Bank of the Philippine Islands v. Fidelity & Surety Company
REITERATIONFacts
1. The Antecedents: The underlying dispute concerns a P50,000 promissory note executed by the Laguna Coconut Oil Co. on April 26, 1920, payable to the Philippine Vegetable Oil Company, Inc. or order. On May 3, 1920, the Fidelity and Surety Company of the Philippine Islands affixed a notation to this note, stating they would hold the Laguna Coconut Oil Co. harmless against loss for having discounted the note. The Philippine Vegetable Oil Company subsequently endorsed the note in blank and delivered it to the Bank of the Philippine Islands on May 4, 1920. Following the note's maturity, demand for payment was made on the Laguna Coconut Oil Co., the Philippine Vegetable Oil Company, and the Fidelity and Surety Company, all of whom refused to pay, with the Laguna Coconut Oil Co. being admittedly insolvent. 2. Procedural History: This case has a complex procedural history, having been before the courts multiple times. An initial action commenced by the Bank of the Philippine Islands against both the Laguna Coconut Oil Co. and the Fidelity and Surety Company was dismissed on demurrer, then reversed on appeal, and subsequently dismissed again by the trial court after a second demurrer was sustained. A subsequent appeal to the Supreme Court resulted in a reversal and dismissal without prejudice to a new action. The present action was commenced on October 20, 1925, in the Court of First Instance of Manila. After the defendant demurred and the demurrer was overruled, an answer was filed. Following the presentation of evidence, the trial court rendered judgment in favor of the plaintiff for P50,000, plus interest, attorney's fees, and costs. The defendant, Fidelity and Surety Company, has appealed this judgment. 3. The Petition: The plaintiff, Bank of the Philippine Islands, seeks reformation of the written instrument of guaranty executed by the Fidelity and Surety Company. The core of the plaintiff's argument is that the notation on the note, which obligates the Fidelity and Surety Company to hold the Laguna Coconut Oil Co. harmless, contains a mistake. Specifically, the plaintiff contends that the words "Laguna Coconut Oil Co." were mistakenly substituted for "Bank of the Philippine Islands," and that the true intent was for the Fidelity and Surety Company to guarantee the note for the benefit of the Bank of the Philippine Islands, which discounted the note. The plaintiff argues that this mutual mistake should be corrected by the court, allowing for a judgment against the Fidelity and Surety Company for P55,000, with interest.
Issue(s)
Whether the trial court erred in rendering judgment for reformation of the contract of guaranty when reformation was not put in issue by the pleadings. Whether the plaintiff (BPI) sufficiently proved by clear and convincing evidence that there was a mutual mistake in the written instrument of guaranty, warranting reformation.
Ruling
The judgment appealed from is reversed, and the proceedings are definitely dismissed, without special pronouncement as to costs.
Ratio Decidendi
On the issue of whether reformation was properly put in issue by the pleadings: The Court reiterated that under Section 285 of the Code of Civil Procedure, a written agreement is presumed to contain all the terms, but evidence of other terms may be admitted if a mistake or imperfection of the writing, or its failure to express the true intent and agreement of the parties, is put in issue by the pleadings. The Court noted that in a previous instance of this case, it was held that the action could only be maintained upon the theory that the writing did not express the true intent of the parties, and that reformation was not put in issue by the pleadings. The Court found that the plaintiff's theory in the current action, while attempting to establish an error in the guaranty, still fundamentally relied on the concept of reformation, which requires specific pleading. The plaintiff had filed three distinct and conflicting complaints, alleging different theories, including the existence of mutual mistake and the discounting of the note by different parties, indicating a lack of clarity in the issues presented. On the issue of whether the plaintiff sufficiently proved mutual mistake by clear and convincing evidence: The Court held that to justify the reformation of a written instrument upon the ground of mistake, three things are necessary: first, the mistake must be of fact; second, the mistake must be proved by clear and convincing evidence; and third, the mistake must be common to both parties to the instrument. The Court emphasized that the rule is that the mistake must be mutual. The Court found that the plaintiff had not carried the burden of proof in this manner and to this extent. The Court noted that the language of the note itself, indicating interest at maturity, would disprove a discount by BPI on or before May 3, 1920. Furthermore, the plaintiff's own averment in its second amended complaint stated that the note "was discounted by Philippine Vegetable Oil Company, Inc.," contradicting the theory that BPI discounted it. The bookkeeping entries of the bank were deemed hardly competent against a stranger like Fidelity, and one entry was shown to have been altered. The correspondence between the parties failed to disclose any express or implied admission by Fidelity that it had executed the guaranty in favor of BPI. The Court concluded that while there may have been a mistake, it would be straining the natural course of events to hold Fidelity a party to that mistake, and that the proof was far from meeting the stringent requirements for reformation.
Main Doctrine
Reformation of a written instrument requires proof of mutual mistake by the clearest and most satisfactory character, exceeding a mere preponderance of evidence. The mistake must be common to both parties, and the burden of proof rests upon the party seeking reformation.