s official languages (the other is Filipino).

4) What are the consequences of non-compliance with the written form of a contract?

When the law requires that a contract be in some form so that it may be valid and enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable (Article 1356, New Civil Code). When the law requires that a contract be in some form to be valid, non-compliance would render the contract invalid. However, when the law requires that a contract be in some form to be enforced or proved in a certain way, non-compliance would not render the contract invalid. Likewise, when the law requires that a contract be in some form for the convenience of the parties or for the purpose of affecting third persons, non-compliance would not adversely affect the validity nor enforceability of the contract between the parties.

5) What specific rules apply when contracting with public authorities or state customers?

Contracting with public authorities is mainly governed by Republic Act No. 12009 or the New Government Procurement Act and its Implementing Rules and Regulations. Section 4 of this law provides that it shall apply to the Procurement of Goods, Infrastructure Projects, and Consulting Services, regardless of source of funds, whether local or foreign, by all branches and instrumentalities of the national government, its departments, bureaus, offices and agencies, including SUCs, GOCCs, GFIs, and LGUs.

6) What are the requirements for performance and modification of contracts?

A contract needs only be perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law (Article 1315, New Civil Code). As to modification of contracts, when, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed. However, if mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract (Article 1359, New Civil Code).

7) What are the requirements regarding currency and payments in contracts with non-residents?

Where a contract involves a non-resident, the parties may decide whether the applicable law is Philippine law or that of the non-resident. Under Philippine law, the payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines (Article 1249, New Civil Code), that is, Philippine peso.

8) Can foreign law be chosen to govern a contract and what are the restrictions?

Yes, foreign law can be chosen to govern a contract; however, for a foreign law to govern a contract: (1) the contract should involve a foreign element, which may consist in the fact that one of the parties to a contract is an alien or has a foreign domicile, or that a contract between nationals of one State involves properties situated in another State (Saudi Arabian Airlines vs. CA, G.R. No. 122191, 08 October 1998); and (2) the foreign law should not be contrary to the fundamental and statutory laws of the Philippines (Industrial Personnel & Management Services vs. De Vera, G.R. No. 205703, 07 March 2016).

9) What are the requirements for registration and reporting of cross-border contracts?

Cross-border contracts are governed by the law chosen by the contracting parties. The parties may decide whether the governing law is Philippine law or a foreign law. Some of the major clauses found in cross-border contracts are applicable law, jurisdiction, currency, and taxation, among others. In the Philippines, certain cross-border financial contracts must be registered with and reported to the Central Bank in accordance with its regulations.

Authors: Krisanto Karlo Nicolas, Atty. Jose Al Norbe