Contract Interpretation Notes

Interpretation of Contracts

Literal Interpretation (Article 1370)

Contracts should be fulfilled according to the literal sense of their stipulations if the terms are clear and unequivocal.
When a contract is clear, the parties' subjective intentions are secondary to the intention expressed in the language of the contract.

Definition of Interpretation

Interpretation of a contract is the determination of the meaning of the terms or words used by the parties in their contract.

Interpretation vs. Reformation

Interpretation: Determining the meaning attached to the words written or spoken in the contract.
Reformation: An equitable remedy that modifies a written instrument to express the real intention of the parties.

Interpretation Based on Subsequent Acts (Article 1371)

The parties’ contemporaneous and/or subsequent acts to the perfection of the contract are significant in determining their intention.
If the words appear contrary to the parties' evident intention, their intention prevails over the terms stated in the contract.
To judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.

Specific vs. General Intent (Article 1372)

When there are general and specific provisions covering the same subject matter, the specific provision controls the general provision.
Even if the terms used in the contract/agreement may be general, the interpretation should not deviate far from the parties' intention; that intention will be determined according to circumstances.
Inconsistent general and special provisions: Special provisions prevail over general provisions when the two cannot stand together.

Interpretation of Various Stipulations of a Contract (Article 1373)

If a stipulation is subject to different meanings, the interpretation that upholds the contract's validity should be chosen.
When the contract contains incompatible provisions, it must be interpreted as a whole, determining the parties' intention from the entire instrument, not merely from particular provisions. All provisions must be taken together to harmonize with each other.

Interpretation of Several Terms of a Contract (Article 1374)

The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones the sense which may result from all of them taken jointly.

Interpretation of Words with Different Significations (Article 1375)

Words that may have different significations shall be understood in that which is most in keeping with the nature and object of the contract.

Usage or Custom as Aid in Interpretation (Article 1376)

The usage or custom of the place shall be considered in interpreting the ambiguities of a contract and shall fill the omission of ordinarily established stipulations.

Interpretation of Obscure/Vague Words (Article 1377)

The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.
The contract should be interpreted against the party who drafted it and in favor of the party who incurred an obligation based on it. The rationale is that the drafter could have prevented the obscurity.
This usually occurs in contracts of adhesion, where terms are prescribed in printed forms prepared by one party, and the other party can only adhere to them without changes.

Rules in Case Doubts are Impossible to Settle (Article 1378)

If the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights shall prevail.
If the contract is onerous, the doubts shall be settled in favor of the greatest reciprocity of interests.
If the doubt refers to the principal object of the contract such that the intention or will of the parties cannot be known, the contract shall be null and void.

Additional Rules on Interpretation of Documents

Legal Meaning: The language of a writing is to be interpreted according to the legal meaning it bears in the place of its execution unless the parties intended otherwise.
- The law of the place where the contract is executed governs unless the parties specify the laws of a specific place to govern the contract. This rule usually applies to contracts between parties from different countries.
Circumstances: For the proper construction of an instrument, the circumstances under which it was made, including the situation of the subject thereof and the parties to it, may be shown so that the judge may be placed in the position of those whose language he is to interpret.
- Evidence of the circumstances existing at the time of the execution of the contract may be presented to help the court properly interpret the contract.
Primary and General Acceptance: The terms of writing are presumed to have been used in their primary and general acceptance. Still, evidence is admissible to show they have a local, technical, or otherwise peculiar signification, and they were used and understood in the particular instance where the agreement must be construed accordingly.
- The general rule is to interpret terms based on how they are generally used unless the terms have a local, technical, or peculiar meaning that must be proven.
Written vs. Printed Form: When an instrument consists partly of written words and partly of a printed form, and the two are inconsistent, the former controls the latter.
- The discrepancy between written words and a printed form shall be resolved in favor of the written form.
Difficult to Decipher: When the characters in which an instrument is written are difficult to decipher, or the court does not understand the language, the evidence of persons skilled in deciphering the characters or who understand the language is admissible to declare the characters or the meaning of the language.
- Since contracts can be entered into in whatever form, some contracts are written in incomprehensible form (i.e., bad penmanship). In such cases, expert witnesses may be presented to decipher the writings.