INTERPRETATION VS REFORMATION OF CONTRACTS

CHAPTER 4 Interpretation Reformation

REFORMATION OF INSTRUMENTS the act of making intelligible The remedy in equity by
what was before not means of which a written
understood, ambiguous or instrument is made or
not obvious. construed so as to express
Article 1359. When, there having been a meeting of the minds of the or conform to the real
It a method by which the intention of the parties.
parties to a contract, their true intention is not expressed in the instrument
meaning of the language is
purporting to embody the agreement, by reason of mistake, fraud,
ascertained
inequitable conduct or accident, one of the parties may ask for the
reformation of the instrument to the end that such true intention may be
expressed. Requisites of Reformation

If mistake, fraud, inequitable conduct, or accident has prevented a meeting 1. There must have been a meeting of the minds of the parties to the
of the minds of the parties, the proper remedy is not reformation of the contract;
instrument but annulment of the contract. 2. The instrument does not express the true intention of the parties; and
3. The failure of the instrument to express the true intention of the parties is
due to mistake, fraud, inequitable conduct or accident.
Article 1360. The principles of the general law on the reformation of
- The presumption is that an instrument sets out the true agreement of the
instruments are hereby adopted insofar as they are not in conflict with the
parties thereto and that it as executed for valuable consideration.
provisions of this Code.
- In actions for reformation of contract, the onus probandi is upon the party
who insists that the contract should be reformed.

Reformation – as a remedy in equity, whereby a written instrument is made or

construed so as to express or conform to the real intention of the parties, where
EFFECT OF MUTUAL MISTALE OF PARTIES
some error or mistake has been committed.
General Rule: When a mutual mistake of the parties cause the failure of the
Rationale (Doctrine of Reformation): it would be unjust and inequitable to allow
instrument to disclose their real agreement, said instrument may be reformed.
the enforcement of a written instrument which does not reflect or disclose the real
meeting of the minds of the parties. XPN: When the mutual error of the parties relates to the legal effect of their
agreement which frustrates the real purpose of the contract, the consent is
Equity orders the reformation of an instrument in order that the true intention of
vitiated, and the remedy is not reformation of the instrument but the annulment of
the contracting parties may be expressed
the contract.
- The courts do not attempt to make another contract for the parties
Requisite (In order for reformation of the instrument by reason of mutual mistake
to be applicable:

1. The mistake should be of fact

2. The same should be proved by clear and convincing evidence; and
3. The mistake should be common to both parties to the instrument.
Article 1361. When a mutual mistake of the parties causes the failure of (2) Wills;
the instrument to disclose their real agreement, said instrument may be
(3) When the real agreement is void.
reformed.

Article 1362. If one party was mistaken and the other acted fraudulently Article 1367. When one of the parties has brought an action to enforce
or inequitably in such a way that the instrument does not show their true the instrument, he cannot subsequently ask for its reformation.
intention, the former may ask for the reformation of the instrument.
INSTANCES WHERE INTRUMENT MAY NOT BE REFORMED
Article 1363. When one party was mistaken and the other knew or
believed that the instrument did not state their real agreement, but 1. If mistake, fraud, inequitable conduct, or accident has prevented a
concealed that fact from the former, the instrument may be reformed. meeting of the minds of the parties. Here, the remedy annulment of the
contract and not reformation.
Article 1364. When through the ignorance, lack of skill, negligence or
bad faith on the part of the person drafting the instrument or of the clerk or 2. In simple donations inter vivos wherein no condition is imposed
typist, the instrument does not express the true intention of the parties, the
courts may order that the instrument be reformed. 3. In wills
Article 1365. If two parties agree upon the mortgage or pledge of real or
4. When the real agreement is void
personal property, but the instrument states that the property is sold
absolutely or with a right of repurchase, reformation of the instrument is
5. When one of the parties has brought an action to enforce the instrument,
proper.
he cannot subsequently ask for its reformation

6. When the contract is unenforceable because of failure to comply with the

INSTANCES WHERE INSTRUMENT MAY BE REFORMED
 When a mutual mistake of the parties causes a failure of the instrument
to disclose the real agreement.
 If one party was mistaken and the other acted fraudulently or inequitably
in such a way that the instrument does not show their true intention.
 When one party was mistaken and the other knew or believed that the
instrument did not state their real agreement, but concealed that fact
from the former.
 When through the ignorance, lack of skill, negligence or bad faith on the
part of the person drafting the instrument or of the clerk or typist and the
instrument does not express the true intention of the parties,
 If two parties agree upon the mortgage or pledge of real or personal
property, but the instrument states that the property is sold absolutely or
with a right to repurchase.
Statute of Frauds.
Article 1368. Reformation may be ordered at the instance of either party
or his successors in interest, if the mistake was mutual; otherwise, upon
petition of the injured party, or his heirs and assigns.
Article 1369. The procedure for the reformation of instrument shall be
governed by rules of court to be promulgated by the Supreme Court.
WHO MAY DEMAND REFORMATION
If the mistake was mutual, either party or his successor – in – interest may
demand for reformation. If the mistake was not mutual, only the injured party or
his heirs and assigns may demand for reformation. However, the party who has
brought an action to enforce the instrument cannot subsequently ask for its
reformation.

Article 1366. There shall be no reformation in the following cases:

(1) Simple donations inter vivos wherein no condition is imposed;

CHAPTER 5
INTERPRETATION OF CONTRACTS
Article 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)
Article 1371. In order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally
considered. (1282)
Article 1372. 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. (1283)
Article 1373. 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. (1284)
Article 1374. 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. (1285)
Article 1375. Words which may have different significations shall be
understood in that which is most in keeping with the nature and object of
the contract. (1286)
Article 1376. 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. (1287)
Article 1377. The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity. (1288)
Article 1378. 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. If the contract is onerous, the doubt shall
be settled in favor of the greatest reciprocity of interests.
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. (1289)
Article 1379. The principles of interpretation stated in Rule 123 of the
Rules of Court shall likewise be observed in the construction of contracts.
(n)
RULES IN INTERPRETATION OF CONTRACTS
Cardinal Rule: In the interpretation of contract, the intention of the parties is to be
pursued, and that an instrument must be interpreted according to the intention of
the parties.
- The court’s purpose in examining a contract is to interpret the intent of
contracting parties, as objectively manifested by them.
- The process of interpreting a contract requires the court to make a
preliminary inquiry as to whether the contract before it is ambiguous.
- A contract provision is ambiguous if it is susceptible of two reasonable
alternative interpretations
- If the contract is determined to be ambiguous, then the interpretation of the
contract is left to the court, to resolve the ambiguity in the light of the intrinsic
evidence.
WHEN TERMS OF CONTRACT ARE CLEAR
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.
- Where the language of contract is plain and unambiguous, its meaning
should be determined without reference to extrinsic facts or aids.
WHERE THERE IS AMBIGUITY - An accessory contract must be read in its entirety and together with the
principal agreement
a. When considered Ambiguous.
Example: A promissory note and a deed of chattel mortgage must be
- A contract provision is ambiguous if it is susceptible of two reasonable construed together, and the surety contract is merely an accessory contract
alternative interpretations. and must be interpreted with its principal contract, which is the loan
agreement.
- If its not ambiguous, the court will interpret the contract as a matter of law.

b. When extrinsic evidence allowed

f. In Keeping With Nature and Object of Contract
- When the agreement has been reduced to writing, the parties cannot be
permitted to adduce evidence to prove alleged practices which, to all Article 1375. Words which may have different significations shall be understood
purposes, would alter the terms of the written agreement. in that which is most in keeping with the nature and object of the contract.

c. Contra Proferentem (Construe Against Drafting Party) - It is the duty of the courts to place a practical and realistic construction upon
it, giving due construction upon it, giving due consideration to the context in
which it is negotiated and the purpose which it is intended to serve.
Article 1377 – The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity.
- Absurd and illogical interpretation should be also be avoided.
d. Principle of Effectiveness
g. Ejusdem Generis (Limit Generalities to Things of Same Genre)
Interpretations:
Article 1372. 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
1. Having the effect of rendering the contract meaningless.
from those upon which the parties intended to agree.
2. Would give effect to the contract as a whole, the latter interpretation must
- Where general words follow the enumeration of particular classes of person
be adopted.
or things, the general words will be construed as applicable only to person or
things of the same general nature or class as those enumerated.
Article 1373 – the contract is susceptible of two interpretations, one which will
make it invalid and illegal, and another which will make it valid and legal, the
h. Usage or Customs
latter interpretation should be adopted.

Article 1376. The usage or custom of the place shall be borne in mind in the
e. Contract Interpreted As A Whole
interpretation of the ambiguities of a contract, and shall fill the omission of
stipulations which are ordinarily established.
Article 1374. The various stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may result from all of them
Example: In a contract of lease of services did not provide for the amount of the
taken jointly.
compensation to be paid, this was determined by the rate customarily paid in the
place where the services were rendered.
- The stipulations in a contract and the other contract documents should be
interpreted together with the end in view of giving effect to all.
i. In Case of Impossibility to Settle Doubts by Other Rules.
Doctrine of Complementary-Contracts-Construed-Together
1. If the doubts refer to incidental circumstances of a gratuitous contract,
the least transmission of rights and interest shall prevail;

2. If the contract is onerous, the doubt shall be settled in favor of the

greatest reciprocity of interest; and

3. If the doubts are cast upon the principle 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.

CHAPTER 5
INTERPRETATION OF CONTRACTS
DEFECTIVE CONTRACTS
Kinds of Contracts:
1. Perfectly valid – where contract does not suffer from any defect.
2. Defective – if the contract suffers from a certain kind of defect/s.
Kinds of Defective Contracts
1. Rescissible Contract – contains all the requisites of a valid contract and
are considered legally binding, but by reason of injury or damage (lesion)
to either of the contracting parties or to third person. Valid, binding, and
effective until rescinded.
2. Voidable Contract – one which the essential requisites for validity under
Article 1318 are present but may be annulled because of want of
capacity or the vitiated consent of one of the parties.
3. Unenforceable contract – which cannot be enforced by a proper action
in court, unless it is ratified, because either it is entered without or in
excess of authority or it does not comply with the statute of frauds or
where both of the contracting parties do not possess the required legal
capacity.
4. Void or inexistent contract – which has no force and effect from the
very beginning.
- Contains all essential elements but it is invalid because of the following
reason:
a. Its cause, object or purpose is contrary to law, morals and good customs
b. Its object or purpose is outside of the commerce of men.
c. It contemplates an impossible service
d. It is expressly prohibited or declared void by law.
Perfection – the birth of a contract or its existence
Types of Perfection
1. Consensual – perfection is perfected by mere consent (Requisite:
Consent, Object, and Cause)
2. Real – as to its perfection is not perfected by mere consent but by the
delivery of the object of the contract.
CHAPTER 6
RESCISSBLE CONTRACTS
Article 1380. Contracts validly agreed upon may be rescinded in the cases
established by law.
- Termination of contract is different from rescission.
- When a contract is rescinded, it is deemed inexistent, and the parties are
returned to their status qou ante. (There is mutual restitution).
Rescission Distinguished from Mutual Dissent
Rescission of contract should also be distinguished from a case where the
parties agree to cancel their contract and mutually return the things they may
have received under it.
Article 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one-fourth of the
value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter
suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in
any other manner collect the claims due them;
 (4) Those which refer to things under litigation if they have been
entered into by the 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. (1291a)
Article 1382. Payments made in a state of insolvency for obligations to
whose fulfillment the debtor could not be compelled at the time they were
effected, are also rescissible. (1292)
Concept of Rescission under Article 1381
- It implies a contract, which even if initially valid, produces a lesion or a
pecuniary damage to someone.
- The action for rescission in this chapter is subsidiary in character, meaning
the action cannot be instituted except when the party suffering damages has
no other legal means to obtain reparation for the same.
Nature of Rescissible Contracts under Article 1381
- Contracts which are rescissible are valid having all the essential requisites of
a contract and therefore obligatory under normal conditions, but by reason of
injury or damage caused to either of the parties therein or to third persons
are considered defective and, this may be rescinded.
- The defect may not however be cleansed by ratification although the right of
action for rescission may be lost by way of extinctive prescription.
Requisites for Rescission to Prosper:
1. The action for rescission must originate from any of the causes specified
in Article 1381 and 1382
2. The party suffering damage and who is asking for rescission has no
other legal means to obtain reparation for the damage suffered by him.
3. The person demanding rescission must be able to return what he may
obliged to restore if rescission is granted by the court
XPN: It will not apply to a creditor suing for rescission under Article 1381
because he received nothing from the contract which he seeks to
rescind.
4. The things which are object of the contract must not be legally in the
possession of third person who did not act in bad faith.
5. The action for rescission must be filed within four years from accrual of
the right of action.
Specific Contracts Declared Rescissible
Kinds of Rescissible Contracts
1. Because of lesion or prejudice
2. Rescissible on the account of fraud or bad faith
3. By provisions of law.
1. The following contracts are rescissible by reason of lesion or
prejudice:
a. Those which are entered into by guardians whenever the wards whom
they represent suffer lesion by more than ¼ of the value of things which
are object thereof;
b. Those agreed upon in representation of absentees, if the latter suffer
lesion by more than ¼ of the value of things which are the object thereof;
and
c. Partition of inheritance where an heir suffers lesion of at least ¼ of the
share to which he is entitled.
2. Rescissible on account of fraud or bad faith
a. Those undertaken in fraud of creditors when the latter cannot in any
manner collect the claims due them;
 b. Those which refer to things under litigation if they have been entered into
by defendant without the knowledge and approval of the litigants or of
competent judicial authority, and
c. Payments made in a state of insolvency for obligations to whose
fulfillment the debtor could not be compelled at the time they were
effected.
Rescissible By Reason of Lesion or Prejudice
a. Concept of Lesion
Lesion – injury which one of the parties suffers by virtue of a contract which is
disadvantageous to him.
b. Scope and Coverage
It appears that the rescissible contracts referred to above can possibly refer only
to contracts which do not require court approval, such as when the contract is
merely an exercise of acts of administration.
Administration includes all acts for the preservation of the property and the
receipts of fruits according to the neutral purpose of thing.
c. Sale or Encumbrance of Real Property of Ward or Absentee
Any disposition or encumbrance by the guardian or administrator of real property
of the ward or of the absentee requires prior court of approval.
The court declared void of sale the ward’s realty by the guardian without the
authority from the court.
- The court rules that any disposition of the property of the ward (minor)
without the proper judicial authority, unless ratified by them upon reaching
the age of majority, is unenforceable in accordance with Articles 1317 and
Article 1403 of the Civil Code.
d. Guardian Cannot Acquire Property of Ward
The guardian is likewise prohibited from acquiring by way of purchase, either in
person or through the meditation of another, the property of his ward whether
such purchase is made at a public or judicial action.
After the termination of guardianship, the probation is no longer applies.
Contracts in Fraud of Creditor
a. Accion Pauliana
Contracts undertaken in fraud of creditors are rescissible under the
provisions of the 3rd paragraph of Art. 1381, when the latter cannot in any
manner collect the claims due them.
- The rescissory action to set aside contracts in fraud of creditors is known as
Accion Pauliana.
Requisites of Accion Pauliana and Prescriptive Period
1. The plaintiff asking for rescission has a credit prior to the alienation.
Although demandable later;
2. The debtor has made a subsequent contract conveying a patrimonial benefit
to a third person;
3. The creditor has no other legal remedy to satisfy his claim
4. The act impugned is fraudulent;
5. The third person who received the property conveyed, if it is by onerous title,
has been an accomplice in the fraud.
Guardians Cannot Acquire Property of Ward
The guardian is likewise prohibited from acquiring by way of purchase, either in
person or through the meditation of another, the property of his ward whether
such purchase is made at a public or judicial auction.
Right of Right Refusal
The prevailing doctrine in this jurisdiction is that a contract entered into in
violation of right of first refusal of another person is rescissible.
Concept of Right of First Refusal
A right of first refusal is a contractual grant, not of the sale of a property, but of
the first priority to buy the property in the event the owner sells the same.
The rights of first refusal is an integral and indivisible part of the contract of lease
and is inseparable from the whole contract,
Example: If the lessor sold the leased premises to a third person without the
offering first the property to the lessee, the latter’s right of refusal is violated.
Distinguished from Option
An option or an offer would require, among other things, a clear certainty on both
the object and the cause or consideration of the envisioned contract.
XPN: It would be dependent not only on the grantor’s eventual intention to enter
into a binding juridical relation with another but also on terms, including the price,
that obviously are yet to be later firmed up.
Contracts Relating to things under Litigation
2. Accion Subrogatoria
3. Accion Pauliana
Article 1385. Rescission creates the obligation to return the things which were
the object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can
return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad
faith.
In this case, indemnity for damages may be demanded from the person causing
the loss. (1295)

Contracts which are rescissible due to fraud or bad faith include those which
involve things under litigation, if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial
authority.

Payments Made in State of Insolvency

A debtor who is under a state of insolvency should not give undue preference to
one creditor by paying only the latter’s credit to the prejudice of the others.

Article 1383. The action for rescission is subsidiary; it cannot be

instituted except when the party suffering damage has no other legal
means to obtain reparation for the same. (1294)

Article 1384. Rescission shall be only to the extent necessary to cover

the damages caused. (n)

Subsidiary remedy – the exhaustion of all remedies by the prejudiced creditor to

collect claims due him before rescission is resorted to.

- A creditor would have a cause of action to bring an action for rescission, if it

is alleged that the following successive measures have already been taken:

1. Exhaust the properties of the debtor through levying by attachment and

execution