Bank of the Philippine Islands vs. Fidelity & Surety Company of the Phil.

Relief by way of reformation of a written contract on the ground of mistake will not be granted unless the mistake is mutual, the mistake is one of fact, and the proof of mutual mistake is of the clearest and most satisfactory character — more than a mere preponderance of the evidence.

The Laguna Coconut Oil Co. executed a P50,000 promissory note payable to the Philippine Vegetable Oil Company, Inc. The Fidelity and Surety Company thereafter placed a notation on the note stating that it obligated itself to hold the Laguna Coconut Oil Co. harmless against loss for having discounted the note. The Philippine Vegetable Oil Co. endorsed the note in blank and delivered it to the Bank of the Philippine Islands. After maturity, the bank demanded payment from all parties. The Laguna Coconut Oil Co. was insolvent; the other parties refused to pay. The bank sued to recover on the guaranty, but the instrument on its face did not name the bank as the obligee.

• The Promissory Note: On April 26, 1920, the Laguna Coconut Oil Co. executed a P50,000 promissory note payable one month after date to the Philippine Vegetable Oil Company, Inc., with stipulated interest at 9% per annum and P5,000 as attorney’s fees upon non-payment.

• The Guaranty Notation: On May 3, 1920, the Fidelity & Surety Company appended a notation to the note stating: “For value, received, we hereby obligate ourselves to hold the Laguna Coconut Oil Co. harmless against loss for having discounted the foregoing note at the value stated therein.” The notation was signed by the surety’s Vice-President and attested by its Secretary-Treasurer. The word “hold” was interlined in ink.

• Endorsement and Delivery: On May 4, 1920, the Philippine Vegetable Oil Company endorsed the note in blank and delivered it to the Bank of the Philippine Islands. Demand for payment after maturity was made on the Laguna Coconut Oil Co., the Philippine Vegetable Oil Co., and the Fidelity & Surety Company; all refused to pay, the Laguna Coconut Oil Co. being insolvent.

• Plaintiff’s Evidence at the Reformation Trial: The bank sought to connect the P50,000 note to a pre-existing obligation of the Philippine Vegetable Oil Co. and to demonstrate that the reference to the Laguna Coconut Oil Co. in the surety’s notation was an error. The bank presented bookkeeping entries alleged to reflect the transaction; one entry had been altered by erasing “y Fidelity and Surety Co. of the Phil. Islands” and substituting “Philippine Vegetable Oil Co. garatizado p. Fidelity & Surety Co. of the Phil. Islands.” The correspondence between the bank and the surety was offered as indicative of responsibility but contained no express or implied admission that the guaranty was executed in favor of the bank.

• Trial Court’s Finding: The trial judge accepted the bank’s theory, emphasizing that the note could not have been discounted by the Laguna Coconut Oil Co. and must logically have been discounted by the bank, and reformed the instrument accordingly.

N/A — The decision does not separately set out the arguments of the appellee (Bank of the Philippine Islands). The bank’s position is, however, discernible from the opinion: it maintained that the guaranty notation contained a mistake in naming the Laguna Coconut Oil Co. as the beneficiary, that the true intent was to protect whoever discounted the note, and that the bank was that party.

As appellant, the Fidelity & Surety Company assigned six errors. Its core arguments, as reflected in the opinion, were:

• No Mutual Mistake: The surety maintained that there was no mutual mistake of fact warranting reformation, and that the bank’s evidence failed to meet the required standard of clarity and conclusiveness.
• Absence of Privity: The surety argued that the guaranty, on its face, did not create an obligation in favor of the bank, and that the action necessarily rested on an unexpressed intent not reflected in the writing.

• Reformation — Mutual Mistake: Whether the plaintiff proved, by clear and convincing evidence, that the guaranty notation failed to express the true intent of the parties due to a mutual mistake of fact, so as to warrant reformation of the instrument.

• Reformation — Mutual Mistake: Relief by reformation was denied because the evidence did not meet the exacting standard required. Under section 285 of the Code of Civil Procedure and the rule announced in Philippine Sugar Estates Development Co. vs. Government of the Philippine Islands, a written contract will be reformed for mutual mistake only upon proof “of the clearest and most satisfactory character” — a quantum higher than mere preponderance. The face of the instrument showed that the guarantor had corrected the typewritten notation by interlining the word “hold,” suggesting deliberate attention to language, yet still named the Laguna Coconut Oil Co. The bookkeeping entries of the bank were not competent against a stranger to the transaction, and one entry had been materially altered. The correspondence contained no definite, certain, or unequivocal admission that the surety intended to guarantee payment to the bank. The note was to draw interest from maturity, which was inconsistent with discounting by the bank on or before May 3, 1920. Even assuming some mistake existed, the confluence of facts did not establish that the mistake was common to both contracting parties. The necessary concurrence of three elements — mistake of fact, proof by clear and convincing evidence, and mutuality of mistake — was not satisfied.

• Reformation on the Ground of Mutual Mistake — A written instrument may be reformed where, owing to mutual mistake, the language used does not fully or accurately express the agreement and intent of the parties. Three requisites must concur: (1) the mistake must be one of fact; (2) the mistake must be proved by clear and convincing evidence, which is more than a mere preponderance of the evidence; and (3) the mistake must be common to both parties to the instrument. The proof must be of the clearest and most satisfactory character. The doctrine is drawn from section 285 of the Code of Civil Procedure and the ruling of the United States Supreme Court in Philippine Sugar Estates Development Co. vs. Government of the Philippine Islands (247 U.S. 385 [1917]), and was applied here to deny reformation where the evidence was indeterminate and the plaintiff had shifted theories across multiple complaints.

• “The relief by way of reformation will not be granted unless the proof of mutual mistake be ‘of the clearest and most satisfactory character.’” — This passage encapsulates the controlling standard, adopted from the U.S. Supreme Court, and was dispositive of the appeal.

• “To justify the reformation of a written instrument upon the ground of mistake, the concurrence of three things are necessary: First, that the mistake should be of a fact; second, that the mistake should be proved by clear and convincing evidence; and, third, that the mistake should be common to both parties to the instrument.” — This formulation states the tripartite test applied by the Court.

• “The rule is, as has been above stated, that the mistake must be mutual. There may have been a mistake here. It would, however, seem to be straining the natural course of events to hold the Fidelity and Surety Company of the Philippine Islands a party to that mistake.” — The Court articulated why, even accepting the possibility of error, the evidence did not implicate the surety in a shared mistake.

• Philippine Sugar Estates Development Co. vs. Government of the Philippine Islands, 247 U.S. 385 (1917) — The U.S. Supreme Court construed the same provision of the Code of Civil Procedure and established the “clearest and most satisfactory character” standard for proof of mutual mistake; followed as controlling authority.
• Centenera vs. Garcia Palicio, 29 Phil. 470 (1915) — Cited for the rule that more than a preponderance of the evidence is required to impugn the truth of a fact stated in a document.
• Mendozana vs. Philippine Sugar Estates Development Co. and De Garay, 41 Phil. 475 (1921) — Applied the same heightened evidentiary standard in an action to contradict a written instrument.

• Section 285, Code of Civil Procedure — This section codified the parol evidence rule and its exceptions, permitting evidence of terms other than the contents of a writing where mistake or imperfection is put in issue. The Court applied it as the statutory basis for allowing extrinsic evidence, but conditioned relief on the stringent proof requirement articulated in Philippine Sugar Estates and local jurisprudence.

Justices Johnson, Ostrand, Johns, and Villa-Real concurred.

• Chief Justice Avanceña, joined by Justices Street, Villamor, and Romualdez — The dissenters would have reformed and enforced the contract, reasoning that an obvious error in wording created an impossible situation and frustrated the manifest intention of the parties. They emphasized that the Fidelity and Surety Company acknowledged receiving value for the guaranty, making it inequitable to free the surety entirely from the obligation it undertook. According to the dissent, the instrument should be reformed to hold the surety liable to the bank that discounted the note in reliance on the guaranty.