5 Questions on Business Contracts

What is a business contract?

A contract is an agreement between two or more parties whereby they exchange promises to do or give something in exchange for a payment.

We call business contracts those agreements that are related to your enterprise, such as purchase and sale of assets or shares, guaranties, loans, leases, bailments, commissions, and others that may arise from a business transaction.

Are there any writing formalities for business contracts?

There will be a writing and notarization requirement only when provided by law. For example: a business person that purchases a piece of land would need to memorialize the agreement with the seller in writing. Moreover, both the buyer and seller would need to appear before a notary public to execute the agreement. In contrast, in a purchase and sale of goods, e.g., office supplies, there is typically no writing nor notarization requirement.

It is a good practice, however, to have a written contract for all transactions that entail a long-term relationship with a supplier or business partner. These contracts should also be formalized with a public attester, such as a notary public or public broker.

What happens if I do not keep my contracts in writing?

First and foremost, if you do not have a contract in writing and a controversy arises from your agreement, you would need to compile evidence to prove your cause of action in court. For example, let’s say you are a service provider and bill your customers for services rendered without a written agreement. One day, one of your customers does not pay the bills for services already provided. You want to file a cause of action against him, claiming payment of amounts due; however, since you do not have a contract in writing, you need to file a preliminary judicial petition to ask your debtor to come into a tribunal to provide a testimony concerning this services agreement. Moreover, you would need to organize invoices, communications and other documents that would evidence your business relationship.

Another thing that could happen is that if a tax officer pays a visit to your business for an audit, they will regularly want to see that the transactions that you have in your accounting books are evidenced by a written and notarized agreement. In the event that you do not have a written and notarized agreement, the tax authority may consider the transaction null or inexistent. This means you may have a hard time claiming a deduction for the transaction or, in a more sever case, the authority may find that the business is reporting transactions that are inexistent and be subject to sanctions.

Are contracts in English, or any language other than Spanish, acceptable?

Contracts in any other language that is not Spanish should be supported by a translation into Spanish.

What other formalities should I consider for my business contracts?

Depending on the nature of the contract, in addition to the writing and notarization requirement you may need to have the contract registered with the Public Registry of Property and Commerce (PRPC). For example, an agency contract (mandato) whereby a business grants authority to a third party to act on its behalf would need to be registered with the PRPC, in addition to the writing and notarization requirement.