INTERPRETATION OF CONTRACTS

RESCISSIBLE CONTRACTS
VOIDABLE CONTRACTS
GROUP 5: BUSINESS LAW: OBLICON & CONTRACTS
 GROUP 5
MEMBERS TOPICS

GICARO, GISELLE M.
INTREPRETATION OF
TABABA, ROSELYN T. CONTRACTS

BALLEGO, LOUISE RYAN T.

RESCISSIBLE OF
AURELIO, THEA CARYL F. CONTRACTS

EYAS, ILEN D.
VOIDABLE OF
SILDA, MONICA F.
CONTRACTS
INTERPRETATION
OF CONTRACTS
ARTICLE 1370-1379
MEANING OF INTERPRETATION
OF CONTRACTS

Interpretation of a contract is the

determination of the meaning of the
terms or words used by the parties in
their contract.
Determining the intent of the parties is
usually what courts say it is when they
interpret a contract’s language in Interpretation: Is the act of making
intelligible that was not before understood, or
particular cases. not obvious.
 ARTICLE. 1370
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. (1281)
 Rule:
LITERAL MEANING CONTROLS EVIDENT INTENTION OF
WHEN PARTIES PREVAILS
LANGUAGE CLEAR. OVER TERMS OF CONTRACT.
Contracts, which are the private Where the words and clauses of a written
laws of the contracting parties, contract are in conflict with the manifest
should be fulfilled according to the intention of the parties, the latter shall prevail
literal sense of their stipulations, if over the former. It is a cardinal rule in the
the terms of a contract are clear interpretation of contracts that the intention of
and unequivocal. The parties are the contracting parties should always prevail
because their will has the force of law between
bound by such terms. them.
 ART. 1371 ART. 1372

In order to judge the intention of the contracting However general the terms of a contract may
parties, their contemporaneous and subsequent acts be, they shall not be understood to comprehend things
shall be principally considered. (1282) that are distinct and cases that are different from
those upon which the parties intended to agree. (1283)
Rule:
CONTEMPORANEOUS AND SUBSEQUENT ACTS
RELEVANT IN THE DETERMINATION OF INTENTION SPECIAL INTENT PREVAILS OVER GENERAL INTENT
Where the parties to a contract have placed an As a rule, where in a contract there are general and
interpretation to the terms thereof by their special provisions covering the same subject matter are
contemporaneous and/ or subsequent conduct, as inconsistent, the latter shall be paramount to and control
by acts in partial performance, such interpretation over the former when the two cannot stand together.
may be considered by the court in determining its The reason for this rule is that when the parties express
meaning and ascertaining the intention of the themselves in reference to a particular matter, the
parties when such intention cannot clearly be attention is directed to that, and it must be assumed that
it expresses their intent; whereas, a reference to some
ascertained from the words used in their contract.
general matter, within which the particular matter may
Antecedent circumstances under which it was made
be included, does not necessarily indicate that the
may also be considered. parties had that particular matter in mind.
 ART. 1373 ART. 1374

If some stipulation of any contract should admit of The various stipulations of a contract shall be
several meanings, it shall be understood as bearing that interpreted together, attributing to the doubtful
import which is most adequate to render it effectual. ones that sense which may result from all of them
(1284) taken jointly. (1285)
Rule:
INTERPRETATION OF STIPULATION WITH SEVERAL INTERPRETATION OF VARIOUS STIPULATIONS/
MEANINGS SEPARATE WRITINGS OF A CONTRACT.
When an agreement is susceptible of several A contract must be interpreted as a whole and
meanings, one of which would render it effectual, it the intention of the parties is to be gathered
should be given that interpretation. Thus, if one
from the entire instrument and not from
interpretation makes a contract valid or effective
particular words, phrases, or clauses. All
and the other makes it illegal or meaningless, the
provisions should, if possible, be so interpreted
former interpretation is one which is warranted by
as to harmonize with each other.
the rule stated in Article 1373.
 ART. 1375 ART. 1376

Words which may have different significations The usage or custom of the place shall be borne
shall be understood in that which is most in keeping in mind in the interpretation of the ambiguities of a
with the nature and object of the contract. (1286) contract, and shall fill the omission of stipulations
which are ordinarily established. (1287)
Rule:
INTERPRETATION OF WORDS WITH DIFFERENT RESORT TO USAGE OR CUSTOM AS AID
SIGNIFICATIONS. IN INTERPRETATION.
If a word is susceptible of two or more The usage or custom of the place where the
meanings, it is to be understood in that sense contract was entered into may be received to
which is most in keeping with the nature and explain what is doubtful or ambiguous in a
object of the contract in line with the cardinal contract on the theory that the parties entered
rule that the intention of the parties must into their contract with reference to such usage
prevail. (Art. 1370.) or custom.
 ART. 1377 ART. 1378

The interpretation of obscure words or stipulations in When it is absolutely impossible to settle doubts
by the rules established in the preceding articles, and the doubts
a contract shall not favor the party who caused the
refer to incidental circumstances of a gratuitous contract, the least
obsecurity. (1288) transmission of rights and interest shall prevail. If the contract is
Rule: onerous, the doubt shall be settled in favor of the greatest reciprocity
of interests.
INTERPRETATION OF OBSCURE WORDS.
If the doubts are cast upon the principal object of the contract in
A written agreement should, in case of doubt or 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. (1289)
ambiguity, be interpreted strictly against the
party who has drawn it, or be given an
interpretation which will be favorable to the RULES IN CASE DOUBTS ARE IMPOSSIBLE TO SETTLE
other who, upon the faith of which, has incurred (1) Gratuitous contract
an obligation. (2) Onerous contract
(3) Principal object of contract
ART. 1379
The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of
contracts.
RESCISSIBLE
CONTRACTS
ARTICLE 1380-1389
 ARTICLE. 1380. Contracts validity agreed upon
may be rescinded in the cases established by Law.
BINDING FORCE OF
RESCISSIBLE CONTRACTS
MEANING They are valid and enforceable although subject
to rescission by the court when there is damage
or prejudice to one of the parties or to a third
Rescissible contracts are those person. In a rescissible contract, there is no
validly agreed upon because all defect at all but by reason of some external facts,
the essential elements exist and, its enforcement would cause injustice.
therefore, legally effective, but in
the cases established by law, the RESCISSION
remedy of rescission is granted in Is a remedy granted by law to the contracting parties and
the interest of equity. sometimes even to third persons in order to secure
reparation of damages caused them by a valid contract, by
means of the restoration of things to their condition in which
they were prior to the celebration of said contract.
ART. 1381. The following contracts are rescissible:
Those which are entered into by guardians whenever the wards whom they represent suffer
1
lesion by more than one fourth of the value of the things which are the object thereof;

Those agreed upon in representation of absentees, if the latter suffer the lesion
2
stated in the preceding number;

Those undertaken in fraud of creditors when the latter cannot in any other manner
3
collect the claims due them;

Those which refer to things under litigation if they have been entered into by the
4 defendant without the knowledge and approval of the litigants or of competent judicial
authority;

5 All other contracts specially declared by law to be subject to rescission.

 ART. 1382 ART. 1383

Payments made in a state of insolvency for The action for rescission is subsidiary; it cannot
obligations to whose fulfillment the debtor could not be instituted except when the party suffering
be compelled at the time they were effected, are damage has no other legal means to obtain
also rescissible. (1292) reparation for the same. (1294)

Rule:
NATURE OF ACTION FOR RESCISSION
PAYMENTS MADE IN A STATE OF INSOLVENCY
Rescission of contracts under Article 1383
The present article speaks of “payments” not exactly
should be distinguished from rescission of
of a contract. A debtor is insolvent if he does not
reciprocal obligations under Article 1191.
have sufficient properties to meet his obligations. It
Although both presuppose contracts validly
is not necessary that debtor’s insolvency be
entered into and subsisting and both require
judicially declared
mutual institution when proper, they are not
entirely identical.
 ART. 1385
ART. 1384
Rescission creates the obligation to return the things which were the
Rescission shall be only to the extent object of the contract, together with their fruits, and the price with its
interest; consequently, it can be carried out only when he who
necessary demands rescission can return whatever he may be obliged to restore.
to cover the damages caused.
Neither shall rescission take place when the things which
are the object of the contract are legally in the possession of third
Rule: persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person
EXTENT OF RESCISSION. causing the loss. (1295)

The entire contract need not be set aside by

rescission if the damage can be repaired or RESCISSION DIFFERENT FROM MUTUAL DISSENT
covered by partial rescission. The rescission Rescission must be distinguished from mutual dissent where
shall only be to the extent of the creditor’s the parties agree to cancel their contract and mutually return
unsatisfi ed credit. The policy of the law is to the object and cause thereof.
preserve or respect the contract, not to Article 1385 refers to contracts that are rescissible for causes
extinguish it. specified in Articles 1381 and 1382 but it does not refer to
contracts that are dissolved by mutual consent of the parties.
 ART. 1387
ART. 1386
All contracts by virtue of which the debtor alienates property
Rescission referred to in Nos. 1 and 2 of
by gratuitous title are presumed to have been entered into in
Article 1381 shall not take place with fraud of creditors, when the donor did not reserve sufficient
respect to contracts approved by property to pay all debts contracted before the donation.
the courts.
Alienations by onerous title are also presumed fraudulent
Rule: when made by persons against whom some judgment has been
rendered in any instance or some writ of attachment has been
CONTRACTS APPROVED BY THE COURTS. issued. The decision or attachment need not refer to the
property alienated, and need not have been obtained by the
If a contract entered into in behalf of a ward party
or absentee has been approved by the court, seeking the rescission.
rescission cannot take place because it is
valid whether there is lesion or not. The law In addition to these presumptions, the design to defraud
presumes that the court is acting in the creditors may be proved in any other manner recognized by
the law of evidence. (1297a)
interests of the ward or absentee when it
approves the contract in spite of the lesion.
 ART. 1389
ART. 1388
Whoever acquires in bad faith the things alienated in
The action to claim rescission must be commenced
fraud of creditors, shall indemnify the latter for
within four years.
damages suffered by them on account of the
alienation, whenever, due to any cause, it should be
For persons under guardianship and for absentees,
impossible for him to return them.
the period of four years shall not begin until the
termination of the former’s incapacity, or until the
If there are two or more alienations, the first
domicile of the latter is known.
acquirer shall be liable first, and so on successively.
(1298a)
PERIOD FOR FILING ACTION FOR RESCISSION.
LIABILITY OF PURCHASER IN BAD FAITH.
As a general rule, the action to rescind contracts must be
The purchaser in bad faith, who acquired the commenced
object of the contract alienated in fraud of within four (4) years from the date the contract was entered into. The
creditors, must return the same if the sale is exceptions are:
rescinded (see Art. 1383.) and should it be
(1) For persons under guardianship, the period shall begin from
impossible for him to return it due to any
the termination of incapacity; and
cause, he must indemnify the former. (2) For absentees, from the time the domicile is known.
 VOIDABLE
CONTRACTS
ARTICLE 1390-1402
MEANING OF VOIDABLE OF
CONTRACTS

Voidable or annullable contracts are

those which possess all the essential
requisites of a valid contract but one Annulment: is a remedy as well as a sanction
provided by law, for reason of public interest, for
of the parties is legally incapable of the declaration of the inefficacy of a contract
giving consent, or consent is vitiated based on a defect or vice in the consent of one
by mistake, violence, intimidation, of the contracting parties in order to restore
them to their original position in which they
undue influence, or fraud. were before the contract was executed.
 ART. 1390
The following contracts are voidable or annullable, even though there
may have been no damage to the contracting parties: KINDS OF VOIDABLE CONTRACTS
(1) Those where one of the parties is incapable of giving A contract otherwise legal in object and operation is voidable
consent to a contract; because of a defect caused by either
(2) Those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud. (1) Legal incapacity to give consent, where one
These contracts are binding, unless they are annulled by a of the parties is incapable of giving consent to
proper action in court. They are susceptible of ratification. the contract; or
(2) Violation of consent, where the vitiation is
BINDING FORCE OF VOIDABLE CONTRACTS done by mistake, violence, intimidation, undue
They are valid and binding between the parties unless annulled by a influence, or fraud.
proper action in court by the injured party. Once ratified, they become
absolutely valid and can no longer be annulled.
Note that the existence of economic damage is not essential for their
annulment as in the case of rescissible contracts.
 RESCISSION ANNULMENT

The basis is vitiated consent or

The basis is lesion or damage
incapacity to consent

Defect is external or intrinsic Defect is intrinsic

The action is subsidiary The action is principal

To prevent rescission, ratification is not To prevent annulment, ratification is

required required
 ART. 1391 ART. 1392
The action for annulment shall be brought within four
years. Ratification extinguishes the action to annul a
This period shall begin: voidable contract.
In cases of intimidation, violence or undue influence,
from the time the defect of the consent ceases.
In case of mistake or fraud, from the time of the
discovery of the same.
And when the action refers to contracts entered into
by minors or other incapacitated persons, from the time EFFECT OF RATIFICATION RETROACTIVE
the guardianship ceases.
Ratification cleanses the contract of all its
PERIOD FOR FILING ACTION FOR ANNULMENT defects from the moment it was executed. It
Direct court action is necessary to annul a extinguish the right of action to annul. In other
voidable contract, and until annulled or set aside words, the effect of ratification is to make the
by the court, a party cannot relieve himself from contract valid from its inception subject to the
the obligations arising therefrom. prior rights of third person.
 ART. 1393 ART. 1394

Ratification may be effected expressly or tacitly.

Ratification may be effected by the guardian of
It is understood that there is a tacit ratification if,
the incapacitated person.
with knowledge of the reason which renders the
contract voidable and such reason having ceased,
the person who has a right to invoke it should PARTY WHO MAY RATIFY
execute an act which necessarily implies an (1) A contract entered into by an incapacitated person may be
intention to waive his right. ratified by:
KINDS OF RATIFICATION. (a) the guardian; or
(b) the injured party himself, provided, he is already
(1) Express. — when the ratification is manifested in capacitated.
words or in writing; or
(2) Implied or tacit. — It may take diverse forms, such As legal representatives of their wards, guardians have the
as by silence or acquiescence; by acts showing power to contract on their behalf. Hence, they may also ratify
contracts entered into by their wards. (see Art. 1407.)
adoption or approval of the contract; or by
(2) In case the contract is voidable on the ground of mistake,
acceptance and retention of benefits flowing etc., ratification can be made by the party whose consent is
therefrom. vitiated.
ART. 1395 ART. 1396

Ratification does not require the conformity of

Ratification cleanses the contract from all its
the contracting party who has no right to bring the
defects from the moment it was constituted.
action for annulment.

CONFORMITY OF GUILTY PARTY TO RATIFICATION EFFECT OF RATIFICATION RETROACTIVE.

NOT REQUIRED.

Ratification is a unilateral act by which a party Ratification purges the contract of all its defects
(Art. 1390.) from the moment it was executed. It
waives the defect in his consent. The consent of
extinguishes the action to annul. (Art. 1392.) In
the guilty party is not required; otherwise, he can
other words, the effect of ratification is to make
conveniently disregard his contract by the simple
the contract valid from its inception subject to
expedient of refusing to give his conformity the prior rights of third persons.
 ART. 1397 PARTY ENTITLED TO BRING AN ACTION TO ANNUL.
The action for the annulment of contracts may Two different requisites are required to confer the
be instituted by all who are thereby obliged necessary capacity to bring an action for annulment of
principally or subsidiarily. However, persons who a contract, to wit:
are capable cannot allege the incapacity of those
with whom they contracted; nor can those who (1) The plaintiff must have an interest (see Art. 1311.) in
exerted intimidation, violence, or undue the contract; and
influence, or employed fraud, or caused mistake (2) The victim and not the guilty party or the party
responsible
base their action upon these flaws of the
for the defect is the person who must assert the same.
contract. (1302a)
RIGHT OF SUCCESSORS-IN-INTEREST TO BRING ACTION.
One who is not a party to a contract or an assignee thereunder, or does not represent those who took part therein, has,
under Article 1397 (and Art. 1311), no legal capacity to challenge the validity of such contract.
Strangers, therefore, are without right or personality to bring the action for they are not obliged by the contract,
principally or subsidiarily, unless they can show detriment which would positively result to them from the contract in
which they had no intervention or participation.
 ART. 1398 ART. 1400

An obligation having been annulled, the Whenever the person obliged by the decree of
annulment to return the thing can not do so
contracting parties shall restore to each other because it has been lost through his fault, he
the things which have been the subject matter shall return the fruits received and the value of
of the contract, with their fruits, and the price the thing at the time of the loss, with interest
with its interest, except in cases provided by from the same date.
law. In obligations to render service, the value
EFFECT OF LOSS OF THING TO BE RETURNED.
thereof shall be the basis for damages.
(1) If the thing to be returned is lost without the fault of the person
ART. 1399 obliged to make restitution (defendant), there is no more obligation to
return such thing. But in such a case, the other cannot be compelled
When the defect of the contract consists in the to restore what in virtue of the decree of annulment he is bound to
incapacity of one of the parties, the incapacitated return. (Art. 1402.)
(2) If it is lost through his fault, his obligation is not extinguished but
person is not obliged to make any restitution is converted into an indemnity for damages consisting of the value of
except insofar as he has been benefited by the the thing at the time of the loss with interest from the same date and
the fruits received from the time the thing was given to him to the
thing or price received by him. time of its loss.
 ARTICLE. 1401 ARTICLE. 1402
The action for annulment of contracts shall be
extinguished when the thing which is the object
thereof is lost through the fraud or fault of the As long as one of the contracting parties does
person who has a right to institute the not restore what in virtue of the decree of
proceedings. annulment he is bound to return, the other
If the right of action is based upon the cannot be compelled to comply with
incapacity of any one of the contracting parties, what is incumbent upon him.
the loss of the thing shall not be an obstacle to
the success of the action, unless said loss took
place through the fraud or fault of the plaintiff.
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