Contracts That Backfire: When Poorly Drafted Agreements Create More Problems

Contracts are the foundation of commercial relationships. Every service agreement you sign, every employment contract you execute, every joint venture you enter into — these documents define your rights, your obligations, and your exposure if things go wrong. Yet many Philippine businesses treat contracts as a formality: a document to sign quickly so business can proceed. This approach creates enormous legal risk.

Philippine courts interpret contracts in accordance with Civil Code principles. Under Article 1370, if the terms of a contract are clear and unambiguous, courts will give effect to the literal meaning of its stipulations. Under Article 1377, if there is ambiguity in a contract, it shall be construed against the party who caused the obscurity — typically the drafter. This means a poorly worded contract that you prepared may be interpreted against your own interest in a dispute.

We have seen businesses bound by obligations they believed were excluded — because the exclusion was buried in an ambiguous clause. We have seen clients lose the right to terminate a contract because the termination provisions were incomplete. We have seen joint venture partners unable to enforce profit-sharing rights because the formula was never precisely defined. In each case, the document existed. The parties had signed it. But the agreement did not protect them in the way they intended.

Key areas of contract risk include: undefined scope of work (leading to disputes about what was actually promised); absent or unclear termination provisions; missing liquidated damages clauses; absence of dispute resolution mechanisms; intellectual property ownership provisions that do not align with the commercial arrangement; and confidentiality provisions that are too broad or too narrow to be enforced.

The investment in a properly drafted contract — reviewed by a lawyer who understands both the legal framework and your business objectives — is one of the highest-return investments a business owner can make. A good contract not only defines the deal; it prevents disputes from arising in the first place.