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How to Read a Contract
Agreements & Legal Documents · ~10 min read
A contract is a legally binding promise. Under Philippine law, once you sign, you are bound by all its terms — even the ones in small print. This guide walks you through the key sections of any contract and the red flags that could cost you.
Philippine Contract Law Basics
Under the Civil Code (RA 386), a valid contract requires three essential elements: consent (agreement of the parties), object (the thing or service being contracted), and cause (the consideration or reason for the contract). Contracts with illegal object or cause are void from the beginning.
Parties & Recitals
The opening section identifies who is entering the contract and their legal capacity. Recitals (starting with 'WHEREAS') provide context — why the parties are entering the contract. They are not operative provisions, but courts use them to interpret ambiguous terms.
Example
This CONTRACT is entered into by and between: XYZ CORPORATION, a Philippine corporation duly organized... — hereinafter referred to as the "Service Provider" — and JUAN DELA CRUZ, Filipino, of legal age... — hereinafter referred to as the "Client" —
💡 Tip: Check that the parties are who they say they are. A corporation must be duly registered with the SEC. Verify the signatory has authority to bind the corporation (look for a board resolution or Secretary's Certificate).
Definition of Terms
Many contracts define specific terms to control their meaning throughout the document. These contractual definitions take priority over dictionary meanings — read them carefully before reading the rest of the contract.
💡 Tip: Pay attention to defined terms when they appear capitalized in the body of the contract (e.g., 'Confidential Information', 'Services', 'Deliverables'). Always trace them back to their definition.
Obligations of Each Party
The heart of the contract — what each party promises to do or refrain from doing. Look for: specific deliverables and deadlines, quality standards, reporting requirements, and approval processes. Vague obligations lead to disputes.
💡 Tip: If an obligation says 'shall use best efforts' vs. 'shall deliver,' the difference is significant. 'Best efforts' is harder to enforce than a concrete delivery obligation.
Payment Terms & Consideration
The amount, schedule, currency, and method of payment. Also look for: invoicing procedures, late payment penalties, payment upon milestone completion vs. calendar dates, and any conditions precedent to payment.
Example
Payment of ₱500,000.00 shall be made within thirty (30) days from receipt of invoice. Late payments shall bear interest at 12% per annum computed from the due date.
💡 Tip: Under Philippine law, the legal interest rate for loans and forbearance is 6% per annum (BSP Circular 799). Contractual rates higher than this are valid but must be expressly agreed upon.
Term & Termination
How long the contract lasts and how either party can end it. Distinguish between: termination for cause (due to breach), termination for convenience (without fault), and automatic expiry. Check required notice periods for each.
Example
This Agreement shall be for a period of one (1) year from the Effectivity Date and shall automatically renew for successive one-year terms unless either party provides sixty (60) days written notice of non-renewal.
💡 Tip: Termination for convenience clauses favor the party that can invoke them. If only one party has this right, negotiate for mutual termination for convenience.
Liability, Indemnification & Warranties
These clauses allocate risk between the parties. Indemnification requires one party to compensate the other for specified losses. Warranties are promises about the quality or condition of goods/services. Limitation of liability caps the total exposure.
💡 Tip: Philippine courts can void unconscionable limitation of liability clauses under the principle that contracts contrary to morals, good customs, or public policy are null and void (Civil Code Art. 1306).
Dispute Resolution
How disputes will be resolved — through Philippine courts (which court has jurisdiction?), mediation, or arbitration (under RA 9285, the ADR Act). Arbitration is generally faster and more confidential than court litigation.
Example
Any dispute arising from this Agreement shall be submitted to arbitration under the Rules of the Philippine Dispute Resolution Center, Inc. (PDRCI), before a sole arbitrator.
💡 Tip: If the contract specifies venue (e.g., 'courts of Makati City'), it doesn't necessarily mean only Makati courts have jurisdiction — Philippine courts apply the rules of venue strictly only when stated as 'exclusive.'
Governing Law
Specifies which country's laws govern the contract. For Philippine transactions, Philippine law should govern. If a foreign law is specified, Philippine courts may still apply Philippine public policy rules — some Philippine rights cannot be waived by contract.
💡 Tip: Under Philippine law, certain rights cannot be contracted away regardless of governing law: labor rights, consumer protection rights, and constitutional guarantees.
🚩 Red Flags to Watch For
One-Sided Liability Clause
One party limits its liability to zero or near-zero while the other bears full risk. Look for "in no event shall [Party A] be liable for any damages whatsoever."
Automatic Renewal Without Notice
The contract renews automatically unless one party gives 30–90 days notice. Easy to miss, especially for SaaS or services contracts.
Unilateral Modification Rights
One party can change contract terms at will with or without notice. Common in service agreements but can dramatically shift the deal.
Perpetual or Overly Broad IP Assignment
All work product, even pre-existing IP, is assigned to the other party. Check for carve-outs for background IP.
Foreign Governing Law in a PH Transaction
Requiring disputes to be resolved under foreign law or in foreign courts makes enforcement practically impossible for Philippine parties.
Missing Dispute Resolution Clause
No clause on how disputes are resolved means default court litigation in Philippine courts — often slow and expensive.
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