Chapter 5 – Interpretation of Contracts

Art. 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.
(1281)

- Interpretation of contract
o Is the determination of the meaning of the terms or words used by the parties in their written contract
o Is the process of ascertaining the intention of the parties from the written words contained in the contract
- Literal Meaning controls when language is clear
o Contracts, which are private laws of the contracting parties, should be fulfilled according to the literal
sense of their stipulations, if the terms of a contract are clear and unequivocal
- Evident intention of parties prevails over terms of contract
o Where the words and clauses of a written contract are in conflict with the manifest intention of the
parties, the intention shall prevail
o Rule: Intention of contracting parties always prevail because their will has the force of law between them

Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall
be principally considered. (1282)

- Contemporaneous and subsequent acts relevant in the determination of intention

o Considered by the court in determining meaning and ascertaining the intention of the parties when
intention cannot be clearly ascertained from the words used by contract

Art. 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. (1283)

- Special intent prevails over general intent

o Rule: Where in a contract there are general and special provisions covering the same subject matter, the
special condition controls over the general condition when the two cannot stand together

Art. 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. (1284)

- Interpretation of stipulation with several meanings

o The meaning which would make the stipulation effectual is the interpretation given
o If one interpretation makes a contract valid, and all else illegal, the former interpretation shall be used

Art. 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. (1285)

- Interpretation of various stipulations of a contract

o A contract must be interpreted as a whole and the intention of the parties is to be gathered from the
entire instrument and not from particular words, phrases, or clauses
o All provisions should, if possible, be so interpreted as to harmonize with each other
Art. 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. (1286)

- Interpretation of words with different significations

o If a word is susceptible of two or more meanings, it is to be understood in that sense which is most in
keeping with the nature and object of the contract in line with the cardinal rule that the intention of the
parties must prevail

Art. 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. (1287)

- Resort to usage or custom as aid in interpretation

o Usage or custom of the place where the contract was entered into may be received to explain what is
doubtful or ambiguous in a contract on the theory that the parties entered into their contract with
reference to such usage or custom
o Rule: Burden of proof for the usage or custom is on the party alleging it

Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the
obscurity. (1288)

- A written agreement should, in case of doubt, be interpreted against the party who has drawn it, or be given an
interpretation which will be favorable to the other who, upon faith of which, has incurred an obligation
- Reason:
o The party who drafts the contract could have prevented mistakes or ambiguity in meaning by careful
choice of words
o generally the party who causes the obscurity acts with ulterior motives
- Rule is generally applied to contracts of adhesion
o Contracts most of the terms of which do not result from mutual negotiation between the parties as they
are usually prescribed in printed forms prepared by one party to which the other may “adhere” if he
chooses but which he cannot change
o E.g. insurance, bill of landings for goods, plane tickets, and contracts between lawyer and client

Art. 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.

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. (1289)

- Rule in case of doubts impossible to settle

1. Gratuitous contract – if doubt refer to incidental circumstances of a gratuitous contract, such interpretation
should be made which would result in the least transmission of rights
2. Onerous contract – if the contract in question is onerous (Art 1350) the doubts should be settled in favor of
the greatest reciprocity of interests
3. Principal object of the contract – contract shall be null and void

Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the
construction of contracts. (n)
 INTRODUCTION TO CHAPTERS 6, 7, 8, 9
Kinds of Defective Contracts

- Four kinds of defective contracts

- In order of their defectiveness:
1. Rescissible contracts – are valid because all the essential requisites of a contract exist but by reason of
economic injury or damage to one of the parties or to a third person, such as creditors, the contract may be
rescinded
2. Voidable contracts – are also valid until annulled unless there has been ratification
o Defect is caused by vice of consent
3. Unenforceable contract – cannot be sued or enforced upon unless they are ratified
4. Void or inexistent contract – absolutely null and void, have no effect at all and cannot be ratified

Chapter 6 – Rescissible Contract

Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)

- Rescissible Contracts
o Are those validly agreed upon because all the essential elements exist and, therefore, legally effective,
but in the cases established by law, the remedy of rescission is granted in the interest of equity
- Binding Force of Rescissible Contract
o Valid and enforceable although subject to rescission by court when there is economic damage or prejudice
to one of the parties or a third person
 There is actually no defect but because of external facts, its enforcement causes injustice
- Rescission
o Is a remedy granted by law to the contracting parties and sometimes even to their persons in order to
secure reparation of damages caused them by a valid contract, by means of restoration of things to their
condition in which they were prior to the celebration of said contract
o Requisites:
1. The contract must be validly agreed upon
2. There must be lesion or pecuniary prejudice to one of the parties or to a third person
3. The rescission must be based upon a case especially provided by law
4. There must be no other legal remedy to obtain reparation for the damage
5. The party asking for rescission must be able to return what is obliged to restore by reason of the
contract
6. The object of the contract must not legally be in the possession of third persons who did not act in
bad faith
7. The period for filing the action for rescission must not have prescribed
 Art. 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than
one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission. (1291a)

- Cause of Rescissible Contracts

1. Contracts entered into in behalf of wards
o Ward – is a person under guardianship by reason of some incapacity
o Must suffer lesion greater than ¼ of value
 Lesion – means injury/ harm (loss)
2. Contracts agreed upon in representation of absentees
o Absentees – is a person who disappears from his domicile his whereabouts being unknown, and without
leaving an agent to administer his property
o Absentee must suffer lesion by more than ¼ of value
3. Contracts undertaken in fraud of creditors
o Requisites:
a. There must be an existing credit prior to the contract to be rescinded, although not yet due or
demandable
b. There must be fraud on the part of the debtor which may be presumed or proved
c. The creditor cannot recover his credit in any other manner, it not being required that the debtor be
insolvent
4. Contracts which refer to things under litigation
5. Other Instances:
o A partition, judicial, or extrajudicial, may also be rescinded on account of lesion, when any one of the co-
heirs received things whose value is less by at least ¼ than the share to which he was entitled, considering
the value of the thing at the time they were adjudicated
o If the lessor or lessee should not comply with the obligations set forth in Art 1657, the aggrieved party
may ask for rescission of the contract and indemnification, or only the latter, allowing the contract to
remain in force
o Vendee may exercise remedy of rescission when the lack in the area of the real estate sold be not less
than 1/10 of that that stated, or when inferior value of the thing sold exceeds 1/10 of price agreed upon

Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be
compelled at the time they were effected, are also rescissible. (1292)

- Payments made in state of insolvency

o Payment may refer to that not of the contract
 Payment must have been made for obligation whose fulfillment the debtor could not be
compelled at the time they were effected
 Refers to :
o Obligations that have not yet become due or demandable
o Obligations that cannot be legally demanded (e.g. natural obligations and
obligations that have already been prescribed)
 o A debtor is insolvent if he does not have sufficient properties to meet his obligation
 Does not necessarily have to be judicially declared

Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has
no other legal means to obtain reparation for the same. (1294)

- Nature of action for rescission

o Is not a principal remedy
o Subsidiary – it can be availed only when injured party proves he has no other legal means aside from
rescinding the contract to obtain redress for the damage caused
o If damage is repaired, rescission cannot take place

Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n)

- Extent of Rescission
o Entire contract doesn’t need to be fully rescinded if damage can be repaired or covered by partial
rescission
o Rescission shall only be to the extent of the creditor’s unsatisfied credit
o Policy of law to preserve or respect contract, not extinguish it

Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with
their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission
can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the possession of
third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss. (1295)

- Rescission creates obligation of mutual restitution

o When court declares a contract rescinded, the parties must return to each other
1. The object of the contract with its fruits
2. The price thereof with legal interest
- Obligation of third person to restore
o The clause “he who demands rescission” applies to third person
 But if third person has nothing to restore, article does not apply
- When rescission not allowed
1. The remedy of rescission cannot be availed of if the party who demands rescission cannot return what he is
obliged to restore under the contract
2. If property is legally in the possession of a third person who acted in good faith

Art. 1386. Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved
by the courts. (1296a)

- If a contract entered into is in behalf of a ward or absentee has been approved by the court, rescission cannot
take place because it is valid whether there is lesion or not
- Presumption: Court is acting in the interest of the ward or absentee when it approves contract in spite of lesion
Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been
entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted
before the donation.
Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has
been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by
the party seeking the rescission.
In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by
the law of evidence. (1297a)

- When alienation presumed in fraud of creditors

o Establishes prima facie presumptions of fraud in case of alienation by the debtor of his property
1. Alienation by gratuitous title
2. Alienation by onerous title (e.g. through sale)
- Circumstances denominated as badges of fraud
o The following are some of the circumstances attending sales which have been denominated by the courts
as badges of fraud:
1. The fact that the consideration of the conveyance is fictitious or inadequate
2. A transfer made by a debtor after suit has been begun and while it is pending against him
3. A sale upon credit by an insolvent debtor
4. The transfer of all of his property by a debtor, especially when he is insolvent or greatly embarrassed
financially
5. The fact that the transfer is made between father and son, when there are present some of any of the
above circumstances
6. The failure of vendee to take exclusive possession of all the property
7. It was known to the vendee that the vendor had no properties other than that sold to him

Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for
damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him
to return them.
If there are two or more alienations, the first acquirer shall be liable first, and so on successively. (1298a)

- Liability of purchaser in bad faith

o Return property if sale is rescinded; if impossible to return due to any cause, must indemnify the creditors
o If there are two or more alienations, first acquirer shall be liable first, and so on, successively

Art. 1389. The action to claim rescission must be commenced within four years.
For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the
former's incapacity, or until the domicile of the latter is known. (1299)

- Period for filing action for rescission

o Rule: Action must be commenced within four years from date when contract was entered into
o Exceptions:
1. For persons under guardianship, the period shall begin from termination of incapacity
2. For absentees, the time domicile is known
- Persons entitled to bring action
1. Injured party or defrauded creditor
2. His heirs, assigns, or successors in interests
3. The creditors of the above entitled to subrogation