Interpretation of Contracts

Borromeo v. CA, 47 SCRA 65 (1972)

Doctrine:
It is a fundamental principle in the interpretation of contracts that while ordinarily the literal sense of
the words employed is to be followed, such is not the case where they "appear to be contrary to the
evident intention of the contracting parties," which “intention shall prevail” (Art. 1370). The terms,
clauses and conditions contrary to law, morals and public order (in this case the contested stipulation)
should be separated from the valid and legal contract when such separation can be made because
they are independent of the valid contract which expresses the will of the contracting parties.
To determine the nature of a contract courts do not have or are not bound to rely upon the name or
title given it by the contracting parties, should there be a controversy as to what they really had
intended to enter into, but the way the contracting parties do or perform their respective obligations,
stipulated or agreed upon may be shown and inquired into, and should such performance conflict with
the name or title given the contract by the parties, the former must prevail over the latter.
There is another fundamental rule in the interpretation of contracts specifically referred to in Kasilag v.
Rodriguez, as "not less important" than other principles which "is to the effect that the terms, clauses
and conditions contrary to law, morals and public order should be separated from the valid and legal
contract when such separation can be made because they are independent of the valid contract which
expresses the will of the contracting parties.
Facts:
The facts as found by the Court of Appeals follow: "On one occasion with some pressing obligation to
settle with Mr. Miller, defendant borrowed from plaintiff a large sum of money for which he mortgaged
his land and house in Cebu City. Mr. Miller filed civil action against the defendant and attached his
properties including those mortgaged to plaintiff, inasmuch as the deed of mortgage in favor of
plaintiff could not be registered because not properly drawn up. Plaintiff then pressed the defendant
for settlement of his obligation, but defendant instead offered to execute a document promising to pay
his indebtedness even after the lapse of ten years. Liquidation was made and defendant was found to
be indebted to plaintiff in the sum of P7,220.00, for which defendant signed a promissory note therefor
on November 29, 1933 with interest at the rate of 12% per annum, agreeing to pay 'as soon as I have
money'. The note further stipulates that defendant 'hereby relinquish, renounce, or otherwise waive my
rights to the prescriptions established by our Code of Civil Procedure for the collection or recovery of
the above sum of P7,220.00. ... at any time even after the lapse of ten years from the date of this
instrument'. After the execution of the document, plaintiff limited himself to verbally requesting
defendant to settle his indebtedness from time to time. Plaintiff did not file any complaint against the
defendant within ten years from the execution of the document as there was no property registered in
defendant's name, who furthermore assured him that he could collect even after the lapse of ten years.
After the last war, plaintiff made various oral demands, but defendants failed to settle his account, —
hence the present complaint for collection."
Issue:
Whether or not the stipulation amounting to a waiver in line with the principle "that a person cannot
renounce future prescription" is valid.
Ruling:
No.
Is it not rather evident that since even the denomination of the entire contract itself is not conclusively
determined by what the parties call it but by the law, a stipulation found therein should likewise be
impressed with the characterization the law places upon it?
What emerges in the light of all the principles set forth above is that the first ten years after November
29, 1933 should not be counted in determining when the action of creditor, now represented by
petitioners, could be filed. From the joint record on appeal, it is undoubted that the complaint was filed
on January 7, 1953. If the first ten-year period was to be excluded, the creditor had until November 29,
1953 to start judicial proceedings. Nor could there be any legal objection to the complaint by the
creditor Borromeo of January 7, 1953 embodying not merely the fixing of the period within which the
debtor Villamor was to pay but likewise the collection of the amount that until then was not paid. An
action combining both features did receive the imprimatur of the approval of this Court. As was clearly
set forth in Tiglao v. The Manila Railroad Company: "There is something to defendant's contention that
in previous cases this Court has held that the duration of the term should be fixed in a separate action
for that express purpose. But we think the lower court has given good reasons for not adhering to
technicalities in its desire to do substantial justice." The justification became even more apparent in the
latter portion of the opinion of Justice Alex Reyes for this Court: "We may add that defendant does not
claim that if a separate action were instituted to fix the duration of the term of its obligation, it could
present better proofs than those already adduced in the present case. Such separate action would,
therefore, be a mere formality and would serve no purpose other than to delay." There is no legal
obstacle then to the action for collection filed by the creditor. Moreover, the judgment of the lower
court, reversed by the respondent Court of Appeals, ordering the payment of the amount due is in
accordance with law.
The then Justice, now Chief Justice, Concepcion expressed a similar thought in emphasizing that in the
determination of the rights of the contracting parties "the interest of justice and equity be not ignored."
This is a principle that dates back to the earliest years of this Court. The then Chief Justice Bengzon in
Arrieta v. Bellos, invoked equity. Mention has been made of "practical and substantial justice," "[no]
sacrifice of the substantial rights of a litigant in the altar of sophisticated technicalities with impairment
of the sacred principles of justice," "to afford substantial justice" and "what equity demands." There has
been disapproval when the result reached is "neither fair, nor equitable." What is to be avoided is an
interpretation that "may work injustice rather than promote justice." What appears to be most obvious
is that the decision of respondent Court of Appeals under review offended most grievously against the
above fundamental postulate that underlies all systems of law.
WHEREFORE, the decision of respondent Court of Appeals of March 7, 1964 is reversed, thus giving full
force and effect to the decision of the lower court of November 15, 1956. With costs against private
respondents.
Kasilag v. Rodriguez, 69 Phil. 217 (1939)
Doctrine:
The cardinal rule in the interpretation of contracts is to the effect that the intention of the contracting
parties should always prevail because their will has the force of law between them. Article 1281 of the
Civil Code consecrates this rule and provides, that if the terms of a contract are clear and leave no
doubt as to the intention of the contracting parties, the literal sense of its stipulations shall be followed;
and if the words appear to be contrary to the evident intention of the contracting parties, the intention
shall prevail.
Another fundamental rule in the interpretation of contracts, not less important than those indicated, is
to the effect that the terms, clauses and conditions contrary to law, morals and public order should be
separated from the valid and legal contract and when such separation can be made because they are
independent of the valid contract which expresses the will of the contracting parties.
FACTS:
The parties entered into a contract of loan to which has an accompanying accessory contract of
mortgage. The executed accessory contract involved the improvements on a piece land, the land
having been acquired by means of homestead. Petitioner for his part accepted the contract of
mortgage.
Believing that there are no violations to the prohibitions in the alienation of lands Petitioner, acting in
good faith took possession of the land. To wit, the Petitioner has no knowledge that the enjoyment of
the fruits of the land is an element of the credit transaction of Antichresis.
Issue:
Whether or not the principal contract is null and void.
Ruling:
The words used by the contracting parties in the contract clearly show that they intended to enter into
the principal contract of loan in the amount of P1,000, with interest at 12 per cent per annum, and into
the accessory contract of mortgage of the improvements on the land acquired as homestead, the
parties having moreover, agreed upon the pacts and conditions stated in the deed. In other words, the
parties entered into a contract of mortgage of the improvements on the land acquired as homestead,
to secure the payment of the indebtedness for P1,000 and the stipulated interest thereon.
Principal contract is that of loan and the accessory that of mortgage of the improvements upon the
land acquired as a homestead. There is no question that the first of these contract is valid as it is not
against the law.

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

Doctrine:
The established doctrine is that when the dispositive portion of a judgment, which has become final
and executory, contains a clerical error or an ambiguity arising from an inadvertent omission, such error
or ambiguity may be clarified by reference to the body of the decision itself.
Facts:
On 15 October 1982, petitioners Antonio Castelo, Bernabe Banson, Lourdes Banson and Pompeyo
Depante entered into a contract denominated as a "Deed of Conditional Sale" with private respondent
Milagros Dela Rosa involving a parcel of land. The agreed price of the land was P269,408.00. Upon
signing the contract, private respondent paid petitioners P106,000.00 leaving a balance of P163,408.00.
The Deed of Conditional Sale also stipulated that:
"xxx xxx xxx
b.)The balance of P163,408.00 to be paid on or before December 31, 1982 without interest and penalty
charges;
c.)Should the said balance [remain unpaid] by the VENDEE, the VENDORS hereby agree to give the
VENDEE a grace period of SIX (6) months or up to June 30, 1983 to pay said balance provided that
interest at the rate of 12% per annum shall be charged and 1% penalty charge a month shall be imposed
on the remaining diminishing balance.
Private respondent Dela Rosa was unable to pay the remaining balance. Petitioners filed an action for
specific performance with damages. RTC rendered the decision ordering the rescission of the Deed of
Conditional Sale. Petitioners went on Certiorari to CA. They claimed that rescission of the contract was
only an alternative relief available under the Civil Code, while they in their complaint before the RTC,
had asked for specific performance with damages.CA reversed the RTC decision. Writ of execution was
issued. Private respondent Dela Rosa was required to pay petitioners a total of P197,723.68. Petitioners
filed a motion for reconsideration and a separate motion for alias writ of execution contending that the
sum of P197,723.68 was erroneous. They argued that the obligation of private respondent was to pay
(a) interest at the rate of twelve percent (12%) per annum plus (b) one percent (1%) penalty charge per
month, from default, i.e, from 1 January 1983; that the amount to be paid by the Defendant should be
P398,814.88 instead and not P197,723.68 or a difference of P201,091.20.
RTC denied the motion. Further contends that the phrase "to pay interest" found in the dispositive
portion of the CA’s November 21, 1986 decision did not refer to the stipulation in the "Deed of
Conditional Sale" but rather to the legal rate of interest imposed by the CA which started to run from 12
February 1987, the date of entry of judgment.
Issue:
The Petition before us now presents the issue of what is the correct interpretation of the phrase "to pay
interest" set out in the dispositive portion of the 21 November 1986 decision of Castro-Bartolome, J.
Ruling:
We believe and so hold that the phrase "to pay interest," found in the dispositive portion of the Castro-
Bartolome decision must, under applicable law, refer to the interest stipulated by the parties in the
Deed of Conditional Sale which they had entered into on 15 October 1982. We note, in the first place,
that the phrase "to pay interest" comes close upon the heels of the preceding phrase "to comply with
her obligation under the conditional sale to pay the balance — of P163,408.00." A strong inference thus
arises that the "interest" required to be paid is the interest stipulated as part of the "obligation [of
private respondent dela Rosa] under the conditional sale [agreement] to pay the balance of [the
purchase price of the land]. There is, in the second place, no question that private respondent dela
Rosa had failed to pay the balance.
In the computation for the amount to be paid, The question is whether, during the period of 1 January
1983 up to 30 June 1983, 12% interest per annum plus 1% penalty charge a month was payable "on the
remaining diminishing balance;" or whether during the period from 1 January 1983 to 30 June 1983,
only 12% per annum interest was payable while the 1% per month penalty charge would in addition
begin to accrue on any balance remaining unpaid as of 1 July 1983.
We believe that the contracting parties intended the latter view of their stipulation on interest; for if the
parties had intended that during the grace period from 1 January 1983 to 30 June 1983, interest
consisting of 12% per annum plus another 12% per annum (equivalent to 1% per month), or a total of
24% per annum, was payable, then they could have simply said so. Instead, the parties distinguished
between interest at the rate of 12% per annum and the 1% a month penalty charge. The interpretation
we adopt is also supported by the principle that in case of ambiguity in contract language, that
interpretation which establishes a less onerous transmission of rights or imposition of lesser burdens
which permits greater reciprocity between the parties, is to be adopted.
WHEREFORE, the writ of certiorari is hereby GRANTED.
Lopez vs. Sarabia, 439 SCRA 35 (2004)
It bears stressing that the law favors the least transmission of rights and interests over a property in
controversy. The purpose of the law is to prevent circumvention of the law on usury and the
prohibition against a creditor appropriating the mortgaged property. Additionally, it is aimed to end
unjust or oppressive transactions or violations in connection with the sale of the property. The wisdom
of these provisions cannot be doubted, considering many cases of unlettered persons or even those
with average intelligence invariably finding themselves in no position whatsoever to bargain fairly with
their creditors.

There is no dispute that the transaction between the parties is one of equitable mortgage and not a
sale as maintained by the petitioners. This was a finding correctly made by the trial court and the
appellate court, which we find no cogent reason to disturb.
No matter what nomenclature is given to a document, Article 1602 of the New Civil Code provides that
the contract is presumed to be an equitable mortgage in any of the following cases:
1) When the price of a sale with right to repurchase is usually inadequate;
2) When the vendor remains in possession as lessee or otherwise;
3) When upon the expiration of the right to repurchase another instrument extending the period of
redemption or granting a new period is executed;
4) When the purchaser retains for himself a part of the purchase price;
5) When the vendor binds himself to pay the taxes on the thing sold;
6) In any other case where it may be fairly inferred that the real intention of the parties is that the
transaction shall secure the payment of a debt or the performance of any other obligation;
In any of the foregoing cases, any money, fruits or other benefit to be received by the vendee as rent
or otherwise shall be considered as interest which shall be subject to the usury laws.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals is AFFIRMED with the
modification that respondent Margarita Sarabia is DIRECTED to exercise, within thirty (30) days from
the finality of this decision, her option of either paying one-half of the value of the improvements made
on the land at that time they were made, or to demand the removal by the petitioners of the
improvements made on the subject property at their expense. No costs.