Etiquette on breaking contracts

The controversy involving the unilateral termination by Defense Secretary Delfin Lorenzana of the 1989 University of the Philippines (UP)–Department of National Defense (DND) agreement on police and military presence in UP campuses brought to light a flaw in that accord: It did not have an exit clause. That clause, which is standard in business contracts, states the grounds or causes for the termination of an agreement by any of the parties and the manner of its implementation. Unless any of its signatories (then UP president Jose Abueva and Defense Secretary Fidel Ramos) is able to explain the reason for the omission, we can only speculate that it was either done on purpose or they intended the agreement to be timeless.

But the fact that no such provision is in the agreement, and for that matter, in other kinds of contracts, does not mean the contracting parties are barred from demanding its termination or unilaterally ending it for any reason they consider justified or valid. Thus, for example, if a contracting party thinks the agreement no longer meets the purpose for which it was entered into or has worked against its interests, that party can, without any by or leave, opt out or refuse to be bound by it.

In doing so, however, it risks being sued by the other party for damages for losses the latter may suffer on account of the cancellation of their agreement. The action for damages is consistent with the provision of the Civil Code which states “Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage.” The canceling party has the burden of proof in showing to the court that its action is based on justifiable grounds or causes. If a party is intent on terminating a contract and wants to play it safe, it can file an action in court for the rescission or reformation of the contract depending on the underlying circumstances. Judging from the statements of UP president Danilo Concepcion, it seems UP does not intend to litigate on the issue and instead discuss the matter with Lorenzana.

In the business community, it is rare, if at all, that contracting parties fail to put an exit or termination provision in their contracts.

Although all contracts at the beginning are, figuratively-speaking, made in heaven, the probability of the erstwhile harmonious relations between the parties souring up, or the climate under which the contract was made may change to the detriment of one party, or a party is no longer able to live up to its responsibilities under the agreement for one reason or another, cannot be ignored. In anticipation of any of those instances, it makes good business sense to make provisions for a mechanism that would allow any of the parties to peacefully disengage from the agreement for pre-agreed reasons. Failure to comply with the exit clause would not only give rise to expensive legal consequences, but would make the defaulting party a pariah in the business community.

Business people are reputed to have an elephant’s memory. By word of mouth or personal experience, they know who or what company can be trusted to live up to contractual obligations and who or what company should be avoided like a plague for lack of integrity. If, for any reason, a signed contract has to be scrapped or the parties decide not to proceed with it despite its partial performance, there is an unwritten rule on how that incident should be disclosed: None of the parties should lose face or made to appear as “guilty.”

The usual line used to describe the termination of the contracts is, “after a careful review of their respective positions, the parties have mutually agreed to withdraw or suspend their contract without prejudice to further discussions” or words to that effect to convey the impression they are parting ways harmoniously or without rancor. This show of cordial relationship despite the termination of their contract presents the parties in a good light and mitigates whatever adverse effects their action may have caused to the public or their market. With the way the abrogation of the UP–DND panned out, it looks like taxpayer money used to defray the enrolment of top DND officials in masteral management courses has not been put to good use. INQ

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