OBLIGATIONS AND CONTRACTS​｜ATTY.
BATHAN-LASCO｜​CONTRACTS SAMPLE PROBLEMS
CONTRACTS
REFORMATION
ART. 1359 - When, there having been a
meeting of the minds of the parties to a
contract, their true intention is not
expressed in the instrument purporting to
embody the agreement, by reason of
mistake, fraud, inequitable conduct or
accident, one of the parties may ask for the
reformation of the instrument to the end
that such true intention may be expressed.
If mistake, fraud, inequitable conduct, or
accident has prevented a meeting of the
minds of the parties, the proper remedy is
not reformation of the instrument but
annulment of the contract.
EXAMPLES:
(1) Reformation v. Annulment. If the seller
was selling for P1,000,000 but the buyer
thought he was buying for P500,000 and the
contract states P1,000,000, there has been no
meeting of the minds and the remedy is
annulment; but if both agreed on P500,000
and the contract as written states P1,000,000,
the remedy is reformation, because here,
there has been a meeting of the minds.
What constitutes inequitable conduct.
Inequitable conduct, t​ o warrant relief by way
of reformation, has been held to consist in
doing acts, or omitting to do acts, which the
court finds to be unconscionable. ​Examples
are​:
(1) Taking advantage by one party of the
other party’s illiteracy; (2) abusing
confidence;
(3) concealing what of right should have been
disclosed;
(4) drafting or having drafted an instrument
contrary to the previous understanding of the
parties and making the other party to believe
the instrument other than it actually is; or
(5) in taking advantage of a mistake of the
other party, known or suspected at the time
of the execution of the instrument. (see 53 C.J.
950-952.)
EXAMPLE:
S sold his land to B. It was agreed that the sale
will include all the improvements. However,
the contract as signed by the parties, states
that the land is being sold, excluding the
improvements thereon.
In this case, the remedy is reformation
because there has been a meeting of the
minds. But if S was selling his land
“excluding” the improvements and B was
buying the land “including” the
improvements, then there has been no
meeting of the minds and the remedy,
therefore, is annulment. Reformation cannot
be the remedy because, either way, it would
not make the instrument express the real
intention of both parties.
ART. 1360 - The principles of the general
law on the reformation of instruments are
hereby adopted insofar as they are not in
confl ict with the provisions of this Code.
ART. 1361 - When a mutual mistake of the
parties causes the failure of the
instrument to disclose their real
agreement, said instrument may be
reformed.
EXAMPLES:
(1) Mutual mistake. A sold to B orally a house
at 16 San Isidro, Malate. In the written public
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document, both forgot the true number of the
house and instead wrote on the contract “No.
18 San Isidro, Malate.” Here, reformation of
the instrument is proper.
(2) A made a check in favor of B. C wrote in
the note “I guarantee that A will not suffer
any harm.” B now seeks to reform the
instrument saying that the note should state
“I guarantee that B will not suffer any harm”
and that the mistake was mutual. But B was
not able to satisfactorily prove that there was
such a mistake. Should the instrument be
reformed?
ANS.: No, the instrument should not be
reformed. The plaintiff Bank (B) has not
established a mutual mistake by proof of the
clearest and most satisfactory character
constituting more than a preponderance of
evidence. To justify the reformation of a
written instrument upon the ground of
mistake, the concurrence of three things are
necessary: First, that the mistake should be
of a fact; Second, that the mistake should be
proved by clear and convincing evidence; and
Third, that the mistake should be common to
both parties to the instrument (where mutual
mistake is alleged).
ART. 1362 - If one party was mistaken and
the other acted fraudulently or
inequitably in such a way that the
instrument does not show their true
intention, the former may ask for the
reformation of the instrument.
EXAMPLES:
(1) A agreed with B that A would be loaned
P10,000,000 by B. In the contract signed by A
and B, it was stated that A was selling his
house to B for said amount. A signed the
contract in the belief that it was really a
contract of loan. Who, if any, may ask for the
reformation of the instrument if B had acted
fraudulently?
ANS.: A may ask for the reformation of the
instrument because after the meeting of the
minds, one party (B) acted fraudulently or
inequitably in such a way that the contract
does not show their real intention. In such a
case, the law provides that the person who
acted by mistake may ask for the reformation
of the instrument.
ART. 1363 - When one party was mistaken
and the other knew or believed that the
instrument did not state their real
agreement, but concealed that fact from
the former, the instrument may be
reformed.
ART. 1364 - When through the ignorance,
lack of skill, negligence or bad faith on the
part of the person drafting the instrument
or of the clerk or typist, the instrument
does not express the true intention of the
parties, the courts may order that the
instrument be reformed.
ART. 1365 - If two parties agree upon the
mortgage or pledge of real or personal
property, but the instrument states that
the property is sold absolutely or with a
right of repurchase, reformation of the
instrument is proper.
EXAMPLES:
(1) B wanted to borrow from L, so he offered
by way of mortgage his land as security. Both
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parties agreed on this point but the contract
as drafted contained an absolute sale. May the
instrument be reformed?
ANS.: Yes; otherwise, the true intention of the
parties would be frustrated.
ART. 1366 - There shall be no reformation
in the following cases: (1) Simple
donations inter vivos wherein no
condition is imposed; (2) Will; (3) When
the real agreement is void.
ART. 1367 - When one of the parties has
brought an action to enforce the
instrument he cannot subsequently ask
for its reformation.
EXAMPLE:
(1) A sold B a house. A fraudulently made the
contract one of mortgage instead of sale. Both
signed the contract of mortgage, with B
believing all the time that it was a contract of
sale. B, therefore, has the right to bring an
action for the reformation of the instrument;
but if B brings an action to foreclose the
mortgage, he is by said action enforcing the
instrument. He cannot, therefore,
subsequently ask for the reformation of the
instrument to make it one of sale.
ART. 1368 - Reformation may be ordered
at the instance of either party or his
successors in interest, if the mistake was
mutual; otherwise, upon petition of the
injured party, or his heirs and assigns.
EXAMPLES:
(1) A and B agreed on a certain contract, but
A fraudulently made a document reciting
another kind of contract. Later, both A and B
died.
(a) May the son of B bring an action to
reform the instrument?
(b) May the son of A bring an action to
reform the instrument?
ANS.:
1) Yes, the son of B may bring an
action to reform the instrument
because he is the heir of the injured
party.
2) No, the son of A cannot bring a
successful action to reform the
instrument inasmuch as it was the
father who caused the fraud.
Query: But suppose the son of A wanted to
correct the fraud made by his father?
ANS.: This is all right but in such a case, no
court action is needed anymore, since both
parties can agree to reform the instrument by
themselves.
ART. 1369 - The procedure for the
reformation of instruments shall be
governed by Rules of Court to be
promulgated by the Supreme Court.
INTERPRETATION
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.
EXAMPLES:
(1) In case of confl ict between the words of
the contract and the evident intention of the
parties, which one must prevail?
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ANS.: The intention must prevail. “Let us
interpret not by the letter that killeth but by
the spirit that giveth life.” “If the words
appear to be contrary to the evident intention
of the parties, the latter shall prevail over the
former.” (2nd paragraph, Art. 1370, Civil
Code). Where the terms and provisions
thereof are clear and leave no doubt as to the
intention of the contracting parties, the literal
meaning of its stipulation shall control.
(1) For example, the provision in a contract
giving the end or the right to repurchase the
property sold “after two (2) years from and
after the execution of this contract’’ simply
means the vendor can redeem the property
after two (2) years and not that the right must
be exercised within that two-year period
from the date of the execution of the contract.
(Badayos vs. Court of Appeals, 207 SCRA 209
[1992].)
(2) In a case where the sellers declared in the
“Receipt of Down Payment’’ that they
received from the buyer “the sum of
P50,000.00 purchase price of our inherited
house and lot x x x, in the total amount of
P1,240,000.00,’’ without any reservation of
title until full payment of the entire purchase
price, the natural and ordinary idea conveyed
is that they sold their property. (Coronel vs.
Court of Appeals, 263 SCRA 15 [1996].)
(3) In another case, petitioner expressly
bound herself to “be jointly and severally or
solidarily liable’’ with the principal maker of a
promissory note. Having entered into the
contract with full knowledge of its terms and
conditions, she was held estopped to assert
that she did so under a misapprehension or in
ignorance of their legal effect, or as to the
legal effect of the undertaking. The terms of
the contract she signed are clear, explicit and
unequivocal that her liability is that of surety
and not of guarantor. (Palmares vs. Court of
Appeals, 288 SCRA 422 [1998].)
(4) The term“and/or’’has been held to mean
that effect shall be given to both the
conjunctive “and’’ and disjunctive “or;’’ or
that one or the other may be taken
accordingly as one or the other will best
effectuate the intended purpose. In using the
term “and/or’’ the two words are to be used
interchangeably. (Amon Trading Corporation
vs. Court of Appeals, 477 SCRA 522 [2006].)
For example​, the use of the term “guarantee’’
does not ​ipso facto ​make the contract one of
guaranty, where the word “guarantor’’ is
qualified by the term “jointly and severally’’
to refer to a “surety’’ whose liability is direct,
primary, and absolute. (International Finance
Corporation vs. Imperial Textile Mills, Inc.,
475 SCRA 149 [2006].)
Evident intention of parties prevails over
terms of contract.
EXAMPLES:
(1) S sold to B a parcel of agricultural land. It
is not disputed that the reasonable value of
the land is P50,000.00. However, the contract
of sale states that the purchase price is
P500,000.00.
In this case, as the amount of P500,000.00
appears to be contrary to the evident
intention of the parties, the latter shall
prevail.
(2) R entered into a contract called “contract
of lease” with E whereby R leased his car to E.
It is stipulated that E, shall pay P100,000.00,
upon the signing of the contract, and P500.00,
by way of “rental” on or before the 5th day of
every month; and that at the end of one year,
E would become the absolute owner of the
car. The contract fixed the value of the car to
be P160,000.00.
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There can hardly be any question that the
contract is not a lease of the car but a sale in
installments. (see Abella vs. Gonzaga, 56 Phil.
132 [1931]; Manila Gas Corp. vs. Calupitan, 66
Phil. 646 [1938]; U.S. Commercial vs. Halili,
93 Phil. 271 [1953]; see Arts. 1484, 1485.)
The so-called rent must necessarily be
regarded as payment of the price in
installments inasmuch as the due payment of
the agreed amount results, by the terms of the
bargain, in the transfer of title to E, the
alleged lessee. (see Vda. de Jose vs. Veloso
Barrueco, 67 Phil. 191 [1939].)
ART. 1371 - In order to judge the
intention of the contracting parties, their
contemporaneous and subsequent acts
shall be principally considered.
ART. 1372 - However general the terms of
a contract may be, they shall be
understood to comprehend things that are
distinct and cases that are different from
those upon which the parties intended to
agree.
EXAMPLES:
(1) A sold B his house including “all the
furniture therein.” Suppose part of the
furniture belonged to a relative of A who had
asked him (A) for permission to leave them
there temporarily, should such furniture be
included?
ANS.: No, such furniture should not be
included, because although the term “all” is
general, still it should “not be understood to
comprehend things that are distinct and cases
that are different from those upon which the
parties intended to agree.” (Art. 1372, Civil
Code).
In one case, the Supreme Court said:
“Considering that the land of the applicant
was not the subject of the contract, and that it
could not be so for the reason that it did not
belong to the vendor, it can in no wise be
understood as included in the instrument of
sale which appears at folio 66, no matter what
may be the terms of the document.”
Special intent prevails over a general
intent.
EXAMPLES​:
(1) S sold his house “including all the
furniture therein.” The term “all” should not
be understood to include S’s refrigerator
which is distinct and different from
“furniture.”
Neither should it be interpreted to include
chairs borrowed by S from C for the reason
that they do not belong to S.
(2) S sold parcels of land to B. In the deed of
sale, the description stated a greater
extension than the actual area of the lands
sold thereby including a piece of land
belonging to C.
This piece of land cannot be among the
subject matter of the sale simply because it
was included in the description.
(3) R mortgaged his land to secure the debt of
D to C, without expressly assuming personal
liability for the debt. In case there is a
deficiency remaining after the mortgage is
foreclosed, R cannot be compelled to pay the
same.
ART. 1373 - If some stipulation of any
contract should admit of several
meanings, it shall be understood as
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bearing that import which is most
adequate to render it effectual.
(1) A wife exchanged “her house” for a
diamond ring. Now the wife had a house
which was her paraphernal property, and
another house, which, however, belonged to
the conjugal partnership. The contract
entered into by the wife was against the
consent of the husband. To which house
should “her house” refer?
ANS.: It should refer to her paraphernal
house, because this would validate the
contract. If the other interpretation would be
followed, the exchange would not be valid
since the husband had not given consent.
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.
EXAMPLE:
R leased his house to E. In the contract, it was
stated that E should not sublease the house
without the written consent of R. Another
stipulation therein contained stated that E
should pay P1,000.00, as additional rent a
month should he violate this condition. E
subleased the house without the consent of R.
Has R the right to eject E? No, in the light of
the clause stating the penalty for the violation
of the condition. (see Bank of the Phil. Islands
vs. Ty Camco Sobrino, 57 Phil. 801 [1933].)
ART. 1375 - Words which may have
different signifi cations shall be
understood in that which is most in
keeping with the nature and object of the
contract.
(1) If authority is given “to exact payment by
legal means,” does this include authority to fi
le actions in court for the recovery of sums of
money?
ANS.: Yes. The clause in question means “the
power to exact payment of debts due the
concerned by means of the institution of suits
for their recovery. If there could be any doubt
as to the meaning of this language taken by
itself, it would be removed by a consideration
of the general scope and purpose of the
instrument in which it concurs.”
(2) If a word is susceptible of two or more
meanings, what meaning should be used?
ANS.: (a) That in keeping with the nature and
object of the contract. (Art. 1375, Civil Code).
(b) If this cannot be determined, then the
“terms of a writing are presumed to have
been used in their primary and general
acceptation.” (Sec. 12, Rule 130, Revised
Rules of Court).
(3) Despite the fact that the terms are
presumed to have been used in their primary
and general acceptation, may other meanings
or signifi cations be proved?
ANS.: Yes. “Evidence is admissible to show
that they have a local, technical or otherwise
peculiar signifi cation, and were so used and
understood in the particular instance, in
which case the agreement must be construed
accordingly.”
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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 fi ll the omission of
stipulations which are ordinarily
established.
EXAMPLES:
(1) A made 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. (Yañez
de Barnuevo v. Fuster, 29 Phil. 606).
(2) 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. (Arroyo v. Azur, 76 Phil. 493).
(3) Should customs and usages be pleaded
(alleged in the pleading)?
ANS.: Distinguish: If the customs and usages
are general, they need not be pleaded. Hence,
even without previously being alleged, they
may be proved in court. If the customs and
the usages are merely local, then they have to
be both alleged (pleaded) and proved.
EXAMPLES:
(1) 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. (see
Arroyo vs. Azur, 76 Phil. 493 [1946].)
(2) In a contract, the word “prenda’’ is used.
This word admits of several definitions, as its
usage in particular parts of the country
dictates.
It is a kind of special contract which is akin to
salda ​in Ilocano, ​sangra ​in Bicol, or ​mortgage
in prenda w ​ hereby the debtor delivers to the
creditor the possession of a parcel of land as
security for a loan he has obtained from the
latter who enjoys the usufruct. It may be
equated with the ordinary mortgage. It may
be construed also as a sale with a right of
repurchase. (Republic vs. Intermediate
Appellate Court, 234 SCRA 285 [1993].)
ART. 1377 - The interpretation of obscure
words or stipulations in a contract shall
not favor the party who caused the
obscurity.
EXAMPLES:
(1) Obscure terms in an insurance policy are
construed strictly against the insurer, and
liberally in favor of the insured. This is to
effectuate the dominant purpose of insurance
indemnifi cation. This indeed is particularly
true in cases where forfeiture is involved.
ART. 1378 - When it is absolutely
impossible to settle doubts by the rules
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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.
EXAMPLES:
(1) Doubt as to the Principal Object. Here, the
contract is void. X promised to give Y this
(___________). Since the object is unknown, it is
clear that there could not have been any
meeting of the minds.
(2) Doubts as to the Incidental Circumstances.
If A needs a fountain pen and B gives it to him
freely (gratuitously), is this a mere donation
or a commodatum? ANS.: A mere
commodatum (loan) for this would transmit
lesser rights than a donation.
(3) It is fairer, in case of doubt, to interpret a
mortgage contract as one which is gratuitous
rather than one which is onerous. (Bruiser v.
Cabrera, 81 Phil. 669).
(4) If a pacto de retro contract is not clear as
to exactly when redemption has to be made,
we should interpret the period as an indefi
nite one (hence, the maximum period is 10
years, rather than 4 years). This is important
to effectuate the least transmission of rights.
(Tumaneng v. Abad, 92 Phil. 18).
(5) When what has been received for his
house by a person needing money is very
much less than the value of the house, the
courts will be inclined to interpret the
transaction more as an equitable mortgage,
than as a sale with the right of repurchase, the
reason being that in an equitable mortgage,
there is in this case greater reciprocity of
interests, considering the amount of money
received. Said the Supreme Court: “Even if
there were a doubt as to whether the contract
entered into by Vicente Perez was one of
mortgage or one of sale, on the hypothesis
that he could dispose of the property, while it
is not possible to decide the question by the
language of the document, in justice, it must
be assumed that the debtor assumed a lesser
obligation, and that in accord with the
creditor he bound himself to execute a
mortgage which has a greater reciprocity of
interests than a contract of sale under pacto
de retro, in spite of the fact that both the
latter and that of mortgage involve a valuable
consideration in accordance with the
provisions of Art. 1289 of the Civil Code”
Rules in case doubts are impossible to
settle.
(1) ​Gratuitous contract.​—If the doubts refer
to incidental circumstances of a gratuitous
contract (see Art. 1350.), such interpretation
should be made which would result in the
least transmission of rights and interests.
EXAMPLE:
R gave his car to E. It is not clear, whether the
contract is a donation or a commodatum.
The contract should be presumed as a mere
commodatum because it would transmit
lesser rights than a donation since R retains
his ownership of the car.
(2) ​Onerous contract. — ​ If the contract in
question is onerous (see Art. 1350.), the
doubts should be resolved in favor of the
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greatest reciprocity of interests. (see
Rodriguez vs. Belgica, 1 SCRA 611 [1961].)
EXAMPLE:
D borrowed from C P5,000.00 at 18%
interest. It cannot be determined from the
terms of the contract whether the loan is
payable in six (6) months or in one (1) year.
It must be assumed that the period agreed
upon is one (1) year which results in a greater
reciprocity of interest since D can use the
money for one (1) year, and C, on the other
hand, can earn interest due for one (1) year
instead of only six (6) months.
(3) ​Principal object of contract.​—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.
EXAMPLE:
S sold his land to B. S 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.
Greatest reciprocity of interests
EXAMPLE:
In a case, the stipulation on interest in a deed
of conditional sale provides that the vendee
shall pay the balance of the purchase price on
or before December 31, 1982 without
incurring any liability for any interest and
penalty charges. Should the balance remain
unpaid, the vendee was given the right to pay
the said balance during the grace period of six
(6) months from January 1, 1993 to June 30,
1993, provided, that “interest at the rate of
12% ​per annum s​ hall be charged and 1%
penalty charge shall be imposed on the
remaining diminishing balance.’’
The question is whether during the grace
period, 12% interest ​per annum ​plus 1%
penalty charge a month was payable “on the
remaining diminishing balance’’ or whether
during said period only 12% interest was
payable while the 1% per month penalty
charge would in addition begin to accrue on
any balance remaining unpaid as of July 1,
1983.
It was held that the second interpretation is
supported by the principle contained in
Article 1378 that in case of ambiguity in
contract language, that interpretation which
establishes a less onerous transmission of
rights or lesser burdens as to permit greater
reciprocity between the parties, is to be
adopted. (Castelo vs. Court of Appeals, 244
SCRA 180 [1995].)
Least transmission of rights
Thus, as between a sale (see Universal Food
Corp. vs. Court of Appeals, ​supra, ​under Art.
1374.) with the right to repurchase ​(pacto de
retro) ​and one of loan with mortgage, it must
be assumed that the contract is one of loan,
“because such a con-tract involves a smaller
transmission of rights and interests, and the
debtor does not surrender all rights to his
property but simply confers upon the creditor
the right to collect what is owing from the
value of the thing given as security.” (Olino vs.
Medina, 13 Phil. 379 [1929]; Padilla vs.
Linsangan, 19 Phil. 65 [1911]; Perez vs.
Cortes, 15 Phil. 211 [1910].)
ART. 1379 - The principles of
interpretation stated in Rule 123 of the
Rules of Court shall likewise be observed
in the construction of contracts.
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