Q&A: contract formation in Philippines

Contract formation

Is there an obligation to use good faith when negotiating a contract?

The Civil Code of the Philippines provides for a general obligation for parties to act in good faith. Under the Civil Code, every person must, in the exercise of his or her rights and in the performance of his or her duties, act with justice, give everyone his or her due, and observe honesty and good faith, and every person who, contrary to the law, willfully or negligently causes damage to another, shall indemnify the latter for the same.

The Philippine Supreme Court has referred to ‘bad faith’ as not merely pertaining to bad judgment or negligence but relates to a dishonest purpose and a deliberate doing of a wrongful act. The Philippine Supreme Court has ruled that bad faith involves breach of a known duty through some motive or interest or ill will that partakes of the nature of fraud.

The foregoing obligations would apply to parties negotiating a contract.

How are ‘battle of the forms’ disputes resolved in your jurisdiction?

Contracts are perfected by consent of the contracting parties. Under the Civil Code of the Philippines, consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause that are to constitute the contract. The offer must be certain and the acceptance absolute. If acceptance is qualified, it constitutes a counter-offer that does not bring about the perfection of the contract. The Philippine Supreme Court has ruled that acceptance should be unequivocal and that any modification or variation from the terms of the offer frees the party making the offer.

The Philippine Supreme Court has also ruled that:

[w]hile Article 1319 of the new Civil Code prescribes that “consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract,” this rule does not apply to a situation where one or both parties consider that the matters or details, in addition to the subject matter and the consideration, should be stipulated and agreed upon. The area of agreement must extend to all points that the parties deem material or there is no contract.

Given the foregoing, a ‘battle of the forms’ dispute is not common in the Philippines. It is typical for one of the parties involved in negotiating a contract to prevail and for the counterparty to accept the prescribed form of the prevailing party. There are also instances where both parties are forced to negotiate the terms of the contract to avoid an impasse.

Is there a legal requirement to draft the contract in the local language?

There is no legal requirement in the Philippines for a contract to be drafted in the local language.

English is an official language in the Philippines, and most commercial documents are in English.

In what circumstances are signatures or any other formalities required to execute commercial contracts in your jurisdiction? Is it possible to agree a B2B contract online (eg, using a click-to-accept process)? Does the law recognise the validity of electronic and digital contract signatures? If so, how are they treated in comparison to wet-ink signatures?

Under the Civil Code of the Philippines, the general law on contracts, a contract is formed once all of the following requisites are present:

• Consent – consent means that there has been an offer and an acceptance of the cause and object of the contract. The acceptance must be conveyed to the party making the offer.
• Object – all things within the commerce of men and services not contrary to law, morals, good customs, public order and public policy may be the object of a valid contract.
• Cause – cause is understood as ‘consideration’ in common law jurisdictions. Cause has been defined by the Philippine Supreme Court as ‘the essential reason which moves the contracting parties to enter into the contract’.

Article 1356 of the Civil Code then provides that ‘contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present.’ As a general rule, therefore, a contract under Philippine law will be valid in whatever form it may be found, whether oral, paper-based or electronic or digital.

The Civil Code is supplemented by the Electronic Commerce Act (Republic Act No. 8792) with respect to electronic or digital documents and signatures.

Under the Electronic Commerce Act, electronic documents are expressly declared to have the same legal effect, validity and enforceability as any other document or legal writing provided that the electronic document maintains its integrity and reliability and can be authenticated. For evidentiary purposes, an electronic document is the functional equivalent of a written document under existing laws.

An ‘electronic document’ under the Electronic Commerce Act refers to a record ‘generated, communicated, received or stored by electronic means in an information system or for transmission from one information system to another’. Accordingly, an online contract would generally be valid and enforceable if it were valid and enforceable had it been a paper-based document. Further, under the Electronic Commerce Act, an offer, the acceptance of an offer and other elements for the formation of contracts may be expressed in or demonstrated in by means of electronic data messages or electronic documents. No contract is to be denied validity or enforceability on the sole ground that it is in the form of an electronic data message or electronic documents or that any or all of the elements required under existing laws for the formation of the contract is expressed, demonstrated and proved by means of electronic documents. 

Thus, the Electronic Commerce Act expressly provides that electronic data messages or electronic documents ‘shall have the legal effect, validity or enforceability as any other document or legal writing’.

An electronic document will be considered as the ‘original’ of a document, if:

• there exists a reliable assurance as to the integrity of the electronic document or electronic data message from the time when it was first generated in its final form and such integrity is shown by evidence (that is, evidence other than the electronic data message itself) or otherwise; and
• the electronic document or electronic data message is capable of being displayed to the person to whom it is to be present.

As electronic documents are given legal recognition under the Electronic Commerce Act, the expression of consent to a contract may necessarily be made electronically as well. Considering that ‘consent’ is an essential requisite to form a binding contract, a person’s consent, albeit in digital or electronic means, must likewise be sufficiently established for a contract to be enforceable.

In this regard, similar to electronic documents, electronic signatures are likewise given express legal recognition under the E-Commerce Act. Under the E-Commerce Act, an ‘electronic signature’ refers to ‘any distinctive mark, characteristic and/or sound in electronic form, representing the identity of a person and attached to or logically associated with the electronic data message or electronic document or any methodology or procedures employed or adopted by a person and executed or adopted by such person with the intention of authenticating or approving an electronic data message or electronic document’.

Accordingly, a digital form contract, coupled with an express (albeit electronic) acknowledgement of the terms and conditions of the contract (ie, ‘I agree and understand the Terms and Conditions…’), should be enforceable under Philippine law. The parties should ensure, however, that the elements for the formation of the contract – particularly the customer’s consent – are properly documented and recorded and, if needed, could be expressed in or demonstrated in a reliable manner.

On the other hand, there are contracts that must appear in a public document to be valid. Under the Civil Code, the following contracts must appear in a public document: deed of donation of real property, contract of partnership where immovable property or real rights are contributed, and assignment of a credit, right or action.

While the notarisation of a private document by a duly commissioned notary converts it into a public document, the 2004 Rules on Notarial Practice do not recognise the validity of electronic signatures, and still require the signatories to represent to the notary public that the signature on the instrument or document was voluntarily affixed by the signatory for the purposes stated in the instrument or document, and to declare that he or she executed the instrument or document as his or her free and voluntary act and deed. The foregoing contemplates that the signature is the ‘wet’ signature of the signatory. Thus, if the agreements will be notarised in the Philippines, electronic signatures cannot be used to execute the same.