not state their real agreement
d. The clerk, typist, or person drafting the instrument commits an error through negligence, lack of skill, ignorance, or bad faith
2. IT IS A MORTAGE OF REAL OR PERSONAL PROPERTY, but the instrument says it is an absolute sale with a right of repurchase.
IMPROPER 1. Simple donations inter vivos where no condition is imposed
- These donations are acts of liberality, and do not involve any meeting of the minds (there is no negotiation or agreement)
2. Wills
- Similar to simple donations 3. When the real agreement is void
4. When the party seeking reformation has already brought an action to enforce the instrument
- Such party is stopped already
Art. 1368. Reformation may be ordered at the instance of either party or his successors in interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns.
WHO MAY ORDER REFORMATION?
1. In mutual mistake: either party or their successors in interest
2. Not mutual mistake: upon petition of the injured party, his/her heirs or assigns
Art. 1369. The procedure for the reformation of instrument shall be governed by rules of court to be promulgated by the Supreme Court.
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.
INTERPRETATION REFORMATION
The act of making intelligible what was before not understood, ambiguous or not obvious
The determination of the meaning attached to the words written or spoken which make the contract
A remedy in equity where a written instrument is made or construed as to express or conform to the real intention of the parties
General rule: The intention of the parties is reflected from the wordings of the contract, and therefore the literal stipulations shall control. Exception: When the wording is ambiguous, apply the rules in statutory construction and those outlined in this chapter.
Sir Mel’s summary of rules—how to discern intention, in order of applicability:
1. Examine the text. If it is unclear...
2. Consider the context. Context can be ascertained from the following:
a. The prior, contemporaneous, and subsequent acts of the parties b. Applying ejusdem generis and noscitur a sociis
c. Examining the nature of the contract
d. Customs and usage (but only to fill omissions) e. Contra proferentem
f. Applying the gratuitous and onerous rule
Relevant cases:
- Santi v. CA: The stipulation “said period of the lease being extendable for another period of twenty years” means clearly that the lessor’s intention is not to automatically extend the lease contract but to give her time to ponder and think whether to extend the lease.
- Fernandez v. CA: The Court said that the interpretation of the phrase “renewable for another ten years at the option of both parties under such terms, conditions, and rental reasonable at that time” is that the plaintiff cannot renew the lease by a unilateral act of exercising his option.
- Universal Textile Mills Inc. v. National Labor Relations Commission: The interpretation or construction of a contract does not include its modification or the creation of a new one. It must be construed and enforced according to the terms employed, and a court has no right to interpret the agreement as meaning something different from what the parties intended to be expressed by the language they saw fit to employ.
Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.
- Pingol v. CA: The Court deemed a contract as one of absolute sale, and not a contract to sell, by looking at the contemporaneous and subsequent acts of the vendee. Pursuant to the deed of sale, the vendor delivered actual and constructive possession of the property to the vendee, who occupied and took such possession, constructed a building thereon, among others. These are demonstrative acts that the vendor recognized the vendee as the absolute owner of the property sold.
- Rapanut v. CA: The Court decided that the phrase “...payable in monthly instalments of P500 with an interest of 10% per annum on the remaining balance until the full amount is paid” means that the 10% interest on the balance is added to whatever remains of the principal whenever an instalment is paid (petitioner’s interpretation), and not that the 10% interest must be paid every year (respondent’s interpretation). The Court observed that the respondent accepted the payments petitioner religiously made for four years without objection.
- Javier v. CA: Where the parties to a contract have given it a practical construction by their conduct as by acts in partial performance, such construction may be considered by the court in construing the contract, determining its meaning and ascertaining the mutual intention of the parties at the time of contracting.
- Carceller v. CA: Analysis and construction, however, should not be limited to the words in the contract. The reasonableness of the result obtained should also be considered. In contractual relations, the Court allows the parties reasonable leeway on the terms of their agreement, and that contracts should not be interpreted in a harsh and inequituous way.
- Gonzales v. Previsora Filipina: The import of a word ultimatedly depends upon the consideration of the entire provision, its nature, the object and the consequences that would follow it from construing it one way or the other. Thus if a provision demands a mandatory application, the word “may” be construed as “shall.”
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.
NOSCITUUR A SOCIIS
General and unlimited terms are restrained and limited by particular terms that follow.
EJUSDEM GENERIS
A general term joined with a specific one will be deemed to include only things that are like, of the same genus, as the specific one.
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.
- Lao Lim v. CA: The Court interpreted a contract to mean that there is a renewal of the lease every three years and that a 20% increase of rentals will only take effect if the parties decide to renew the lease, because a contrary interpretation will result in a situation where the continuation and the effectivity of the contract will depend only upon the will of the lessee, in violation of Article 1308 of the Civil Code. The compromise agreement should be understood as bearing that import which is most adequate to render it effectual.
- Caltex v. Intermediate Appellate Court: Provisions in a contract must be given a construction as will give effect to them. If it were the intention of the parties to limit the respondent’s obligation to P4M they should have stated so, and there would have been no need to qualify the statement of said amount with the clause “as of June 1980 plus any applicable charges on the overdue account,” among others.
- Ridjo Tape and Chemical Corporation v. CA: Construction in terms of a contract which would amount to impairment or loss of right is not favoured; conservation and preservation, not waiver, abandonment, or forfeiture of a right, is the rule.
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.
The various provisions of a contract must be read as a whole and not in isolation. Each provision must be related to each other in order to clearly now the total import and application of the law, and so that a harmonious whole can be attained.
- Ruiz v. Sheriff of Manila: The clause “failure to pay two successive monthly amortizations will cause the loan to be automatically die and payable in its entirety.
Notwithstanding the foregoing, this loan shall not run for more than five years” is not self-conflicting, according to the Court. It means that while monthly amortizations could be as little as P300, the loan should be paid anyway in five years; and that failure to pay two successive amortizations would render the entire loan due and payable. Thus, if there is default committed for twelve months, any foreclosure of a mortgage is not premature.
- Fernandez v. CA: The important task in contract interpretation is always the ascertainment of the intention of the parties through looking to the words they used to project the intention of their contract—all the words, and not just a particular word or two, and words in context and not words standing alone.
- China Banking Corp v. CA: Mortgages given to secure future advancements or loans are valid and legal contracts, and amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security, if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.
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.
- Pasay City Government v. Court of First Instance of Manila: The Court interpreted the words “in proportion” to mean that the parties to a compromise contemplated a divisible obligation.
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.
It is important to note that usage or custom will only be admissible if a contract’s provisions are doubtful. An express contract embodying in clear and positive terms the intention of the parties cannot be varied nor contradicted by evidence of usage or custom. A written and express contract cannot be controlled, varied, or contradicted by usage or custom.
Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.
CONTRA PROFERENTEM
Means “against the proferrer.” If there is an ambiguity in a document and all the other methods of construction have failed to resolve so that there are two alternative meanings to certain words, the Court may construe the words against the party who put forward the document, and give effect to the meaning more favourable to the other party
Based on the maxim verba accipiuntur fortius contra proferentem: a contract is interpreted against the person who wrote it.
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.
When a contract is gratuitous in nature, the least transmission of rights should prevail.
- Central Philippine University v. CA: Where a donee seeks the execution of a donation even though such done did not fulfil a condition sought by the donor, because such donor did not seek the enforcement of the condition for a long time anyway, the Court ruled for the revocation of the donation.
When a contract is onerous in nature, doubt shall be settled in favour of the greatest reciprocity of interests.
- Castelo v. CA: Between two interpretations of a stipulation in a contract—whether during the period of January 1, 1983 up to June 30, 1983, 12% per annum plus 1% penalty charge a month was payable on the remaining diminishing balance, or whether during the same period, only 12% interest was payable while the 1% per month penalty charge would begin to accrue on any balance remaining unpaid—the Court chose the latter. If the parties intended the former they would have stated a 24% interest (1% per month = 12% per year).
- Gaite v. Fonacier: The Court ruled that a provision in a contract transferring Gaite’s rights to Fonacier in exchange for an amount of money, and where the remaining balance of the money will be paid “from and out the first letter of credit covering the first shipment of iron ores and of the first amount derived from the local sale of iron ore”
should be interpreted as providing for a suspensive period, and not a suspensive condition. The Court ruled that a greater reciprocity of interests obtains if the buyer’s obligation is deemed to be actually existing, with only its maturity date postponed or deferred, than if such obligation was viewed as non-binding until the ore was sold.
When the contract’s principal object is expressed in such a way that the intention of the parties cannot be known, the contract is 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.
OTHER PRINCIPLES OF INTERPRETATION
Interpretation according to legal meaning, unless the parties intended otherwise
Construction that will give effect to all provisions is favoured
Particular intent will control a general one that is inconsistent with it
Interpretation according to the circumstances
The terms in a contract are presumed to be used in their general acceptation, but if evidence can be shown that they have a local, technical, or otherwise peculiar signification, then they must be construed as such accordingly
Written words control printed
Experts and interpreters can be presented in court in case the contract cannot be deciphered and such persons are proved to be skilled in deciphering the characters
Of two constructions, that sense is to prevail against either party in which he supposed the other understood it, or that view which is more favourable to the party in whose favour the provision was made
Construction in favour of a natural right
Interpretation according to usage RESCISSIBLE CONTRACTS
Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law.
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.
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.
RESCISSIBLE CONTRACTS
Valid contracts that can be terminated on legal grounds
Rescission is principally based on some economic damage (lesion) as a result of the inequitable conduct by one party
TYPES OF RESCISSIBLE CONTRACTS
1. Entered by guardians, wherein the ward suffers lesion by more than ¼ of the value of the property
- Rescission cannot take place however when the contract has been judicially approved 2. Entered by representatives of absentees, wherein the absentee suffers lesion by more than ¼ of
the value of the property
- Rescission cannot take place however when the contract has been judicially approved 3. Those undertaken in fraud of creditors, and which makes collection of the creditors’ claim
impossible
- Bobis v. Provincial Sheriff of Camarines Norte: The fraud is never presumed, but must be proved by clear preponderance of evidence. It is essential that it be shown that both contracting parties have acted maliciously and with fraud for the purpose of prejudicing said creditors, and that the latter are deprived by the transactions of all means by which they may effect collection of their claims
4. Those which refer to things under litigation, unless it has been entered with the knowledge or approval of the litigants, or of competent judicial authority
5. Payments made in state of insolvency, for which the debtor cannot be compelled to pay at the time the obligation was effected
- A state of insolvency occurs when a debtor’s liabilities exceed his/her assets and can barely pay off his/her debts
6. All others declared by law to be rescissible
- For example, a contract of sale entered in violation of the right to first refusal is rescissible
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.
SUBSIDIARY NATURE
Must be the last remedy, of last resort (e.g., an accion pauliana, an action to rescind contracts made in favour of creditors, and which has the ff. requisites: a) a judgment, b) the issuance of a trial court of a writ of execution for the satisfaction of the judgment, c) the failure of the sheriff to enforce and satisfy the judgment of the court.)
A cause for action in a rescission can only be made in a proper and direct action filed for that purpose, and not on a mere motion incidental to another case
- Air France v. Court of Appeals: Rescission is a relief which the law grants on the premise that the contract is valid and for the protection of one of the contracting parties and third persons from all injury and damage the contract may cause, or to protect some incompatible and preferential right created by the contract. An action for rescission may not be raised or set up in a summary proceeding, through a motion, but in an independent civil action and only after a full-blown trial
Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused.
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.
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.
RESTITUTION IN RESCISSION
In restitution, the parties shall be placed in the same position where they were before they entered the
In restitution, the parties shall be placed in the same position where they were before they entered the