ANNOTATION
BASIC RULES IN THE INTERPRETATION OF
CONTRACTS
by
MAURICIO C. ULEP*
___________________
§ 1. Basic rules in the interpretation of contracts,
p. 737
§ 2. Definition and requisites of a contract, p. 739
§ 3. Three phases or stages in contract making, p.
739
§ 4. Requisites before a contract may be
invalidated due to intimidation, 740
§ 5. Special provisions control the general
provisions of a contract, p. 741
§ 6. What is the Plain Meaning Rule, p. 741
§ 7. Rule in the construction of contracts where
there are several provisions or particulars, p. 742
§ 8. When the words of a contract are contrary to
the intention of the parties, the latter shall prevail,
p. 743
§ 9. Rule when a contract is embodied in two or
more separate writings, p. 743
§ 10. Aim in the interpretation of contracts, p. 744
§ 11. What is the Principle of Effectiveness in
Contract Interpretation, p. 744
§ 12. What is the “Complementary Contracts
Construed Together” Doctrine, p. 745
_______________
* Former Associate Dean, UE College of Law, Professor of Law, Author
of Law Books, former President, IBP Manila Chapter III.
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§ 13. Doubts and ambiguities arising from a
contract should be resolved against those who
prepared it, p. 745
§ 14. The terms of a contract has the force of law
between the parties, p. 746
§ 15. Contracts are binding in whatever form they
may have been entered into, p. 747
§ 16. Interpretation of a marine insurance
contract, p. 747
§ 17. Interpretation of property insurance
policies, p. 748
§ 18. Interpretation of Contract of Legal Services,
p. 748
§ 19. Interpretation of a Collective Bargaining
Agreement, p. 749
§ 20. Interpretation of “fixed term contracts”
under Labor Laws, p. 749
§ 21. Interpretation of private documents, p. 749
§ 22. Doubts arising from interpretation of
agreements between the employee and the employer
must be resolved in favor of the former, p. 750
§ 23. Reformation of contracts and rationale, p.
750
§ 24. Reformation of Contracts distinguished from
Interpretation of Contracts, p. 751
§ 25. A judicial action for rescission of a contract
is not needed when the contract has not been
performed by either party, p. 752
§ 26. Courts are not bound by the title or name
given to contracts by the parties, p. 752
§ 27. Duty of courts in the interpretation of
contracts, p. 753
§ 28. Parties who signed a compromise agreement
that is declared void by law cannot recall acts
already done in the past, p. 753
§ 29. Consequences of reducing an agreement into
writing; General Rule and the Exception, p. 754
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§ 30. What is the Principle of Relativity of
Contracts, p. 755
§ 31. Rule when the contract is so ambiguous or
obscure,
p. 755
§ 32. Rule if there is doubt in the interpretation of
a gratuitous contract, p. 756
§ 33. The construction of a contract which would
amount to loss of rights is not favored, p. 757
§ 34. Absolute simulation of a contract renders it
null and void, p. 757
§ 35. As between a notarized contract and an oral
testimony, the former shall prevail, p. 757
§ 36. Seamen’s contracts are not ordinary
contracts, p. 758
§ 37. Quasi-judicial bodies can interpret contracts
in the determination of private rights, p. 758
§ 38. Procedural matters, p. 758
___________________
§ 1. Basic rules in the interpretation of contracts
In general, Chapter 5 of the New Civil Code provides for
the Rules of Interpretation of Contracts. They are as
follows:
Article 1370. If the terms of a contract are clear and
leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident
intention of the parties, the latter shall prevail over the
former.
Article 1371. In order to judge the intention of the
contracting parties, their contemporaneous and subsequent
acts shall be principally considered.
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Article 1372. However general the terms of a contract
may be, they shall not be understood to comprehend things
that are distinct and cases that are different from those
upon which the parties intended to agree.
Article 1373. If some stipulation of any contract should
admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it
effectual.
Article 1374. The various stipulations of a contract
shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken
jointly.
Article 1375. Words which may have different
significations shall be understood in that which is most in
keeping with the nature and object of the contract.
Article 1376. The usage or custom of the place shall be
borne in mind in the interpretation of the ambiguities of a
contract, and shall fill the omission of stipulations which
are ordinarily established.
Article 1377. The interpretation of obscure words or
stipulations in a contract shall not favor the party who
caused the obscurity.
Article 1378. When it is absolutely impossible to settle
doubts by the rules established in the preceding articles,
and the doubts refer to incidental circumstances of a
gratuitous contract, the least transmission of rights and
interests shall prevail. If the contract is onerous, the doubt
shall be settled in favor of the greatest reciprocity of
interests. (See also Sicad v. Court of Appeals, 294 SCRA
183 [1998])
If the doubts are cast upon the principal object of the
contract in such a way that it cannot be known what may
have been the intention or will of the parties, the contract
shall be null and void.
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Article 1379. The principles of interpretation stated in
Rule 123 of the Rules of Court shall likewise be observed in
the construction of contracts. (See also City of Manila v.
Rizal Park Co., 53 Phil. 515 [1929]; Ruiz v. Sheriff of
Manila, 34 SCRA 83 [1970]; Cebu Portland Cement Co. v.
Dumon, 61 SCRA 218 [1974]; Matienzo v. Servidad, 107
SCRA 276 [1981]; Bank of the Philippine Islands v. Pineda,
156 SCRA 404 [1987])
§ 2. Definition and requisites of a contract
A contract is a meeting of minds between two persons
whereby one binds himself, with respect to the other, to
give something or to render some service (Art. 1305, New
Civil Code, National Irrigation Administration v. Gamit,
215 SCRA 436 [1992]; ABS-CBN Broadcasting Corporation
v. Court of Appeals, 301 SCRA 572 [1999]; Heirs of Manuel
Uy Ek Liong v. Castillo, 697 SCRA 294 [2013])
Its requisites are as follows:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the
contract; and
(3) Cause of the obligation which is established. (Art.
1318, New Civil Code, National Grains Authority v. IAC,
171 SCRA 131 [1989]; People’s Industrial and Commercial
Corp. v. Court of Appeals, 281 SCRA 206 [1997])
§ 3. Three phases or stages in contract making
The phases that a contract goes through may be
summarized as follows:
(a) preparation, conception or generation, which is the
period of negotiation and bargaining, ending at the moment
of agreement of the parties;
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(b) perfection or birth of the contract, which is the
moment when the parties come to agree on the terms of the
contract; and
(c) consummation or death, which is the fulfillment or
performance of the terms agreed upon in the contract. (
Limketkai Sons Milling, Inc. v. Court of Appeals, 250 SCRA
523 [1995]; San Miguel Properties Philippines, Inc. v.
Huang, 336 SCRA 737 [2000]; Lorenzo Shipping Corp. v.
BJ Marthel International, Inc., 443 SCRA 163 [2004];
Manila Metal Container Corporation v. Philippine National
Bank, 511 SCRA 444 [2006]; Central Cement Corporation v.
Mines Adjudication Board, 542 SCRA 277 [2008];
International
Freeport
Traders,
Inc.
v.
Danzas
Intercontinental, Inc., 640 SCRA 621 [2011]; C.F. Sharp &
Co., Inc. v. Pioneer Insurance & Surety Corporation, 666
SCRA 210 [2012]; Robern Development Corporation v.
People’s Landless Association, 693 SCRA 24 [2013])
§ 4. Requisites before a contract may be
invalidated due to intimidation
A contract may be invalidated due to intimidation if the
following requisites concur:
(1) That the intimidation must be the determining cause
of the contract or must have caused the consent to be given;
(2) That the threatened act be unjust or unlawful;
(3) That the threat be real and serious, there being an
evident disproportion between the evil and the resistance
which all men can offer, leading to the choice of the
contract as a lesser evil; and
(4) That it produces a reasonable and well-grounded fear
from the fact that the person from whom it comes has the
necessary means or ability to inflict the threatened injury. (
De Leon v. Court of Appeals,
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186 SCRA 345 [1990]. See also Art. 1335, New Civil Code)
§ 5. Special provisions control the general
provisions of a contract
It is a rudimentary canon of interpretation that all parts
of a writing should be construed together and a special
provision in a written contract, controls the general. (
Hanlon v. Haussermann and Beam, 40 Phil. 796 [1920];
Bangko Sentral ng Pilipinas v. Santamaria, 395 SCRA 84
[2003])
§ 6. What is the Plain Meaning Rule
The plain meaning rule says that if the provisions of a
contract are clear, there is no need for any interpretation
and the literal meaning of the stipulations shall control
without the aid of extrinsic facts or aids. The court may not
read into it any other intention that would contradict its
plain import. (Art. 1370, New Civil Code, United Planters
Sugar Milling Co., Inc. v. Court of Appeals, 583 SCRA 63
[2009]; Adriatico Consortium, Inc. v. Land Bank of the
Philippines, 609 SCRA 403 [2009]; PNCC Skyway Traffic
Management and Security Division Workers Organization
[PSTMSDWO] v. PNCC Skyway Corporation, 613 SCRA 28
[2010]; Prisma Construction & Development Corporation v.
Menchavez, 614 SCRA 590 [2010]; Magoyag v. Maruhom,
626 SCRA 247 [2010]; Taghoy v. Tigol, Jr., 626 SCRA 341
[2010])
Ultimately, their intention is to be deciphered not from
the unilateral post facto assertions of one of the parties, but
from the language used in the contract. And when the
terms of the agreement, as expressed in such language are
clear, they are to be understood literally, just as they
appear on the face of the contract. (Berman Memorial Park,
Inc. v. Cheng, 458 SCRA 112 [2005])
The clear terms of a contract should never be the subject
matter of interpretation. Neither abstract justice nor the
rule
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of liberal interpretation justifies the creation of a contract
for the parties which they did not make themselves or the
imposition upon one party to a contract or obligation not
assumed simply or merely to avoid seeming hardships.
Their true meaning must be enforced as it is to be
presumed that the contracting parties know their scope
and effects. (JMA House, Incorporated v. Sta. Monica
Industrial and Development Corporation, 500 SCRA 526
[2006)
Hence, courts have no authority to alter a contract by
construction or to make a new contract for the parties.
Since their duty is confined to the interpretation of the one
which the parties have made for themselves without regard
to its wisdom or folly, it has been ruled that courts cannot
supply material stipulations or read into the contract
words it does not contain. Indeed, courts will not relieve a
party from the adverse affects of an unwise or unfavorable
contract freely entered into. (Heirs of Manuel Uy Ek Liong
v. Castillo, 697 SCRA 294 [2013)
§ 7. Rule in the construction of contracts where
there are several provisions or particulars
An important task in contract interpretation is the
ascertainment of the intention of the contracting parties
which is accomplished by looking to the words they used to
project that intention in their contract, i.e., all the words,
not just a particular word or two, and words in context, not
words standing alone or a denomination used by the
parties. The various stipulations in a contract should be
read together in order to give effect to all. (Art. 1374, New
Civil Code, Sec. 11, Rule 130, Revised Rules of Court,
Norkis Free and Independent Workers Union v. Norkis
Trading Company, Inc., 462 SCRA 485 [2005]; Republic v.
Gingoyon, 478 SCRA 474 [2005]; Valerio v. Refresca, 485
SCRA 494 [2006]; Hanjin Heavy Industries and
Construction Co., Ltd. v. Dynamic Planners and
Construction Corp., 553 SCRA 541 [2008]; Catungal v.
Rodriguez, 646 SCRA 130 [2011]; Capalla v. Commission
on Elec743
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743
tions, 673 SCRA 1 [2012]; J Plus Asia Development v.
Utility Assurance Corporation, 700 SCRA 134 [2013])
Contracts should be read in the light of the layman’s
understanding of their esoteric legal language, that they
may not ensnare him because of his trusting lack of caution
in their intricate stipulations. (Filoil Marketing Corp. v.
Intermediate Appellate Court, 169 SCRA 293 [1989])
Previous, simultaneous and subsequent acts of the parties
are properly cognizable indicia of their true intention. (
Bacordo v. Alcantara, 14 SCRA 730 [1965])
§ 8. When the words of a contract are contrary to
the intention of the parties, the latter shall prevail
When the words appear contrary to the evident
intention of the parties, the latter shall prevail over former.
In order to judge the intention of the parties, their
contemporaneous and subsequent acts shall be principally
considered. (Art. 1371, New Civil Code, Labasan v.
Lacuesta, 86 SCRA 16 [1978]; Almeda v. Bathala
Marketing Industries, Inc., 542 SCRA 470 [2008]; Aliño v.
Heirs of Angelica A. Lorenzo, 556 SCRA 139 [2008];
Benguet Corporation v. Cabildo, 563 SCRA 25 [2008];
Global Resource for Outsourced Workers [GROW], Inc. v.
Velasco, 678 SCRA 751 [2012])
As such, documentary and parol evidence may be
submitted and admitted to prove such intention. (Cortes v.
Court of Appeals, 494 SCRA 570 [2006])
Once the intention has been ascertained, it becomes an
integral part of the contract as though it has been
originally expressed therein in unequivocal terms. (Ligon v.
Court of Appeals, 177 SCRA 64 [1989])
§ 9. Rule when a contract is embodied in two or
more separate writings
It is perfectly legitimate for a bilateral contract to be
embodied in two or more separate writings. In such an
event, the
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writings should be read and interpreted together in such a
way as to eliminate seeming inconsistencies and render the
parties’ intention effectual. (Constantino v. Desierto, 288
SCRA 654 [1998]; Golden Diamond, Inc. v. Court of
Appeals, 332 SCRA 605 [2000]; Security Bank Corporation
v. Court of Appeals, 515 SCRA 63 [2007])
§ 10. Aim in the interpretation of contracts
The aim of the interpretation of contracts is to ascertain
the true intention of the parties. However, interpretation is
not equivalent to reformation. (National Irrigation
Administration v. Gamit, 215 SCRA 436 [1992])
The reasons and the surrounding circumstances behind
a contract’s execution are of paramount importance to place
the interpreter in the situation occupied by the parties
concerned at the time the writing was executed. (Gonzales
v. Court of Appeals, 354 SCRA 8 [2001])
§ 11. What is the Principle of Effectiveness in
Contract Interpretation?
It says that where two (2) interpretations of the same
contract language are possible, one interpretation having
the effect of rendering the contract meaningless (and one of
the parties merely dishonest for receiving considerations
thereunder without parting with any) while the other
interpretation would give effect to the contract as a whole,
the latter interpretation must be adopted. (Philippine
National Bank v. Utility Assurance & Surety Co., Inc., 177
SCRA 208 [1989]; Art. 1373, New Civil Code, See also
Gonzales v. Heirs of Thomas and Paula Cruz, 314 SCRA
585 [1999]; De Mesa v. Court of Appeals, 317 SCRA 24
[1999])
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§ 12. What is the “Complementary Contracts
Construed Together” Doctrine
This doctrine closely adheres to the spirit of Art. 1374 of
the New Civil Code which states that:
The various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that
sense which may result from all of them taken jointly.
Thus, the provisions of contracts must be construed
together to arrive at their true meaning. Certain
stipulations cannot be segregated and then made to
control. (Velasquez v. Court of Appeals, 309 SCRA 539
[1999]; Development Bank of the Philippines v. Court of
Appeals, 344 SCRA 492 [2000]; Lee v. Court of Appeals, 345
SCRA 707 [2000]; Rigor v. Consolidated Orix Leasing and
Finance Corporation, 387 SCRA 437 [2002]; Southeast Asia
Shipping Corporation v. Seagull Maritime Corp., 414 SCRA
419 [2003])
§ 13. Doubts and ambiguities arising from a
contract should be resolved against those who
prepared it
It is a well-established rule that all doubts and
ambiguous words arising from a contract must be resolved
against the one who prepared it. (Art. 1377, New Civil
Code, Wood Technology Corporation v. Equitable Banking
Corporation, 451 SCRA 724 [2005]; Macapagal v. Remorin,
458 SCRA 652 [2005]; Horrigan v. Troika Commercial, Inc.,
476 SCRA 421 [2005]; Innodata Philippines, Inc. v.
Quejada-Lopez, 504 SCRA 253 [2006]; Amado v. Salvador,
540 SCRA 161 [2007])
Doubts in contracts should be settled in favor of the
greatest reciprocity of interests. Thus, the act of treating a
contract as cancelled or rescinded on account of infractions
by the other contracting party is always provisional, that
is, contestable and subject to judicial determination.
Judicial action is necessary for its rescission in order to
afford the other party an opportunity to be heard and to
determine if the rescission
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was proper. (Philippine National Construction Corporation
v. Mars Construction Enterprises, Inc., 325 SCRA 624
[2000]; Lorenzo Shipping Corp. v. BJ Marthel
International, Inc., 443 SCRA 163 [2004])
§ 14. The terms of a contract has the force of law
between the parties
It is settled that the parties may establish such
stipulations, clauses, terms and conditions as they may
want to include, and as long as such agreements are not
contrary to law, morals, good customs, public policy or
public order, the terms of a contract have force of law
between the parties (Keppel Cebu Shipyard, Inc. v. Pioneer
Insurance and Surety Corporation, 681 SCRA 44 [2012];
Mallari v. Prudential Bank [now Bank of the Philippine
Islands], 697 SCRA 555 [2013]; Mendiola v. Commerce
Trading Int’l., Inc., 703 SCRA 137 [2013]) and it must be
complied with in good faith. (Premiere Development Bank v.
Court of Appeals, 427 SCRA 686 [2004])
Just as nobody can be forced to enter into a contract, in
the same manner, once a contract is entered into, no party
can renounce it unilaterally or without the consent of the
other. It is a general principle of law that no one may be
permitted to change his mind or disavow and go back upon
his own acts, or to proceed contrary thereto, to the
prejudice of the other party. (Government Service Insurance
System v. Province of Tarlac, 417 SCRA 60 [2003])
However, this rule is not absolute when the contract
provides for usurious rates. In such an event, courts are
allowed to temper interest rates when necessary. (State
Investment House, Inc. v. Court of Appeals, 361 SCRA 201
[2001]. See also Lo v. Court of Appeals, 411 SCRA 523
[2003])
Besides, courts are not to play as decision-makers as to
the terms of a business contract when it is not asked to
play that role. The sanctity of contracts must be respected
and deli747
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cately preserved. (Cuizon v. Court of Appeals, 260 SCRA
645 [1996])
However, although a contract is the law between the
parties, the provisions of positive law which regulate such
contracts are deemed included and shall limit and govern
the relations between the parties. (Asia World Recruitment,
Inc. v. NLRC, 313 SCRA 1 [1999]; Surviving Heirs of
Alfredo R. Bautista v. Lindo, 718 SCRA 321 [2014])
§ 15. Contracts are binding in whatever form they
may have been entered into
It is axiomatic that contracts are obligatory and may be
entered into in any form, orally or in writing, or parol in
part and written in part, it being needful merely that the
essential requisites for their validity be present — a
precept of general application, unless “the law requires
that a contract be in some form” in order that it may be
valid and enforceable. (Lopez v. Auditor General, 20 SCRA
655 [1967]; Deloso v. Sandiganbayan, 217 SCRA 49 [1993];
Cenildo v. Apacionado, 318 SCRA 688 [1999]; San Lorenzo
Development Corporation v. Court of Appeals, 449 SCRA 99
[2005]; Cruz v. Gruspe, 693 SCRA 415 [2013])
The requisite form under Art. 1458 of the Civil Code is
merely for greater efficacy or convenience and the failure to
comply therewith does not affect the validity and binding
effect of the act between the parties. (Tan v. Lim, 296
SCRA 455 [1998])
§ 16. Interpretation of a marine insurance
contract
General terms following an enumeration of the
particular risks assumed by the insurer in a contract of
marine insurance are interpreted as referring to risks of
like character (ejusdem generis) as those particularly
mentioned, and not as extending the liability of the insurer
to risks incident to defects in the equipment of the ship.
Thus, a loss which results
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from the natural and inevitable action of the sea from the
ordinary wear and tear of the ship, or from the negligent
failure of the ship’s owner to provide the vessel with proper
equipment to convey the cargo under ordinary conditions,
is not a peril of the sea. (Go Tiaoco y Hermanos v. Union
Ins. Society of Canton, 40 Phil. 40 [1919])
§ 17. Interpretation of property insurance policies
In the case of property insurance policies, the evident
intention of the contracting parties, i.e., the insurer and the
assured, determine the import of the various terms and
provisions embodied in the policy. It is only when the terms
of the policy are ambiguous, equivocal or uncertain, such
that the parties themselves disagree about the meaning of
particular provisions, that the courts will intervene. In
such an event, the policy will be construed by the courts
liberally in favor of the assured and strictly against the
insurer. (Pan Malayan Insurance Corporation v. Court of
Appeals, 184 SCRA 54 [1990]; New Life Enterprises v.
Court of Appeals, 207 SCRA 669 [1992]; Rizal Surety &
Insurance Company v. Court of Appeals, 336 SCRA 12
[2000])
§ 18. Interpretation of Contract of Legal Services
Any ambiguity in the Contract of Legal Services must be
construed against the lawyer who prepared it. This is
consonance with the rule of interpretation that in
construing a contract of professional services between a
lawyer and his client, such construction as would be more
favorable to the client should be adopted. Rightly so
because of the inequality in situation between an attorney
who knows the technicalities of the law on the one hand
and a client who usually is ignorant of the vagaries of the
law on the other hand. (Fabillo v. Intermediate Appellate
Court, 195 SCRA 28 [1991])
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§ 19. Interpretation of a Collective Bargaining
Agreement
A CBA as a labor contract x x x which governs the
relations between labor and capital, is not merely
contractual in nature but impressed with public interest,
thus, it must yield to the common good. As such, it must be
construed liberally rather than narrowly and technically,
and the courts must place a practical and realistic
construction upon it, giving due consideration to the
context in which it is negotiated and purpose which it is
intended to serve x x x. When conflicting interests of labor
and capital are to be weighed on the scales of social justice,
the heavier influence of the latter should be counterbalanced by sympathy and compassion, the law must
accord the underprivileged worker. (Marcopper Mining
Corporation v. NLRC, 255 SCRA 322, 333-334 [1996]. See
also Innodata Philippines, Inc. v. Quejada-Lopez, 504
SCRA 253 [2006])
§ 20. Interpretation of “fixed term contracts”
under Labor Laws
Art. 280 of the Labor Code completely ruled out all
written or oral agreements conflicting with the concept of
regular employment and security of tenure. It should have
no application to instances where a fixed period of
employment was agreed upon, knowingly and voluntarily
by the parties, without any force, duress or improper
pressure being brought to bear upon the employee and
absent any other circumstances vitiating his consent, or
where it satisfactorily appears that the employer and
employee dealt with each other on more or less equal terms
with no moral dominance whatever being exercised by the
former over the latter. (Poseidon Fishing v. National Labor
Relations Commission, 482 SCRA 717 [2006])
§ 21. Interpretation of private documents
Where the dominant purpose of a private document
conveys the idea that the naked ownership of a real
property was
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transferred to plaintiff-appellant by defendant’s father who
divested himself of such ownership, his children are merely
usufructuaries for an undetermined length of time and hold
the same so long as the period has not been fixed for its
delivery and has not elapsed, and they are mere trustees of
plaintiff. Besides, the deed, being a declaration by the
father against his own proprietary interest, is binding upon
his heirs, and he could not have transferred such naked
ownership which he did not have — nemo dat quod non
habet. (Julio v. Dalandan, 21 SCRA 543 [1967])
§ 22. Doubts arising from interpretation of
agreements between the employee and the employer
must be resolved in favor of the former
It is a time-honored rule that in controversies between a
laborer and his employer, doubts reasonably arising from
the evidence or from the interpretation of agreements and
writings should be resolved in the former’s favor in
consonance with the avowed policy of the State to give
maximum aid and protection to labor. (InterOrient
Maritime Enterprises, Inc. v. Remo, 622 SCRA 237, 248-249
[2000])
§ 23. Reformation of contracts and rationale
It is well-settled that courts of equity will reform a
written contract, where owing to mutual mistake, the
language used therein did not fully or accurately express
the agreement and intention of the parties. The fact that
interpretation or construction of a contract presents a
question of law and that therefore the mistake was one of
law is not a bar to granting relief. (Yacapin and Neri Liñan
v. Neri, 40 Phil. 61 [1919])
American jurisprudence from where the provisions on
reformation of instruments were taken discloses that suits
to reform written instruments are subject to the general
rule in equity that all persons interested in the subject
matter of the litigation, whether it is a legal or an equitable
interest, should
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be made parties, so that the court may settle all of their
rights at once and thus prevent the necessity of a
multiplicity of suits. (Toyota Motor Philippines Corp. v.
Court of Appeals, 216 SCRA 236 [1992])
However, a contract may not be reformed simply
because a party later finds itself at the shorter end of an
unwise bargain. (Mata v. Court of Appeals, 207 SCRA 753
[1992])
The rationale of the doctrine of reformation is that it
would be unjust and inequitable to allow the enforcement
of a written instrument which does not reflect or disclose
the real meeting of the minds of the parties. The rigor of
the legalistic rule that a written instrument should be the
final and inflexible criterion ad measure of the rights and
obligations of the contracting parties is thus tempered, to
forestall the effect of mistake, fraud, inequitable conduct or
accident. (National Irrigation Administration v. Gamit, 215
SCRA 436 [1992])
§ 24. Reformation of Contracts distinguished from
Interpretation of Contracts
“Reformation” is that remedy in equity by means of
which a written instrument is made or construed so as to
express or conform to the real intention of the parties. In
granting reformation, equity is to really making a new
contract for the parties, but is confirming and perpetuating
the real contract between the parties, which, under the
technical rules of law, could not be enforced but for such
reformation. (Sarming v. Dy, 383 SCRA 131 [2002])
“Interpretation” is the act of making intelligible what
was before not understood, ambiguous, or not obvious. It is
a method by which the meaning of language is ascertained.
The “interpretation” of a contract is the determination of
the meaning attached to the words written or spoken which
made the contract. (Huibonhoa v. Court of Appeals, 320
SCRA 625 [1999])
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§ 25. A judicial action for rescission of a contract
is not needed when the contract has not been
performed by either party
No judicial action for the rescission of a contract is
necessary to terminate the obligation where the contract
itself contains a resolutory provision by virtue of which the
obligation is already extinguished. Nor is a judicial
rescission necessary for the protection of a party occupying
a purely defensive attitude when the contract has not been
performed by either. (Hanlon v. Haussermann and Beam,
40 Phil. 796 [1920])
§ 26. Courts are not bound by the title or name
given to contracts by the parties
To determine the nature of a contract, courts do not
have or are not bound to rely upon the name, title or
nomenclature given it by the contracting parties, should
there be a controversy as to what they really had intended
to enter into, but the way the contracting parties do or
perform their respective obligations stipulated or agreed
upon be shown and inquired into, and should such
performance conflict with the name or title given the
contract by the parties, the former must prevail over the
latter. (Balbas v. Domingo, 21 SCRA 444 [1967]; Baluran v.
Navarro, 79 SCRA 309 [1977]; Cruz v. Court of Appeals,
129 SCRA 222 [1984]; Filinvest Credit Corporation v. Court
of Appeals, 178 SCRA 188 [1989]; Romero v. Court of
Appeals, 250 SCRA 223 [1995]; Zamora v. Court of Appeals,
260 SCRA 10 [1996]; Lao v. Court of Appeals, 275 SCRA
237 [1997]; Alvaro v. Ternida, 479 SCRA 288 [2006]; Tayco
v. Heirs of Concepcion Tayco-Flores, 637 SCRA 742 [2010])
Likewise, in case of conflict between the words of the
contract and the evident intention of the parties, the
intention must prevail. (Kimberly Clark Philippines v.
Lorredo, 226 SCRA 639 [1993])
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§ 27. Duty of courts in the interpretation of
contracts
Courts have no authority to alter a contract by
construction or to make a new contract for the parties.
Since their duty is confined to the interpretation of the one
which the parties have made for themselves without regard
to its wisdom or folly, it has been ruled that courts cannot
supply material stipulations or read into the contract
words it does not contain. (Barrera v. Lorenzo, 389 SCRA
329 [2002])
It is the duty of the courts to place a practical and
realistic construction of contracts, giving due consideration
to the context in which it is negotiated and the purpose
which it is intended to serve. Absurd and illogical
interpretations should be avoided. Littera necat spiritus
vivificat. An instrument must be interpreted according to
the intention of the parties. (TSPIC Corporation v. TSPIC
Employees Union [FFW], 545 SCRA 215 [2008]; Balus v.
Balus, 610 SCRA 178 [2010])
Courts should not go beyond the provisions of a clear
and unambiguous contract to determine the intent of the
parties thereto, because it will run the risk of substituting
its own interpretation for the true intent of the parties. (
Baladad v. Rublico, 595 SCRA 125 [2009])
§ 28. Parties who signed a compromise agreement
that is declared void by law cannot recall acts
already done in the past
Parties who signed a compromise agreement that is
declared void by law cannot recall acts already done in the
past. This is because of the provisions of the New Civil
Code on the matter, to wit:
“Article 1412. If the act in which the unlawful or
forbidden cause consists does not constitute a criminal
offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting
parties, neither may recover what he has given by virtue of
the
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contract, or demand the performance of the other’s
undertaking;
(2) When only one of the contracting parties is at fault,
he cannot recover what he has given by reason of the
contract, or ask for the fulfillment of what has been
promised him. The other, who is not at fault, may demand
the return of what he has given without any obligation to
comply his promise.” (Vda. de Castellvi v. Castellvi, 77
SCRA 88 [1977])
§ 29. Consequences of reducing an agreement into
writing; General Rule and the Exception
As a general rule, when parties reduced their agreement
into writing, it is presumed that they have made the
writing the only repository and memorial of the truth and
whatever is not found in the writing must be understood to
have been waived and abandoned. No other evidence shall
be admissible other than the original document itself. (Sec.
9, Rule 130, Revised Rules of Court, Ortañez v. Court of
Appeals, 266 SCRA 561 [1997]; Arwood Industries, Inc. v.
D.M. Consunji, Inc., 394 SCRA 11 [2002]; Allied Banking
Corporation v. Cheng Yong, 472 SCRA 101 [2005]; Baluyot
v. Poblete, 514 SCRA 370 [2007])
In construing a written agreement, the reason behind
the circumstances surrounding its execution are of
paramount importance to place the interpreter in the
situation of the parties concerned at the time the writing
was executed. (Bank of the Philippine Islands v. Pineda,
156 SCRA 404 [1987]; citing Vicente Gotamco Hermanos v.
Shotwell, 38 SCRA 107 [1971]; Cuizon v. Court of Appeals,
260 SCRA 645 [1996]. See also Philippine Airlines, Inc. v.
NLRC, 180 SCRA 555 [1989])
The exception is when the validity of the agreement is
an issue or the failure of the written agreement to express
the true intent of the parties. (Llana v. Court of Appeals,
361 SCRA 27 [2001]); American Home Assurance Company
v. Tantuco Enterprises, Inc., 366 SCRA 740 [2001]); D.M.
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Wenceslao and Associates, Inc. v. Readycon Trading and
Construction Corp., 433 SCRA 251 [2004])
§ 30. What is the Principle of Relativity of
Contracts?
This principle provides that contracts can only bind the
parties who had entered into it, and it cannot favor or
prejudice a third person. Where there is no privity of
contract, there is likewise no obligation or liability to speak
about. (Ramos v. Court of Appeals, 302 SCRA 589 [1999];
Integrated Packaging Corp. v. Court of Appeals, 333 SCRA
170 [2000]; Ballesteros v. Abion, 482 SCRA 23 [2006];
Philippine National Bank v. Dee, 717 SCRA 14 [2014])
§ 31. Rule when the contract is so ambiguous or
obscure
Ambiguities or obscurities must be strictly interpreted
against the party that caused them. This rigid application
of the rule on ambiguities has become necessary in view of
current business practices. The courts cannot ignore that
nowadays monopolies, cartels and concentration of capital,
endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared
‘agreements’ that the weaker party may not change one
whit, his participation in the ‘agreement’ being reduced to
the alternative to ‘take it or leave it.’ (Fieldmen’s Insurance
Co. Inc. v. Vda. de Songco, 25 SCRA 70 [1968])
Where the written contract is so ambiguous or obscure
in terms that the contractual intention of the parties
cannot be understood from a mere reading of the
instrument, extrinsic evidence of the subject matter of the
contract, of the relations of the parties to each other and of
the facts and circumstances surrounding them when they
entered into the contract may be received, to enable the
court to make a proper interpretation of the instrument.
(Heirs of Amparo del Rosario v. Santos, 108 SCRA 43
[1981])
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In case of ambiguity in contract language, that
interpretation which establishes a less onerous
transmission of rights or imposition of lesser burdens
which permits greater reciprocity between the parties is to
be adopted. (Castelo v. Court of Appeals, 244 SCRA 180
[1995])
Thus, a contract should be construed as a mortgage or a
loan instead of a pacto de retro sale when its terms are
ambiguous or the circumstances surrounding its execution
or its performance are incompatible or inconsistent with a
sale. In such case, parol evidence then becomes competent
and admissible to prove that the instrument is in truth and
in fact given merely s a security for the repayment of a
loan. And upon proof of the truth of such allegations, the
court will enforce the agreement or understanding in
consonance with the true intent of the parties at the time of
the execution of the contract (Lapat v. Rosario, 312 SCRA
539 [1999])
Likewise, parol evidence is admissible to show that a
written document though legal in form, was a device to
cover usury. (Investors Finance Corporation v. Autoworld
Sales Corporation, 340 SCRA 735 [2000])
§ 32. Rule if there is doubt in the interpretation of
a gratuitous contract
When it is absolutely impossible to settle doubts by the
rules established in the preceding articles, and the doubts
refer to incidental circumstances of a gratuitous contract,
the least transmission of rights and interests shall prevail.
If the contract is onerous, the doubt shall be settled in
favor of the greatest reciprocity of interests. (Art. 1378,
New Civil Code, Sicad v. Court of Appeals, 294 SCRA 183
[1998]; United Planters Sugar Milling Co., Inc.
[UPSUMCO] v. Court of Appeals, 527 SCRA 336 [2007])
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§ 33. The construction of a contract which would
amount to loss of rights is not favored
The construction of the terms of a contract which would
amount to impairment or loss of rights is not favored.
Conservation and preservation, not waiver or abandonment
or forfeiture of a right is the rule. (Amado v. Salvador, 540
SCRA 161 [2007])
§ 34. Absolute simulation of a contract renders it
null and void
There is absolute simulation, which renders the contract
null and void, when the parties do not intend to be bound
at all by the same. The basic characteristic of this type of
simulation of contract is the fact that the apparent contract
is not really desired or intended to either produce legal
effects. Or in any way alter the juridical situation of the
parties. (Umali v. Court of Appeals, 189 SCRA 529 [1990])
Thus, where a contract of sale is vitiated by the total
absence of a valid cause or false consideration, the contract
is void and inexistent. (Vda. de Portugal v. Intermediate
Appellate Court, 159 SCRA 178 [1988]; Javier v. Court of
Appeals, 183 SCRA 171 [1990]; Modina v. Court of Appeals,
317 SCRA 696 [1999])
§ 35. As between a notarized contract and an oral
testimony, the former shall prevail
As between a notarized contract and an oral testimony,
the former shall prevail because a notarized contract enjoys
the presumption of regularity. Spoken words could be
notoriously unreliable as against a written document that
speaks a uniform language. (Mendezona v. Ozamiz, 376
SCRA 482 [2002])
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§ 36. Seamen’s contracts are not ordinary
contracts
Seamen’s contracts are not ordinary contracts but are
the subject to and are governed by various special laws. (
Vir-Jen Shipping and Marine Services, Inc. v. National
Labor Relations Commission, 115 SCRA 347 [1982])
§ 37. Quasi-judicial bodies can interpret contracts
in the determination of private rights
The Housing and Land Use Regulatory Board has
adjudicatory powers to hear and decide cases of unsound
real estate business practices. One of the thrust of the
multiplication of administrative agencies is that the
interpretation of such contracts and agreements and the
determination of private rights under these agreements is
no longer a uniquely judicial function. (Realty Exchange
Venture Corporation v. Sendino, 233 SCRA 665 [1994])
§ 38. Procedural matters
Acts done by the parties to a contract in the course of its
performance are admissible in evidence upon the question
of its meaning as being their own contemporaneous
interpretation of its terms. (Manila Electric Company v.
Court of Appeals, 114 SCRA 173 [1982])
Evidence aliunde may be received where it is alleged
that an agreement does not express the true intention of
the parties. (Premiere Insurance & Surety Co. v.
Intermediate Appellate Court, 141 SCRA 423 [1986])
A contract that is apparently lawful on its face must be
treated as such. One who assails its genuineness has the
burden of proof to do so. (Dy v. Sacay, 165 SCRA 473
[1988])
An existing law forms part of a valid contract without
need for the parties’ expressly making reference to it. (
Lakas ng Manggagawang Makabayan [LMM] v. Abiera, 36
SCRA 437
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[1970]; Boman Environment Dev’t. Corp. v. Court of
Appeals, 167 SCRA 540 [1988])
Contracts solemnly and deliberately entered into may
not be overturned by inconclusive proof or by reason of
mistakes of one of the parties to which the other in no way
has contributed. (Salen v. Dinglasan, 198 SCRA 623
[1991])
In a situation wherein one or both parties consider that
certain matters or specifics, in addition to the subject
matter and the causa should be stipulated and agreed
upon, the area of agreement must extend to all points that
the parties deem material or there is no contract. (Dumez
Company of France v. NLRC, 200 SCRA 505 [1991])
Clarity of contract terms and the name given to it does
not bar the courts from determining the true intent of the
parties. Hence, documentary and parol evidence may be
submitted and admitted to prove such intention. (Aguirre v.
Court of Appeals, 323 SCRA 771 [2000])
There is no conclusive test to determine whether a deed,
absolute in itself, is really a simple loan accommodation
secured by a mortgage — the decisive factor in evaluating
such agreement is the intention of the parties. (Lorbes v.
Court of Appeals, 351 SCRA 716 [2001])
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