University of San Agustin

College of Law

Interpretation of Contracts
A term paper in Obligations and Contracts

Submitted by:

Christelle G. Divinagracia
Juris Doctor, section 1B

Submitted to:

Atty. Anfred P. Panes

Professor

April 28, 2020

INTERPRETATION OF CONTRACTS 1
Interpretation of Contracts

Article 1370 of the Civil Code states that “ 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.”

The interpretation of contract is the determination of the meaning of the words/term used
in its contents that are ambiguous or not clearly understood.

The intention of the parties are the determining factor for the interpretation of contracts.
When the terms of contract are clear, we simply apply it. In case there is conflict on the
words of the contract and the intention of the parties, the latter shall prevail.

The evident intention of the parties are determined by considering the following:
1. Interpretation to the terms and stipulations by the parties themselves
2. The contemporaneous and subsequent acts of the parties
3. The mutual relationship between the parties and the purpose of the contract
(philawgov.wikia.org)

Rules on Interpretation:

1. Inconsistency of General Terms - specific terms shall prevail if there is

inconsistency or confusion over the uses of general terms covering the same subject
matter.

2. Stipulations having Multiple Meanings - most adequate meaning shall prevail if

some provisions/stipulations have several meaning.

3. Terms having Multiple Meanings - most sensible meaning shall prevail of a

word/term has multiple meanings. Sensibility of the meaning is determined by:
a) Keeping with the nature and object of the contract
b) Presuming the ordinary and generally accepted meaning
c) Proving it with the use of evidences

4. Doughtful Provisions - interpretation of a contract as a whole shall prevail if there

are various doughtful stipulations in the entirety. The provisions of a contract must not be
viewed together, not in isolation to each other. These provisions are harmonized with
each other so as to give effect and meaning to the entire contract.

5. Usage or Custom of the Place - usage or custom of the place shall prevail if the
parties entered into their contract with reference to such usage or custom. It shall also fill
the omission of provisions which are ordinarily established. The existence of the usage
or custom should be proven to a court:
a) Without being alleged (pleaded) if such usage or custom is general
b) After being alleged (pleaded) if such usage or custom is local

6. Obscure terms - interpretation of obscure term or stipulation shall be against the

party who caused the obscurity. This is because one should be careful in drafting a
contract and responsible in case of mistakes and ambiguity.

INTERPRETATION OF CONTRACTS 2
Supplementary Rule of Interpretation

In case the aforementioned rules are unable to settle doubts, the supplementary rule
shall resolved such doubts:

1. In incidental circumstances of a gratuitous contract, the interpretation should be made

which would result in the least transmission of rights and interests.

2. In incidental circumstances of an onerous contract, the interpretation should be made

which would result in the greatest reciprocity of interests.

3. In object, the contract shall be null and void since the intention of the parties cannot
be known.

Principles of Interpretation in the Rules of Court

The rules in the interpretation of documents now contained in Rule 130, Sections 10-19
of the Revised Rules of Court shall also be observed in the construction of contracts:

Section 10. Interpretation of a writing according to its legal meaning - the writing
shall be interpreted according to the legal meaning it bears in the place of its execution,
unless the parties intended otherwise.

Section 11. Instrument construed so as to give effect to all provisions - the several
provisions/stipulations of an instrument shall be interpreted so as to give effect to all if
possible.

Section 12. Interpretation according to intention; general and particular provisions

- the interpretation specific provisions shall override the general provisions in case of
inconsistency; so a particular or specific intent will control a general one that is
inconsistent with it.

Section 13. Interpretation according to circumstances - the interpretation shall

consider the circumstances under which it was made, including the situation of the
subject thereof and of the parties to it.

Section 14. Peculiar signification of terms - the terms shall be presumed to have used
in their ordinary and generally accepted meaning, unless intended to be used with a
different meaning.

Section 15. Written words control printed - the written words shall prevail over the
printed form in case of inconsistency.

Section 16. Experts and interpreters to be used in explaining certain writings - to

be the explanation of certain writings may be provided by experts and interpreters if the
characters in such writings are difficult to be deciphered, or the language is not
understood.

Section 17. Of two constructions, which preferred - the interpretation of the terms
that have been intended in a different meaning by both parties shall be against the party
who understood it; the interpretation of a valid provision that have been given different
meanings shall favor the party in whose favor the provision was made.

INTERPRETATION OF CONTRACTS 3
Section 18. Construction in favor of natural right - the interpretation in favor of
natural right shall prevail if an instrument can have two interpretations in which the other
interpretation is against such right.

Section 19. Interpretation according to usage - the interpretation shall be according to

usage in order to determine its true character.

RULES ON DOUBTS (Art. 1378)

A. Principal Objects - Doubts where it cannot be known what may have been the
intention or will of the parties, the contract shall be null and void.
B. Gratuitous Contracts - Absolutely impossible to settle doubts by the rules and only
refer to incidental circumstances the least transmission of rights and interests shall
prevail.
C. Onerous Contracts - Absolutely impossible to settle doubts by the rules and only refer
to incidental circumstances the doubt shall be settled in favor of the greatest
reciprocity of interests.
(Civil Law-Obligations and Contracts of Prof. Solomon Lumba)

Primacy of intention

In the case of “Santi vs. CA GR#93625, 227 SCRA 541, 1993”, Santi was the new
owner after Esperanza Jose sold all her rights and participation in the subject parcel of
land. Prior to the sale, a lease agreement between Esperanza and the spouses Vitan
was executed wherein the property was leased for (20) twenty years and "automatically
extended" for another 20 years but with a rental of P220.00 per month. Since the
spouses sold their leasehold rights to Augusto Reyes, a new leasehold contract was
executed for a period of 20 years from and after April 1, 1962 with a monthly rental of
P180.00 payable in advance, said period of lease being "extendable" for another period
of 20 years with a monthly rental increased to P220.00.

The court ruled that in as much as both parties to the lease contract have already died, a
resort to the terms and conditions of the lease contract is inevitable in order to ascertain
the true intent of the parties. In the new contract of lease, the phase "automatically
extended" did not appear and was not used in the lease contract subsequently entered
into by Esperanza Jose and Augusto Reyes, Jr. for the simple reason that the lessor
does not want to be bound by the stipulation of automatic extension as provided in the
previous lease contract.

As provided for in Articles 1370 and 1372 of the Civil Code,5 the court ruled that when
terms and stipulations embodied in the contract are clear and leave no room for doubt,
such should be read in its literal sense and that there is absolutely no reason to construe
the same in another meaning.

Thus, the private respondent Reyes was ordered to turn over the possession of the
disputed property and to pay a monthly rental of P220 starting from April 1, 1982 up to
and until they shall have vacated and turned over the possession of the premises to the
petitioner.

INTERPRETATION OF CONTRACTS 4
A. How to determine intention

In the case of “Rapanut vs. CA 246 SCRA 323 1995”, to ascertain the intent of the
parties, the court shall look at their contemporaneous and subsequent acts.

The controversial provision in their Supplemental Agreement reads: ". . . the

VENDOR/MORTGAGEE is willing to sell said portion of her lot to the
VENDEE/MORTGAGOR for a total price of P37,485. 00 payable in monthly installments
of P500.00 with an interest of 10% per annum on the remaining balance until the full
amount is paid" Private respondent’s view is that the 10% interest must be paid every
year. Petitioner posits that the P500.00 monthly installments include the 10% interest.
The interpretation of the provision in question having been put in issue, the Court is
constrained to determine which interpretation is more in accord with the intent of the
parties. To ascertain the intent of the parties, the court shall look at their
contemporaneous and subsequent acts (Civil Code of the Philippines Art. 1371).
The Deed of Conditional Sale with Mortgage categorically provides for the date of
payment of the P500.00 monthly installments, that is, not later than the fifth of every
month, and of the P1,000.00 semi-annual installment, that is, on June 30 and December
31. The Supplemental Agreement was likewise specific that petitioner shall pay private
respondent "monthly installments of P500.00 with an interest of 10% per annum on the
remaining balance until the full amount is paid."

A liberal interpretation of the contracts in question is that at the end of each year, all the
installment payments made shall be deducted from the principal obligation. The 10%
interest on the balance is then added to whatever remains of the principal. Thereafter,
petitioner shall pay the monthly installments on the stipulated dates. In other words, the
interests due are added to and paid like the remaining balance of the principal. Thus, we
must rule that the parties intended that petitioner pay the monthly installments at
predetermined dates, until the full amount, consisting of the purchase price and the
interests on the balance, is paid. Significant is the fact that private respondent accepted
the payments petitioner religiously made for four years.

(https://www.chanrobles.com/cralaw)

B. How to interpret a contract when it contains stipulations that admit several

meanings?

In the facts in the case of “Oil and Natural Gas Commission vs Court of Appeals GR
No. 114323 July 23, 1998” revolved around the petitioner's interpretation that Clause 16
of their contract would contemplate even the non-delivery of the oil well cement would in
effect render Clause 15 a mere superfluity. A perusal of Clause 16 shows that the parties
did not intend arbitration to be the sole means of settling disputes. This is manifest from
Clause 16 itself which is prefixed with the proviso, "Except where otherwise provided in
the supply order/contract . . .", thus indicating that the jurisdiction of the arbitrator is not
all encompassing, and admits of exceptions as may be provided elsewhere in the supply
order/contract. We believe that the correct interpretation to give effect to both stipulations
in the contract is for Clause 16 to be confined to all claims or disputes arising from or
relating to the design, drawing, instructions, specifications or quality of the materials of
the supply order/contract, and for Clause 15 to cover all other claims or disputes.

The doctrine of noscitur a sociis, although a rule in the construction of statutes, is equally
applicable in the ascertainment of the meaning and scope of vague contractual
stipulations, such as the aforementioned phrase. According to the maxim noscitur a
sociis, where a particular word or phrase is ambiguous in itself or is equally susceptible
of various meanings, its correct construction may be made clear and specific by

INTERPRETATION OF CONTRACTS 5
considering the company of the words in which it is found or with which it is associated,
or stated differently, its obscurity or doubt may be reviewed by reference to associated
words. A close examination of Clause 16 reveals that it covers three matters which may
be submitted to arbitration namely,

(1) all questions and disputes, relating to the meaning of the specification designs,
drawings and instructions herein before mentioned and as to quality of workmanship of
the items ordered; or

(2) any other question, claim, right or thing whatsoever, in any way arising out of or
relating to the supply order/contract design, drawing, specification, instruction or these
conditions; or

(3) otherwise concerning the materials or the execution or failure to execute the same
during stipulated/extended period or after the completion/abandonment thereof.

The following fundamental principles in the interpretation of contracts and other

instruments served as the court’s guide in arriving at the foregoing conclusion:

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.

Art. 1374. The various stipulations of a contract shall be interpreted together,

attributing the doubtful ones that sense which may result from all of them taken
jointly.

Sec. 11. Instrument construed so as to give effect to all provisions. In the construction of
an instrument, where there are several provisions or particulars, such a construction is, if
possible, to be adopted as will give effect to all.

Thus, the Court held that as in statutes, the provisions of a contract should not be read in
isolation from the rest of the instrument but, on the contrary, interpreted in the light of the
other related provisions. The whole and every part of a contract must be considered in
fixing the meaning of any of its harmonious whole. Equally applicable is the canon of
construction that in interpreting a statute (or a contract as in this case), care should be
taken that every part thereof be given effect, on the theory that it was enacted as an
integrated measure and not as a hodge-podge of conflicting provisions. The rule is that a
construction that would render a provision inoperative should be avoided; instead,
apparently inconsistent provisions should be reconciled whenever possible as parts of a
coordinated and harmonious whole.

(https://www.chanrobles.com/scdecisions/jurisprudence1998/jul1998/gr_114323_19
98.php)

C. How to interpret a contract when it contains various stipulations, some of

which are doubtful?

In the case of “Spouses Rigor vs Consolidated Orix Leasing and Finance

Corporation GR. No. 136423 Aug 20, 2002”, the following were the facts.

Petitioners obtained a loan from private respondent Consolidated Orix Leasing and
Finance Corporation ("Private Respondent" for brevity) in the amount of P1,630,320.00.
Petitioners executed a promissory note on July 31, 1996 promising to pay the loan in 24
equal monthly installments of P67,930.00 every fifth day of the month commencing on

INTERPRETATION OF CONTRACTS 6
September 5, 1996. The promissory note also provides that default in paying any
installment renders the entire unpaid amount due and payable. To secure payment of the
loan, petitioners executed in favor of private respondent a deed of chattel mortgage over
two dump trucks.

Petitioners failed to pay several installments despite demand from private respondent.
On January 5, 1998, private respondent sought to foreclose the chattel mortgage by
filing a complaint for Replevin with Damages against petitioners before the Regional Trial
Court of Dagupan City ("Dagupan trial court" for brevity). After service of summons,
petitioners moved to dismiss the complaint on the ground of improper venue based on a
provision in the promissory note which states that, "x x x all legal actions arising out of
this note or in connection with the chattels subject hereof shall only be brought in or
submitted to the proper court in Makati City, Philippines."

Private respondent opposed the motion to dismiss and argued that venue was properly
laid in Dagupan City where it has a branch office based on a provision in the deed of
chattel mortgage which states that, "x x x in case of litigation arising out of the
transaction that gave rise to this contract, complete jurisdiction is given the proper court
of the city of Makati or any proper court within the province of Rizal, or any court in the
city, or province where the holder/mortgagee has a branch office, waiving for this
purpose any proper venue."

In dismissing the petition, the Court of Appeals ruled as follows:

"Records reveal that Chiara executed the Promissory Note in favor of Consolidated
secured by a Chattel Mortgage over two (2) motor vehicles. Conformably, failure to
comply with the obligations under the Promissory Note entitles Consolidated to the
possession of the mortgaged chattels or motor vehicles for purposes of foreclosure to
satisfy the loan obligation. It is for this reason that the action commenced by
Consolidated is for Replevin and damages with an alternative prayer for the defendants
to pay the outstanding amount in the event manual delivery of the motor vehicles
involved cannot be effected. In plain language, the action commenced before the
respondent court is principally based both on the Promissory Note and the Chattel
Mortgage, so much so, that it becomes essentially imperative to interpret and give effect
to all the provisions of the two actionable documents.

In this wise, both the Promissory Note and the Chattel Mortgage should be treated as a
singular contract with one complementing the other. Appropriately, Article 1374 provides:

'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.'

And in giving meaning to the contract, an interpretation of all its provisions must be
adopted as will give effect to all. The stipulations of the contract shall be interpreted
together attributing to the doubtful ones that sense which may result from all of them
taken jointly [Layug vs. Intermediate Appellate Court, 167 SCRA 627 (1988)]. Tolentino,
in his Civil Code of the Philippines, Vol. 4, 1995 Reprint, pp. 563-564 said:

'xxx The whole contract must be interpreted or read together in order to arrive at its true
meaning. Certain stipulations cannot be segregated and then made to control; neither do
particular words or phrases necessarily determine the character of a contract. The legal
effect of the contract is not to be determined alone by any particular provision
disconnected from all others, but in the ruling intention of the parties as gathered from all
the language they have used; and from their contemporaneous and subsequent acts.

INTERPRETATION OF CONTRACTS 7
Provisions of a contract are to be given a reasonable and practical interpretation so as to
be efficacious. Titles given to sections of a contract may be resorted to in interpreting its
scope. An interpretation that gives effect to the contract as a whole should be adopted.'

By and large, it was therefore not an error or grave abuse of discretion when the
controversial Motion to Dismiss was denied by the respondent court. Indeed, venue is
properly laid in the case at bar under the provisions of the Chattel Mortgage in issue."
(http://lawyerly.ph/juris/view/cc876)

D. How to interpret a contract when it contains words that have different

significations?

Where possible, the mutual intent of the parties will be determined solely from the written
terms of the contract. The courts have developed a number of rules that are used when
interpreting disputed contracts. This exercise introduces the language used when
applying the rules of contractual interpretation, training your reading and vocabulary
skills.

However broad may be the terms of a contract, it extends only to those things
concerning which it appears the parties intended to contract. The terms employed are
servants, and not masters, of an intent; they are to be interpreted so as to subserve, and
not to subvert, such intent. Words which admit of a more extensive or more restrictive
signification must be taken in that sense which will best effectuate what it is reasonable
to suppose was the real intention of the parties. Words are not to be taken in their
broadest sense if they are equally appropriate in a sense limited to the object and the
intent of the contract. The courts are sometimes required to restrict the meaning of the
words, and to that end a word in the plural may be restricted to the singular.
(Sta. Maria textbook)

E. How to interpret a contract when it contains ambiguities and omission of

stipulations?

In the case of “Chua vs. Court of Appeals GR. No. 119255 April 9, 2003” , the issue is
whether the contract entered into is a contract of sale or contract to sell.

Chua has consistently characterized his agreement with Valdez-Choy, as evidenced by

the Receipt, as a contract to sell and not a contract of sale. This has been Chua's
persistent contention in his pleadings before the trial and appellate courts until he
pleaded that there is a perfected contract of sale rather than a contract to sell and
contends that there was no reservation in the contract of sale that Valdes-Choy shall
retain title to the Property until after the sale.

There was no agreement for an automatic rescission of the contract in case of Chua's
default. He argues that his payment of earnest money and its acceptance by
Valdes-Choy precludes the latter from rejecting the binding effect of the contract of sale.
Thus, Chua claims that Valdes-Choy may not validly rescind the contract of sale without
following Article 1592 of the Civil Code which requires demand, either judicially or by
notarial act, before rescission may take place.

The distinction between a contract of sale and contract to sell is:

In a contract of sale, the title to the property passes to the vendee upon the delivery of
the thing sold; in a contract to sell, ownership is, by agreement, reserved in the vendor
and is not to pass to the vendee until full payment of the purchase price. Otherwise
stated, in a contract of sale, the vendor loses ownership over the property and cannot
recover it until and unless the contract is resolved or rescinded; whereas, in a contract to

INTERPRETATION OF CONTRACTS 8
sell, title is retained by the vendor until full payment of the price. In the latter contract,
payment of the price is a positive suspensive condition, failure of which is not a breach
but an event that prevents the obligation of the vendor to convey title from becoming
effective.

A perusal of the Receipt shows that the true agreement between the parties was a
contract to sell. Ownership over the Property was retained by Valdes-Choy and was not
to pass to Chua until full payment of the purchase price.

First, the Receipt provides that the earnest money shall be forfeited in case the buyer
fails to pay the balance of the purchase price on or before 15 July 1989. In such event,
Valdes-Choy can sell the Property to other interested parties. There is in effect a right
reserved in favor of Valdes-Choy not to push through with the sale upon Chua's failure to
remit the balance of the purchase price before the deadline. This is in the nature of a
stipulation reserving ownership in the seller until full payment of the purchase price. This
is also similar to giving the seller the right to rescind unilaterally the contract the moment
the buyer fails to pay within a fixed period.

Second, the agreement between Chua and Valdes-Choy was embodied in a receipt
rather than in a deed of sale, ownership not having passed between them. The signing of
the Deeds of Sale came later when Valdes-Choy was under the impression that Chua
was about to pay the balance of the purchase price. The absence of a formal deed of
conveyance is a strong indication that the parties did not intend immediate transfer of
ownership, but only a transfer after full payment of the purchase price.

Third, Valdes-Choy retained possession of the certificate of title and all other documents
relative to the sale. When Chua refused to pay Valdes-Choy the balance of the purchase
price, Valdes-Choy also refused to turn-over to Chua these documents. These are
additional proof that the agreement did not transfer to Chua, either by actual or
constructive delivery, ownership of the Property.

It is true that Article 1482 of the Civil Code provides that "Whenever earnest money is
given in a contract of sale, it shall be considered as part of the price and proof of the
perfection of the contract." However, this article speaks of earnest money given in a
contract of sale. In this case, the earnest money was given in a contract to sell. The
Receipt evidencing the contract to sell stipulates that the earnest money is a forfeitable
deposit, to be forfeited if the sale is not consummated should Chua fail to pay the
balance of the purchase price. The earnest money forms part of the consideration only if
the sale is consummated upon full payment of the purchase price. If there is a contract of
sale, Valdes-Choy should have the right to compel Chua to pay the balance of the
purchase price. Chua, however, has the right to walk away from the transaction, with no
obligation to pay the balance, although he will forfeit the earnest money. Clearly, there is
no contract of sale. The earnest money was given in a contract to sell, and thus Article
1482, which speaks of a contract of sale, is not applicable.

Since the agreement between Valdes-Choy and Chua is a mere contract to sell, the full
payment of the purchase price partakes of a suspensive condition. The non-fulfillment of
the condition prevents the obligation to sell from arising and ownership is retained by the
seller without further remedies by the buyer. Article 1592 of the Civil Code permits the
buyer to pay, even after the expiration of the period, as long as no demand for rescission
of the contract has been made upon him either judicially or by notarial act. However,
Article 1592 does not apply to a contract to sell where the seller reserves the ownership
until full payment of the price.
(http://www.lawyerly.ph/juris/view/cbbb6)

INTERPRETATION OF CONTRACTS 9
F. How to interpret a contract with respect to the party who caused the obscurity?

In the case of “Rizal Commercial Banking Corporation vs. Court of Appeals GR No.
133107 March 25, 1999”, the facts of the case are the following:

On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota Corolla
from Toyota Shaw, Inc. for which he made a down payment of P164,620.00, the balance
of the purchase price to be paid in 24 equal monthly installments. Private respondent
issued 24 postdated checks for the amount of P14,976.00 each.

To secure the balance, private respondent executed a promissory note and a contract of
chattel mortgage over the vehicle in favor of Toyota Shaw, Inc. The contract of chattel
mortgage, in paragraph 11 thereof, provided for an acceleration clause stating that
should the mortgagor default in the payment of any installment, the whole amount
remaining unpaid shall become due. In addition, the mortgagor shall be liable for 25% of
the principal due as liquidated damages.

On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the chattel
mortgage to petitioner Rizal Commercial Banking Corporation (RCBC).

All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and
debited by RCBC from private respondent's account, except for RCBC Check No.
279805 representing the payment for August 10, 1991, which was unsigned. Previously,
the amount represented by RCBC Check No. 279805 was debited from private
respondent's account but was later recalled and re-credited to him. Because of the recall,
the last two checks, dated February 10, 1993 and March 10, 1993, were no longer
presented for payment. This was purportedly in conformity with petitioner bank's
procedure that once a client's account was forwarded to its account representative, all
remaining checks outstanding as of the date the account was forwarded were no longer
presented for payment.

On the theory that respondent defaulted in his payments, the check representing the
payment for August 10, 1991 being unsigned, petitioner, in a letter dated January 21,
1993, demanded from private respondent the payment of the balance of the debt,
including liquidated damages. The latter refused, prompting petitioner to file an action
(Rcbc vs. Ca G.R. No. 133107 March 25, 1999)

The Court of Appeals affirmed the decision of the RTC, thus:

We xxx concur with the trial court's ruling that the Chattel Mortgage contract being a
contract of adhesion that is, one wherein a party, usually a corporation, prepares the
stipulations the contract, while the other party merely affixes his signature or his
"adhesion" thereto xxx - is to be strictly construed against appellant bank which prepared
the form Contract xxx. Hence xxx paragraph 11 of the Chattel Mortgage contract
[containing the acceleration clause] should be construed to cover only deliberate and
advertent failure on the part of the mortgagor to pay an amortization as it became due in
line with the consistent holding of the Supreme Court construing obscurities and
ambiguities in the restrictive sense against the drafter thereof xxx in the light of Article
1377 of the Civil Code.

Article 1377 of the Civil Code states that: “The interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the obscurity.”

The terms of paragraph 11 of the Chattel Mortgage Contract states:

‘11. In case the MORTGAGOR fails to pay any of the installments, or to pay the interest
that may be due as provided in the said promissory note, the whole amount remaining

INTERPRETATION OF CONTRACTS 10
unpaid therein shall immediately become due and payable and the mortgage on the
property (ies) herein-above described may be foreclosed by the MORTGAGEE, or the
MORTGAGEE may take any other legal action to enforce collection of the obligation
hereby secured, and in either case the MORTGAGOR further agrees to pay the
MORTGAGEE an additional sum of 25% of the principal due and unpaid, as liquidated
damages, which said sum shall become part thereof. The MORTGAGOR hereby waives
reimbursement of the amount heretofore paid by him/it to the MORTGAGEE.

The above terms leave no room for construction. All that is required is the application
thereof. (Rcbc vs. Ca G.R. No. 133107 March 25, 1999)’

It bears stressing that a contract of adhesion is just as binding as ordinary contracts.

There are occasion when such contracts were struck down as void when the weaker
party is imposed upon in dealing with the dominant bargaining party and is reduced to
the alternative of taking it or leaving it, completely deprived of the opportunity to bargain
on equal footing. Nevertheless, contracts of adhesion are not invalid per se; they are not
entirely prohibited. The one who adheres to the contract is in reality free to reject it
entirely; if he adheres, he gives his consent.

While ambiguities in a contract of adhesion are to be construed against the party that
prepared the same, this rule applies only if the stipulations in such contract are obscure
or ambiguous. If the terms thereof are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control. In the latter case,
there would be no need for construction.

(https://www.digest.ph/decisions/rcbc-vs-ca-1)

G. How to interpret a contract when it is impossible to settle doubts by the rules

above in gratuitous contracts?

In case of doubts on the incidental circumstances of the contract, and the contract is
gratuitous, the least transmissible of rights and interest shall prevail.

E.g.: A pacto de retro sale should be interpreted as providing for the least transmissible
of rights. The construction favoring the right to redeem should be adopted which right is
considered a natural right.

In the case of “Gacos vs. Court of Appeals GR Nos. 85962-63 Aug 3, 1992” , the
heirs of Petrona Gacos, namely, Leonora, Solomon, Constantino, Jr. and Benjamin, all
surnamed Briones, executed a "Deed of Extra-judicial Settlement" (Exh."D"-1008)
adjudicating onto themselves the 1/3 undivided portion of the 2,242 square meters of
their mother's share of inheritance from Eladio Gacos after Leonora G. Briones was
informed in 1972 by her aunt, Lucia, that a portion of the land had been sold to
Encarnacion Gacos although Rosario Gacos appeared in the deed of sale as the vendee,
and that a ricemill had been constructed on the land. In the same document, they
constituted and appointed their cousin, Jesus G. Gabito, as their attorney-in-fact to do for
and in their behalf whatever necessary anent the said land in Irosin, Sorsogon.

Gacos, petitioners in this case, argued that their continued possession in good faith and
in the concept of an owner with just title over the disputed property which includes that of
their predecessors-in-interest, Rosario Gacos, for 27 years ripened into ownership by
acquisitive prescription. Possession, under the Civil Code, to constitute the foundation of
a prescriptive right, must be possession under claim of title (en concepto de dueno) or it
must be adverse (Cuayong vs. Benedicto, 37 Phil. 783). Acts of possessory character
performed by one who holds by mere tolerance of the owner are clearly not "en concepto
de dueno," and such possessory acts, no matter how long so continued, do not start the

INTERPRETATION OF CONTRACTS 11
running of the period of prescription (Manila Electric Company vs. IAC, G.R. No. 71393,
June 28, 1989).

Even under ordinary acquisitive prescription of immovables and other real rights through
adverse possession of 10 years, the possession of petitioners' predecessors-in-interest
of the unsold portion of 1,159 square meters cannot be characterized as adverse
possession in good faith. As found by the trial court and the appellate court, as early as
April 26, 1949, petitioners' predecessors-in-interest, Rosario Gacos, knew and
recognized the sale on February 22, 1949 by Lucia Gacos to Teodolfo Mendones of the
eastern portion (Lot No. 2452) of the hereditary estate of Petrona Gacos reportedly
containing an area of 84 square meters. In the "Escritura de Venta con Pacto de Retro"
dated April 26, 1949 (Exh."BB"-1008; Exh. "26"-1049) between Lucia Gacos and Rosario
Gacos involving the share of Lucia Gacos, Teodolfo Mendones is mentioned as the
boundary owner on the south. In fact, Encarnacion Prieto, mother of petitioners, signed
as a witness in the said pacto de retro sale, thus impliedly recognizing the ownership of
the lot involved in Civil Case No. 1049.

If the entire hereditary share of Petrona was sold on March 13, 1948, as asserted by
petitioners, the eastern portion (Lot 2452) of her hereditary estate involved in Civil Case
No. 1049 could not have been sold to Teodolfo Mendones on February 22, 1949.
Petitioners never raised any objection on the exercise of Teodolfo Mendones of his
dominical rights over the said eastern portion when the latter mortgaged the land as a
collateral for a loan with the Rural Bank of Bulan, Inc. which was discharged and
released on April 15, 1975. Earlier, or on July 7, 1972, Teodolfo Mendones even leased
the 84 square meter land to Jesus Gabito (Exh "W"-1008; Exh. "21"-1049) who, on May
21, 1975, bought the same from Teodolfo Mendones (Exh. "X"-1008; Exh. "22"-1049).
For their part, the spouses Gabito constructed a residential house thereon and declared
the land under Tax Declaration No. 7371 (Exh. "EE"-1008; Exh. "29"-1049). There was
even a fence constructed by Marcial Olaybal separating the property he bought from that
of Petrona Gacos (p. 7, Court of Appeal decision, pp. 49-63, Rollo).

The Court applied instead the provisions found in Article 1372 (formerly Art. 1283) and
Article 1378 (formerly Art. 1289) of the New Civil Code, thus:

"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.

"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 ransmission of rights and
interests shall prevail. If the contract is onerous, the doubt shall be settled in favor
of the greatest reciprocity of interest."

The Court finds the above quoted articles applicable in the instant case. It must be
observed that the "Escritura de Venta Absoluta" was consummated in favor of a close
relative, a nephew-in-law (Marcial Olaybal) of Petrona Gacos, he being married to the
daughter of her sister Fortunata Gacos-Cambal. Thus, in accordance with Article 1378 of
the Civil Code, said contract should be interpreted as "to effect the least possible
transmission of rights or interests." Besides, Petrona Gacos could not have sold her
entire hereditary share as she and her four (4) minor children were then staying in the
disputed land with her sister Lucia.

(http://lawyerly.ph/juris/view/c76d6)

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H. How to interpret a contract when it is impossible to settle doubts by the rules
above in onerous contracts?

If Articles 1370 to 1377 cannot apply, this article will be considered as the last resort.

In case of doubts on the incidental circumstances of the contract, and the contract is
onerous, the doubt shall be construed in favor of the greatest reciprocity of interests.

E.g.: When there is doubt as to whether the contract is a loan or a sale, to hold that the
land was conveyed as security for a loan would afford greater reciprocity of interest.

If there is doubt on the principal object of the contract and it cannot be determined what
might have been the intention or will of the contracting parties, the contract shall be void.
(Article 1409, par. 6)
(https://lspuoblicon2015.wordpress.com/2016/03/25/article-1378-2/)

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