CIVIL LAW: OBLIGATIONS AND CONTRACTS

B. Contracts

4. Form, Reformation, and Interpretation of Contracts

In the Philippine Civil Law, Contracts fall under the provisions of Book IV of the Civil Code of the Philippines (Republic Act No. 386). This topic is crucial in understanding the intricacies of how obligations and rights arise from agreements between parties, as well as how these agreements are interpreted and enforced. Here is a comprehensive guide on Form, Reformation, and Interpretation of Contracts:

A. Form of Contracts

General Rule of Form
Contracts are generally binding regardless of form, as long as the essential requisites for their validity are met (i.e., consent, object, and cause). This is grounded in the principle of consensuality under Article 1305 of the Civil Code, which states that a contract exists as soon as there is an agreement between parties on the essential elements.
Form as a Requirement for Enforceability
Some contracts, however, require a specific form to be enforceable or for purposes of public record and protection:
- Public Instrument: Certain contracts, like sales of real property, must be in a public document to be enforceable against third parties.
- Statute of Frauds: Certain contracts must be in writing to be enforceable, such as those that cannot be performed within a year, sales of goods over a certain value, or contracts of suretyship.
Formalities in Special Contracts
Specific formalities are required by law for certain contracts, such as:
- Donation of Real Property: Must be in a public instrument.
- Contracts of Partnership: Partnerships contributing immovable property must be in a public instrument.
- Marriage Settlements: Must be executed before the marriage in a public document.
Subsequent Written Form for Proof
Even if a contract does not require a specific form for validity, subsequent documentation (such as written acknowledgment) may be needed as evidence in disputes or for enforceability under certain circumstances.

B. Reformation of Contracts

Purpose and Definition of Reformation
Reformation allows a contract to be revised so that it accurately reflects the true intention of the parties. This doctrine exists to correct contracts with wording that does not conform to the true agreement due to mistake, fraud, inequitable conduct, or accident.
Conditions for Reformation (Articles 1359 to 1369)
Reformation may be granted under the following conditions:
- Mutual Mistake: When both parties are mistaken, and the error prevents the true intention from being expressed.
- Mistake of One Party and Fraud or Inequitable Conduct by the Other: If one party’s mistake is induced by the other’s bad faith.
- Ignorance, Lack of Skill, Neglect, or Mistake of the Person Drafting the Instrument: Reformation is also permitted if the person drafting the contract misinterpreted the intentions.
Limitations on Reformation
Not all contracts can be reformed:
- Void Contracts: A void contract cannot be reformed because it lacks essential validity.
- Simple Donations Inter Vivos: These cannot be reformed.
- Wills: These cannot be reformed because they are governed by separate rules in testamentary succession.
- Stipulations Prohibited by Law: If a contract contains stipulations prohibited by law, it cannot be reformed but must instead be revised or nullified.
Procedure for Reformation
Reformation is a remedy that must be pursued judicially. The party seeking reformation must file an action in court to prove that the contract does not reflect the true agreement due to error, fraud, or other valid grounds.

C. Interpretation of Contracts

Principles Governing Interpretation
The interpretation of contracts is governed by Articles 1370 to 1379 of the Civil Code. These principles are designed to ascertain the true intention of the parties rather than rely solely on the literal meaning of the language used.
Literal Meaning vs. Intent (Article 1370)
If the terms of the contract are clear and leave no doubt as to the intent of the parties, the literal meaning shall govern. However, if there is any ambiguity or doubt, the intent of the parties shall be determined by examining the contract as a whole.
Interpretation in Case of Ambiguity
When the terms are susceptible to several interpretations:
- Usage and Custom (Article 1376): The contract will be interpreted according to the established usage or custom of the place.
- Intention Prevails over Words: Ambiguous terms should be understood in the sense most favorable to the obligee (i.e., the party who stands to lose if ambiguity exists).
- Interpretation Favorable to Validity: If the contract is susceptible to different meanings, one of which would make it valid, the interpretation which would uphold the contract’s validity should be adopted.
Interpretation by Conduct (Article 1371)
The conduct of the parties after the contract was executed can be a basis for interpreting the terms of the contract, especially if the subsequent actions indicate an understanding of ambiguous provisions.
Successive Interpretation Steps
When the intent remains unclear, the following steps are used:
- Evaluate the Usage and Custom of the Place: Custom can fill in gaps in the agreement’s terms.
- Interpreted Against the Drafter (Contra Proferentem Rule): Ambiguities are construed against the party who drafted the agreement, especially in adhesion contracts (standard-form contracts).
Supplementary Rules in Interpreting Contracts
If ambiguity remains, additional presumptive rules apply:
- Specific Over General Terms: Specific clauses prevail over general terms.
- Interpretation in Accordance with the Nature of the Contract: The court may consider the nature and purpose of the contract to clarify ambiguities.
Equitable Interpretation
Contracts should be interpreted according to the spirit rather than the letter if such interpretation will bring about fairness and equity. Courts often adopt an interpretation that prevents unjust enrichment or undue advantage.

D. Effect of Interpretation on the Enforceability of Contracts

Binding Effect of Judicial Interpretation
When a court interprets a contract, its judgment is binding between the parties. This includes reformation judgments or interpretations based on equitable considerations, reflecting a fair and just resolution of disputes.
Modification Based on Interpretation
Judicial interpretation may lead to the modification or partial invalidation of specific clauses if they contradict the intended purpose or create an imbalance in the obligations.
Role of Public Policy
Public policy considerations may limit the interpretation or enforcement of certain contractual provisions if they are deemed contrary to law, morals, or public order. Courts may reject interpretations that would enforce provisions violating these principles.

Summary

The Form, Reformation, and Interpretation of Contracts under Philippine Civil Law involves ensuring that contracts are entered into with the proper formalities, accurately reflect the true intentions of the parties, and are enforced fairly and equitably. The courts play an essential role in reinterpreting or reforming contracts that fail to express the genuine agreement due to error, fraud, or inequity, always guided by public policy and the interest of justice.