Legal Aid 101: F&B Contracts Contract Preparation Guidelines in the Food and Beverage Business

by Geraldine Rullan-Borromeo
(Manila, Philippines)

Legal Aid 101: F&B Contracts Contract Preparation Guidelines in the Food and Beverage Business

By Geraldine Rullan-Borromeo

The food and beverage business, whether it is in production, packaging, distribution, retailing or food service, is subject to ambiguities in transactional relations should the parties fail to put their agreement in writing. And even if such agreement was put in writing, the business is fraught with future disputes between business partners, suppliers and buyers, employers and employees, manufacturer and distributor, etc. should the agreement not clearly outline the obligations and responsibilities of the parties.

The following is a basic checklist of the preliminary steps that business partners must take before they draft the general provisions that a business contract must contain. It is a useful guideline to help navigate the many pitfalls that businesses fall into when they overlook basic contract preparation rules.

WHAT IS IN YOUR BUSINESS CONTRACT?

A contract is by definition an undertaking to give something, to perform a service or do an act in favor of the other party. It must be clear that the parties have consented to a clearly defined object of the contract and that there is a cause or consideration for said performance of an act or service, as defined by the New Civil Code in Article 1305.

Contract preparation is key, and there are several steps that must be undertaken by each party before they give their full consent to the terms and conditions in a contract. As a preliminary step, the parties can write a term sheet together where they will outline the specifics of what service or act constitutes the object of the contract and the parties who will be named in the contract. There must also be an agreement by both parties to provide access to corporate documents to satisfy the other party of its legitimacy as a business, its financial standing and compliance with government rules and regulations. This step is crucial since the conduct of due diligence to inquire into the “legal health” of a future business partner cannot be overlooked to avoid partnering with a either a defunct, bankrupt or worse an illegal business.

While registrations in the Securities and Exchange Commission (SEC) or Department of Trade and Industry (DTI) and city or municipality where the business is located may be requested from your future business partner, these registrations are by their nature, public records. Thus, it is available for photocopying or issuance of certified true copies by any person inquiring with said agencies. The SEC also provides the company or partnership financial statements that have also been submitted to the BIR by these legal entities. The SEC provides General Information Sheets (GIS) on the status of companies and their current stockholders and organization structure.

Other regulatory bodies, like the Bureau of Food and Drugs (BFAD) have special requirements for the food industry to comply with. Registration for specific activities must be verified to ensure legitimacy of a future business partner. Environmental compliance is also a major concern for food manufacturing activities that may cause unlawful emissions to the environment, including water treatment and industrial waste disposal requirements which should be looked into.

Access to your future business partner’s organizational charts and employee list, disclosures of any conflicts of interest on similar current or future business plans, asset list, if such asset is part of the business contract, should be given by the other party in good faith and the refusal to do so may be a sign of bad faith in the conduct of negotiations. Mutual access is indicative of the intention of the parties to come to a fruitful conclusion of a contract.

Food equipment inventories, supply and distribution chains, warehousing requirements, food transport lines, food handlers; chefs’ resumes and even food and drink formulations are only some of the confidential disclosures that the other party may find helpful before they commit to entering into a contract.

However, since some of these records are confidential, parties enter into a Confidentiality Agreement on the onset or a Non-Disclosure Agreement to protect the information divulged during contract preparation. Remedies in cases of a violation of the confidentiality are stated in said Agreements, with specific damages to compensate the party whose information was divulged.

After the conduct of due diligence and access to corporate information is granted, the parties may now enter into a Memorandum of Understanding or Agreement (MOU or MOA), confident of the corporate standing of both parties. The MOU or MOA will now outline the reasons that the parties are entering into the contract; the specific obligations of both parties in the performance of the future contract; general guidelines for compensation of the party providing the service or performing the act; and the parties will now explore the extent of their commitments under the contract via further disclosures of their business.

The general provisions that the parties need to study will be discussed in the next issue which includes a discussion on contract titles; dating of documents, proper identification and authorization of parties; electronic documents; remedies in case of breach or acts of God; performance and assignment restrictions; prescription of actions; amendment procedures; waiver of rights; dispute resolution and termination provisions.

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Legal Aid 101: F&B Contracts (Part 2) Contract preparation guidelines in the food and beverage business

by Geraldine Rullan-Borromeo
(Manila, Philippines)

Legal Aid 101: F&B Contracts (Part 2) Contract preparation guidelines in the food and beverage business

By Geraldine Rullan-Borromeo

Contracts bear the written intention of parties to a business transaction, and much care and attention is called for to ensure that the provisions that make up a particular agreement are in consonance with said intentions. Template contracts that are ready to be filled in with the details of an agreement may be an easier and cheaper option to take, including cut and paste provisions that may seem applicable to a business model. However, the more prudent action is to seek the advice of a lawyer who specializes in contracts, lest a loophole or an ambiguity be inserted in the contract which will work out a difficulty in the performance of the obligations or the enforcement of its protective measures. What follows is a checklist of the essential provisions for a business transaction to ensure that the basic contract nuts and bolts are in place.

1. TITLE OF THE CONTRACT.
While the title of a contract does not control the nature of the contract as the provisions themselves construed together will define the kind of contract, it is best to aptly describe a contract in accordance with its provisions. One may call an agreement an “Integrated Distribution and Warehousing Contract of Food Grade Packaging” but if the basic service is merely for storage, and the contract provisions lack a distribution clause, then no agreement to distribute the goods will be imputed on the parties.

2. DATE OF THE CONTRACT.
The date of execution of a contract, the date when it is signed by the parties and notarized, is the date of reckoning when the obligation is to be performed; the date to count from when remedies may be sought to enforce performance or damages; and the date to start off to compute the term of the agreement. Thus, dating a contract is an essential step to avoid second guessing the date of execution.

3. PLACE OF EXECUTION.
Contract laws differ from country to country, and it is best to indicate the country where the contract is signed to determine which law applies. Cross border contracts that are signed by different parties in different countries specify the law of a specific country that will govern their contract to avoid the uncertainty of whose contract law will apply.

4. PROPER IDENTIFICATION OF PARTIES AND DESIGNATED REPRESENTATIVES.
The parties to a contract must be properly named, taking care not to confuse sister or affiliate companies. Also when contracts are signed by representatives for juridical persons (corporations and partnerships), said representatives have to be duly authorized via a notarized corporate secretary’s certificate or board resolution or a notarized partnership authorization to ensure the capacity to represent. These are relevant to ensure that the parties authorized the business transaction; that they will duly perform the obligation; and, answer for the liabilities of default.

5. PRINCIPAL PLACE OF BUSINESS.
The contract must specify the principal place of business for purposes of fixing the venue for civil actions and to determine the local taxation aspects of the business transaction.

6. WHEREAS CLAUSES.
While whereas provisions are not required, it provides an overview of the fundamental obligations undertaken by the parties that define the nature of the contract.

7. DEFINITION OF TERMS.
Business contracts makeup the engagement of technical services; sale and or storage of industrial goods with special descriptions; channels of distribution; accounting terms; etc., thus, it is always more prudent to include a section where each relevant term is defined to avoid misapplication of the contract provisions. Seek the assistance of the technical experts of the parties as they are the best persons to define these terms.

8. DEFINITION OF THE OBLIGATION.
This is the heart of the contract and the obligation to be undertaken by each party. It must be clearly defined and enumerated for each party in one section of the contract so that in can easily be referenced during the implementation of the contract.

9. SAMPLE FORMULAS.
Most business contracts necessitates the application of a formula to compute prices, interest, commissions, levels of compliance with sales targets, market share, or even computation of delay in the performance of the obligation, etc. Thus, including a sample formula will remove any future disagreement on how to compute and allow for smooth sailing in the performance of the obligations and payments for the same.

10. SCHEDULE OF DELIVERABLES.
Including this schedule either in the body of the contract or as an Appendix is essential to ensure that both parties are aware that time is of the essence and that strict performance of the obligation according to the said schedule is expected. Penalties for late performance may also be included.

11. PRODUCT OR SERVICE WARRANTIES.
Reference to the legal requirements for warranties is best resorted to make sure that the warranties are not in violation of the minimum requirements of the law. The Civil Code provisions on Obligations and Contracts may be referred to, including special laws like the R.A. 7384, the Consumer Act

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