It's not a secret that many new businesses fail every year. But when you look at the facts more closely, you find a shocking cause. Part of the reason why so many startups fail is because of how they handle contracts.
In fact, 39% of businesses have reported missing contractual obligations due to poor contract management practices. This clearly indicates that companies should give contracts the attention they deserve.
But what exactly is a legally binding contract? How do you know if an agreement is legally valid or not? What are the advantages of having a notary public review a contract?
All of these questions, and more, will be addressed by our notary public expert witnesses in this post. So, keep on reading.
What Exactly Is a Contract?
Before we get into the specifics of what makes a legally binding agreement and how it can affect business success, let's first start with the basics—the very definition of a contract.
A contract is defined in the Philippines' Civil Code as a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.
Under the same law, a contract can be implied or express, and its distinctions are as follows:
- An express contract refers to an agreement in which the terms and conditions are stated verbally or in writing. Once an express contract has been made and accepted, it cannot be repeated in an implied form.
- An implied contract refers to an agreement in which the terms and conditions are inferred from the actions of the parties involved.
In the eyes of the courts, either type of contractual agreement is legally binding, as any contract entered willingly by the involved parties through an offer and acceptance.
That being said, an express contract, particularly one in writing, is obviously much easier to define and then enforce than an implied contract.
What Is a Legally Binding Contract?
A "binding" or a "legally binding" contract is an agreement between parties that legally binds them to carry out specified transactions, duties, or services. If one party breaks the contract, the other may sue to enforce the terms of the agreement.
So, what are the different types of contracts that are legally binding?
- Fixed-Price Contract. This type of contract is best suited for arrangements where the payment amount is not determined by the resources used for the undertaking. The seller simply calculates the total allowable resource costs to complete the project.
- Aleatory Contract. This type of contract is commonly found in insurance policies. It requires parties to perform required actions only when a triggering event occurs, and this event must be something that neither party can control.
- Bilateral Contract. This type of contract is commonly used in sales transactions in which parties exchange promises to perform specific actions. Both parties have obligations to fulfill and value to gain from the agreement.
- Unilateral Contract. This type of contract is used when one party promises to compensate another after the latter has performed the required service or action. There is usually an open request to which individuals can respond, fulfill the requirements, and receive compensation.
Some endeavors have such high stakes that they simply cannot be undertaken without the protection of the contract law. Now, let's take a look at why you need a binding contract.
Why You Need a Legally Binding Contract?
The short answer is that you need a binding contract to ensure that your rights are protected. In addition to outlining the duties of each party, contracts should be drafted by a public notary with the possibility of future conflict in mind and include a procedure for resolving disputes.
Most of the time, people sign contracts to get something of value. For example, if you want to buy something, a contract can ensure that the seller gives you the item after paying for it. Or, if you're selling something, the contract can ensure you get paid for it.
A legally binding agreement can also provide critical security for business owners and their assets. For instance, if your business encounters problems, a contract can shield you from any legal responsibility.
However, a common misconception is that a contract for a minor project is unnecessary. Regardless of the project size, it's always a good idea to have a contract in place if something goes wrong.
Even a simple, short contract can protect everyone and make it more likely that the project will be finished successfully. You can even put in your contract what should happen if the project runs behind schedule and takes longer than both of you thought it would.
Furthermore, contracts can protect you from having to follow unfavorable rules. For example, if you work for a company without a contract, the company may later ask you to sign an agreement that benefits them rather than you. Insisting on a contract from the start will help define the relationship and ensure you are aware of your responsibilities.
What Makes a Contract Legally Binding?
A binding contract can be created in a variety of ways. The most efficient approach is for both parties to collaborate on writing a contract that specifies all of their relationship's terms and conditions.
However, for a contract to be legally binding, Article 1318 of the Philippine Civil Code states that the following essential conditions are met:
- Consent. Consent implies that the cause and object of the contract have been offered and accepted. The acceptance must be communicated to the party who made the offer.
- Object. A valid contract may include all things within the commerce of men and services that are not against the law, morals, good customs, public order, or public policy.
- Cause. The term "cause" is synonymous with "consideration" in standard law systems. The Philippine Supreme Court defines cause as "the essential reason that moves the contracting parties to enter into the contract."
In addition to the abovementioned requirements, a signature is another necessary but often overlooked element of any legally binding agreement. The contract cannot bind either party if the person entering into it lacks the legal capacity to do so under the law.
If you've ever signed a contract before, whether for a job or a business transaction, you may have noticed that the last page of the document contains a space for both parties to sign. Sometimes, you may even be required to sign on each document page.
Ultimately, a contract is valid under Philippine law regardless of its form, whether oral, written, electronic, or digital. It only loses legal force if it contains unenforceable language or lacks a condition. In such a case, a contract would not be nonbinding.
Do Contracts Need to Be Notarized to Be Legally Binding?
This is a frequently asked question among contracting parties. But before we get to the answer, let us first define notarization and discuss why it's necessary for your contract.
Notarization is the official fraud-prevention process that assures transaction parties that a document is authentic and trustworthy. However, it is not a magic bullet that eliminates all flaws in legal documents.
Generally, contracts need not be notarized because the signed agreement itself makes it legally binding.
The Civil Code also states that a contract is valid and legally enforceable if all elements, namely consent, object, and cause, are present. Therefore, if these elements are present, the contract is valid even if it is not notarized.
Going back to the original question, why is there such a high demand for notarization services if not all legal documents require notarization?
Well, there could be three answers.
- A duly notarized document is presumed to be authentic and lawfully executed. Legally, this signifies that you can rely on what is written on the page when it is notarized. If there are any disputes regarding the document, it can be used as solid evidence.
- Certain types of contracting are required by law to be recorded in a public document. Notarization is required in these certain circumstances because it makes a document legally binding in the eyes of the public.
- There is a demand for civil law notaries due to internal requirements of specific government and private offices where services are obtained (i.e., replacing a lost ID or getting insurance and other benefits).
Although not all legal documents need to be notarized, the importance of this process cannot be underestimated.
It's not just a meaningless routine task; it's crucial to the public because it turns a private document into a public document—which means that it can be used as evidence without any other proof that it's real.
As a result, notarial acts must be exercised with extreme caution, and public notaries must diligently carry out their responsibilities.
Can a Legally Binding Contract Be Broken?
Because binding contracts carry with them the force of law, all parties are required to follow its terms and conditions.
If one or both parties suspect a breach of contract and wish to challenge the validity of their agreement, they may need to take their dispute to court, where a judge will decide whether or not a breach of contract has occurred based on the criteria mentioned above.
Remember that any legal action should be carefully considered because of the complexities and length of time involved in determining contract law. However, there are some circumstances where you can legally breach binding contracts.
These could be situations in which:
- All other contracting parties agree to the termination. In any case, you'll want rock-solid evidence that they gave their consent.
- You are willing to pay the agreed-upon damages. For example, a franchisee may decide to terminate their agreement with the franchisor, even if it means paying a fee.
- Your contract includes an opt-out clause that allows you to break the agreement within a specific timeframe and without penalty.
Given the specifics of any contract dispute or negotiation, it's always wise to consult an attorney before moving forward.
Now Is the Time to Draft That Legally Binding Contract
Legally binding contracts can assist you in pursuing the other party if they fail to meet their end of the bargain. You can use the power of the law to enforce the contract's terms and conditions as long as it contains all of the elements required to make it legally binding.
Remember that the right tools can help you avoid entering into contracts that will work against you in the long run.
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