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.
Literal meaning controls when language is clear.
Valid and enforceable contracts, being the private laws of the contracting parties, should
be fulfilled according to the literal sense of their stipulations as they appear on the face of
the contract. The words used thereon should be given their natural and ordinary meaning
unless a technical meaning was intended.

Evident intention of parties prevails over terms of the contract:

When the words of a contract are clear and readily understandable, there is no room for
construction
Such words are to be understood literally, just as they appear on the fact of the contract,
However where the words and clauses of a written contract appear to conflict or contravene the
manifest intention of the parties, the lattes shall prevail over the former.

Illustration:
(1) S sold to B a parcel of land. It is not disputed that the reasonable value of the land is
P50,000. However, the contract of sale states that the purchase price is P500,000.
In this case, as the amount of P500,000 appears to be contrary to the evident intention of
the parties, the latter shall prevail.

Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered.
Contemporaneous and subsequent acts to be principally considered:
While intentions involve a state of mind which may sometimes be difficult to decipher, the acts
of the parties as well as the evidentiary facts as proved and admitted can be reflective of one’s
intention. (Sarming vs Dy, 383 SCRA 131 [2002]).
Antecedent circumstances relevant in determination of intention:
Although Article 1371 speaks of acts contemporaneous and subsequent to the celebration of the
contract, antecedent circumstances under which it was made may also be considered.
It is well-settled that in construing a writing, particularly a written agreement, the reason behind
and the circumstances surrounding its execution are of paramount importance to place the
interpreter in the situation occupied by the parties concerned at the time the writing was
executed.

Illustration:
Manila Electric Co. vs Board of Public Utility Commissioners, 30 Phil 387 [19150
Facts: Under a franchise which is in the nature of a contract granted by the City of Manila for the
construction and maintenance of a street railway system, employees of the police and fire
departments of the city shall be entitled to ride free upon the Meralco cars. For 9 years, the
parties had understood the provision giving the privilege of free ride as granted only to those
wearing official badges visible during the period of transportation.
Subsequently, he city secured an order from the Public Utility Commission an order requiring
the Meralco to vie the same privilege to city detectives who did not wear their badges visibly.
Issue: In the light of the conduct of the parties during the period of 9 years, as the interpretation
given to the provision correct?
Held:
No. The construction placed by the parties to the contract on the clause under consideration must
exert a powerful influence in the determination of the question presented. The construction
adopted by the Commission was diametrically opposed to that which the parties have placed
thereon for so long a time

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.

Special intent prevails over a general intent:

As a rule, where in a contract there are general and special provisions covering the
samew subject matter are inconsistent, the latter shall be paramount to and control over the
former when the two cannot stand together.
The reason for this rule is that when the parties express themselves in reference to a
particular matter, the attention is directed to that, and it must be assumed that it expresses their
intent; whereas, a reference to some general matter within which the particular matter may be
included, does not necessarily indicate that the parties had that particular matter in mind
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.

Interpretation of stipulation with several meanings:

When an agreement is susceptible of several meanings, one of which would render it effectual, it
should be given that interpretation. Thus, if one interpretation makes a contract valid or effective
an the other makes it illegal or meaningless, the former interpretation is one which is warranted
by the rule stated in Article 1373.

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.

Interpretation of various stipulations/separate writings of a contract:

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 other related provisions. It is a canon of
statutory construction that the whole and every part of the statute must be considered in fixing
the meaning of any of its parts and in order to produce a harmonious rule. This is also the
injunction in Article 1374.

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.

Interpretation of words with different significations:

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.

Illustration:
R leased to E a roof for the purpose of erecting an advertising sign. The contract provides for the
termination of the lease by E if a building should be constructed on an adjoining property of such
height as to obscure the view of E’s sign. There was erected on the roof of an adjoining building
a sign which obstructed the view of E’s sign.
In this case, the term building as the term is used in the contract may be interpreted to include
the obstructing sign having in mind the nature and object of the contract.
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.

Resort to usage or custom as aid in interpretation:

The usage or custom of the place where the contract was entered into and 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.
Courts take no judicial notice of custom. It is therefore necessary to prove the existence of usage
or custom like any other fact according to the rules of evidence, the burden of proof being upon
the party alleging it. But usage or custom is not admissible to supersede or vary the plain terms
of a contract. That which is agreed upon in a contract in the law between the contracting parties
provided it is not contrary to law, morals, good customs, public order or public policy.
Illustration:
X rendered services to Y but the contract did not provide for the amount of compensation to be
paid.
In this case, the amount must be determined by the rate customarily paid in the place where the
services were rendered.

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

Interpretation of obscure words:

A written agreement should, in case of doubt or ambiguity, be taken contra preferentum, i.e., be
interpreted strictly against the party who has drawin it, or be given an interpretation which will
be favorable to the other who, upon the faith of which has incurred an obligation.

Illustration:
Thus, one who prepared the contract which states: “Terms: Cash upon signing of this contract,”
cannot deny that the agreement was a cash transaction
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)
Rules in case doubts are impossible to settle:
When despite the application of the preceding rules (Arts. 1370-1377), certain doubts still exist,
such doubts shall be resolved in accordance with the supplementary rules stated in the present
article.

Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall
likewise be observed in the construction of contracts.
Principles of interpretation in the Rules of Court applicable:
The rules in the Rules of Court on the interpretation of documents are now contained in Rule
130, Sections 10 to 19. The rules may be summarized as follows:
(1) The language of a writing shall have the legal meaning it bears in the place of execution,
unless the parties intended otherwise.
(2) An instrument with several provisions or particulars shall be construed so as to give
effect to all.
(3) In case of conflict between a general and a particular provision, the latter shall prevail; so
a particular intent will control a general one that is inconsistent with it.
(4) The circumstances under which the instrument was made including the situation of the
subject thereof and of the parties to it, may be considered in its interpretation.
(5) Terms are presumed to have been used in their ordinary and generally accepted meaning
unless intended to have been used in a different sense.
(6) In case of conflict, the written words prevail over the printed form.
(7) Experts and interpreters may be asked to declare the characters or the meaning of the
language when such characters are difficult to decipher or the language is not understood
by the court.
(8) Of two constructions, that sense is to prevail against the party in which he understood it
or which is most favorable to the party in whose favor the provision was made.
(9) Of two constructions, one in favor and the other against natural right, the former is to be
adopted.
(10) Usage may be the basis to determine the true character of an instrument.
Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law.
Rescission is a process designated to render inefficacious a contract validly entered into and
normally binding, by reason of external conditions, causing an economic prejudice to a party or
to his creditors.

Requisites for Rescission:

a. There must be at the beginning either a valid or a voidable contract;
b. But there is an economic or financial prejudice to someone ( a party or a third person);
c. Requires mutual restitution.
d.
Two kinds of Rescission:
a. The rescission mentioned in Art. 1380 of the New Civil Code. This is properly called
rescission
b. The rescission mentioned in Art, 1191 of the New Civil Code.