Drafting Business Agreement Letters in the Philippines: A Comprehensive Guide

Business agreement letters — commonly referred to as Letters of Intent (LOI), Memoranda of Understanding (MOU), Memoranda of Agreement (MOA), Term Sheets, or Offer Letters — are indispensable tools in Philippine commercial practice. They serve as the bridge between initial negotiations and the execution of formal contracts, or in many cases, function as the complete and binding contract itself when properly drafted.

In the Philippines, where business culture values personal relationships (“pakikisama”) yet demands legal certainty, these documents strike the crucial balance between flexibility and enforceability. This article exhaustively discusses the legal framework, drafting techniques, essential and recommended clauses, enforceability issues, notarization, electronic execution, taxation, and practical considerations specific to Philippine jurisdiction.

I. Legal Nature and Governing Law

All business agreement letters are governed primarily by the Civil Code of the Philippines (Republic Act No. 386, as amended), particularly:

Art. 1305 – Definition of contract
Art. 1315 – Contracts are perfected by mere consent
Art. 1318 – Essential requisites: consent, object certain, cause of the obligation
Art. 1356 – Contracts shall be obligatory in whatever form they may have been entered into, provided all essential requisites are present
Art. 1357–1358 – Right to compel execution of formal document if agreed upon
Arts. 1403–1405 – Statute of Frauds (certain agreements unenforceable unless in writing)

Supplementary laws include:

Republic Act No. 8792 (Electronic Commerce Act of 2000) and its IRR
Republic Act No. 11232 (Revised Corporation Code of the Philippines)
Republic Act No. 10173 (Data Privacy Act of 2012)
Republic Act No. 8799 (Securities Regulation Code) for investment-related agreements
Relevant provisions of the Intellectual Property Code (RA 8293) for technology transfer or licensing agreements

II. Binding vs. Non-Binding Agreements: The Most Critical Distinction

Philippine courts consistently uphold the principle that the binding nature of an agreement depends on the intention of the parties as expressed in the document, not on its title.

Binding agreements (e.g., MOA, Supply Agreement Letter, Distribution Agreement Letter) create immediate obligations.
Non-binding agreements (e.g., most LOIs or MOUs) merely express intent to negotiate in good faith.

To make an agreement non-binding, include explicit language such as:

“This Letter of Intent is not intended to be legally binding, except for the provisions on Confidentiality, Exclusivity, and Governing Law, which shall be binding upon the parties.”

To make it fully binding, state:

“This document constitutes the entire, legally binding agreement between the parties and supersedes all prior understandings.”

The Supreme Court has repeatedly ruled (e.g., Limketkai Sons Milling, Inc. v. Court of Appeals, G.R. No. 118509, 1996; Philippine Realty and Holdings Corp. v. Ley Construction, G.R. No. 165548, 2011) that clear language determines binding effect.

III. Types of Business Agreement Letters Commonly Used in the Philippines

Type	Typical Use	Binding or Non-Binding	Common Philippine Practice
Letter of Intent (LOI)	Real estate, joint ventures, M&A	Usually non-binding except specific clauses	Widely used in property acquisitions
Memorandum of Understanding (MOU)	Government-private partnerships, academic collaborations	Usually non-binding	Common in PPP projects under BOT Law
Memorandum of Agreement (MOA)	Supply, distribution, services, franchise	Fully binding	Preferred term for enforceable contracts
Term Sheet	Financing, private equity, venture capital	Usually non-binding	Standard in startup investments
Offer to Purchase / Offer Letter	Sale of shares, assets, real property	Binding upon acceptance	Heavily used in stock or asset acquisitions
Non-Disclosure Agreement (NDA) Letter	Due diligence, technology discussions	Binding	Often executed as a stand-alone letter agreement

IV. Essential Components of a Well-Drafted Business Agreement Letter

Letterhead and Date – Use company letterhead; date in Manila, Philippines format (e.g., 01 December 2025).
Addressee and Subject Line
Re: Memorandum of Agreement for the Supply and Distribution of [Product]
Recitals / Whereas Clauses – Set the factual and business context (highly recommended in Philippine practice).
Operative Provisions
a. Definition section (if complex)
b. Rights and obligations of each party
c. Consideration / Purchase price or fees
d. Term and termination
e. Representations and warranties
f. Conditions precedent (if any)
g. Confidentiality and non-compete (if applicable)
h. Intellectual property ownership
i. Indemnity and limitation of liability
j. Force majeure (include pandemics and government restrictions post-COVID jurisprudence)
k. Governing law and dispute resolution
l. Miscellaneous (entire agreement, amendments in writing, severability, no waiver, counterparts)
Execution Block
Must be signed by authorized representatives with designation and proof of authority (Secretary’s Certificate or Board Resolution for corporations).
Conforme / Acceptance Line (for offer letters)
Notarial Acknowledgment (recommended for enforceability as public document)

V. Recommended Clauses Specific to Philippine Jurisdiction

Governing Law

“This Agreement shall be governed by and construed in accordance with the laws of the Republic of the Philippines.”
Dispute Resolution (choose one or combine)

“Any dispute arising from this Agreement shall be submitted to the exclusive jurisdiction of the courts of Makati City, Philippines”
or
“All disputes shall be resolved through arbitration under the Construction Industry Arbitration Commission (CIAC)” (for construction) or “Philippine Dispute Resolution Center, Inc. (PDRCI)”
Force Majeure (post-COVID updated version)
Include “pandemic,” “community quarantine,” “acts of government” explicitly.
Data Privacy Clause (mandatory since 2012)
Reference compliance with RA 10173 and require the receiving party to implement reasonable security measures.
Tax Clause

“All taxes, including documentary stamp tax, arising from this Agreement shall be for the account of [Party].”
Language Clause (if bilingual)

“In case of conflict between the English and Filipino versions, the English version shall prevail.”

VI. Notarization and Documentary Stamp Tax (DST)

Document Type	Notarization Required for Validity?	DST Rate (2025)
Loan agreements	No, but required for enforceability against third parties	₱1.50 for every ₱200
Sale of real property	Recommended	1.5% of consideration
Sale of shares (unlisted)	Yes, for BIR purposes	₱0.75 for every ₱200
Lease agreements (> ₱2,000/month)	No, but for enforceability	₱2 for first ₱2,000 + progressive
General MOA/MOU	Not required for validity, but highly recommended	Usually ₱30–₱200 (BIR Ruling)

Failure to pay DST within 5 days after month-end renders the document inadmissible in evidence (Sec. 201, Tax Code).

VII. Electronic Execution and the E-Commerce Act

Since 2000, electronic signatures have the same validity as wet-ink signatures under RA 8792, provided:

The method identifies the signer and indicates approval
It is reliable for the purpose
Common platforms: DocuSign, HelloSign, Adobe Sign (widely accepted by Philippine courts)

The Supreme Court’s 2020–2023 Rules on Electronic Evidence and the 2022 Judicial Affidavit Rule amendments explicitly recognize electronically signed contracts.

VIII. Common Drafting Errors That Render Agreements Unenforceable

Vague or ambiguous terms (violates Art. 1370–1379 on interpretation)
Lack of authority of signatory (corporation must attach Secretary’s Certificate)
Violation of Statute of Frauds (e.g., agreement not performable within one year not reduced in writing)
Absence of consideration in supposedly onerous contracts
Inclusion of unlawful cause or object (Art. 1409)
Failure to specify binding nature when intended to be binding

IX. Practical Drafting Tips from Philippine Legal Practice

Use “shall” for obligations, “may” for rights
Define all capitalized terms
Number paragraphs consecutively
Use active voice when possible
Include an annex for technical specifications
Require initialling of every page by both parties (especially in real estate)
Retain at least three original signed copies (one for each party + BIR if DST applicable)

X. Conclusion

A well-drafted business agreement letter in the Philippines is not merely a formality — it is often the primary enforceable document in commercial relationships. By clearly expressing the parties’ intent, incorporating the essential requisites under the Civil Code, addressing Philippine-specific requirements (DST, data privacy, notarization, authority), and using precise language regarding binding effect, practitioners can create documents that withstand judicial scrutiny while facilitating smooth business transactions.

In a jurisdiction where litigation remains costly and time-consuming, the extra effort invested in proper drafting invariably yields substantial protection and peace of mind for all parties involved.