G.R. No. 26743 | October 19, 1927
THE BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee, vs. FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendant-appellant.

Ponente: MALCOLM, J.

FACTS

1. On April 26, 1920, the Laguna Coconut Oil Co. (LCOC) executed a promissory note for P50,000 in favor of the Philippine Vegetable Oil Co., Inc. (PVOC).
2. On May 3, 1920, the Fidelity and Surety Company (Fidelity) wrote a notation on the back of 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.”
3. On May 4, 1920, PVOC endorsed the note in blank and delivered it to the Bank of the Philippine Islands (BPI), which discounted it.
4. Upon the note’s maturity, LCOC defaulted. BPI demanded payment from LCOC, PVOC, and Fidelity, but all refused. LCOC was insolvent.
5. BPI sued Fidelity to enforce the guaranty. In a prior case (*Bank of the P.I. v. Fidelity & Surety Co.*, 48 Phil. 5), the Supreme Court dismissed BPI’s action because the guaranty, as written, named LCOC (the maker) as the party to be held harmless, not BPI (the discounter). The dismissal was without prejudice to filing a new action for reformation of the instrument.
6. BPI then filed the present action, seeking reformation of the written guaranty on the ground of mistake, alleging that the words “Laguna Coconut Oil Co.” were mistakenly used instead of “Bank of the Philippine Islands.” The trial court granted reformation and rendered judgment in favor of BPI.

ISSUE

Whether the written contract of guaranty should be reformed on the ground of mistake to substitute “Bank of the Philippine Islands” for “Laguna Coconut Oil Co.,” thereby making Fidelity liable to BPI.

RULING

NO. The Supreme Court DENIED the reformation and REVERSED the trial court’s judgment.

1. Legal Standard for Reformation: A written contract can be reformed by a court of equity if, due to a mutual mistake of the parties, the instrument does not express their true agreement. However, the proof of such mutual mistake must be of the “clearest and most satisfactory character” (citing *Philippine Sugar Estates Development Co. v. Government of the P.I.*, 247 U.S. 385).

2. Application to the Case: The Court held that BPI failed to meet this stringent burden of proof. The evidence did not clearly and satisfactorily establish that a mutual mistake occurred. The language of the guaranty was specific: Fidelity obligated itself to hold LCOC harmless. There was insufficient proof that both Fidelity and BPI (through PVOC) intended the obligation to run in favor of BPI at the time the guaranty was executed.

3. Interpretation of the Instrument: The Court found the instrument’s wording not impossible or absurd. It could be construed as Fidelity guaranteeing LCOC against loss if LCOC itself had discounted the notea scenario not supported by the facts but not a basis for reformation without clear proof of a different mutual intent.

4. Dissent: A dissenting opinion argued that the wording created an “impossible situation” and frustrated the manifest intention of the parties. Since Fidelity received value for the guaranty and BPI discounted the note relying on it, the instrument should be reformed to reflect the liability of Fidelity to the actual discounter, BPI. The dissent emphasized giving effect to the parties’ intention rather than frustrating it.

DOCTRINE:
Reformation of a written instrument on the ground of mutual mistake requires proof of the clearest and most satisfactory character. The presumption is that a written agreement contains all the terms of the parties’ contract, and this presumption can only be overcome by evidence meeting this high standard. Courts will not rewrite contracts based on a mere preponderance of evidence or on what might seem a more logical arrangement after the fact.