LONG 3.docx - Chapter V Interpretation of Contracts(Compare with Rules on Statutory Construction Primacy of intention\"Verba intentiOne nOn e

LONG 3.docx - Chapter V Interpretation of Contracts(Compare...

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Unformatted text preview: Chapter V. Interpretation of Contracts (Compare with Rules on Statutory Construction) Primacy of intention □ "Verba intentiOne nOn e cOntradebent inservare" - wOrds Ought tO be subservient tO the intent, nOt the intent tO the wOrd □ Look for the contractual intent Art 13⁄0 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. Art 13⁄2 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. • “Generalia verba sunt generaliter intelligencia" □ general things are to understood in a general sense C ases: • Borromea v CA • Kasilag v Rodriguez How to determine intention Art 13⁄1 In order to judge the intention of the contracting parties, their cOntempOraneOus and subseQuent acts shall be principally considered. □ Also take note of the usage and customs of the place How to interpret a contract 1. fihen it contains stipulations that admit of several meanings Art 13⁄3 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 efectual. 2. fihen it contains various stipulations, some of which are doubtful Art 13⁄4 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. 3. fihen it contains words that have different significations Art 13⁄5 fiords which may have different significations shall be understood in that which is mOst in keeping with the nature and Object Of the cOntract. 4. fihen it contains ambiguities and omission of stipulations Art 13⁄6 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. 5. fiith respect to the party who caused the obscurity Art 13⁄⁄ The interpretation of obscure words or stipulations in a contract shall nOt favOr the party whO caused the Obscurity. o Contracts of adhesion – resolved against the party who prepared the contract and in favor of the one who merely adhered to it 6. fihen it is absolutely impossible to settle doubts by the rules above Art 13⁄8 Par 1 fihen 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. a. In gratuitous contracts, incidental circumstances □ least transmission of rights and interests b. In onerous contracts □ greatest reciprocity of interests ⁄. fihen the doubts are cast upon the principal objects so that the intention cannot be known Art 13⁄8 Par 2 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. Applicability Of Rule 12, Rules Of COurt (now Secs. 10-19, Rule 130) Art 13⁄9 The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts. • Law in evidence; interpretation of documents) In between VALID and DEFECTIVE contracts is RELATIVELY INEFFECTIVE – ineffectively only with respect to certain parties, but are effective as to other persons. • Against voidable contract: ineffectiveness is produced ipso jure • Void or inexistent contract: can be made completely effective by the consent of the person as to whom it is effective or by the cessation of the impediment which prevents its complete ineffectiveness (1) assignment of the lease by the lessee without the consent of the lessor is ineffective only as regards the lessor, (2) transfer of a debt by the debtor to another, without the consent of the creditor is ineffective as to the creditor, (3) the payment by a debtor to his creditor after the credit has been garnished or attached by a third person is ineffective to the latter DEFECTIVE CONTRACTS OBLIGATIONS & CONTRACTS | Prof. Labitag [2 nd Semester, A.Y. 2008-2009] Page 90 of 110 1. RESCISSIBLE – contract that has caused a particular damage to one of the parties or to a third person and which for EQUITABLE REASONS may be set aside even if valid 2. VOIDABLE OR ANNULLABLE (cOntratO nulO) – contract in which CONSENT of one of the parties is defective, either because of fiANT OF CAPACITY or because it is VITIATED , but which contract is VALID until JUDICIALLY set aside 3. UNENFORCEABLE – contract that for some reason CANNOT BE ENFORCED, UNLESS RATIFIED in the manner PROVIDED BY LAfi 4. VOID AND NON-EXISTENT (cOntratO inexistente) – contract which is an ABSOLUTE NULLITY and produces NO EFFECT, as if it had never been executed or entered into Chapter VI. Rescissible COntracts Kinds Of Rescissible COntracts Art 1381 The following are rescissible contracts: 1. Entered into by guardians whenever the wards suffer lesion by more than ¼ of value of things object • Guardian: authorized only to “manage" ward´s property, no power to dispose without prior approval of court. Only includes those which are “ordinary course" of management of estate of the ward, because if sale, mortgage and other encumbrance AND not approved by court, it becomes unenforceable. • Sir Labitag: “thin band of contracts" 2. Agreed upon in representation of absentee, suffer lesion by more than ¼ of the value of things object • Same principle in relation to contracts by guardians 3. In fraud Of creditOrs who cannot collect claims due them • ReQuisites Of AcciOn Pauliana 1. Plaintiff asking fOr rescissiOn (subsidiary actiOn) has a credit priOr tO the alienatiOn 2. DebtOr has made subseQuent cOntract, giving advantage tO a 3rd persOn 3. CreditOr has nO Other remedy but tO rescind the debtOr´s cOntract tO the 3rd persOn (last resOrt) 4. Act being impugned is f raudulent 5. 3rd persOn whO received the prOperty is an accOmplice in the f raud • Credit must be existing at the time Of the fraudulent alienatiOn, althOugh nOt yet due. But at the time Of acciOn pauliana, the credit must already be due because it presuppOses a judgment and unsatisfied executiOn which cannOt exist when the debt is nOt yet demandable at the time the rescissOry actiOn is brOught. • GENERAL RULE: Credit is prior to the alienation • EXCEPTION: Credit is after alienation but entitled to accion pauliana because of some prior right 1. Claims were acknowledged by the debtor after alienation, but origin of which antedated the alienation 2. Those who become subrogated, after the alienation, in the rights of a creditor whose credits were prior to the alienation • Even secured creditors are entitled to AP • Conveyance was intentionally fraudulent which may be established by the presumption in Art 138⁄ • TEST OF FRAUD: fihether the conveyance was a bona fide transaction or a trick and contrivance to defeat creditors or whether it conserves to the debtor a special right; founded on good consideration or is made with bona fide intent. □ Does it prejudice the right of creditors?? • Good consideration: creditor is not prejudiced becomes the property was merely replaced or substituted • Badges of fraud applicable 4. Things under litigatiOn, without knowledge and approval of litigant or of competent judicial authority • To secure the possible effectivity of a claim • Transferee of property in good faith who acQuires property for valuable consideration, without OBLIGATIONS & CONTRACTS | Prof. Labitag [2 nd knowledge of the litigation or claim of the plaintiff, cannot be deprived of property. Semester, A.Y. 2008-2009] 5. Specially declared by law to be subject of rescission Characteristics of Rescissible Contracts Page 91 of 110 1. 2. 3. 4. 5. Their defect consist in injury Or damage either to one of the contracting parties or to third persons LESION: injury which one of the parties suffers by virtue of contract that is disadvantageous to him; must be known or could have been known at the birth of contract and not due to subseQuent thereto or unknown to the parties E.g. Art 1098 Partition, judicial and extra-judicial may be rescinded on account of lesion Art 1539 Sale of real estate of inferior thing Art 1542 Sale of real estate made for a lump sum They are valid befOre rescissiOn They can be attacked directly Only, nOt cOllaterally They can be attacked Only either by a cOntracting party, Or by a third persOn whO is injured Or defrauded They can be cOnvalidated Only by prescriptiOn and nOt by ratificatiOn RESCISSION Art 1380 Contracts validly agreed upon may be rescinded in the cases established by law. Definition Remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if this should be valid, by means of the restoration of things to their condition at the moment prior to the celebration of said contract. □ □ □ □ □ □ Relief for the protection of one of the contracting parties AND third persons from all injury and damages the contract may cause OR protect some incompatible and preferent right created by the contract Implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone Set asides the act or contract for justifiable reasons of eQuity Grounds for rescission can only be for legal cause Voidable contracts may also be rescinded Sir Labitag: Rescissible contracts are in between valid and void Rescission Art 1380 Distinguished from Resolution Art 1191 Similarities fiho may demand Grounds Scope of judicial control Kind of obli applicable to Character Art 1380 Rescission Art 1191 Resolution 1. Presuppose contracts validly entered into and existing □ Rescission v. Annulment: the latter there is a defect which vitiates/invalidates the contract 2. Mutual restitution when declared proper Only by a party to the contract Party to the contract suffering lesion Third parties prejudiced by the contract Non-performance (implied tacit condition in Various reasons of eQuity provided by the grounds, reciprocal obligation) mainly economic injury or lesions Court determines sufficiency of reason to justify Sufficiency of reason does not affect right to ask for extension of time to perform obligation (whether rescission (cannot be refused if all the reQuisites slight or casual breach) are satisfied) Only to reciprocal Unilateral, reciprocal Even when contract is fully fulfilled Principal Remedy Secondary/Subsidiary C ase: • Universal Food Corporation v CA MUTUAL DISSENT not the same with rescission, because mutual dissent is tantamount to a simple creation of new contract for the dissolution of the previous one. In order for rescission to take place, the reQuisites must first be satisfied: ReQuisites for Rescission 1. The contract is rescissible Art 1381 Kinds of rescissible contracts Art 1382 Payments made in a state Of insOlvency for obligations to whose fulfillment the debtor could not be compelled at the time (has not yet matured) they were effected, are also rescissible. 2. The party asking for rescission has no other legal means to obtain reparation Art 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. 3. He is able tO return whatever he may be Obliged tO restOre if rescissiOn is granted Art 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…" 4. The object of the contract has not passed legally to the possession of a third person acting in good faith Art 1385 “…conseQuently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore." Art 1385 Par 3 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. 5. The action for rescission is brought within the prescriptive period of four years Art 1389 The action to claim rescission must be commenced within fOur years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former´s incapacity or until the domicile of the latter is known. o Period commences on the termination of the ward´s incapacity or absentee´s domicile is known Effect of Rescission □ If in fraud of the creditors: Property alienated reverts to liable to creditor who sought rescission, under its original obligation □ Art 1385 Rescission creates the obligation to return the cOntract, together with their fruits, and the price with its interest; he who demands rescission can return whatever he may the patrimony of the debtor and becomes liability as a guaranty of the debtor´s things which were the Object Of the conseQuently, it can be carried out only when be obliged to restore. fiith respect tO third persOns whO acQuired the thing in gOOd faith • Transferee of property in good faith who acQuires property for valuable consideration, without knowledge of the litigation or claim of the plaintiff, cannot be deprived of property. • Art 1385 Par 2 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. • Art 1385 Par 3 In this case, indemnity for damages may be demanded from the person causing the loss. • Right of transferee to retain alienation: □ Nature of transfer o ONEROUS ▪ Good faith – no rescission ▪ Bad faith – rescissible because of his complicity in the fraud □ not entitled for reimbursement because in pari delicto; if not possible to return, indemnify the plaintiff; o GRATUITOUS ▪ Good faith – does not protect him because he gave nothing; rescissible, though not reQuired to restore the fruits ▪ Bad faith – rescissible because of his complicity in the fraud; if not possible to return, indemnify the plaintiff fiho may bring 1. 2. 3. action for rescission Creditor injured Heirs of creditor injured Creditors of creditor injured (by virtue of accion subrogatoria) Extent of Rescission Art 1384 Rescission shall be only to the extent necessary to cover the damages caused. • • • As to the excess, alienation is maintained even if transferee is in bad faith Benefits only the plaintiff creditor, not everyone BUT if transferee is willing to pay, no rescission Presumptions of Fraud Art 138⁄ All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence. □ Rebuttal by evidence that conveyance was made: o In good faith o For a sufficient cause □ Effect of Fraud: Does not necessarily make the alienation rescissible. It is only one of the reQuisites for accion pauliana. Can be overruled by a transferee in good faith and for valuable consideration Badges of Fraud (indicia of fraud) – rules by which fraudulent character of transaction may be determined 1. Fictitious/insufficient consideration 2. Conveyance is after suit is filed and while it is pending 3. Sale on credit by insolvent debtor 4. Evidence of insolvency or large indebtedness 5. Transfer of All or nearly all of debtor´s property 6. Transfer is between father and son when some of above is present ⁄. Failure of vendee to take exclusive possession of the property Cases: • Oria v McMicking • Siguan v Lim • Suntay v CA supra Liability for acQuiring in bad faith the things alienated in fraud of creditors Art 1388 fihoever acQuires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them. If there are two or more alienations, the first acQuirer shall be liable first, and so on successively. Chapter VII. Voidable or Annullable Contracts Kinds of Voidable/Annullable Contracts Art 1390 Although no damage to contracting parties: 1. fiant of capacity 2. Vitiated consent Characteristics of Voidable/Annullable Contracts 1. Their defect consists in the vitiation of consent of one of the contracting parties 2. They are binding until they are annulled by a competent court 3. They are susceptible of convalidation by ratification or by prescription ANNULMENT Annulment distinguished from Rescission NULLITY (Voidable) Declares inefficiency which contract already carries in itself (intrinsic defect) ReQuires act of ratification to be cured Based on a vice of the contract which invalidates it Annulment is a sanction based on law Demanded only by the parties to the contract Public interest predominates RESCISSION (Rescissible) Merely produces inefficiency, which did not exist essentially in the contract (external defect i.e. pecuniary damages or prejudice to one of the contracting parties or 3rd persons) Needs no ratification to be effective Compatible with the perfect validity of the contract Rescission is a remedy based on eQuity Demanded even by third parties affected by it Private interest predominates Grounds for Annulment Art 1390 1. Incapacity to consent □ Not a reQuisite sine Qua non of the contract; want is only a ground for annulment 2. Vices of consent: violence, intimidation, undue influence, mistake or fraud fiho may and may not institute an Action for Annulment Art 139⁄ A. MAY: All who are obliged principally or subsidiarily Art 1395: action does not reQuire conformity of the other party who has no right to bring action for annulment ReQuisites: a. Interest in the contract – there must be legal capacity by being bound to the contract either principally or subsidiarily b. Victim and not the party responsible for the defect – he who comes to the court must come with clean hands (so not applicable to the successor in interest of one who has contracted with a minor) B. MAY NOT: 1. Capable parties cannot allege the incapacity of those with whom they contracted 2. Parties who exerted intimidation, violence or undue influence or employed fraud or caused mistake 3. Third person who is a stranger to the contract. UNLESS he can prove that the contract prejudiced his rights with respect to one of the contracting parties, he may ask for annulment e.g. guarantors and sureties (Singsong v. Isabela Sawmill) Case: • Singsong v Isabela Sawmill Prescription of Action for Annulment – after prescription, contract can no longer be set aside Art 1391 - fiithin 4 years Period shall begin: 1. Intimidation, violence or undue influence: from the time consensual defect ceases 2. Mistake or fraud: from the time of discovery of the same 3. Incapacity: from the time guardianship ceases ‡ Extinctive prescription applies not only to action for annulment, but also to the defense of nullity ‡ Applies to the parties of to the contract, but NOT to third persons Effects of Annulment– cleanses the contract from all its defect from the moment it was constituted (retroactive effect), but does not prejudice rights of 3rd persons acQuire before the ratification Art 1396 a. MUTUAL RESTITUTION Art 1398 Restore to each other things which have been the subject matter of the contract, together wi...
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