When Courts Can Step In: Upholding Contracts vs. Correcting Bad Bargains

G.R. No. 102096, August 22, 1996

Imagine agreeing to a deal that later turns sour. Can you simply walk away, or can a court rewrite the agreement to be fairer? Philippine law generally respects the sanctity of contracts, but there are limits. The Supreme Court case of Carmela Cuizon v. Court of Appeals clarifies when courts can intervene in contractual disputes, particularly when one party claims the agreement is unfair or based on a misunderstanding. This case underscores the principle that while parties have freedom to contract, courts can step in when there’s evidence of fraud, misrepresentation, or when the literal interpretation leads to absurd results.

The Freedom to Contract and Its Limits

Philippine law enshrines the principle of freedom of contract, meaning parties are generally free to agree on the terms and conditions they deem fit. Article 1306 of the Civil Code states: “The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.”

However, this freedom is not absolute. Courts can intervene when contracts violate the law, public policy, or when there’s evidence of vitiated consent (fraud, mistake, duress). The legal maxim pacta sunt servanda (agreements must be kept) is fundamental, but it doesn’t shield agreements tainted by illegality or unfairness. The court will look into the intention of the parties to ensure that the agreement is not one-sided.

For example, imagine a contract with excessively high interest rates that are unconscionable or a contract that requires someone to perform an illegal act. These agreements will not be upheld by the courts.

The Story of the Cuizon vs. Paray Case

The case revolves around Carmela Cuizon, a businesswoman, and Spouses Gerardo and Maria Paray, who owned several parcels of land. The Parays needed money and proposed that Cuizon mortgage their lands using Special Powers of Attorney (SPAs) in her name. The agreement was that Cuizon would pay the loan amortizations, and as the loans were released, the Parays would convey the lots to Cuizon at a price of P170.00 per square meter.

Here’s a breakdown of the events:

• Initial Agreement: Cuizon and the Parays agreed that Cuizon would secure loans using the Parays’ land as collateral.
• SPAs and Loans: The Parays executed SPAs, and Cuizon obtained loans from various banks, using the land as security.
• Partial Conveyance: The Parays sold Lot No. 800-A-1-B to Cuizon.
• Dispute: A dispute arose when Cuizon requested the conveyance of another lot, Lot No. 800-A-1-A, and the Parays refused, demanding an accounting first.

Cuizon sued for specific performance, seeking the conveyance of Lot No. 800-A-1-A and other damages. The Parays countered that Cuizon had only remitted a portion of the agreed purchase price for all the lots.

The Regional Trial Court (RTC) ruled in favor of Cuizon, but the Court of Appeals (CA) reversed this decision, finding that Cuizon had not fully paid for all the lands. Cuizon then elevated the case to the Supreme Court.

The Supreme Court, in its decision, emphasized the importance of determining the true agreement between the parties. The Court stated:

“In arriving at a sensible meaning of the agreement of the parties, the first thrust of the Court is to discover and ascertain the intention of the contracting parties. And in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered.”

The Court also noted the significance of the Parays’ initial act of conveying Lot No. 800-A-1-B even before full payment, which suggested that the agreement was indeed for piecemeal conveyance based on loan releases.

“If it were true as private respondents claim that their agreement was for the transfer of the subject lots only upon payment of the full consideration of P699,890.00, why then did private respondents execute a deed of sale over Lot No. 800-A-1-B although they knew too well that a partial amount only of the purchase price was paid?”

What This Means for You: Practical Implications

This case serves as a reminder of the importance of clearly defining the terms of any agreement in writing. It also highlights that courts will look beyond the literal words of a contract to ascertain the true intention of the parties, especially when there are ambiguities or inconsistencies.

Key Lessons:

• Document Everything: Put all agreements in writing, clearly stating the terms and conditions.
• Seek Legal Advice: Consult a lawyer before entering into significant contracts.
• Understand the Terms: Ensure you fully understand the obligations and rights under the contract.
• Act Consistently: Your actions after the contract is signed can indicate your understanding of the agreement.

For example, a small business owner securing a loan needs to ensure that the loan agreement clearly specifies the repayment terms, collateral, and consequences of default. Ambiguity in these terms could lead to disputes later on, and the court will look into the intent of both parties.

Frequently Asked Questions

Q: What is freedom of contract?

A: Freedom of contract is the right of individuals and entities to enter into agreements of their choosing, provided those agreements are not illegal or against public policy.

Q: Can a court change the terms of a contract?

A: Generally, no. Courts uphold the terms agreed upon by the parties. However, they can intervene if the contract is unconscionable, illegal, or based on fraud or mistake.

Q: What does “vitiated consent” mean?

A: Vitiated consent refers to situations where a party’s agreement to a contract is not freely and voluntarily given, due to factors like fraud, mistake, or duress.

Q: What is the significance of “pacta sunt servanda”?

A: Pacta sunt servanda is a legal principle that means “agreements must be kept.” It underscores the importance of honoring contractual obligations in good faith.

Q: How do courts determine the intention of the parties in a contract?

A: Courts consider the words of the contract, as well as the actions and statements of the parties before, during, and after the contract was made.

Q: What happens if a contract is found to be unconscionable?

A: A court may refuse to enforce the contract, or it may modify the contract to remove the unconscionable terms.

Q: Is a verbal agreement binding?

A: Yes, verbal agreements can be binding, but they are more difficult to prove than written contracts. Certain contracts, like those involving real estate, must be in writing to be enforceable.

ASG Law specializes in contract law and real estate transactions. Contact us or email hello@asglawpartners.com to schedule a consultation.