Dec 20, 2022

Construing Contracts

By Tranquil G.S. Salvador III
DEC 16, 2022 12:01 AM

“Since contracts have the force of law between parties, it must be complied with in good faith”

A contract is a transaction involving two or more individuals whereby each becomes obligated to the other, with reciprocal rights to demand performance of what is promised by each respectively (Barron’s Law Dictionary).

 The contract may require a party thereto “to give something or to render some service” (Article 1305, Civil Code of the Philippines).

The contracting parties “may establish stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy” (Article 1306, Civil Code of the Philippines).

If the stipulations and clauses “are clear and leave no doubt upon the intention of the parties,” then its literal meaning shall control (Article 1370, Civil Code of the Philippines).

“This provision is akin to the ‘plain meaning rule’ applied by Pennsylvania courts, which assumes that the intent of the parties to an instrument is ‘embodied in the writing itself, and when the words are clear and unambiguous the intent is to be discovered only from the express language of the agreement’” (Norton Resources and Development Corporation v. All Asia Bank, G.R. NO. 162523, November 25, 2009).

The court’s “[p]urpose in examining a contract is to interpret the intent of the contracting parties… interpreting a contract requires the court to make a preliminary inquiry as to whether the contract… is ambiguous. [It] is ambiguous if it is susceptible of two reasonable alternative interpretations” (G.R. 162523, November 25, 2009).

However, “where the written terms of the contract are not ambiguous and can only be read one way, the court will interpret the contract as a matter of law. 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” (G.R. 162523, November 25, 2009).

Since contracts have the force of law between parties, it must be complied with in good faith.

A contracting party’s failure, without legal reason, to comply with contract stipulations breaches their contract and can be the basis for the award of damages to the other contracting party (Talampas v. Moldex Realty, Inc., G.R. No. 170134, June 17, 2015). Breach of contract is known in Latin as “contritionem contractus.”

“Courts cannot make for the parties better or more equitable agreements than they themselves have [made], or [to] rewrite contracts because they operate harshly or inequitably as to one of the parties… [neither] can it alter them for the benefit of one party and to the detriment of the other, or… relieve one of the parties from [its] terms… or impose on him those which he did not [consent to]” (G.R. 162523, November 25, 2009).

In the case Talampas v. Moldex Realty, Inc. (Moldex), the latter issued a letter containing its decision to terminate its contract with the former on the grounds of project redesign.

Talampas entered a contract with Moldex for roadworks, earthworks and site-grading of the Metrogate Silang Estate in Kilometer 41, Aguinaldo Highway, Cavite (G.R. 170134, June 17, 2015).

The Supreme Court declared that Moldex failed to comply with its contractual stipulations on the unilateral termination when it terminated their contract due to the redesign of the Metrogate Silang Estates’ subdivision plan.

“[The] contract limits the instances when the respondent [Moldex] or the petitioner (Talampas] may unilaterally terminate their agreement,” and project redesign is not one of them (G.R. 170134, June 17, 2015).

The rule in our jurisdiction is “[w]here the language of a written contract is clear and unambiguous, the contract must be taken to mean that which, on its face, it purports to mean, unless some good reason can be assigned to show that the words should be understood in a different sense” (G.R. 162523, November 25, 2009 citing Bautista v. Court of Appeals).

Under the “parol evidence rule,” when an agreement has been reduced into writing, the parties cannot be permitted to adduce extrinsic evidence that would alter the terms of the written agreement.

In simpler words, any addition or alteration to the terms thereof by testimony or other evidence is not allowed under the said Rule (see Rule 130, Section 10, 2019 Rules on Evidence).

In the case of Norton Resources (Norton) v. All Asia Bank (All Asia), Norton applied for and was granted a loan by All Asia in the amount of Three Million Eight Hundred Thousand Pesos (P3,800,000.00) as evidenced by a Loan Agreement.

The loan was intended for the construction of 160 housing units on a 3.9 hectare property located in Matina Aplaya, Davao City.

To speed up the processing of all documents necessary for the release of the funds, Norton allegedly offered All Asia a service/commitment fee of P320,000.00 for the construction of 160 housing units, or at P2,000.00 per unit.

The offer having been accepted, both parties executed a Memorandum of Agreement.

Paragraph 4 of the MOA plainly states “[T]hat the CLIENT offers and agrees to pay a commitment and service fee of… P320,000.00, which shall be paid in two (2) equal installments, on the same dates as the first and second partial releases of the proceeds of the loan” (G.R. NO. 162523, November 25, 2009).

The question to be answered was whether the MOA reflects the true intention of the parties, since Norton advanced the argument that the P320,000.00 commitment/service fee was to be paid on a per-unit basis.

Specifically, only 35 housing units were constructed, hence, Norton posited that it was only liable to pay P70,000.00 and not the whole amount of P320,000.00.

Paragraph 4 is clear and explicit in its terms, leaving no room for different interpretation. Therefore, the commitment/service fee must be paid in lump sum and not on a per unit basis.

“Simply put, courts cannot stipulate for the parties or amend the latter’s agreement, for to do so would be to alter the real intention of the contracting parties…” (G.R. NO. 162523, November 25, 2009).

However, our courts are not always requested to apply cut and dried contractual provisions.

In the case of CE Construction Corporation (CECON) v. Araneta Center, Inc., the Supreme Court was faced with the issue of whether CECON was rightfully entitled to time extensions, making ACI liable for cost adjustments, additional overhead costs, and the extension of the contractor’s all risk insurance coverage, among others (G.R. 192725, August 9, 2017).

It started with ACI sending invitations to different construction companies, including CECON, for them to bid for the design, construction, and completion of all architectural and structural portions of the Araneta Center Redevelopment Project.

ACI also delivered tender documents to the prospective bidders.

The tender documents guided the bidders in formulating their own offers to ACI, or, even more fundamentally, helped them make up their minds if they were even willing to consider undertaking the proposed project.

In submitting their bids, the contractors made their own representations as to their own willingness and ability (G.R. 192725, August 9, 2017).

While ACI verbally informed CECON that the contract was being awarded to it, there was no indication that an agreement was reached on the contract sum.

The object of the contract was even subjected to multiple modifications; hence, absent a concurrence of consent and object, no contract was perfected (G.R. 192725, August 9, 2017).

There being no definitive governing instruments nor a fixed remuneration for CECON’S services, the CIAC Arbitral Tribunal had to ascertain the sum properly due CECON.

To determine the intention of the contracting parties, their contemporaneous and subsequent acts would have to be considered by the CIAC Arbitral Tribunal (see Article 1371, Civil Code of the Philippines; G.R. 192725, August 9, 2017).

The Supreme Court has been consistent that “where one has rendered services to another, and these services are accepted by the latter, in the absence of proof that the service was rendered gratuitously, it is but just that he should pay a reasonable remuneration therefore because ‘it is a well-known principle of law, that no one should be permitted to enrich himself to the damage of another’” (G.R. 192725, August 9, 2017 citing Perez v. Pomar).

 Article taken from