After the two previous discussions on the basic elements and the title of a contract, this is the third installment of the “Contract Series.” This series is a step-by-step discussion of the basic elements and standard provisions of a contract, which is a basic business tool. It is, of course, safe to assume that Pinoy Entrepreneurs are familiar with the nuts and bolts of contracts, but a short discussion certainly won’t hurt.
A contract is basically a meeting of the minds between two persons, and one of the basic elements of a contract is the consent of the contracting parties. Now, some others say that a “party” should not be confused with the number of “persons” participating in the contract, because one party can be represented by two persons, in the same way that one person can represent two parties. Confused? Well, for our purposes, let’s just agree to use “parties” and “persons” interchangeably in this series.
The parties to a contract are generally designated at the first part, right under the Title. To illustrate, let’s take a standard employment contract, the designation of parties of which may look like this:
ACME, INC., a corporation duly organized and existing under and by virtue of the laws of the Philippines, with office address at XYZ Avenue, Quezon City, represented by its President and Chief Executive Officer, FRED PINOY, hereinafter referred to as the “EMPLOYER”.
– and –
JUAN DE LA CRUZ, Filipino, of legal age and with address at ABC Street, Quezon City, hereinafter referred to as the “EMPLOYEE”.
Please remember that this is not the only format used in contracts. In the illustration, an employment contract can be a simple letter addressed to the employee, duly signed by the authorized officer of the employer (by the way, an employment contract may be oral or may be implied from the actions of the parties, but this is another topic).
Natural and Juridical persons. A person may be a natural person (a human being) or a juridical person, an entity clothed with personality by law (e.g., corporations and partnerships). Any contractual obligation assumed by a juridical person is not the obligation of the natural persons composing or controlling that juridical person, except in cases where the doctrine of piercing the corporate veil is applied.
Authority of the contracting party. A party to a contract must be authorized to deal with whatever is the subject of the contract. For instance, while a manager or other responsible officer of a corporation has the presumed authority to act on day-to-day matters, important contracts require a resolution of the Board of Directors, contained in a Secretary’s Certificate. Agents may have a general authorization, but a special power of attorney is required in certain contracts, such as selling or buying real properties. Nevertheless, the principal can subsequently ratify the contract if entered into without prior authority.
In sum, a careful examination of the capacity and authority of parties to a contract is important because these matters affect the validity or enforceability of the contract. These matters constitute just the tip of the iceberg, so to speak, so hopefully we’ll have more spare time to discuss these matters in the days to come.