stages of a contract: at what stage in a contract are rights and obligations created?
TRANSCRIPT
STAGES OF A CONTRACT
AR WHAT STAGE IN A CONTRACT ARE RIGHTS AND OBLIGATIONS CREATED?
PERFECTION.
©2015, Atty. Jericho B. del Puerto. All rights reserved. For permissions to use this material, send a request to this e-mail address: [email protected]
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“A contract undergoes stages from negotiation, perfection, and consummation.
- Atty. Jericho B. Del Puerto
Business Lawyer & Legal ConsultantJDP Consulting Ltd. Co.
Business Law ProfessorSan Beda Graduate School of Business
Book Author, Legal Aspects of BusinessCentral Books Publishing
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www.jdpconsulting.ph
What are the different stages of a contract?
A contract has 3 stages: negotiations, perfection, consummation.
There is a purpose and consequence for each stage.It is only during at the stage of perfection that rights and obligations are created
between the contracting parties.
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OVERVIEW: 3 STAGES OF A CONTRACT
Negotiations Perfection Consummation
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STAGE 1: NEGOTIATIONS
In negotiations, the parties discuss and explore the terms and conditions of their would-be agreement. They manifest their proposals to each other in the hope of having a favorable response.
No contractual rights and obligations created yet. There are special contracts which have certain rules even during negotiations. For
instance, government negotiated contracts require that prior approval by heads of agencies be secured before entering into discussions. In companies, corporate approval to negotiate and execute a contract is required to be obtained from the Board of Directors.
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STAGE 2: PERFECTION
Perfection gives birth to a contract so to speak. This birth refers to that point in time when the parties finally consented to the terms and conditions of their agreement.
Contractual rights and obligations are created and enforceable. NB: Perfection only happens when both the contracting parties are properly
authorized. If a representative turns out to be unauthorized, then there is no perfected contract as the essential requisite of consent is missing.
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STAGE 3: CONSUMMATION
Consummation is simply about delivery or following through what has been agreed upon. It is at this stage that the parties fulfill or perform their contractual obligations resulting in the extinguishment of the contract.
If the parties do not comply with their contractual obligations, they open themselves to a breach of contract which carry consequences.
Whatever happens in consummation does not affect a perfected contract. That is to say, a party’s non-performance in an obligation does not necessarily invalidate a contract. Despite non-performance, the contract remains to be valid, binding, and enforceable.
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Why learn the stages of a contract?
Entrepreneurs and professional managers will learn if a contract has been perfected resulting in the creation of rights and obligations.As stated, the happening of the 2nd stage on perfection results in the creation of a
contract resulting in rights and obligations between the parties.
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What if a contract has been perfected and no performance was
made?
Non-performance of contractual obligations results in a breach of contract which gives rise to liabilities and damages.
In certain situations, entrepreneurs and professional manager may be held personally liable for solidary obligations created by law or the agreement.
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How do you avoid such liabilities?
Management should observe best legal practices to avoid such consequences and liabilities.
Best legal practices are best practices with legal compliance. For contracts, they are sourced from contract laws, rules, principles, jurisprudence, and best practices.
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WHAT ARE THESE BEST LEGAL PRACTICES DURING THE STAGES OF A CONTRACT?
Document every stage.Secure authorization documents of the other party.Put agreements in writing during perfection.Observe formalities required by law.Keep it simple and short.
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1. DOCUMENT EVERY STAGE.
In case of conflict in a contract, it is the intention of the parties that will govern and be followed.
How do you establish intent? Documentation through: e-mail correspondences, SMS messages, intent/proposal letter, minutes of a meeting, etc.
These documentation is crucial in case of breach of contract due to non-performance during the consummation stage.
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2. SECURE AUTHORIZATION DOCUMENTS OF THE OTHER PARTY.
Contracts entered into by an unauthorized person is useless – the agreement is either void or unenforceable depending on the circumstances.
It will always be best to contract with the contracting party, and not through his representatives.
If through representatives, ensure that you have obtained the authorization documents which may either be the following: Special Power of Attorney (for individuals), Partnership Resolution (for partnerships), Board Resolution (for corporations), etc.
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3. PUT AGREEMENTS IN WRITING DURING PERFECTION.
While valid, a consensual contract may be unenforceable due to the Statue of Frauds. As the latter rule is broad, it would be best to put agreements in writing whenever practicable.
The Statute of Frauds declares unenforceability of certain valid consensual contracts. As the aim is to avoid fraud, these agreements are required to be in writing to create documentary evidence.
Enforcement of a breach of contract would be easier if there is an existing written agreement.
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4. OBSERVE FORMALITIES REQUIRED BY LAW.
The law requires certain contracts to be in writing or in a public document. Failure to comply with a requirement results in a void or unenforceable contract.
Putting agreements in writing would always be best. Familiarize yourself with contracts required to be in writing or in a public document. In general, transactions involving real property require a public document.
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5. KEEP IT SIMPLE AND SHORT.
A simple and short contract will avoid conflict in its interpretation and implementation.
Most problems in a contract are due to confusing and ambiguous provisions. Principle of adhesion: In case of ambiguity in the contract, it will be interpreted
against the person who caused the confusion.
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Have there been cases when stages of a contract were made an issue in
a case?
Yes, there are numerous Supreme Court Decisions or Jurisprudence wherein the stages of a contract were the issue in a case.
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JURISPRUDENCE OR SUPREME COURT DECISIONS…
NEGOTIATIONS
No valid government contract for construction works with PPA as its General Manager was never authorized by the Board to enter into negotiations.- Sargasso Construction & Development v. Philippine Ports Authority, G.R. No. 170530, 05 July 2010
PERFECTION
In employment, perfection of the contract is different from the commencement and engagement of work by a seafarer.- C.F. Sharp & Co. v. Pioneer Insurance & Surety Corporation, G.R. No. 179469, 15 February 2012
CONSUMMATION
Non-payment of the purchase price entitles the seller to rescind the sale contract of real property.- Sps. Tongson v. Emergency Pawnshop Bula, G.R. No. 167874, 15 January 2010
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“No perfected contract, no agreement.
- Atty. Jericho B. Del Puerto
Business Lawyer & Legal ConsultantJDP Consulting Ltd. Co.
Business Law ProfessorSan Beda Graduate School of Business
Book Author, Legal Aspects of BusinessCentral Books Publishing
You may also want to visit:
www.legalaspects.phBusiness Laws & Best Legal Practices
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