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D. Interpretation of Contracts

1. RULES TO INTERPRETING CONTRACTS

a. Literal meaning 

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. (Article 1370, Civil Code)

b. Intention over words / terms

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. (Paragraph 2, Article 1370, Ibid.)

1) Contemporaneous and subsequent acts

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

2) Limitations on general contracts

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. (Article 1372, Ibid.)

c. Several meanings

1) That which is most adequate to render the contract effectual

If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. (Article 1373, Ibid.)

d. Various stipulations

1) Interpreted together

2) Attribute to doubtful ones that sense may result

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. (Article 1374, Ibid.)

e. Different significations

1) That which is in most keeping with nature and object of the contract

Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract. (Article 1375, Ibid.)

f. Usage of custom of the place

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. (Article 1376, Ibid.)

g. Obscure words or stipulations

1) Interpreted against one who made the ambiguity

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

2) Application: Contract of adhesion

A contract of adhesion is defined as one in which one of the parties imposes a ready-made form of contract, which the other party may accept or reject, but which the latter cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his “adhesion” thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing. It must be borne in mind, however, that contracts of adhesion are not invalid per se. Contracts of adhesion, where one party imposes a ready-made form of contract on the other, are not entirely prohibited. The one who adheres to the contract is, in reality, free to reject it entirely; if he adheres, he gives his consent. (Norton Resources and Development Corporation, G.R. No. 162523, 25 November 2009)

Being a contract of adhesion, any ambiguity in its provisions must be construed against [the one who made the contract]. (Polotan v. CA, Security Diners International Corporation, G.R. No. 119379, 25 September 1998)

2. WHERE DOUBTS STILL REMAIN DESPITE ABOVE RULES

1) Gratuitous contract

a) Least transmission of rights and interests

When it is absolutely impossible to settle doubts by the rules 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. (Article 1378, Ibid.)

2) Onerous contract

a) In favor of greatest reciprocity of interests

If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. (Ibid.)

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. (Paragraph 2, Article 1378, Ibid.)

c. RULES OF COURT

The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts. (Article 1379, Ibid.)

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