5STUDY GUIDE

Chapter 5 – Interpretation of Contracts

A. True or False (Explain briefly your answer citing the legal basis thereof)

1. A contract provision is ambiguous if it is susceptible of two reasonable alternative

interpretations.
2. It is a cardinal rule in the interpretation of the contracts that the intention of the parties shall be
accorded secondary consideration.
3. In order to judge the interpretation of the contracting parties, only their preceding acts shall be
principally considered.
4. The denomination given by the parties in their contract is conclusive of the nature of the
contents.
5. The provision of the contract should not be read in isolation from the rest of the instrument.
6. It is a cardinal rule in contract interpretation that the ascertainment of the intention of the
contracting parties is to be discharged by looking to the words they used to project that
intention in their contract, that is, all the words, not just a particular word or two, and words in
context, not words standing alone.
7. 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.
8. 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.
9. The interpretation of obscure words or stipulations in a contract shall favour the party who
caused the obscurity.
10. When it is absolutely impossible to settle doubts, and the doubt refer to incidental
circumstances of a gratuitous contract, the least transmission of rights and interests shall
prevail.

B. Multiple Choice Questions (Explain briefly your answer citing the legal basis thereof)

1. Is the act of making intelligible what was before no understood, ambiguous or not obvious.
a. Annulment
b. Reformation
c. Ratification
d. Interpretation
2. Z Corp. is a government-owned and controlled corporation. It is engaged in the business of mass
media communications.
X was appointed by V, the general manager then of Z Corp., as marketing manager with
a monthly compensation of Php20,000 plus 1% commission from collections of all advertising
contracts consummated. After more than a year, in a letter signed by Q, at that time the
 president of Z Corp., X was terminated from his position without just or authorized cause. He
was already 64 years old.
X filed a complaint where he alleged that after his appointment, he was able to increase
the televiewing, listening and audience ratings of Z Corp. which resulted in its improved
competitive financial strength.
Specifically, he claimed that he successfully initiated, pursued and consummated an
advertising contract with F Corp. for a period of 5 years involving the amount of Php600 million.
Can X continue to receive the commission indefinitely?
a. No. Doubts in contract should be settled in favour of X.
b. No. The stipulation providing for commissions would not be burdensome if interpreted
to mean that X had a right to it even after his employment with Z Corp.
c. No. X’s right to the commission was coterminous with his employment with Z Corp. and
this ended when he reached the compulsory retirement age. Doubts in contract should
be settled in favour of the greatest reciprocity of interests.
d. No. X is entitled only up to the time he reached 70 years old.
3. Is the determination of the meaning attached to the words written or spoken which make the
contract.
a. Annulment
b. Reformation
c. Ratification
d. Interpretation
4. The intent of the parties to an instrument is “embodied in the writing itself, and when the words
are clear and unambiguous the intent is to be discovered only from the express language of the
agreement.”
a. Plain meaning rule
b. Four courners rule
c. Ambiguity rule
d. Reformation rule
5. A “DEED OF DONATION INTER VIVOS” was executed by X. It named as donees her grandchildren,
namely: A, B and C. X however retained the owner’s duplicate copy of the new title, as well as
the property itself, until she transferred the same 10 years later.
On March 12, 1987, X drew up a deed of revocation of the donation. Then, she filed a petition
for the cancelation of the new title and the reinstatement of the old title. Her petition was
founded on the theory that the donation to her 3 grandchildren was one mortis causa which
thus had to comply with the formalities of a will; and since it had not, the donation was void.
The donees (X’s grandchildren) opposed the petition. In their opposition, they averred that the
donation in their favour was one inter vivos; hence, valid.
a. The donation was inter vivos because X’s grandchildren did not get possession of the
property donated.
b. The donation was inter vivos because they did not acquire the right to the fruits thereof,
or any other right of dominion over the property.
 c. The donation is in truth one mortis causa; it is valid because the essential requisites for
its validity are present.
d. The donation in question, though denominated inter vivos ,is in truth one mortis causa
because in case of doubt relative to a gratuitous contract, the construction must be that
entailing “the least transmission of rights and interests.”
6. A principle which allows courts in some cases to search beneath the semantic surfaces for clues
to meaning.
a. Plain meaning rule
b. Four courners rule
c. Ambiguity rule
d. Reformation rule
7. An accessory contract must be read in its entirety and together with the principal agreement.
a. No-segregation principle
b. No-ambiguity principle
c. Not clear principle
d. No-interpretation principle
8. X filed a complaint against Y, Inc. the complaint alleged that sometime in 1987, X signed a
Marketing Agreement to act as an agent of Y, Inc. As agent, X claimed that she obtained certain
contracts on behalf of Y, Inc. and in remuneration for her services, she was to be paid 10%
commission for the said projects. X claimed that y, Inc. defaulted in the payment of her
commission for the contracts with C and D Hotel.
In its Answer, Y, Inc. asserted that X was not entitled to receive commissions for C and D
Hotel projects on the ground that those projects were “construction contracts” while their
Marketing Agreement spoke only of the sale of Y Inc.’s products.
X maintained that the identification, “solicitation, finding or introduction for negotiation
of buyers, dealers and customers” for Y Inc.’s product as stated in the agreement is an
encompassing term as to include the solicitation of interior construction projects. Are the
construction projects solicited by X for Y, Inc. outside the coverage of the Marketing
Agreement?
a. The construction projects solicited by X from Y, Inc. were outside of the coverage of the
Marketing Agreement.
b. X’s commission under the Marketing Agreement was to be paid not only for the
products sold or supplied by Y, Inc. but also for services rendered by the latter.
c. C and D Hotel projects were “interior construction” projects and included in the phrase
“contracts for sale or supply of Y, Inc. products”
d. The construction projects solicited by X for Y, Inc. may be included in the coverage of
the Marketing Agreement.
9. Z Bank filed a complaint against A, B and X Corp. for the collection of a deficiency amounting
Php4,014,2979. Z bank alleged therein that A, B and X Corporation obtained a loan from it and
executed a continuing surety agreement (SA) in favour of Z bank for all loans, credits, etc., that
were extended or may be extended in the future of A, B and X Corp. It was expressly stipulated
therein that the venue for any legal action that may arise out of said promissory note (PN) shall
 be Makati City, ‘to the exclusion of all other courts’. A, B and X Corp. allegedly failed to pay said
obligation upon maturity. A, B and X Corp. moved to dismiss the complaint on the ground of
improper venue. Is the action against the sureties covered by the restriction on venue stipulated
in the promissory note?
a. No, although an accessory contract must be read in its entirety and together with the
principal agreement.
b. Yes, 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.
c. No, because the PN was a contract of adhesion that Z bank required the principal debtor
to execute as a condition of the approval of the loan.
d. Yes, because Z bank approved the loan covered by the PN, wholly because of the SA that
assured the payment of the principal obligation.
10. On January 1, 2015, V, Inc., and X Corp., entered into a CONSULTANCY AGREEMENT by virtue of
which the former obligated itself to render medical services to the employees of X Corp. The
said service contract stipulated, among others: “That this AGREEMENT takes effect on January 1,
1985 up to December 31, 1985, provided however, that either party who desires to terminate
the contract may serve the other party a written notice at least 30 days in advance.”
On December 16, 1985, V, Inc., wrote X Corp., to inform that she was assuming from their
silence that the subject Agreement was renewed from January 1, 2016 to December 31, 2016. In
her Reply-letter, dated December 23, 2015, X Corp. notified V, Inc., of the termination of the
contract in question upon its expiration on December 31, 2015. But such letter-reply was
formally and actually received by V, Inc. only on January 9, 2016. Is the 1985 consultancy
agreement deemed renewed for another term?
a. No, because there is no implied renewal of a consultancy agreement.
b. Yes, because the second clause of the contractual provision in dispute is to the effect
that written notice of termination should be served at least 30 days in advance.
c. No, because there was a Reply-letter dated December 23, 2015 which is within the year
2015.
d. Yes, because the Reply-letter was received only on January 9, 2016 under the cognition
theory.