The Interpretation of a Contract

As a general rule, in the interpretation of a contract, the intention of the parties is to be pursued. It is the duty of the courts to place a practical and realistic construction upon it, giving due consideration to the context in which it is negotiated and the purpose which it is intended to serve. (TSPIC Corporation v. TCPIC Employees Union [FFW], 545 SCRA 215).

It is a familiar rule in interpretation of contracts that conflicting provisions should be harmonized to give effect to all. When general and specific provisions are inconsistent, the specific provision shall be paramount to and govern the general provision (Id).

A significant task in contract interpretation is the ascertainment of the intention of the parties and looking into the words used by the parties to project that intention. (Natalia P. Bustamante v. Spouses Rodito F. Rosel and Norma A. Rosel, G.R. No. 126800, November 29, 1999).

Where one of the parties to a contract did not perform the undertaking to which he was bound by the terms of the agreement to perform, he is not entitled to insist upon the performance of the other party (Almocera v. Ong, 546 SCRA 164).

Section 14. Interpretation according to circumstances. – For the proper construction of an instrument, the circumstances under which it was made, including the situation of the subject thereof and of the parties to it, may be shown, so that the judge may be placed in the position of those whose language he or she is to interpret. (13a)

Interpretation of document according to circumstances under which it was made is similar to determining the true intention of the parties. What was the status or the circumstances of the parties during the execution of the contract?

Non-Payment of Price versus Concept of Simulation will illustrate the above section:

The concept of inadequacy or non-payment of price is irreconcilable with the concept of simulation – if there exists an actual consideration for transfer evidenced by the alleged act of sale, no matter how inadequate it be, the transaction could not be a “simulated sale”. A sale between a mother and a daughter by itself cannot be considered an indication of simulation, absent an indication of the absence of intent to be bound by the contract. (Aliño vs. Heirs of Angelica A. Lorenzo, 556 SCRA 139).

Gross inadequacy of price by itself will not result in a void contract (Bacungan vs. Court of Appeals, 574 SCRA 642).

Freely Executed and yet Against the Law:

The questioned contracts were freely and voluntarily executed by petitioners and respondent is of no moment, pactum commissorium being void for being prohibited by law (Ong vs. Roban Lending Corporation, 557 SCRA 516).

Pactum commissorium is the automatic appropriation by the mortgagee of the mortgaged property upon mortgagor’s failure to pay the loan.

The elements of pactum commissorium are as follows: 

1. There should be a property mortgaged  by way of security for the payment of the principal obligation, and

2. There should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period. (Development Bank of the Philippines vs. Court of Appeals, 284 SCRA 14, 26 (1998), citing Tolentino, Arturo M., Commentaries & Jurisprudence on the Civil Code of the Philippines, Vol. V, pp. 536-537(1992), citing Uy Tong vs. Court of Appeals, 161 SCRA 383 (1988).

Illegality of pactum commissorium can be read in:

“Article 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void”. (New Civil Code).

A contract that violates the law is null and void ab initio and vests no rights and creates no obligation. It produces no legal effect at all (Nunga, Jr. vs. Nunga III, 574 SCRA 760).

Pactum commissorium is void because the thing pledged or mortgaged by the debtor would disappear in favor of the creditor but without due process of law. In short, the debtor losses ownership over the thing pledged or mortgaged and automatically transfers it to the creditor. In pactum commissorium the debtor is condemned without a hearing. 

Article 5 of the Civil Code of the Philippines states: 

“ART. 5. Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity.”