Basic rules in the interpretation of contracts

Citation: 739 SCRA 735

In general, Chapter 5 of the New Civil Code provides for the Rules of Interpretation of Contracts, Art.'s 1370 to 1379. 

Definition and requisites of a contract

A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service (Art. 1305, New Civil Code)

Its requisites are as follows:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract; and

(3) Cause of the obligation which is established. (Art. 1318, New Civil Code)

Three phases or stages in contract making

The phases that a contract goes through may be summarized as follows:

(a) preparation, conception or generation, which is the period of negotiation and bargaining, ending at the moment of agreement of the parties;

(b) perfection or birth of the contract, which is the moment when the parties come to agree on the terms of the contract; and

(c) consummation or death, which is the fulfillment or performance of the terms agreed upon in the contract. (Robern Development Corporation v. People’s Landless Association, 693 SCRA 24 [2013])

xxx thus in the case of Robern Dev. Corp v. People's Landless Association, it held that: Contracts undergo three stages: "a) negotiation which begins from the time the prospective contracting parties indicate interest in the contract and ends at the moment of their agreement[; b) perfection or birth, x x x which takes place when the parties agree upon all the essential elements of the contract x x x; and c) consummation, which occurs when the parties fulfill or perform the terms agreed upon, culminating in the extinguishment thereof.

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Requisites before a contract may be invalidated due to intimidation

A contract may be invalidated due to intimidation if the following requisites concur:

(1) That the intimidation must be the determining cause of the contract or must have caused the consent to be given;

(2) That the threatened act be unjust or unlawful;

(3) That the threat be real and serious, there being an evident disproportion between the evil and the resistance which all men can offer, leading to the choice of the contract as a lesser evil; and

(4) That it produces a reasonable and well-grounded fear from the fact that the person from whom it comes has the necessary means or ability to inflict the threatened injury. (De Leon v. Court of Appeals, 186 SCRA 345 [1990]. See also Art. 1335, New Civil Code)

Special provisions control the general provisions of a contract

It is a rudimentary canon of interpretation that all parts of a writing should be construed together and a special provision in a written contract, controls the general. (Hanlon v. Haussermann and Beam, 40 Phil. 796 [1920]; Bangko Sentral ng Pilipinas v. Santamaria, 395 SCRA 84 [2003])

What is the Plain Meaning Rule

The plain meaning rule says that if the provisions of a contract are clear, there is no need for any interpretation and the literal meaning of the stipulations shall control without the aid of extrinsic facts or aids. The court may not read into it any other intention that would contradict its plain import. (Art. 1370, New Civil Code, United Planters Sugar Milling Co., Inc. v. Court of Appeals, 583 SCRA 63 [2009]; Adriatico Consortium, Inc. v. Land Bank of the Philippines, 609 SCRA 403 [2009]; PNCC Skyway Traffic Management and Security Division Workers Organization [PSTMSDWO] v. PNCC Skyway Corporation, 613 SCRA 28 [2010]; Prisma Construction & Development Corporation v. Menchavez, 614 SCRA 590 [2010]; Magoyag v. Maruhom, 626 SCRA 247 [2010]; Taghoy v. Tigol, Jr., 626 SCRA 341 [2010])

Ultimately, their intention is to be deciphered not from the unilateral post facto assertions of one of the parties, but from the language used in the contract. And when the terms of the agreement, as expressed in such language are clear, they are to be understood literally, just as they appear on the face of the contract. (Berman Memorial Park, Inc. v. Cheng, 458 SCRA 112 [2005])

The clear terms of a contract should never be the subject matter of interpretation. Neither abstract justice nor the rule of liberal interpretation justifies the creation of a contract for the parties which they did not make themselves or the imposition upon one party to a contract or obligation not assumed simply or merely to avoid seeming hardships. Their true meaning must be enforced as it is to be presumed that the contracting parties know their scope and effects. (JMA House, Incorporated v. Sta. Monica Industrial and Development Corporation, 500 SCRA 526 [2006)

Hence, courts have no authority to alter a contract by construction or to make a new contract for the parties. Since their duty is confined to the interpretation of the one which the parties have made for themselves without regard to its wisdom or folly, it has been ruled that courts cannot supply material stipulations or read into the contract words it does not contain. Indeed, courts will not relieve a party from the adverse affects of an unwise or unfavorable contract freely entered into. (Heirs of Manuel Uy Ek Liong v. Castillo, 697 SCRA 294 [2013)