Interpretation of Contracts

Republic v. Castellvi, 58 SCRA 336

Art. 1370 – If the term and condition of a contract are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of the stipulation shall control.

If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the
former.

1371 – In order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered.

In the case at bar, the intention of the republic cannot prevail over what has been expressly stated in
the contract.

Doctrine

The stipulation is clear and free from ambiguity therefore shall not be interpreted otherwise. The
express stipulation shall prevail over the implied intention of the other party.

Rescissible Contracts

Guzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668

Sale may be rescinded for failure to comply to offer the opportunity of first priority. Article 1380 to 1381
(3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by reason of
injury to third persons, like creditors. The status of creditors could be validly accorded the Bonnevies for
they had substantial interests that were prejudiced by the sale of the subject property to the petitioner
without recognizing their right of first priority under the Contract of Lease.

Doctrine:

A contract that is initially valid but produces lesion or pecuniary damage to someone may be invalidated
for reason of equity.

Contract of sale entered by the parties is deemed rescissible if it produces damage to someone and the
buyer is not a purchaser in good faith.
Siguan v. Lim, 318 SCRA 725

Doctrine:

Rescission is but a subsidiary remedy which cannot be instituted except when the party suffering from
damage has no other legal means to obtain reparation.

Even though that the presumption of donation is presumed to have been entered into in fraud of
creditors it doesn’t per se constitute as evidence that the donor did not leave adequate properties
which creditors might have recourse for the collection of their credit BEFORE the execution of Donation.

Badges of Fraud:

(1) The fact that the consideration of the conveyance is fictitious or is inadequate;
(2) A transfer made by a debtor after suit has begun and while it is pending against him;
(3) A sale upon credit by an insolvent debtor;
(4) Evidence of large indebtedness or complete insolvency;
(5) The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or
greatly embarrassed financially;
(6) The fact that the transfer is made between father and son, when there are present other of the
above circumstances; and
(7) The failure of the vendee to take exclusive possession of all the property.

List above is not exclusive. Case to case basis.

Pryce Corp. v. PAGCOR, 458 SCRA 164

Termination of a contract is not equivalent to its rescission. When an agreement is terminated, it is

deemed valid at inception. Prior to termination, the contract binds the parties, who are thus obliged to
observe its provisions. However, when it is rescinded, it is deemed inexistent, and the parties are
returned to their status quo ante. Hence, there is mutual restitution of benefits received.

Doctrine ( recission on account of breach)

Remedy of recission of breach of stipulation is not predicated on injury and economic damage of
plaintiff but on the breach of faith by the defendant, It is a violation of the reciprocity between the
parties. In the case of Breach, rescission becomes a principal action retaliatory in character. It is not
subordinated to anything other than the culpable breach of obligation. However, If the petitioner
intended to enforce the contract and comply to its obligation until the contract is cancelled it is not
rescission but Termination.
Cabaliw v. Sadorra, 64 SCRA 310

Presumption of Public Document over a specific provision of law.

The presumption of regularity of a Public Document only applies to contracting parties and not to a third
party who have been prejudiced. Close relationship between the vendor and the vendee is one of the
known badges of fraud.

China Banking Corp v. CA, 327 SCRA378

Conveyance founded on valuable consideration does not negate the presumption of fraud. Conveyance
is deemed fraudulent if it prejudices the rights of a creditor.

Coastal Pacific Trading v. Southern Rolling

Contracts entered into with all the essential requisite of a contract is valid, but in the case where there is
deliberate intent to enforce undue advantage to avoid obligation which produces prejudice to other
creditors or any transaction entered into by a new company for the purpose of defrauding the creditors
of the company preceded may be rescinded for the reason of equity.

Caltex Philippines v. PNOC Shipping, 498 SCRA 400

When a business assumes all the properties, business and assets of a company it also assumes all the
obligations of assignors.

Transfer of all or substantially all the properties and assets of a corporation, the transfer should not
prejudice the creditors of the assignor. The only way the transfer can proceed without prejudice to the
creditors is to hold the assignee liable for the obligations of the assignor. The acquisition by the assignee
of all or substantially all of the assets of the assignor necessarily includes the assumption of the
assignor’s liabilities, unless the creditors who did not consent to the transfer choose to rescind the
transfer on the ground of fraud.

To allow an assignor to transfer all its business, properties and assets without the consent of its
creditors and without requiring the assignee to assume the assignor’s obligations will defraud the
creditors. The assignment will place the assignor’s assets beyond the reach of its creditors.
Uy Tong v. Silva,

Allowing the off-set of debt under the principle of compensation is valid. But since the off-set limit of the
insolvent debtor is only up to the time prior to the declaration of insolvency, the amount will not equate
the debt. The debt cannot be further off-set after the declaration of voluntary insolvency because it will
give undue preference over the other creditors.

The contract entered by the parties of future claims for the rent of the insolvent is rescissble because it
will produce undue preference over the other creditor.

Floro Enterprises v. CA, 249 SCRA 354

Doctrine of Mutual cancellation

The dissolution or the cancellation of the original Agreement necessarily involves restoration of the
parties to the status quo ante prevailing immediately prior to the execution of the Agreement. But it
also acknowledges the benefit acquired by each party, for restoration of the thing which is the object of
the contract will constitute unjust enrichment. Mutual restoration is in consonance with the basic
principle that when an obligation has been extinguished or resolved, it is the duty of the court to require
the parties to surrender whatever they may have received from the other so that they may be restored,
as far as practicable, to their original situation.