Case Summary (G.R. No. L-24693)
Petitioner
Bank of the Philippine Islands — the holder of the note who seeks reformation of the guaranty notation to establish the defendant’s liability and to recover P50,000 (plus interest and fees).
Respondent
Fidelity & Surety Company of the Philippine Islands — the party that executed the notation on the note and contests reformation and enforcement in favor of the bank.
Key Dates
Note executed April 26, 1920. Notation by Fidelity & Surety dated May 3, 1920. Endorsement to the bank dated May 4, 1920. Early procedural history includes appeals decided in 44 Phil. 618 and 48 Phil. 5. The present decision is the appellate disposition arising from the action begun October 20, 1925.
Applicable Constitutional and Statutory Framework
The decision arises under the laws and procedural rules in force during the Insular Government period, including the Code of Civil Procedure (section 285, concerning written instruments and the admissibility of evidence to show mistake or imperfect expression) and provisions of the Civil Code on written agreements. The Court applied precedent, notably Philippine Sugar Estates Development Co. v. Government of the Philippine Islands (247 U.S. 385), and cited local authorities (Centenera v. Garcia Palicio, Mendezona v. Philippine Sugar Estates) construing the standard of proof for reformation.
Procedural History
The Bank originally sued Laguna Coconut Oil Co., Philippine Vegetable Oil Co., and Fidelity & Surety in 1922; demurrers were sustained at trial but reversed on appeal (44 Phil. 618). A later judgment against the surety was reversed by this Court because reformation was not properly pleaded (48 Phil. 5), and the action was dismissed without prejudice. The bank then filed a fresh action in 1925 against the surety only; the trial court entered judgment for the bank for P50,000 plus interest, attorney’s fees, and costs. The surety appealed to the Supreme Court, generating the present opinion.
Facts Material to Decision
- Promissory note for P50,000 dated April 26, 1920, signed by Laguna Coconut Oil Co., payable to Philippine Vegetable Oil Co., Inc. for one month after date, with interest and P5,000 as collection costs provided.
- On May 3, 1920, Fidelity & Surety wrote a notation on the note: “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,” signed by Vice‑President J. Elmer Delaney and attested by Secretary‑Treasurer A.D. Tanner.
- On May 4, 1920, the Philippine Vegetable Oil Company endorsed the note in blank and delivered it to the Bank of the Philippine Islands.
- Laguna Coconut Oil Co. was insolvent and refused payment; demand on the other parties was refused.
- The bank’s bookkeeping entries and correspondence with the surety were introduced; some entries were altered, and the correspondence did not contain an unequivocal admission by the surety that the guaranty was intended for the bank.
Legal Issue
Whether the court should reform the notation on the promissory note—changing the name of the beneficiary from “Laguna Coconut Oil Co.” to the Bank of the Philippine Islands—on the ground of mutual mistake, thereby creating an enforceable guaranty in favor of the bank against the Fidelity & Surety Company.
Governing Legal Standards for Reformation
The Court identified three essential prerequisites for reformation on grounds of mistake: (1) the mistake must concern a fact; (2) the mistake must be proved by clear and convincing evidence (more than a mere preponderance); and (3) the mistake must be common (mutual) to the parties to the instrument. The Court relied on the high standard established in Philippine Sugar Estates and applied in local precedents: proof must be “of the clearest and most satisfactory character.”
Majority Analysis and Reasoning
The majority applied the presumption that a written agreement contains the full terms of the parties’ agreement (section 285 Code of Civil Procedure and parallel Civil Code provisions) and allowed extrinsic evidence only when mistake or imperfection of the writing was put in issue by the pleadings. The Court examined the notation and surrounding circumstances and found multiple uncertainties:
- The notation’s language—for example, an interlined word “hold”—suggests the signatory was attentive to the drafting, but the insertion of “Laguna Coconut Oil Co.” could represent an error or could have been intended to protect the maker or another party.
- The physical terms of the note (interest payable at maturity) made it unlikely the bank discounted the note before maturity; the bank’s bookkeeping entries were not conclusive and had one alteration. It was therefore uncertain whether the bank ever discounted the note or paid value in reliance on the guaranty.
- Correspondence between bank and surety lacked any definite, certain, and unequivocal admission that the surety had guaranteed the bank’s discounting of the note. Given these uncertainties and the stringent evidentiary standard, the majority concluded that the plaintiff had not proved by clear and convincing evidence a mutual mistake common to both parties that would justify reforming the instrument. The proof fell far short of the required standard, and the Court reversed the trial judgment and dismissed the proceedings, denying the bank’s motions for reconsideration.
Dissenting Reasoning
The dissenting Justices viewed the case as a straightforward instance in which reformation and enforcement were proper. They emphasized:
- The guaranty notation, as written, produces an impossible or incoherent contractual situation: the surety purported to “hold the Laguna Coconut Oil Co. harmless” for having discounted the note, yet Laguna was the maker and could not logically be the discounting party.
- The factual matrix established t
Case Syllabus (G.R. No. L-24693)
Nature and Purpose of the Action
- The action seeks reformation of a written instrument of guaranty on the ground of mistake; specifically, plaintiff alleges the notation on a P50,000 promissory note erroneously substituted the words "Laguna Coconut Oil Co." for "Bank of the Philippine Islands."
- The ultimate objective stated at the outset was to obtain a judgment against the Fidelity & Surety Company of the Philippine Islands for P55,000 with interest, although the operative promissory instrument involved P50,000.
- The case concerns whether a guaranty notation appended to a promissory note may be reformed to reflect the true intended beneficiary and obligor relations.
Full Procedural History
- Original action commenced August 25, 1922, by the Bank of the Philippine Islands against Laguna Coconut Oil Co. and the Fidelity & Surety Company of the Philippine Islands.
- The Fidelity and Surety Company filed a demurrer to the original complaint which the trial court sustained; plaintiff filed an amended complaint; a second demurrer was sustained; plaintiff appealed to the Supreme Court (reported at 44 Phil., 618), which reversed and remanded.
- On remand the Fidelity and Surety Company answered; Laguna Coconut Oil Co. made no defense and default judgment was entered against it. Case was submitted on a stipulation of facts; trial court entered judgment against Fidelity & Surety for the full amount of the note plus interest.
- Fidelity & Surety appealed; this Court found assignments of error well taken because reformation was not put in issue by the pleadings, reversed the judgment, and dismissed the action "without prejudice to the bringing of another action upon the same cause" (reported at 48 Phil., 5).
- A new action was commenced by the Bank on October 20, 1925, in the Court of First Instance of Manila; the defendant demurred, the demurrer was overruled, the defendant answered, plaintiff introduced evidence, and the trial court rendered judgment for the plaintiff for P50,000 plus interest, attorney's fees, and costs.
- The Fidelity & Surety Company appealed from that judgment, assigning six errors; this appeal produced the present decision (51 Phil. 57; G.R. No. 26743; October 19, 1927).
- The majority opinion reverses the trial judgment and dismisses proceedings; two motions for reconsideration by the appellee were denied by the same order.
Chronology and Primary Documents (Dates and Text)
- Promissory note dated April 26, 1920 executed by Laguna Coconut Oil Co. in favor of Philippine Vegetable Oil Company, Inc., for P50,000, payable one month after date at Manila; provides 9% interest on non-payment and an additional P5,000 "in full, without any deduction as and for costs, expenses and attorneys' fees for collection whether actually incurred or not."
- Notation on the note dated May 3, 1920, made by the Fidelity & Surety Company of the Philippine Islands reading in full:
- "MANILA, May 3, 1920 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. FIDELITY AND SURETY CO. OF THE PHILIPPINE ISLANDS By (Sgd.) J. ELMER DELANEY Vice-President Cedula F-3447, Jan. 2, 1920, Manila, P. I. Attest: (Sgd.) A. D. TANNER Secretary-Treasurer Cedula F-3447, Jan. 2, 1920, Manila, P. I."
- On May 4, 1920 the Philippine Vegetable Oil Company endorsed the note in blank and delivered it to the Bank of the Philippine Islands; it is possible the Philippine Vegetable Oil Company was paid P50,000 for it, but that fact is not definitively established in the record.
- After maturity, demand for payment was made on Laguna Coconut Oil Co., Philippine Vegetable Oil Company, and Fidelity & Surety Company; all refused to pay; Laguna Coconut Oil Co. was admittedly insolvent.
Pleadings and Shifting Theories of Plaintiff
- Throughout the litigation the plaintiff advanced inconsistent and multiple theories:
- Alleged at various times that the guaranty was in favor of Laguna Coconut Oil Co. and alternatively that it was in favor of the Bank of the Philippine Islands.
- Alleged the note was discounted by the Philippine Vegetable Oil Company and alternatively that it was discounted by the Bank of the Philippine Islands.
- Alternated between asserting absence of mutual mistake and asserting mutual mistake.
- The majority highlights these conflicting pleadings as weakening plaintiff’s position and as a basis for skepticism regarding the asserted mutual mistake.
Evidence Adduced and Its Character
- The record contains:
- The original promissory note with the indorsement/notation by Fidelity & Surety.
- Correspondence between the Bank and the Fidelity & Surety Company which the plaintiff emphasizes but the defendant contests as of minor importance and which the majority finds inconclusive.
- Bookkeeping entries of the Bank (Plaintiff's Exhibit E) which, on close inspection, show at least one alteration: an erasure and substitution involving the words "y Fidelity and Surety Co. of the Phil. Islands" replaced by "Philippine Vegetable Oil Co. garantizado p. Fidelity & Surety Co. of the Phil. Islands."
- On the notation itself an interlined insertion of the word "hold" is visible, indicating the Vice-President of the Fidelity & Surety Company corrected or emphasized type