Tips on reading a contract

Contracts serve as the backbone of many of our daily interactions, regulating everything from the exchange of goods to the formation of employment arrangements and property leasing.

Whether you’re parking your car, seeking medical consultation, or making online purchases, these commonplace activities all entail consenting to specific contractual terms and conditions.

However, the language and structure of contracts can sometimes be intimidating for those unversed in legal jargon. Therefore, whether you’re finalizing a rental agreement, employment contract, or negotiating a business deal, possessing the ability to comprehend and analyze a contract is essential for safeguarding your rights and interests.

But before we go into the intricacies of a contract, it is imperative to grasp its fundamental nature.

Simply put, a contract is an agreement between parties, creating mutual obligations that are enforceable by law.

A contract is the law between the parties. Obligations arising from contracts have the force of law between them and should be complied with in good faith. Unless the stipulations in a contract are contrary to law, morals, good customs, public order, or public policy, the same are binding between the parties. (IP E Game Ventures, Inc. v. Tan, GR 239576, June 30, 2021)

The essential requisites of a valid contract are (1) consent of the contracting parties, (2) object certain or a subject matter of the contract, and (3) cause of the obligation which is established.

A contract, once perfected, is generally binding, whether it is written or oral, provided the essential requisites are present. However, the law provides that certain contracts must be put down into writing to be enforceable such as those for the sale of goods at a price not less than P500, an agreement that by its terms is not to be performed within a year from the making thereof, and an agreement for leasing for a longer period than one year, or the sale of real property or an interest therein, among others. (Art. 1356, 1403, Civil Code)

Below are some pointers when reading contracts:

1. Read other contracts for similar transaction or industry

Before going over a contract, it will be beneficial to go over contracts and agreements involving similar transactions that will allow you to compare the provisions and have an idea of the usual terms and conditions.

2. Understand the type of contract you are reading

Understand the transaction covered by the contract. It may be a sales or purchase contract, employment contract, consent form, or other type of contract which will have their own peculiar recitals, terms, obligations, warranties, waivers, and covenants.

3. Read the contract at least two times

When looking over a document or contract, it is advised to read it more than once. The first reading is to skim the document to get a feel of the different sections, how complicated it may be, how long the document is, and to take note of provisions that may seem special or out of the ordinary.

The second reading should be a more complete reading to understand the provisions of the contract — to ensure that it correctly reflects the intent of the parties, as well as to clarify some doubtful provisions or terminology.

4. Take note of technical terms and legal jargons

Contracts typically contain technical terms and legal jargon, and parties should look up the meaning of these terms, or may even consult specialists who can provide clarity and guidance.

5. All sections are important

Resist the temptation to gloss over or skip sections or provisions that seem usual and regular. There are times that some provisions are misplaced, whether intentional or not, in other sections that are not descriptive of the subject or category where they are found in contracts.

6. Parties

Ensure that the correct parties to the contract are indicated as the contracting parties. If one party is a corporation, the signatory must be authorized by a secretary’s certificate. For individuals signing for another, the representative must be authorized by a special power of attorney.

The law provides that no one may contract in the name of another without being authorized by the latter.  A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed before it is revoked by the other contradicting party. (Art. 1317, Civil Code & San Miguel Foods. Inc. v. Vinoya, GR 225007, July 24, 2019)

7. Do not leave blanks

It is important to fill in any blanks. There are many transactions using pro-forma contract forms that contain blanks, but to leave any blanks could expose one to fraud and unknown liability.

8. Sign all the pages

All parties should sign all the pages in executing contracts.

9. Annexes and references

If the contract contains annexes, attachments, or references to other documents, parties should ensure that they not only have copies of the annexes, attachments, and references but should also have read these.

These documents and references are incorporated into the contract and are binding upon the parties.

10. Payments, penalties & taxes

In contracts that involve the payment of money, it is important not only to ensure that the payment terms and price are correct but also to understand any associated penalties in case of delay or non-payment. Contracts should provide which party is responsible for settling any taxes that may be due on the transaction.

11. Other provisions

Most contracts will usually contain representation, warranties, and guarantees, and it is important to understand the stipulations so as to be aware of the respective responsibility of each party.

Other provisions may relate to non-disclosure and the obligation of the parties to keep confidential the contract and its terms and conditions.

There may also be agreements on limitation of use and non-competition which are material and may have a significant effect on the parties after the contract is finalized.

12. Choice of law and venue of actions

Contracts may contain a choice of law, i.e. whether Philippine law or another country’s law shall govern the agreement, and it is important to take note of this.

Clearly, if a contract provides that a foreign law shall apply to the agreement, this is a signal to seek professional
advice to understand the implications and effects of this.

These days, contracts may also provide that in case of any dispute on the contract, the parties agree to arbitration or mediation instead of or before filing a case in court. These proceedings are different from court action and parties should be aware of the differences.

Lastly, contracts may indicate an exclusive venue or place for any action such as “exclusively with the courts of Zamboanga City”. Such as stipulation is allowable and parties should take note of this as it may affect their ability to commence and maintain any action or maintain a proper defense should a case be filed.

Parties to a contract are reminded to always keep a copy of the contract they signed.

There are instances when after one party signs, the other party will hold on to all copies of the contract. This usually happens when the contract is still to be notarized and the other party will inform the other that it will give it a copy of the contract after notarization.

Parties must note that proper notarization requires personal appearance before the notary public.

Regardless, parties must keep a copy or take a picture of the contract to ensure that they have a copy of the signed document.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in
this article belong to the author alone.)