GORDON COLLEGE

OLONGAPO CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY
BACHELOR OF SCIENCE IN ACCOUNTANCY

FIRST SEMESTER, 2017-2018

CHAPTER 5
INTERPRETATION OF CONTRACTS

LAW301 – Obligations and Contracts

SUBMITTED BY:
GROUP IV
ARANAS, MIKEE
DIVINO. RHOMELYN
ENRICO, MONICA JEAN
ESMEDILLA, GEONARD
SALAZAR, KATHLYN JOY

BSA III-B

SUBMITTED TO:
ATTY. APRIL JOY MAGSAYO-AGUILA
INSTRUCTOR-LAW301

NOVEMBER 23, 2017

 CHAPTER 5
INTERPRETATION OF CONTRACTS

WHAT IS INTERPRETATION?

Article 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.

Interpretation - is the act of making intelligible what was before not understood,
ambiguous, or not obvious.

Interpretation of a Contract - is the determination of the meaning of terms or words used

by the parties in their contract.

 There is no need for interpretation if the terms of a contract are clear and
leave no doubt upon the intention of the contracting parties.
 The evident intention of the parties shall prevail if there is a conflict between
such intention and the words.

Plain Meaning Rule and Four Corners Rule

Plain Meaning Rule – intent of the parties to an instrument is “embodied in the writing
itself”
 Applied by Pennsylvania Courts, which assumes that the intention of the
parties to an instrument is “embodied in the writing itself, and the intention
is only discovered only from the express language”.

Four Corners Rule – allows courts in some cases to search beneath the semantic surface
for clues to meaning.

 A contract provision is ambiguous.

- If it is susceptible of two reasonable alternative interpretations.
- The interpretation of the contract is left to the court.

Intention of the parties shall be accepted primordial consideration.

In Bautista vs. Court Appeals:

The rule is that where the language of a contract is plain and unambiguous, its
meaning should be determined without reference to extrinsic facts or aids.

 Intention of the parties must be gathered from that language and from that
language alone which was used by the contracting parties
  Where the language of a written contract is clear and unambiguous, the
contract must be taken to mean that which, on its face, it purports to mean,
unless some good reason can be assigned to show that the word should be
understood in a different sense.

HOW TO DETERMINE INTENTION?

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

Intention of the Parties

The Supreme Court has consistently decreed that the nomenclature used by the
contracting parties to describe a contract does not determine its nature. The decisive
factor is their intention – as shown by their conduct, words, actions and deeds – prior to,
during, and immediately after executing the agreement.
 contracts are respected as the law between the contracting parties.
 element intention is deemed as an integral part of the contract.
 When we say contemporaneous this will occur in the same period of time and
the subsequent acts is the one which following in time or order of the acts of
the contracting parties.

Practical Construction by their Conduct.

 As by acts in partial performance, such construction may be considered by
court in
construing the contract.
 Characterized as a due or index to, or as evidence of their intention or meaning
 As shown, not necessarily by the terminology used in the contract but by their
conduct, words, actions and deeds.

Determining the Nature of a Contract

 The intention of the parties is decisive factor in evaluating an agreement.
 Contemporaneous and subsequent acts should be considered.
 Legal presumption is always on the validity of contract.

Article 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.

As a rule, where in a contract there are general and special provisions covering the
same subject matter, the latter control over the former when the 2 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

HOW TO INTERPRET A CONTRACT?

1. When it contains stipulations that admit of several meanings,
Article 1373: If some stipulations of any contract should admit of several meanings,
it shall be understood as bearing that import which is most adequate to render it
effectual.

There are some instances that the word or stipulation of a contract has
susceptible meaning. In that case one of which would render it effectual it should
give that interpretation. So if one interpretation makes the contract valid and the other
makes it illegal, the former interpretation is warranted.

2. When it contains various stipulations, some of which are doubtful,

Article 1374: The various stipulations of a contract hall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them taken
jointly.

Contract interpret as a whole

The whole contract should be considered together. Words, phrases or clauses
cannot be segregated and given a meaning which is contrary to the terms of contract.
The whole contract must be interpreted or read together in order to arrive at its true
meaning.

Complementary-contracts-construed-together Doctrine or No-segregation

Principle
According to this principle, an accessory contract must be read in its entirety
and together with the principal agreement. This principle is used in construing
contractual stipulations in order to arrive at their true meaning; certain stipulations
cannot be segregated and then made to control.

3. When it contains words that have different significations,

Article 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.

Words with different significations

Words with different meanings shall be interpreted in the sense which may be
most in keeping with the nature and object of the contract. The doubt as to the meaning
of a particular word should be determined by considering the general slope and purpose
of the instrument.
4. When it contains ambiguities and omission of stipulations,
Article 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.

The usage or custom of the place where the contract was entered into may be
receive 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.

5. With respect to the party who caused the obscurity,

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

A written agreement should, in case of doubt, be interpreted against the party

who has drawn it or given an interpretation which will be favorable to the other who,
upon the faith of which, has incurred in obligation.

The reason for the rule in Article 1377 is that the party who drafted the contract,
more easily than the other, could have prevented mistakes or ambiguity in meaning by
careful choice of words or by the exercise of a little more care; and generally, the party
who causes the obscurity acts with ulterior motives.
 Contracts of adhesion-resolved against the party who prepared the
contract and in favor of the one who merely adhered to it.

6. When it is absolutely impossible to settle doubts by the rules above,

Article 1378: When it is absolutely impossible to settle doubts by the rules established
in the preceding articles, and the doubt 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.

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 Article 1378.

1. If the doubt refers to incidental circumstances of a gratuitous contract, such

interpretation should be made which would result in the least transmissible of
rights and interests.

 Gratuitous Contract - it is contract in which one party promises to do

something without receiving anything in
exchange.
 2. If the contract in question is onerous, the doubts should be settled in favor of the
greatest reciprocity of interest.

 Onerous contract - are those contracts in which the costs involved

with fulfilling the terms and conditions of the
contract are higher when compared to the amount of
economic benefit received.

A contract of sale is essentially onerous. Whether the parties intended a

suspensive condition or suspensive period for the payment of the agreed price, the
doubt shall be resolved in favor of the latter that is the buyer's obligation is deemed
to be actually subsisting, with only its maturity postponed or deferred.

3. 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.
 Principal object of the contract - it is which has been contracted
between the parties.

7. When the doubts are cast upon the principal objects so that the intention cannot
be known,
Article 1379: The principles of interpretation stated in Rule 124 of the Rules of Court
shall likewise be observed in the construction of contracts.

The rules in the Rules of Court on the interpretation of documents are now
contained in Rule 130, Sections 10 to 19.
 Rules of Court - a set of procedural regulations adopted by courts
which are mandatory upon parties and their lawyers
on matters within the jurisdiction of those courts.
 Rule 130 - which is also called “Rules of Admissibility"
 Admissibility - a term used to describe information that is relevant to
a determination of issues in any judicial proceeding
so that such information can be properly considered
by a judge or jury in making a decision.
 SOURCE: (REVISED RULES OF EVIDENCE; RULES 128 TO 134,
RULES OF COURT; July 1, 1989), as amended per resolution adopted
on March 14, 1989.
 RULE 130
RULES OF ADMISSIBILITY
(INTERPRETATION OF DOCUMENTS)

Section 10. 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. The several provisions or stipulations of an instrument shall be

interpreted so as to give effect to all if possible.

Section 12. The interpretation of 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. 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. 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. The written words shall prevail over the printed form in case of
inconsistency.

Section 16. 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. The interpretation of the terms that have been intended in a different
meaning by both parties shall be against the party who understood it.

Section 18. 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. The interpretation shall be according to usage.