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.

COMMENT:
(1) Reason for Interpretation of Contracts
What is the use of interpreting a contract? Should we not just apply the terms of the contract? It is true we
must apply the terms of the contract, but only when they are so clear that there is no doubt regarding the intention of
the contracting parties. But in other cases, we should apply the rules of interpretation.

(2) Rule in Case of Conflict

In case of conflict between the words of the contract and the evident intention of the parties, which one
must prevail?
ANS.: The intention must prevail. “Let us interpret not by the letter that killeth but by the spirit that giveth
life.” “If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the
former.” (2nd paragraph, Art. 1370, Civil Code). Where the terms and provisions thereof are clear and leave no
doubt as to the intention of the contracting parties, the literal meaning of its stipulation shall control. (R & M
General Merchandise, Inc. v. CA, GR 144189, Oct. 5, 2001).

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

COMMENT:

(1) How to Judge Intent of the Parties

(a) If the parties have themselves placed an interpretation to the terms of their contract, such interpretation
must in general be followed. (Valdez v. Sibal, 46 Phil. 930).
(b) The contract of the parties may result in estoppel. (Arts. 1431-1439, Civil Code).
(c) The courts may consider the relations existing between the parties and the purpose of the contract,
particularly when it was made in good faith between mutual friends. (Kidwell v. Cartes, 43 Phil. 953).

(3) Some Observations

As a general rule, when the terms of a contract are clear and unambiguous about the intention of the
contracting parties, the literal meaning of its stipulations shall control. But if the words appear to contravene the
evident intention of the parties, the latter shall prevail over the former. (Art. 1370). The real nature of a contract may
be determined from the express terms of the agreement, as well as from the contemporaneous and subsequent acts of
the parties thereto. (Art. 1371). (Cruz v. CA, 293 SCRA 239 [1998]; Sicad v. CA, 294 SCRA 183 [1998]; and
People’s Aircargo & Warehouse Co., Inc. v. CA, 297 SCRA 170 [1998]).
Upon the other hand, simulation takes place when the parties do not really want the contract they have
executed to produce the legal effects expressed by its wordings. (Villafl or v.CA, 280 SCRA 297 [1997]; Tongoy v.
CA, 123 SCRA 99 [1983],and Rodriguez v. Rodriguez, 20 SCRA 908 [1967]). Simulation or vices of declaration
may be either “absolute” or “relative.”
Art. 1345 distinguishes an absolute simulation from a relative one while Art. 1346 discusses their effects.
Stated in another modality, an absolutely simulated contract of sale is void ab initio and transfer no ownership right.
The purported buyer, not being the owner, cannot validly mortgage the subject property. Consequently, neither does
the buyer at the foreclosure sale acquire any title thereto. (Edilberto Cruz & Simplicio Cruz v.Bancom Finance
Corp. [Union Bank of the Phils.], GR 147788, Mar. 19, 2002).
Art. 1372. However general the terms of a contract may be, they shall be understood to comprehend things
that are distinct and cases that are different from those upon which the parties intended to agree.

COMMENT:
(1) Effect of the Use of General Terms
Example:
A sold B his house including “all the furniture therein.” Suppose part of the furniture belonged to a
relative of A who had asked him (A) for permission to leave them there temporarily, should such furniture
be included?
ANS.: No, such furniture should not be included, because although the term “all” is general, still it
should “not be understood to comprehend things that are distinct and cases that are different from those
upon which the parties intended to agree.” (Art. 1372, Civil Code).
In one case, the Supreme Court said: “Considering that the land of the applicant was not the
subject of the contract, and that it could not be so for the reason that it did not belong to the vendor, it can
in no wise be understood as included in the instrument of sale which appears at folio 66, no matter what
may be the terms of the document.” (Reyes v. Limjap, 15 Phil. 420)

(3) Special Intent Prevails Over a General Intent

Just as a special provision controls a general provision, a special intent prevails over a general intent. (Hibberd v.
Estate of McElroy, 25 Phil. 164).

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.

COMMENT:
(1) Stipulation Admitting of Several Meanings
Example:
A wife exchanged “her house” for a diamond ring. Now the wife had a house which was her
paraphernal property, and another house, which, however, belonged to the conjugal partnership. The
contract entered into by the wife was against the consent of the husband. To which house should “her
house” refer?
ANS.: It should refer to her paraphernal house, because this would validate the contract. If the
other interpretation would be followed, the exchange would not be valid since the husband had not given
consent.

(2) Effect of an Interpretation Upholding the Validity of the

Contract
If one interpretation makes a contract valid and illegal, the former interpretation must prevail. (Luna v.
Linatoc, 74 Phil. 15).

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.

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.

COMMENT:
(1) Words to Be Interpreted in Keeping with the Nature and
Object of the Contract
Example:
If authority is given “to exact payment by legal means,” does this include authority to file
actions in court for the recovery of sums of money?

ANS.: Yes. The clause in question means “the power to exact payment of debts due the
concerned by means of the institution of suits for their recovery. If there could be any doubt as to
the meaning of this language taken by itself, it would be removed by a consideration of the general
 scope and purpose of the instrument in which it concurs.” (German & Co. v. Donaldson, Sim &
Co., 1 Phil. 63).

(2) Meaning of the Article

If a word is susceptible of two or more meanings, what meaning should be used?

ANS.:
(a) That in keeping with the nature and object of the contract. (Art. 1375, Civil Code).
(b) If this cannot be determined, then the “terms of a writing are presumed to have been used in
their primary and general acceptation.” (Sec. 12, Rule 130, Revised Rules of Court).

(3) Use of Other Meanings

Despite the fact that the terms are presumed to have been used in their primary and general acceptation,
may other meanings or significations be proved?
ANS.: Yes. “Evidence is admissible to show that they have a local, technical or otherwise peculiar signifi
cation, and were so used and understood in the particular instance, in which case the agreement must be
construed accordingly.” (Sec. 12, Rule 130, Revised Rules of Court)
.
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.

COMMENT:
(1) Effect of Usage or Custom of the Place
Examples:
(a) A made a contract with B regarding “pesetas.” In the place where the contract was made,
Mexican pesetas were more commonly used than Spanish pesetas. The Supreme Court held that the term
“pesetas” should be construed to mean Mexican pesetas. (Yañez de Barnuevo v. Fuster, 29 Phil.606).
(b) If a contract for a lease of services does not state how much compensation should be given, the
custom of the place where the services were rendered should determine the amount. (Arroyo v. Azur, 76
Phil. 493).

(2) Pleading and Proof of Customs and Usages

Should customs and usages be pleaded (alleged in the pleading)?

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

COMMENT:
(1) Interpretation to Be Against Party Who Caused Obscurity
Reasons for the law: Since he caused the obscurity, the party who drew up the contract with ambiguous
terms should be responsible therefor; so the obscurity must be construed against him. (Gonzales v. La Provisora
Filipina, 74 Phil. 165). The drafter of the terms of the contract should, therefore, be careful.

(3) Rule in Contracts of Adhesion

Art. 1337 of the Civil Code applies with even greater force in contracts of adhesion where the contract is
already prepared by a big concern, and the other party merely adheres to it, like insurance or transportation
contracts, or bills of lading. (See 6 R.C.L. 854; See also Qua Chee Gan v. La Union & Rock, Co., Inc. Co., Ltd., 98
Phil. 85).

Example: Obscure terms in an insurance policy are construed strictly against the insurer, and
liberally in favor of the insured. This is to effectuate the dominant purpose of insurance indemnification.
This indeed is particularly true in cases where forfeiture is involved. (Calanoc v. Court of Appeals, 98
Phil.79).
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.

COMMENT:
(1) Doubts as to Principal Object or Incidental Circumstances
There may be doubts as to:
(a) the principal object
(b) or the incidental circumstances (as to whether, for example, a sale or a mortgage is involved)

(2) Doubt as to the Principal Object

Here, the contract is void.
Example: X promised to give Y this (___________). Since the object is unknown, it is clear that
there could not have been any meeting of the minds.

(3) Doubts as to the Incidental Circumstances

Apply the following rules:
(a) If gratuitous, apply the rule of “least transmission of rights and interest.”
(b) If onerous, apply the rule of the “greatest reciprocity of interests.”

Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed
in the construction of contracts.

COMMENT:
(1) Suppletory Use of the Principles of Interpretation in the Rules of Court
Rule 123 as stated in the Article should be construed to refer to Rule 130 of the New Rules on Evidence.

(2) Language in the Place of Execution

“The language of a writing is to be interpreted according to the legal meaning it bears in the place of its
execution, unless the parties intended otherwise.” (Sec. 8, Rule 130, Revised Rules of Court).

(3) Meaning of Words Used

“The terms of a writing are presumed to have been used in their primary and general acceptation, but
evidence is admissible to show that they have a local, technical, or otherwise peculiar signification, and were so used
and understood in the particular instance, in which case, the agreement must be construed accordingly.” (Sec. 12,
Rule 130, Revised Rules of Court).

(4) Conflict Between Printed and Written (Not Printed) Words

“When an instrument consists partly of written words and partly of a printed form, and the two are
inconsistent, the former controls the latter.” (Sec. 13, Rule 130, Revised Rules of Court).

(5) Use of Experts and Interpreters

“When the characters in which an instrument is written are difficult to be deciphered, or the language is not
understood by the Court, the evidence of persons skilled in deciphering the characters, or who understood the
language, is admissible to declare the characters or the meaning of the language.” (Sec. 14, Rule 130, Revised Rules
of Court).

(6) Interpretation in Favor of a Natural Right

“When an instrument is equally susceptible of two interpretations, one in favor of a natural right and the
other against it, the former is to be adopted.” (Sec. 14, Rule 130, Revised Rules of Court).
[NOTE: The right to redeem is a natural right. (Tumaneng v. Abad, 92 Phil. 18).]
(7) Usage or Customs
“An instrument may be construed according to usage, in order to determine its true character.” (Sec. 17,
Rule 130, Revised Rules of Court).