10 Rules of Contract Interpretation
These are the 10 rules of contract interpretation:
1. A clearly written contract does not need interpretation. Hence, if the terms are clear and does not leave any doubt as to the intention of the contract parties, the literal meaning of the stipulations prevails and controls.
2. If there is a conflict with the words and the evident intention of the parties, it is the latter that will prevail. The intention of the parties is principally determined and considered based on their contemporaneous and subsequent acts. That is to say, the actions of the parties at the time of preparing the contract and their subsequent acts will determine their true intentions.
Best Legal Practices:
Use simple words or phrases in drafting a contract– When simple words or phrases are used, a contract can easily be understood as it will not call for any interpretation. Conflict in interpretation can be readily avoided.
Document negotiations, contemporaneous and subsequent acts – For reference later on as to the true intentions of the parties, negotiation and subsequent acts should be documented. Preferably, correspondences should be made to put in writing the agreements of the parties. This can be done through snail mail or e-mail.
3. The various stipulations of a contract are to be interpreted together. The doubtful ones will be interpreted in such a way as to attribute to them that sense which may result from all of them taken jointly. Otherwise stated, the uncertain provisions will be read in harmony with all other provisions.
4. Regardless of how general the terms and stipulations of a contract may be, they cannot be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree. The party drafting the contract may use general terms so as to include a wide selection or all relevant matters. Despite the use of such all-encompassing words, they cannot mean to include those that are very different from what the parties agreed on.
Example: In a sale transaction of real property, the written contract may require the seller to deliver the original copy of the owner’s duplicate, receipts of real property tax payments, “and all other relevant documents”. If not intended by the parties, the buyer cannot demand for lease documents covering the property being sold. As the parties entered into a contract of sale, “all other relevant documents” would refer only to those required for the transaction.
5. If there are several meanings to some stipulations, they will be understood as bearing that import which is most adequate to render it effectual. On the other hand, if the words have different significations, they are to be understood in such a way that is most in keeping with the nature and object of the contract.
6. If there are ambiguities, the usage or custom of the place where the contract was executed are to be considered in the interpretation thereof. These are also to fill in the omission of stipulations that are ordinarily established.
Best Legal Practices:
Stipulation against usage or custom of place where executed – If it is the intention of the parties that the usage or custom of the place where the contract was executed should not govern, the same should be expressly stipulated to avoid any unforeseen and undesirable consequences in the interpretation of the agreement.
7. In contract interpretation, the principle adhesion provides that the agreement will be construed against the one who caused the obscurity by way of penalty. Thus, the party who prepared the contract should ensure that the written agreement should be free from ambiguous provisions. Otherwise, the contract will be construed against the party who drafted it.
8. If it is absolutely impossible to settle doubts using the foregoing rules, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests is to be observed. On the other hand, if the contract is onerous, the doubt is to be settled in favor of the greatest reciprocity of interests.
9. The contract is void 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.
10. The principles of interpretation found in the Rules of Court will be observed in the interpretation of contracts. “Although a contract is law between the parties, the provisions of positive law which regulate such contracts are deemed included and shall limit and govern the relations between the parties.”
Best Legal Practices:
Important Contractual Clauses
Duty to amicably resolve controversy – To avoid costly and expensive costs of litigation, the parties may stipulate on a mutual obligation to meet and convene promptly and expeditiously in good faith for the purpose of amicably settling a dispute or controversy. They may agree that such a duty is a condition precedent prior to initiating any legal action or proceeding. To be effective, this stipulation must clearly specify the procedure to be taken, the timelines to be observed, and all documentary evidence needed for the meeting.
Jurisdiction – The parties may agree as to which courts will have jurisdiction in case of a dispute or controversy in the contract. They may even stipulate to a sole and exclusive jurisdiction of a particular court to the exclusion of all others.
Arbitration – For the speedier resolution of issues and leseser costs on the parties, they may agree to arbitration. They must specify what arbitral tribunal, who will be the arbitrators, and what rules will be followed in the arbitration.
Governing Law – For international transactions where one party is a foreigner or where the contract is executed outside the Philippines, the parties should state therein that the contract will be interpreted, governed, and enforced in accordance with the laws of the Republic of the Philippines should that be their intention.
Release, waiver, and quitclaim – The parties may provide for a clause on release, waiver, and quitclaim whereby the injured party will absolve the erring party from any and all liability.
Free and harmless – A free and harmless clause is an undertaking of a party to hold the other free and harmless from any liability arising out of or in connection with what the former may do in order to perform his contractual obligations.
Standard of care – The parties may agree to a higher standard of care than the default one which is the due diligence of a good father of a family.
Force majeure – The parties may agree to non-liability in case of a force majeure, as well as increase its coverage, including but not limited to, strikes, lockouts, boycotts, industrial/labor disputes, acts/orders/rulings of the Government, whether national or local. Conversely, the parties may agree to liability despite a force majeure.
Representations – The parties may make representations that the signatories thereto are duly authorized to enter into the contract, as well as warrant that all necessary corporate approval have been duly obtained and the legal documents evidencing such are existing. The parties may undertake to execute any and all documents, well as perform all necessary steps, to accomplish the purpose of the contract.
Relationship of the parties –The parties may clearly specify their relationship to each other, whether they are partners, principal, agent, contractor, sub-contractor, etc. Conversely, they may stipulate that no such relationship exists by and between the parties.
Non-waiver – The parties may agree that the failure to insist on the other the strict performance of any contractual obligation does not result in the waiver of any cause of action arising therefrom. They may agree that a waiver requires to be in writing and signed by the party making the waiver.
Non-disclosure – The parties may stipulate on a non-disclosure agreement to protect the confidential or sensitive information.
Assignment – The parties may agree that their contractual rights or obligations may be assigned or transferred. Conversely, they may agree that such is non-transferrable.
Tax consequences – The parties may agree as to who of them will shoulder any tax consequence that may arise from the contract. They may also agree to a proportional sharing.
Penalties – The parties may stipule on liquidated damages that will serve as penalty for non-performance or failure to comply with the obligations.
Separability – A separability clause ensures that the remaining terms and conditions, which are not void or have not been annulled, are valid and binding.
Termination – The parties may agree that the contract may be for a certain duration or project only.
Effectivity – The parties may stipulate as to when the contract will be effective, in order to create the rights and obligations therein.
Entirety – The parties may agree that the written contract reflects the entire terms and conditions that they have agreed upon on the subject matter superseding all other prior agreements or arrangements. The parties may agree that any revision on the new contract requires that the same be in writing and signed by both parties.