H.

INTERPRETATION OF CONTRACTS
1. LIM LHI LUYA vs. CA 1980 GUERRERO, J.:
Lim Yhi Luya operates a grocery store, hardware store and gasoline station. Private respondent Hind Sugar Company
is engaged in the manufacturing and marketing of sugar, its VP & Gen. Mngr is Atty. Emiliano Abalos. His assistant is
Generoso Bongato, while the cashier and accountant of the company is Teodoro Garcia.
Petitioner and private respondent since 1958 have had business dealings with each other, the company
selling sugar to the petitioner and the latter has been supplying the company with diesoline,
gasoline, muriatic acid, sulfuric acid, other supplies and materials ordered on credit. November 13,
1970, Lim proceeded to the company and in the office of Manager Abalos, the latter offered to sell sugar at P37.00 per
picul. The parties agreed to the purchase of 4,085 piculs of sugar at P35.00 per picul. The specific terms of the
contract are shown in Exhibit "a" as follows:
CONTRACT OF SALE OF SUGAR
Seller : Hind Sugar Company
Manaoag, Pangasinan
Buyer : Lim Yhi Luya
Lingayen, Pangasinan
Quantity: Four Thousand Eighty-Five (4,085)
piculs of Hind-2 sugar, 1969-70 crop
Price : Thirty Five (?35.00) Pesos per picul, f.o.b. Manaoag
Terms : Cash upon signing of this contract.
Manaoag, Pangasina, Nov. 13, 1970.
On the same day, in compliance with the contract, four delivery orders (Nos. 3054, 3055, 3056, and 3057) were issued
to petitioner by cashier Garcia upon instructions of Manager Abalos covering the total quantity of sugar sold, 4,085
piculs. Between November 13, 1970 to January 27, 1971, petitioner withdrew from the company warehouse in
varying quantities a total amount of 3,735 piculs under substitute delivery orders, leaving a balance of 350 piculs
undelivered.
On January 22, 1971, the question of payment cropped out between the parties. Petitioner claimed that he had
paid P142,975.00 to the company officials, Cashier Garcia and Manager Abalos on November 13.
1970 and as proof of his payment, he referred to the contract Exhibit "A", particularly to the
stipulation stating "Terms: Cash upon sing of this contract." Respondent company officials denied the
claim of the petitioner, alleging that petitioner never paid for the sugar on November 13, 1970 or at any time
thereafter. An audit report or examination of the books of the company made by External Auditor
Victorino Daroya showed no payment by petitioner.
Plaintiff filed a complaint against respondent.
ISSUE: whether or not the plaintiff-appellee has paid the sum of P142,975.00 which is the purchase price of the 4,085
piculs of sugar covered by the contract of sale (Exhibit "A") between the parties.
CA: defendant-appellant maintained that plaintiff- appellee has not paid anything on the contract and the contract does
not prove payment but merely created plaintiff-appellee's obligation to pay.
'We agree with defendant-appellant. The contract in its entirety proves no more than that there has been
a meeting of the minds of the parties. The signing perfected the contract but did not ex propio
vigore consummate it. It gave the parties the right to demand reciprocally the performance of the

obligations assumed by each. The vendor assumed to deliver the amount of sugar sold while the vendee which
is the plaintiff-appellee was to pay the contracted price upon the signing of the contract. The questioned portion of the
contract does not say, and is not therefore an evidence that plaintiff-appellee has paid or has performed his obligation
to pay. Stated in another way, the provision of the Contract in question means that the payment of P142,975.00 IS TO
FOLLOW or IS TO BE MADE (and NOT WAS MADE) upon the signing of said contract".
SC:
At this juncture, it is well to lay down cardinal rules in the interpretation of contracts as provided in the New Civil
Code, thus
Art. 1370. If the terms of a contract are Clear and leave no doubt upon the intention of the contracting
parties. the literal meaning of its stipulation shall control.
If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over
the former.
Art. 1371. In order to judge the intention. Of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
Art. 1375. Words which may have different significations shall be understood in that which is most in
keeping with the nature and object of the contract.
Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.
According to the trial court, "(t)here is no question that the contract was signed on November 13, 1970, in the office of
the Hind Sugar Company at Manaoag, Pangasinan. The contract itself is so clear and explicit that it cast no doubt as to
its meaning. "Cash upon signing of this contract meaning to say, that once the contract was signed,
the payment of the 4.085 piculs of sugar which is P142,975.00 was made. After the said contract
was signed and as sustained by the plaintiff, he has already delivered the P142,975.00 in cash to
the cashier of the defendan't, the said plaintiff was given all the delivery orders covering the 4,085
piculs of sugar sold and by the giving of the delivery orders to the plaintiff, the latter was entitled to
withdraw all the 4,085 piculs sugar from the company's warehouse" This is also the stand of the petition.
Contrari-wise, the appellate court castigates the "ex cathedra pronouncement of the trial court that the words 'Terms:
Cash upon the signing of this contract' means that payment was made and the contract itself is the receipt evidencing
payment", as not based on proven facts, adding further that the trial court "has taken the dubious, weak, unreliable and
improbable statements of plaintiff-appellee for true, or for granted, and in so doing the trial court has fallen wittingly
or unwittingly into the error of begging the question (petitio principii)." in other words, respondent company's
interpretation of the contract was upheld.
Considering the admitted fact that the contract of sale (Exhibit "A") was prepared in the office of respondent
company by Generoso Bongato, Assistant to the Manager of the company, upon instruction of General
Manager Emiliano L. Abalos who is a lawyer, and We are now confronted with the varying or conflicting
interpretations of the parties thereto, the respondent company contending that the stipulation "Terms: Cash
upon signing of this contract" does not mean that the agreement was a cash transaction because no
money was paid by the petitioner at the time of the signing thereof, whereas the petitioner insists that it was
a cash transaction inasmuch as he paid cash amounting to P142,975.00 upon the signing of the contract,
the payment having been made at around 1:30 in the afternoon of November 13, 1970 to the cashier,
Teodoro Garcia, and Manager Abalos although the sale was agreed to in the morning of the same day,
November 13, 1970, the conflicting interpretations have shrouded the stipulation with ambiguity or

vagueness. Then, the cardinal rule should and must apply, which is that the interpretation shall not
favor the party who caused the ambiguity (Art. 1377, New Civil Code). We rule that in the instant
case, the interpretation to be taken shall not favor the respondent company since it is the party who
caused the ambiguity in its preparation.
We do not agree with the meaning of the provision in the contract ascribed by the respondent court in its decision that:
"Stated in another way, the provision of the Contract in question means that the payment of the P142,975.00 IS TO
FOLLOW or IS TO BE MADE (and NOT WAS MADE) upon the signing of said contract." As already drafted or
drawn up, complete and finalized with all the signatures thereon of the contracting parties and presented in court as
Exhibit "A" without any change whatsoever in the mode of payment, such provision plainly and simply means that the
payment was in CASH, and not on CREDIT. The ambiguity raised by the use of the words or phrases in the
questioned provision must be resolved and interpreted against the respondent company.
In truth the stipulation in the contract which reads: "Terms: Cash upon signing of this contract" is
very clear and simple in its meaning, leaving no doubt in Our minds upon the intention of the
contracting parties, hence, the first rule of contract interpretation that the literal meaning of its
stipulation shall control, is the governing rule at hand.
Petitioner claims that Exh. "A" is the receipt of his payment of the P142,975.00 cash upon the signing of the contract.
Respondent, on the other hand, insists that it is not a written acknowledgement or written admission of having
received the sum of P142,975.00 and may not be considered a receipt for any purpose (Brief for the Respondent, p.
34), although he fully agrees with the proposition that any written acknowledgement or written admission of anything
received is a receipt (same page 34). This is exactly what the trial court ruled that "It would be redundant to discuss
what are the forms of receipts, but anything evidencing or admitting payment in compliance with an obligation is a
receipt and AS THE CONTRACT, EXH. A AS WELL AS THE SIGNED COPY, IS AN EVIDENCE OF PAYMENT
OF THE P142,975.00 IT MUST BE CONSIDERED A RECEIPT FOR ALL PURPOSES". We affirm the lower
court's ruling.
The most telling, crucial and significant act contemporaneous with and subsequent to the signing
of the agreement embodied in Exhibit "A", which needs emphasis, is the delivery to the petitioner
of four (4) delivery orders covering all the 4,035 piculs of sugar subject of the contract on
November 13, 1970, the very day that the contract was entered into and signed by the parties. The
thing sold shall be understood as delivered when it is placed in the control and possession of the vendee. Therefore,
when the thing subject of the sale is placed in the control and possession of the vendee, delivery is complete.
It is not correct, therefore, for the respondent court to hold that "the contract in its entirety proves no more than that
there has been a meeting of the minds of the parties." It is more than that because the parties did not end the
agreement by simply signing the contract, Exhibit "A". The minds of the parties did not only come to a
meeting but they continued to implement and consummate the same.
RULING: We affirm the decision of the trial court in ruling that petitioner has paid in cash the sum of P142,975.00 to
respondent company for the purchase of 4,085 piculs of H-2 sugar and is entitled to the delivery of 350 piculs of H-2
sugar or to be paid the sum of P12,250.00 plus legal interest from November 13, 1970 until fully paid, at the option of
petitioner.
2. REPUBLIC VS. CASTELLVI 1974 ZALDIVAR, J.:p
FACTS:
After the owner of a parcel of land that has been rented and occupied by the government in 1947 refused
to extend the lease, the latter commenced expropriation proceedings in 1959. During the assessment of

just compensation, the government argued that it had taken the property when the contract of lease
commenced and not when the proceedings begun. The owner maintains that the disputed land was not
taken when the government commenced to occupy the said land as lessee because the essential elements
of the taking of property under the power of eminent domain, namely (1) entrance and occupation by
condemnor upon the private property for more than a momentary period, and (2) devoting it to a public use
in such a way as to oust the owner and deprive him of all beneficial enjoyment of the property, are not
present.
ISSUE: Whether or not the taking of property has taken place when the condemnor has entered and occupied the
property as lesse.

Held: It is clear, therefore, that the "taking" of Catellvi's property for purposes of eminent domain cannot be
considered to have taken place in 1947 when the Republic commenced to occupy the property as lessee thereof. We
find merit in the contention of Castellvi that two essential elements in the "taking" of property under the power of
eminent domain, namely: (1) that the entrance and occupation by the condemnor must be for a permanent, or
indefinite period, and (2) that in devoting the property to public use the owner was ousted from the property and
deprived of its beneficial use, were not present when the Republic entered and occupied the Castellvi property in
1947.
Untenable also is the Republic's contention that although the contract between the parties was one of lease on a year to
year basis, it was "in reality a more or less permanent right to occupy the premises under the guise of lease with the
'right and privilege' to buy the property should the lessor wish to terminate the lease," and "the right to buy the
property is merged as an integral part of the lease relationship ... so much so that the fair market value has been agreed
upon, not, as of the time of purchase, but as of the time of occupancy" 15 We cannot accept the Republic's contention
that a lease on a year to year basis can give rise to a permanent right to occupy, since by express legal provision a lease
made for a determinate time, as was the lease of Castellvi's land in the instant case, ceases upon the day fixed, without need
of a demand (Article 1669, Civil Code). Neither can it be said that the right of eminent domain may be exercised by simply
leasing the premises to be expropriated (Rule 67, Section 1, Rules of Court). Nor can it be accepted that the Republic would
enter into a contract of lease where its real intention was to buy, or why the Republic should enter into a simulated contract
of lease ("under the guise of lease", as expressed by counsel for the Republic) when all the time the Republic had the right
of eminent domain, and could expropriate Castellvi's land if it wanted to without resorting to any guise whatsoever. Neither
can we see how a right to buy could be merged in a contract of lease in the absence of any agreement between the parties to
that effect. To sustain the contention of the Republic is to sanction a practice whereby in order to secure a low price for a
land which the government intends to expropriate (or would eventually expropriate) it would first negotiate with the owner
of the land to lease the land (for say ten or twenty years) then expropriate the same when the lease is about to terminate,
then claim that the "taking" of the property for the purposes of the expropriation be reckoned as of the date when the
Government started to occupy the property under the lease, and then assert that the value of the property being expropriated
be reckoned as of the start of the lease, in spite of the fact that the value of the property, for many good reasons, had in the
meantime increased during the period of the lease. This would be sanctioning what obviously is a deceptive scheme, which
would have the effect of depriving the owner of the property of its true and fair market value at the time when the
expropriation proceedings were actually instituted in court. The Republic's claim that it had the "right and privilege" to buy
the property at the value that it had at the time when it first occupied the property as lessee nowhere appears in the lease
contract. What was agreed expressly in paragraph No. 5 of the lease agreement was that, should the lessor require the lessee
to return the premises in the same condition as at the time the same was first occupied by the AFP, the lessee would have the
"right and privilege" (or option) of paying the lessor what it would fairly cost to put the premises in the same condition as it
was at the commencement of the lease, in lieu of the lessee's performance of the undertaking to put the land in said
condition. The "fair value" at the time of occupancy, mentioned in the lease agreement, does not refer to the value of the
property if bought by the lessee, but refers to the cost of restoring the property in the same condition as of the time when the

lessee took possession of the property. Such fair value cannot refer to the purchase price, for purchase was never intended
by the parties to the lease contract. It is a rule in the interpretation of contracts that "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" (Art. 1372, Civil Code).

We hold, therefore, that the "taking" of the Castellvi property should not be reckoned as of the year 1947
when the Republic first occupied the same pursuant to the contract of lease, and that the just
compensation to be paid for the Castellvi property should not be determined on the basis of the value of
the property as of that year. The lower court did not commit an error when it held that the "taking" of the
property under expropriation commenced with the filing of the complaint in this case.

3. EASTERN SHIPPING VS. MARGARINE-VERKAUFS-UNION 1979 TEEHANKEE,

Acting C.J.:

Respondent corporation, a West German corporation not engaged in business in the Philippines, was the consignee of
500 long tons of Philippine copra in bulk with a total value of US$ 108,750.00 shipped from Cebu City on board
petitioner's (a Philippine corporation) vessel, the SS "EASTERN PLANET" for discharge at Hamburg, Germany.
Petitioner's bill of lading for the cargo provided as follows:
... Except as otherwise stated herein and in - the Charter Party, this contract shag be governed by the
laws of the Flag of the Ship carrying the goods. In case of average, same shall be adjusted according
to York-Antwerp Rules of 1950.
While the vessel was off Gibraltar, a fire broke out aboard the and caused water damage to the
copra shipment in the amount of US$ 591.38. Petitioner corporation rejected respondent's claim for
payment of the and respondent filed on June 18, 1966 in the Manila court of first instance its
complaint against petitioner as defendant for recovery of the same and US$ 250.00 - attorney's fees
and expenses of litigation.
After trial, the lower court rejected petitioner's defense that did not exceed 5% of respondent's interest in the cargo it
was not liable under Philippine Law for the damage which was rendered judgment on April 25, 1969 "ordering the
defendant, Eastern Shipping Lines, Inc. to pay to the plaintiff, Margarine-Verkaufs-Union GMBH, the sum of US$
591.38, with interest at the legal rate from the date of the filing of the complaint until fully paid, plus US$ 250.00 as
attorney's fees and the costs of the suit."
ISSUE: Should Article 848 of the Code of Commerce govern this case despite the bill of lading which expressly
contained for the application of the York-Antwerp Rules which provide for MARGARINE-VERKAUFS-UNION
GmbHs fun recovery of the damage loss?

SC: No. Sc sustained the lower court's ruling sustaining respondent's damage claim although the amount thereof did
not exceed 5% of respondent's interest in the cargo and would have been barred by the cited article of the Commerce
Code.
We hold that the lower court correctly ruled the cited codal article to be "not applicable in this particular case for the
reason that the bill of lading (Exhibit "F") contains "an agreement to the contrary" for it is expressly provided in the
last sentence of the first paragraph (Exhibit "1-A") that "In case of average, same shall be adjusted according to YorkAntwerp Rules of 1950." The insertion of said condition is expressly authorized by Commonwealth Act No. 65 which
has adopted in toto the U.S. Carriage of Goods by Sea Act. Now, it has not been shown that said rules limit the
recovery of damage to cases within a certain percentage or proportion that said damage may bear to claimant's interest
either in the vessel or cargo as provided in Article 848 of the Code of Commerce On the contrary, Rule 3 of said YorkAntwerp Rules expressly states that "Damage done to a ship and cargo, or either of them, by water or otherwise,
including damage by breaching or scuttling a burning ship, in extinguishing a fire on board the ship, shall be made
good as general average. ... "
There is a clear and irreconcilable inconsistency between the York-Antwerp Rules expressly
adopted by the parties as their contract under the bill of lading which sustains respondent's claim
and the codal article cited by petitioner which would bar the same. Furthermore, as correctly contended
by respondent, what is here involved is a contract of adhesion as embodied in the printed bill of
lading issued by petitioner for the shipment to which respondent as the consignee merely adhered,

having no choice in the matter, and consequently, any ambiguity therein must be construed against
petitioner as the author.