5 Things to Check Before Signing a Contract
Why You Should Never Sign a Contract Without Reviewing It
A contract is more than a formality. Once validly entered into, its obligations have the force of law between the parties and should be complied with in good faith. Depending on the contract and the nature of the breach, noncompliance may result in damages, specific performance, enforcement of obligations, rescission, or other legal consequences.
Before signing any contract, take time to understand exactly what you are agreeing to. A careful review can help identify risks, prevent disputes, and protect your interests.
Before signing, consider these five important questions.
Note: The sample clauses below are for illustration only. Contract language should be tailored to the specific transaction, the parties’ actual agreement, and applicable law.
1. Are the Parties Clearly Identified?
Under Article 1318 of the Civil Code, consent of the contracting parties is an essential element of a valid contract. Article 1317 further provides that no person may contract in the name of another without authority or legal representation. For this reason, it is important to verify both the identity of the other party and the authority of any person signing on their behalf.
What to Check
For individuals, verify the full legal name and other identifying details.
For businesses, confirm the correct legal entity and ensure that the signatory is authorized to bind the company. If the other party is a sole proprietorship, remember that the business name is not a legal entity separate from its proprietor. The contract should therefore clearly identify the proprietor, including the registered business name under which they are doing business.
Sample Contract Provision
Parties. This Agreement is entered into by ABC Corporation, represented by Juan Dela Cruz, duly authorized for this purpose, and Maria Santos, doing business under the name and style XYZ Enterprises.
Practical Tip:
Before signing, ask yourself: If a dispute arises tomorrow, do I know exactly who will be legally responsible under this contract?
2. Are the Obligations of Each Party Clearly Defined?
Under Article 1318 of the Civil Code, a valid contract must have an object certain that is the subject matter of the agreement. The contract should clearly define each party's responsibilities, deliverables, timelines, and performance standards. Ambiguous provisions often lead to disputes regarding whether obligations have been fulfilled.
What to Check
Specific obligations of each party;
Deliverables or performance standards;
Deadlines and completion dates;
Procedures for modifying the scope of work.
Sample Contract Provision
Scope of Services. The Service Provider shall deliver the services described in Annex "A" no later than 30 June 2026. Any modification to the scope of work must be agreed upon in writing by both parties.
Practical Tip:
If you cannot explain your obligations under the contract in one or two sentences, the provision may need clarification.
3. Are the payment terms and financial obligations clear?
Payment provisions are among the most common sources of contractual disputes. Before signing, ensure that the contract accurately reflects the agreed price, payment schedule, and any other financial obligations.
Under the Civil Code, interest generally cannot be demanded unless expressly stipulated in writing. Penalties, deposits, refunds, and additional charges should likewise be clearly stated.
What to Check
The total contract price;
Payment due dates and schedule;
Accepted modes of payment;
Interest, penalties, deposits, and refund provisions;
Any additional fees or charges.
Sample Contract Provision
Payment Terms. Client shall pay the total contract price of P500,000.00, with 30% payable upon execution of this Agreement and the remaining balance payable upon completion of the services. Late payments shall incur interest at the rate of 6% per annum on the overdue amount.
Practical Tip:
Calculate the total amount you may be required to pay, including penalties and interest, not just the stated contract price.
4. What Are Termination and Exit Clauses?
Not every contractual relationship proceeds as planned. Understanding how and when the agreement may be terminated can help avoid costly surprises.
The Civil Code recognizes the right to rescind reciprocal obligations when one party substantially fails to perform. Contracts may also contain force majeure provisions addressing unforeseen events that prevent performance.
What to Check
Grounds for termination;
Notice requirements;
Penalties for early termination;
Consequences of breach;
Force majeure provisions.
Sample Contract Provision
Termination. Either party may terminate this Agreement upon thirty (30) days' prior written notice, subject to payment of amounts already due. In the event of a force majeure event preventing performance for more than sixty (60) consecutive days, either party may terminate the Agreement by written notice, subject to the parties’ agreed allocation of accrued obligations and costs.
Practical Tip:
Before signing, determine how you can exit the agreement if circumstances change unexpectedly.
5. How Will Disputes Be Resolved?
Even carefully drafted contracts may give rise to disagreements. A dispute resolution clause determines how conflicts will be handled and can significantly affect the time, cost, and complexity of enforcing your rights.
Philippine law recognizes various dispute resolution mechanisms, including mediation, arbitration, and court proceedings. The contract may also specify the governing law and venue for disputes.
What to Check
Whether mediation or arbitration is required, and whether it must occur before a court case may be filed;
The venue for resolving disputes;
The governing law of the agreement;
Responsibility for legal costs and fees.
Sample Contract Provision
Dispute Resolution. Any dispute arising from this Agreement shall first be submitted to mediation. If unresolved within thirty (30) days, the dispute shall be referred to arbitration in accordance with applicable law.
Practical Tip:
Do not wait until a dispute arises to find out where and how it must be resolved.
Bonus Tips Before You Sign
Even if a contract appears straightforward, keep these additional points in mind:
Make sure all important promises and amendments are in writing. Verbal assurances may be difficult to enforce if they do not appear in the final contract. Further, some agreements are legally required to be in writing; even where writing is not required for validity, written terms are generally easier to prove and enforce.
Review the entire document, including annexes and attachments. Important obligations are often contained in schedules, exhibits, or incorporated/attached documents.
Do not leave blanks or incomplete provisions. Unfilled spaces can create uncertainty and future disputes.
Keep a signed copy of the contract for your records.
Consider obtaining legal advice for significant transactions, particularly those involving substantial amounts, real property, business ventures, or long-term commitments.
Conclusion
A contract is more than a document containing signatures. It is a legally binding agreement that can affect your rights, finances, and obligations long after it is signed.
By verifying the parties, understanding your obligations, reviewing payment terms, examining exit clauses, and evaluating dispute resolution provisions, you can reduce risk and avoid costly misunderstandings before they arise.
If you need assistance reviewing or drafting contracts, contact our legal team at contact@dulaylaw.com, or visit our website www.dulaylaw.com/contact-us to learn more about how we can help you.
Disclaimer: This blog post is for informational and general educational purposes only. It does not constitute legal advice or create an attorney-client relationship.
