Commercial Contracts in Puerto Rico: Basic Aspects

Contracts in General

Puerto Rico has kept the civil law tradition as the bedrock of its private law including contracts and obligations. Some of the code articles can be traced all the way back to the Spanish Civil Code of 1889 and the same applies to contract law which is largely unchanged with the medullar concepts needed in a contract such as cause, object and consent are retained. Contracts in Puerto Rico exist from the moment one or several people consent to obligate themselves with respect to another or others, to give something, or to render some service. The contracting parties can establish the pacts, clauses, and conditions that they deem convenient, provided they are not contrary to the laws, morality, or public order. We work with our clients for the analysis and drafting of various types of contracts in compliance with the Civil Code 2020 and civil law of Puerto Rico as requiered.

Pre-contractual Conduct and Responsibility

The dealings prior to the perfection of a contract in Puerto Rico must be developed in accordance with loyalty and good faith between the prospective contracting parties. The duty to collaborate in the formation of the contract, to obtain and provide information on relevant factual and legal circumstances, to maintain the confidentiality of the information received, and to preserve the asset that will be the object of the future contract is especially required. 31 L.P.R.A. § 9881.
The following actions or omissions, in particular, constitute a violation of the duties of conduct required during the pre-contractual stage:
(a) Breaking off negotiations suddenly, inappropriately, or arbitrarily;
(b) Not respecting partial agreements already reached;
(c) Initiating or continuing negotiations without seriousness;
(d) Incurring in fraud or violence;
(e) Revoking a binding offer or, suddenly, a non-binding offer; and
(f) Causing the nullity of a contract.
Expenses incurred to enter into the contract and the damage suffered for having relied on the valid conclusion of the contract must be compensated. The same compensation is due with respect to expenses incurred by the accepting party who, without fault, is unaware of the offeror’s death or supervening incapacity, or by the person who, upon accepting, is unaware without fault of the offeror’s withdrawal. 31 L.P.R.A. § 9882.

What is a Contract

A contract in Puerto Rico is the bilateral legal transaction by which two or more parties express their consent in the manner provided by law, to create, regulate, modify, or extinguish obligations 31 L.P.R.A. § 9751. What is agreed upon in contracts has the force of law between the parties, their successors, and third parties in the manner provided by law. 31 L.P.R.A. § 9754.
Consent exists through the concurrence of the offer and acceptance when the offeror receives the acceptance. The contract is considered perfected in the place where the accepted offer was made, unless otherwise agreed. 31 L.P.R.A. § 9772.

Offer

An offer is a unilateral legal act, directed at a determinable person, that contains the necessary elements for the existence of the proposed contract, or the means to establish them. If it lacks any of these elements and does not provide the means to establish them, the act is considered an invitation to make an offer. (31 L.P.R.A. § 9773). The offer is freely revocable, unless the offeror has obligated themselves to maintain it for a specific period or until the fulfillment of a condition. The revocation must be communicated to the potential accepting party before the offer is accepted. 31 L.P.R.A. § 9774.

Acceptance

The acceptance of a contract in Puerto Rico is the pure and simple unilateral legal act by which conformity is given to an offer. The acceptance of an offer made by a means that allows for an immediate response must be made immediately. The act by which modifications to the terms of the offer are proposed does not constitute acceptance, but a new offer made to the first offeror. 31 L.P.R.A. § 9775. The offer expires: (a) upon the expiration of the term or the fulfillment of the condition established by the offeror; or (b) by the rejection of the person to whom it is addressed. The offer and acceptance do not expire due to the death or incapacity of the offeror or the accepting party, except when dealing with obligations of a very personal nature. 31 L.P.R.A. § 9777.

Preliminary and Option Contract

A preliminary contract in Puerto Rico may be made between the parties by which they obligate themselves to enter into a future contract. If it grants only one of the parties the power to decide on the conclusion of the future contract, it is called an Option. The preliminary contract is not subject to complying with the formalities that the future contract must satisfy. If the required party refuses to grant the new contract, the court may demand strict compliance. 31 L.P.R.A. § 9756.

General/Non-Negotiated Clauses

General clauses are those contained in a form that has been designed and drafted by one of the parties. General clauses must be accessible to the contracting party who did not draft them. A contract with general clauses is interpreted in a manner unfavorable to the person who drafts them and in favor of the person who had less bargaining power. 31 L.P.R.A. § 9801.

Adhesion Contract

A contract is entered into by adhesion if the accepting party is compelled to accept pre-established content. The clauses of a contract entered into by adhesion are interpreted in a manner unfavorable to the person who drafts them and in favor of the person who was compelled to accept its content. 31 L.P.R.A. § 9802. The following clauses in contracts entered into by adhesion are especially voidable (31 L.P.R.A. § 9803):
(a) That which is not drafted in a clear, complete, and easily legible manner, in Spanish or English;
(b) That which authorizes the party who drafted it to unilaterally modify the elements of the contract;
(c) That which prohibits or limits the adhering party from bringing actions, and restricts the defenses or means of proof available to the adhering party, or reverses the burden of proof;
(d) That which excludes or limits the liability of the party who drafted it; (e) That which changes the contractual domicile of the adhering party without reasons for doing so; (f) That which, in the face of the adhering party’s silence, extends or renews a contract of definite duration; and (
g) That which excludes the jurisdiction of a regulatory agency.

Strengthen the legal foundation of your business in Puerto Rico. Contact us here and work with an experienced corporate lawyer and business attorney for the design, structuring, drafting, and enforcement of your civil and commercial contracts. Click HERE for more information.

Public Policy Limitations on Clauses

Lesion due to Disproportionate Economic Advantage (31 L.P.R.A. § 9841)

The annulment or revision of an onerous contract may be demanded if one of the parties maliciously takes advantage of the other’s need, inexperience, cultural condition, economic dependence, or advanced age, and as a consequence thereof, obtains a disproportionate and unjustified economic advantage, in accordance with the following rules:
(a) The calculation must be made according to the values at the time of the contract’s conclusion, and the disproportion must subsist at the time of the lawsuit. The disproportion creates a presumption of taking advantage if it exceeds half the value of the promised performance;
(b) The action can only be brought by the injured party or their heirs;
(c) The claimant may demand annulment or equitable readjustment of the performances, but the action for annulment is transformed into an action for readjustment if this is offered by the defendant; and
(d) The equitable readjustment must be made taking into consideration the contractual type and its cause, to eliminate the imbalance of the performances.

Lesion due to Excessive Supervening Onerousness (31 L.P.R.A. § 9842)

The party prejudiced by the excessive supervening onerousness of the performance for which they are responsible, caused by an extraordinary and unforeseeable event, may allege the ineffectiveness or request the revision of the contract in Puerto Rico, in accordance with the following rules:
• the contract must be of deferred execution or of continuous performance;
• if the contract is aleatory (involving risk), the excessive onerousness must be foreign to the inherent risk of the contract;
• the extraordinary and unforeseeable event must be foreign to the conduct of the parties;
• to judge foreseeability, the greater duty to act with prudence and full knowledge of the circumstances must be considered; and
• the party alleging excessive supervening onerousness must be free of fault and relevant default.

Contract Regarding a Third Party

A contract regarding the act of a third party is one by which one of the parties obligates themselves to carry out the necessary activity for the third party to fulfill the promised performance. The obligation consists of employing adequate means, unless the result is guaranteed. The third party’s fulfillment releases the promisor. (31 L.P.R.A. § 9812).

Contract with a Stipulation in Favor of a Third Party

If the contract contains a stipulation in favor of a determined or determinable third party, this third party may demand its fulfillment if they communicate their acceptance to all the parties in compliance with certain rules. 31 L.P.R.A. § 9813.

Post-Contractual Conduct; Liability

A person who frustrates the advantage granted in the contract or violates the duty of confidentiality must compensate for the damage caused. This liability includes acts performed from the moment the main performance of the contract is satisfied until the expiration of the statute of limitations for any enforceable obligation. 31 L.P.R.A. § 9883.

Performance of the Contract

Suspension of Performance

In contracts with reciprocal performances, one party may suspend the performance of their obligation:
(a) if the other party is temporarily unable to perform, even if due to causes not attributable to them; or
(b) if it is foreseeable that the other party will not perform, due to a significant impairment in their ability to perform.
The suspension becomes ineffective when the debtor of the correlative performance performs or provides sufficient guarantees of their performance. The suspension must be communicated immediately to the other party. 31 L.P.R.A. § 9822.

Exception of Non-Performance

In contracts with reciprocal performances, one of the parties may refuse their performance as long as the other does not perform their counter-performance or offer to perform it.
The exception does not apply if the counter-performance owed by the plaintiff must be performed after the performance that is the responsibility of the exceptor. If the counter-performance is performed partially or defectively, the exceptor may reduce their performance in proportion to what the plaintiff still owes. 31 L.P.R.A. § 9821.

Resolution of the Contract

In contracts with reciprocal performances, the power to extrajudicially resolve the contract for breach of a principal obligation is implied, in accordance with the following rules:
(a) The breaching party must be in default;
(b) The breaching party must be required, under warning of resolving the contract totally or partially, to fulfill their obligation, including damages for delay;
(c) Partially fulfilled performances are not resolved and remain firm;
(d) The resolution operates at the moment the requirement expires;
(e) The resolution produces the effect provided in this Code for the fulfilled resolutory condition; and
(f) Compliance and compensation for damages may be claimed.
These rules apply, where relevant, even in cases of supervening and non-culpable impossibility of performance. 31 L.P.R.A. § 9823.

Penalty Clause

The parties may agree on clauses for the purpose of preventing partial breach or delay in the performance of the principal obligation. The clauses thus agreed upon may consist of the payment of a certain sum, the loss of the benefit of the term, or any other penalty.
Although the court has the power to moderate penalties in cases of extreme economic disproportion between the penalty and the performance, it must recognize the binding nature of the agreed clauses and only in such cases may it substitute or moderate them.
In the application of the penalty clause, the following rules shall be observed:
(a) The payment of the agreed penalty corresponds exclusively to the breach or the delay;
(b) The creditor may choose to demand full compliance or the payment of the penalty, and may accumulate both remedies in the case of late performance;
(c) The penalty clause is interpreted restrictively; and
(d) Only the performance owed may be substituted by that agreed upon in the penalty clause if it has been expressly agreed.

In addition to penalty clauses, the contracting parties may agree on others that are related to the anticipated calculation of the damage caused by the breach. In such a case, the creditor is not obligated to prove the damage, nor can the debtor be excused by proving that the damage did not occur or was of a lesser amount. Penalty clauses and those that pre-calculate damages may be agreed upon jointly, provided that this is clearly stated in the contract.

As we have stated, drafting a contract in Puerto Rico under Civil Law and the Civil Code of 2020 goes beyond obtaining models or suggestions. It requires a corporate attorney in Puerto Rico versed in contract law to conduct precise analysis of the objectives and necessary protections. Strengthen the legal foundation of your business in Puerto Rico. Contact us here and work with an experienced corporate and business attorney for the design, structuring, drafting, and enforcement of your civil and commercial contracts. Click HERE for more information.