The sanctity of contracts

For relationships to last and for business to thrive, TRUST must be sowed and nurtured between the parties. This applies both to personal and business affairs. Every day, each one of us enters into agreements with each other, whether on trivial private affairs or in billions of pesos of business transactions.

Unknown to most nonlawyers, contracts can be verbal as well. However, it is generally presumed that whenever parties enter into contracts, particularly in most businesses, those contracts must be written. This understanding is not without reason. For at the passage of time, human memory may fail and not fully remember the terms of the agreements a person might have entered into. Hence, to avoid such confusion that may destroy an otherwise fruitful business relationship, the parties (and even the law in some forms of contracts) make it sure that everything that what they have agreed into are recorded and placed in writing for future reference.

The sanctity of contract is of paramount interest to human affairs. For this reason, even the Constitution protects it and ensure that persons or corporations, will have the legal system to run to and seek remedy or enforcement.

It must be emphasized though that before one could invoke the sanctity of contract, the very contract that he is relying on must at first be capable of being sanctified; that is, it is not illegal, immoral or against public policy. And the parties must themselves have been capable of “sanctification” when they entered into it; hence, they must have entered into it in “good faith” and have the capacity to enter into such agreement.

Entering into a contract with government

Private contracting parties when dealing with the government must therefore observe their own “sanctity.” In a profit-maximizing world full of competitors, they tend to outdo each other in so many ways. Unfortunately, there are those who achieve their ends thru “unsanctified” ways.

While all contracts are sacred, government contracts can be classified as one with an extraordinary “sacredness” (this despite the fact that it is extraordinarily transgressed in such regularity as well in some cases). This is so because government contracts do not only bind private sector interests but the entire state through the government. Not only is the public officer entering into it vested with public trust but most significantly, such contract when done to the disadvantage of the government shall burden all citizens of the state.

Relatedly, the government itself must respect the rights of private parties by observing the contract that it entered into. Hence, there is distinction between the power of the state as a sovereign which renders the state immune from suit and the power of the state as a contracting party where the state sheds such immunity for the interest of fairness and protection of the rights of the private party contracting with it. The government is not exempted from observing good faith as well – at least in a functioning democracy.

While this “unorthodox” rent-seeking ways may pay off in the short-term, the lessons learned in the so many cases such as PIATCO and PEA-AMARI show that it would eventually destroy all the parties that participated in it. Such methods cast away the mantle of contractual sanctity and the law does not provide protection for it.

Hence, it is still a good practice that everyone should observe the sanctity of contract from beginning to end. Thus, when a contract is a subject of bidding, the final contract should not be materially and substantially different from the terms of the reference of such bidding unless legally justified and done in the most transparent way. If a contract is negotiated, such negotiations must transpire and be concluded with terms that are not advantageous to the government, conducted in transparent manner, and with the involvement of all concerned, as may be provided for the rules or by law.

It is best practice to thresh out all unclear terms, obligations, representations and warranties, default provisions and all other issues prior to the signing of any contract. It is imperative to conduct legal and financial due diligence before making any commitment. Failure to do so would be tantamount to gross negligence which may expose the board and officers of the contracting parties as well as the signatories to grave legal liabilities, criminally, civilly and administratively. Such prudence and diligence in making business judgment is an indispensable part of the sanctity of contract.

But once a contract is signed, all parties must observe its terms faithfully to its very letter. Good faith is the foundation of contractual sanctity. From its preparation, execution, implementation and termination. Its presence must be enduring and continuing to the end of the agreement. To cast this aside would entail the destruction of trust and the failure of relationships which may be most difficult to attain again.

Atty. Arnel Paciano Casanova completed his Masters in Public Administration (Finance and Leadership) from Harvard University’s Kennedy School of Government as a Mason Fellow in 2007. He obtained his law degree from the UP College of Law (1998) where he likewise obtained his Diploma in Urban and Regional Planning (2000). His expertise is in the field of real property development, public-private partnerships, privatization, public infrastructure and construction, security and negotiations, corporate governance and social entrepreneurship. He is a recipient of the Philippine Legion of Honor Medal in 1997 and was selected by the Asia Society in New York as one of the Asia Young Leaders of 2007. He is currently a General Counsel and Corporate Secretary of a major government corporation and has served as Corporate Secretary of some private corporations. He lectures in Ateneo School of Governemnt as lead faculty for social entrepreneurship.