How Good Contracts Fail

By: Noel C Ducusin

Why You Need to Look Behind the Contract

A major deal is about to be signed. The commercial terms look good. The negotiations were hard, but productive. The lawyers have worked through the agreement, anticipated what could go wrong, and built in the protections that everyone thought were necessary. At that point, it is easy to feel that most of the risk has already been dealt with.

Think again.

Some of the most important risks in a transaction may sit behind the contract rather than inside it. A well-drafted agreement can define what the parties have promised to do. It can allocate risk, impose conditions, provide remedies, and give you rights when something goes wrong. What it cannot do is turn the wrong counterparty into the right one.

That judgment has to come earlier. Before asking whether you can get the terms you want, there is a more basic question:

Is this someone you should be doing this deal with in the first place?

That sounds obvious, but in major transactions it is surprisingly easy for the discussion to move quickly toward price, structure, warranties, indemnities, security, and remedies before some very basic realities have been tested. The contract matters but the transaction has to make sense outside the contract as well.

Consider the following situations:

The approval may not be enough

Suppose you are acquiring substantially all of the business and assets of a company. The seller gives you a board resolution approving the transaction. The agreement is signed by the proper officers. On the surface, everything appears to be in order. But for a transaction of that scale, a board resolution may not be enough. Under Philippine corporate law, a sale of all or substantially all of a corporation’s properties and assets requires approval by stockholders representing at least two-thirds of the outstanding capital stock.

So the real question is not simply whether a board resolution exists. It is whether the transaction was approved by the corporate body that actually has the power to authorize it, i.e., the shareholders, and by the required voting threshold (a supermajority).

If that approval was never properly obtained, or if the seller does not have the shareholder support it assumed it had, you may discover that you have spent months negotiating an excellent acquisition agreement with people who were never, by themselves, in a position to deliver the transaction.

That is why authority should not be treated as a box to check at the end of the documentation process. You need to understand, from the outset, who actually has the power to make the deal happen.

The buyer may have agreed to pay but can the buyer actually pay?

Now take a different situation.

You are selling your company for ₱500 million. Part of the purchase price will be paid at closing, with a substantial balance payable six months later. The agreement is strong. The deferred payment obligation is clear. There is default interest, acceleration, and a carefully negotiated set of remedies. On paper, you are well protected.

But before signing, nobody has really tested whether the buyer has the cash, committed financing, or other resources required to make the later payment. Six months later, the payment does not arrive. Legally, you may be in a very good position but commercially, you may be in a very bad one.

You may have negotiated an excellent contract, but now you have an enforcement problem. And the downside is not limited to legal fees or the cost of litigation. You may now be locked into a disputed transaction, with arguments over termination, breach, damages, ownership, or enforcement and while that dispute is being resolved, another buyer — perhaps better funded, more experienced, and more capable of completing the transaction — may no longer be willing to step in precisely because of the pending litigation and contested claims.

The wrong counterparty can therefore cost you twice. First, the original deal may fail. Second, being tied up in that failed deal may prevent you from doing a better one. That is why financial capability should be tested before commitment, not discovered only when payment falls due.

Contractual remedies matter. But if the buyer was never realistically in a position to perform, the better solution may have been to choose a different buyer before the contract was signed.

Pay attention to how the other side behaves before the deal

There is also a less technical, but equally important, question.

Is this someone you actually want to be in business with?

Suppose you are considering a joint venture. The economics are attractive. The prospective partner brings something valuable to the table. Your lawyers can draft reserved matters, veto rights, information rights, exit mechanisms, and other protections.

But during negotiations, you begin to notice a pattern. Positions that seemed settled reopen when they become inconvenient. Information that should have been disclosed earlier emerges only after repeated requests. Commitments are treated as firm when they favor one side, but suddenly become “subject to further discussion” when circumstances change.

None of that may amount to a contractual breach, but it is still valuable information. Negotiations are often your first opportunity to see how a future counterparty behaves when interests begin to diverge. Businesses encounter financing problems, markets change, projects are delayed, people disagree, or the economics become less attractive than everyone expected at the beginning.

When that happens, contractual protections become important. But so do credibility, incentives, reputation, and the way people behave under pressure. This is not an argument for replacing good contracts with trust because you need both.

The point is that a contract should support a sound counterparty decision. It should not be used to convince yourself that a questionable counterparty has somehow become safe because the lawyers drafted enough protections.

Look behind the contract

In major transactions, a great deal of attention naturally goes into the document. That is necessary, and good contract drafting really does matter.

But the document is only one part of the transaction. You also have to ask whether the people on the other side can actually authorize what they are promising to do, whether they have the financial and operational capability to perform, and whether they are people you are prepared to rely on when the transaction inevitably encounters pressure.

Those are not questions to ask only after the contract has been signed. They are part of deciding whether to enter into the transaction at all, and the best time to discover that a counterparty cannot deliver is before you sign, not when you are already reading its default provisions. A good contract should protect a sound transaction and should not be expected or be a substitute for a weak counterparty.

About the Author

Atty. Noel C. Ducusin is an M&A lawyer who has advised boards, business owners, investors, and family offices on strategic transactions and business transformation for nearly three decades. As Director for M&A at DoingBusinessPH and Senior Partner at N. Ducusin & Partners Law Offices, he advises on mergers and acquisitions, strategic partnerships, capital raising, corporate restructuring, and cross-border investments, while helping international companies establish, invest, and grow in the Philippines. Beyond advising on transactions, he also helps create them by connecting investors, business owners, executives, and advisers whose strategic interests align, believing that many successful opportunities begin with a simple conversation. Through this blog, he shares practical, plain-English insights to help foreign investors, business owners, directors, and executives make better strategic decisions.

"Everything should be made as simple as possible, but no simpler." — Albert Einstein

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