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Interpreting Ambiguities in Contracts: Legal Principles and Case Applications

Contracts are binding agreements, but ambiguities can lead to misinterpretation and disputes. The Supreme Court has consistently held that unclear contractual terms must be construed strictly against the party that drafted them, ensuring fairness and balance in legal agreements.

Key Legal Doctrines on Contractual Interpretation

📌 Strict Interpretation Against the Drafter ✔ Courts prioritize fairness by holding the party responsible for ambiguity liable for misinterpretations. ✔ This prevents large corporations or dominant parties from unfairly manipulating contract terms.

📌 Extrinsic Evidence May Be Used to Clarify Ambiguous Contracts ✔ If a contract’s language is unclear, courts may examine external evidence such as the subject matter, relations between parties, and surrounding circumstances. ✔ Relevant Case: Heirs of Amparo del Rosario v. Santos (108 SCRA 43, 1981)

📌 Preference for Less Onerous Interpretations ✔ When ambiguity exists, courts prefer an interpretation that imposes fewer burdens and allows greater reciprocity. ✔ Relevant Case: Castelo v. Court of Appeals (244 SCRA 180, 1995)

📌 Contracts That May Conceal Usury or Fraud Require Further Review ✔ Courts may determine that a contract is a loan or mortgage rather than a pacto de retro sale if its terms suggest a security agreement. ✔ Similarly, parol evidence (oral testimony) is admissible to prove usury. ✔ Relevant Cases:

  • Lapat v. Rosario (312 SCRA 539, 1999) – Establishing loans disguised as sales

  • Investors Finance Corporation v. Autoworld Sales Corporation (340 SCRA 735, 2000) – Identifying usurious contracts

Why Contractual Clarity Matters in Business Practices

✔ Prevents large corporations or monopolies from imposing unfair "take it or leave it" agreements. ✔ Ensures contracts reflect true intentions rather than hidden or manipulative clauses. ✔ Protects weaker parties from coercion by ensuring agreements are mutually beneficial.

📌 Relevant Case: Fieldmen’s Insurance Co. Inc. v. Vda. de Songco (25 SCRA 70, 1968)

Legal Takeaways for Contractual Disputes

✅ Unclear contracts are construed against the drafter – Courts hold the stronger party accountable for ambiguous language.

✅ Extrinsic evidence can clarify vague terms – If intent cannot be understood from the document alone, surrounding facts may be examined.

✅ Usurious agreements disguised as sales or loans must be exposed – Oral testimony is admissible to prove hidden contractual manipulations.

✅ Preference is given to fairer interpretations – Courts favor agreements that impose fewer burdens and allow balanced negotiations.

Conclusion

The Supreme Court’s rulings reinforce fair contract enforcement, ensuring ambiguities are resolved equitably and preventing exploitative agreements. Whether dealing with business contracts, loans, or property transactions, understanding these doctrines helps protect parties from legal traps hidden in complex agreements.

📌 Relevant Case References:

  • 739 SCRA 735 at 755-756

  • Fieldmen’s Insurance Co. Inc. v. Vda. de Songco (25 SCRA 70, 1968)

  • Heirs of Amparo del Rosario v. Santos (108 SCRA 43, 1981)

  • Castelo v. Court of Appeals (244 SCRA 180, 1995)

  • Lapat v. Rosario (312 SCRA 539, 1999)

  • Investors Finance Corporation v. Autoworld Sales Corporation (340 SCRA 735, 2000)

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