Interpretation of Contracts

1370-1379
 INTERPRETATION OF CONTRACTS:
Primacy of Intention: Words ought to be subservient to the intent, not the intent to the
word. “Verba intentione non e contradebent inservare.” Look of the contractual intent.

1370 If the terms are clear without any doubt, the literal meaning shall control.

How to determine Intention:

1371 by contemporaneous and subsequent acts; usage and customs of the place:

Ex. A and B entered into a contract entitled Contract of Lease referring to A as lessor and B as Lessee. It
states that possession and ownership of the land are transferred to B. The title to the land was given
by A to B who registered the land in his name. Before the date of the contract, B wrote a letter to A
offering to buy the land. By their acts, the parties clearly indicate that their evident intention is to
make B the owner of the land. Hence, the contract should be interpreted as one of Sale.

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: Generalia verba sunt generaliter intelligencia.”

Ex. A is building a house on a 350 sqm. lot with an existing structure that was less than 350 sqm. in
area. B protested alleging that A could occupy ONLY the space where the existing structure lies. A
argued that according to their agreement, he could occupy the lot. B’s interpretation is erroneous
because if that was the intention, they could have used the words “portion” or “part” and not the
word “lot.”
1373: When it contains stipulations that admit several meanings most adequate to render
it effectual.

Ex. A owns two lands, one he owns exclusively and one he co-owns with B. Without specifying the
portions, A sells “his parcel of land” to X. B did not give his consent to the sale. In this case, the sale
should refer to the land owned by A alone as this would make the contract effectual.

1374 when it contains various stipulations, some are doubtful which may result from all
of them taken jointly

Ex. BPI vs. TY Camco Sobrino et. al. G.R. No. L-36524. February 6, 1933:Ty Camco is the registered
owner of two parcels of land situated in the municipality of Rosario, Province of Pangasinan, described
in TCT Nos. 1803 and 1804. On April 12, 1924 Ty Camco executed a deed of first mortgage on these
parcels of land in favor of the PNB and the mortgage was noted on the back of the TCTS. On February
21, 1930, Ty Camco executed a deed of second mortgage on the same properties in favor of Cu Yeg
Keng and Simon A. Chan Bona, without having secured the written consent of the PNB. The mortgagor
obtained the TCTS from this bank. The register of deeds for Pangasinan registered and noted on the TCT
Nos. 1803 ad 1804 the second mortgage. On April 14, 1931, the PNB filed in the CFI of Pangasinan, a
petition praying that the annotation or inscription of the second mortgage be declared null and void,
and ordered cancelled. Whether or not that the 2nd mortgage is valid in favor of the appellees?
SC: The mortgage contract should be read in its entirely. If so read, it is at once seen that while the
making of the 2nd mortgage except with the written consent of the mortgage is prohibited , the
contract continues and states the penalty for such violation namely, it gives to the mortgage the right
immediately foreclose mortgage. It does not give the mortgages the right to treat the second mortgage
as null and void.
1375: when it contains words with different significations, most keeping with the nature
and object of the contract.

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

1376: when it contains ambiguities and omission of stipulations - usage of customs of the
place

Ex. A entered into 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.

Arroyo vs Azur: 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.

What Proof is Needed (HOW): If the customs and usages are general, they need not be
pleaded. Hence, even without previously being alleged, they may be proved in court.
1377: shall not favor the party who caused the obscurity; In contract of adhesions, it
favors the one who merely adhered to it.

Landicho vs. GSIS, 44 SCRA 7:

A provision in the application for insurance with the GSIS states this condition: “That any
policy shall be made effective on the first day of the month next following the month the
first premium is paid.” Another provision states: “That failure to deduct from my salary
the monthly premiums shall not make that policy lapse,” and that, “the premium account
shall be considered as indebtedness which I bind myself to pay the System.”

A, an employee of the Bureau of Public Works died in an airplane crash. It appears,

however, that the Bureau had not remitted to GSIS even a single premium.

SC: The insurance took effect. The ambiguity created by the operation of the conditions
stated in the application should be interpreted adversely against the GSIS.
1378: when absolutely impossible to settle the doubt of the above: 1378 par.1:
(a) incidental circumstances of gratuitous contract, the least transmission of rights and
interest shall prevail;

Ex. A gave her car to B. It is not clear in the contract whether it is commodatum or a pure donation.
The Contract should be presumed as a mere commodatum because it would transmit lesser rights
than a donation since A retains ownership of her car.

(b) onerous contracts settled in favor of the greatest reciprocity of interest

Ex. A borrowed from B PhP10,000.00 at 12% interest. It cannot be determined from the terms of
contract whether the loan is payable in six months or in one year. It must be assumed that the period
agreed upon is one year which results in a greater reciprocity of interests since A can use the money
for one year, and B, on the other hand, can earn interest due for one year instead of only six months.

If the doubt refers to the principal object of the contract and such doubt cannot be
resolved thereby leaving the intention of the parties unknown, the contract shall be null
and void.

Ex. sold her land to B. A has many lands. It cannot be determined which land was intended by the
parties to be the subject of the sale. Therefore, the contract shall be null and void and it is as if the
parties have not entered into any contract at all.
Fernando Gaite vs Isabelo Fonacier et. al. G.R. No. L-11827 July 31, 1961:
The Agreement stated”.. “TEN THOUSAND PESOS (P10,000.00) will be paid upon the signing
of this agreement. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000.00) will be paid
from and out of the first letter of credit covering the first shipment of iron ore made by the
Larap Mines & Smelting Co., Inc., its assigns, administrators, or successors in interest.”
Issue: suspensive condition or suspensive term/period?

SC: We find the court below to be legally correct in holding that the shipment or local sale of the
iron ore is not a condition precedent (or suspensive) to the payment of the balance of P65,000.00,
but was only a suspensive period or term. What characterizes a conditional obligation is the fact
that its efficacy or obligatory force (as distinguished from its demandability) is subordinated to the
happening of a future and uncertain event; so that if the suspensive condition does not take place,
the parties would stand as if the conditional obligation had never existed.

Assuming that there could be doubt whether by the wording of the contract the parties indented a
suspensive condition or a suspensive period (dies ad quem) for the payment of the P65,000.00, the
rules of interpretation would incline the scales in favor of “the greater reciprocity of interests”, since
sale is essentially onerous. The Civil Code of the Philippines, Article 1378, paragraph 1, in fine,
provides:
If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.
and there can be no question that greater reciprocity obtains if the buyer’ obligation is deemed to
be actually existing, with only its maturity (due date) postponed or deferred, that if such obligation
were viewed as non-existent or not binding until the ore was sold.

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
RULES ON DOUBTS (1378)
Gratuitous Contracts Onerous Contracts
Absolutely impossible to Absolutely impossible to
settle doubts by the rules settle doubts by the rules
and only refer to and only refer to
incidental circumstances, incidental circumstances,
the LEAST TRANSMISSION the doubt shall be settled
OF RIGHTS AND IN THE FAVOR OF THE
INTERESTS SHALL PREVAIL GREATEST RECEPROCITY
OF INTERESTS.