Chapter IV.

Reformation of Instruments

A. Requisites (Art. 1359):

1. Meeting of the minds
2. Written instrument does not express true intentions.
3. Due to mistake, fraud, inequitable conduct, or accident.
4. There must be clear and convincing evidence for no. (3).
5. Must be issued through pleading.

TN: If the mistake, fraud, inequitable conduct, or accident has prevented a

meeting of the minds of the parties →ANNULMENT

Cases

Garcia v. Bisaya, 97 Phil. 609 (1955)

• Basically, the SC held that the prescription for an action to correct

agreement is 10 years. But in the case at bar, the action cannot be
dismissed based on prescription since there is no evidence as to when the
error was discovered. The complaint only stated that it was discovered
“recently”.
• The SC also held that there is no cause for reformation since such error
in registry of the property’s title did not affect the real intentions of the
parties in contract of sale. The court highlighted that courts reform
instruments to enable a party to assert rights under them, and in this case,
it questioned what right the plaintiff would have under a reformed
instrument if the land was covered by a different title.

Bentir v. Leande, 330 SCRA 591 (2000)

FACTS:
1. In 1992, it filed an action for the reformation of the 1968 contract of lease
by claiming that its lawyers inadvertently omitted to incorporate in said
contract the verbal agreement between the parties that in the event
Bentir leases or sells the lot after the expiration of the lease, Leyte Gulf
has the right to equal the highest offer.

ISSUE/S & HELD:

1. Has the action for reformation by Leyte Gulf prescribed?

YES. Under Article 1144 of the Civil Code, the prescriptive period for
actions based upon a written contract and for reformation of an
instrument is ten (10) years from its execution.
 Here, Leyte Gulf filed an action for reformation only in 1992, which is
already twenty-four (24) years after the execution of the contract in 1968.
Thus, the action has become time barred.

2. Assuming the action for reformation has not prescribed, is Leyte Gulf
even entitled to the remedy?

NO. Under the Rules of Court, an action for reformation is instituted as a

special civil action for declaratory relief. As such, it may be entertained
only before the breach or violation of the law or contract to which refers.

Here, Leyte Gulf brought the action for reformation only after a breach of
the contract was already committed by Bentir. Thus, the remedy no
longer lies.

B. Cases where reformation is allowed – Art. 1362-1365

1. If one party was mistaken and the other acted fraudulently or inequitably,
reformation is granted only to the party who was mistaken in good faith.

2. When one of the parties was mistaken, the other one knew of the mistake but decided
not to tell the mistaken party, reformation may be availed of only by the party who
acted in good faith.

3. If neither party is responsible for the mistake, either party may ask for reformation.

4. If two parties agree upon the mortgage or pledge of real or personal property, but the
instrument states that the property is sold absolutely or with a right of repurchase,
then reformation is proper.

C. Cases where no reformation is allowed—Art. 1366

1. Simple donations inter vivos (living parties), no conditions imposed

2. Wills

TN: In these 2 instances, the contract is PURELY GRATUITOUS. They cannot be

reformed because it is made with the intention of the party giving something
gratuitously and out of liberality.

3. Void Real Agreement

4. One party has brought an action to enforce the instrument (Art. 1367)
D. Implied Ratification—Art. 1367

If one party has brought an action to enforce the instrument, he admits its validity and
that it expresses the true intention of the parties. Therefore, he is estopped from
reformation.

E. Who may ask for reformation—Art. 1368

1. If the mistake is mutual, then either of the parties can ask for reformation and it may
also be ordered at the instance of his successors in interest.
2. If the mistake is not mutual, then upon petition of the injured party or his heirs or
assigns.

F. Procedure of reformation—Art. 1369

Governed by the RULES OF COURT.

Cases

Atilano v. Atilano, 28 SCRA 2232 (1969)

FACTS:
1. Eulogio I owned five properties lots A, B, C, D, & E. He sold all except lot A.
2. Lot E, originally owned by Luisa, was transferred to Eulogio II and his children.
3. Eulogio II and his children were co-owners of Lot E but decided to subdivide it.
But then they realize that they were actually occupying Lot A, which was owned
by Ladislao, the heir of Eulogio I
4. Eulogio II and children wanted to exchange lots with Ladislao.

ISSUE/S & HELD:

1. Whether the proper remedy is reformation?

NO. Although the new Civil Code provides a remedy by virtue of Art. 1359, in
which there is already a meeting of the minds and the true intention was not
expressed by reason of mistake, the court still ruled that the deed of sale needs
not to be reformed, because the parties have retained possession of respective
properties conformably to the real intention of the parties to that sale, and all
they should do is to execute mutual deeds of conveyance.

Carantes v. CA, supra

• WON petitioner’s argument that private respondents’ action is not actually one
for annulment of the deed but for the reformation thereof adopted by petitioner
for the first time on appeal is tenable and should be considered.
 • NO. Petitioner’s theory that the private respondent’s action is for reformation is
a new one, adopted by petitioner for the first time on appeal to the SC. As a rule,
the procedure for the reformation of instruments shall be governed by rules of
court to be promulgated by the Supreme Court. Under the Rules of Court,
defenses not pleaded in the answer may not be raised for the first time on appeal.
A party cannot, on appeal, fundamentally change the nature of the issue in the
case because to permit him would be unfair to the adverse party. Thus, the
Supreme Court disregarded petitioner's theory that the action is for reformation
of an instrument and must proceed on the basis of the issues properly raised and
ventilated before the lower courts.

Sarming et al. v. Cresencio Dy et al., 383 SCRA 131 (2002)

FACTS:
1. Basically, there is a deed of sale between petitioners and respondent in which
the subject property is Lot 4163.
2. But during the signing of the deed, the wrong OCT was delivered, which was
actually for Lot 5734.
3. At that time, the parties knew the location and description of the property, but
they were not sure with the OCT, but still, both parties decided to proceed with
the sale, with the promise that the contract shall be reformed in case the
delivered OCT was indeed incorrect one.

ISSUES & HELD:

1. Did the deed of sale reflect the true intention of the parties?

NO. It is clear that the object of the sale, as understood by the parties, Lot 4163
and that its designation as Lot 5734 in the document of sale was a simple mistake
in the drafting of the document, which mistake, however, did not vitiate the
consent of the parties or affect the validity and the binding effect of the contract
between them.

The Supreme Court ruled that when one sells or buys real property, he sells or
buys the said property as is shown to her and as he sees it, at its actual setting
and by its physical metes and bounds, not by the mere lot number assigned to it
in the certificate of title.

Therefore, the contract is still valid, and is subject to reformation.

Chapter V. Interpretation of Contracts (Compare with Rules on Statutory Construction)

A. Primacy of intention—Arts. 1370, 1372

RULE:

1. If the terms of a contract are clear and leave no doubt upon the intention
of the contracting parties → the literal meaning of its stipulations shall
control.

2. If the words appear to be contrary to the evident intention of the parties

→ latter shall prevail over the former. (Intent will prevail over the letter
if the latter does not reveal its intention.)

When to interpret a contract?

Only resort in interpreting a contract when there is doubt or ambiguity in the of the
contract.

Cases

Borromeo v. CA, 47 SCRA 65 (1972)

FACTS:
1. Basically, defendant was indebted to the petitioner, and in the promissory note
executed by the defendant, he stipulated that he relinquish or waive his rights
to the prescription established by the Civil Code for his debt, and such debt can
be paid anytime even after the lapse of 10 years.
2. Petitioner demanded payment and CFI granted.
3. But CA reversed the CFI ruling.

ISSUE/S & HELD:

1. Did the CA erred in reversing the CFI ruling in finding the lack of validity of the
stipulation amounting to a waiver in line with the principle “that a person cannot
renounce future prescription”?

YES. The stipulation is contrary to law, and thus must be separated from the rest
of the contract, by virtue of Art. 1370, in which the intention of the contract must
prevail in this case. There is no necessary implication that the illegality of the
assailed stipulation shall immediately render the totality of the contract void.
 Kasilag v. Rodriguez, 69 Phil. 217 (1939)

“The cardinal rule in the interpretation of contracts is to the effect that the intention of
the contracting parties should always prevail because their will has the force of law
between them.”

FACTS:
1. Heirs of Ambrosio filed a case to recover from Kasilag the possession of the land
and its improvements.
2. Kasilag alleged that he was in possession of the land by virtue of a mortgage
contract he and Ambrosio entered into.
3. But the CA ruled that the contract entered between the two was not of a
mortgage but of an absolute purchase and sale. CA held the contract null and
void as well as the subsequent verbal contracts between the parties.

ISSUE/S & HELD:

1. Whether the parties really entered into an absolute purchase and sale of land
instead of a mortgage contract?

NO. The Civil Code provides that if the terms of a contract are clear and leave no
doubt as to the intention of the contracting parties, the literal sense of its
stipulations shall be followed.

The contract entered into by the parties should be interpreted in accordance with
these rules. As the terms thereof are clear and leave no room for doubt, it should
be interpreted according to the literal meaning of its clauses. The words used by
the contracting parties clearly show that they intended to enter into the principal
contract of loan in the amount of P1,000, with interest at 12 percent per annum,
and into the accessory contract of mortgage of the improvements on the land
acquired as homesteads the parties having, moreover, agreed upon the pacts and
conditions stated in the deed.

B. How to determine intention—Art. 1371

RULE: Consider their contemporaneous and subsequent acts.

The real nature of a contract may be determined not only from the express terms of the
written agreement but also by all the surrounding circumstances to prove the intention
of the parties thereto.
C. How to interpret a contract
1. When it contains stipulations that admit several meanings—Art. 1373

RULE: When an agreement is susceptible of several meanings, one of which

would render it effectual, it should be given that interpretation.

IOW, if one interpretation makes a contract valid or effective and the other
makes it illegal or meaningless, the former interpretation should be
considered.

2. When it contains various stipulations, some of which are doubtful—Art. 1364

RULE: CONTEXTUALIZE. You do not interpret it by piecemeal but rather as a

whole.

3. When it contains words that have different significations—Art. 1375

RULE: If a word is susceptible of two or more meanings, it is to be understood

in that sense which is most in keeping with the nature and object of the
contract in line with the cardinal rule that the intention of the parties must
prevail.

4. When it contains ambiguities and omission of stipulations—Art. 1376

RULE: The usage or custom of the place where the contract was entered into
may be received to explain what is doubtful or ambiguous in a contract on
theory that the parties entered into their contract with reference to such
usage or custom. It shall also fill the omission of stipulations which are
ordinarily established.

5. With respect to the party who caused the obscurity—Art. 1377

RULE: It be interpreted strictly against the party who has drawn it or be given
an interpretation which will be favorable to the other who, upon the faith of
which, has incurred an obligation.

6. When it is absolutely impossible to settle doubts by the rules above—Art.

1378
a. In gratuitous contracts
- interpret it in favor of the least transmission of right.
b. In onerous contracts
- in favor of greatest reciprocity of interest. By reason of equity and
fairness
 7. When the doubts are cast upon the principal object so that the intention
cannot be known—Art. 1378

RULE: If the doubts are cast upon the principal object of the contract in such a
way that it cannot be known what may have been the intention or will of the
parties – the contract shall be null and void.

D. Applicability of Rule 123, Rules of Court (now Secs. 10-19, Rule 130)

DEFECTIVE CONTRACTS

Chapter VI. Rescissible Contracts

A. Kinds and their Characteristics—Art. 1381

1. In Behalf of Wards (entered to by Guardians)

Lesion – damage or injury to the party asking for rescission (usually because of
disparity between the price and the value).

If the wards suffer lesion by more than ¼ of the value of the objects, then it is
rescissible.

2. In Representation of Absentees

Same as (1)

3. Those undertaken in Fraud of Creditors, When the Latter Cannot in Any Other
Manner Collect Claims Due Them

Rescission due to fraud of creditors is a.k.a accion pauliana.

4. Thing in Litigation

Example:
A sues B for recovery of a diamond ring. Pending litigation, B sells the ring to C
without the approval of A or of the court. The sale to C is rescissible at A’s instance in
case A wins the original litigation, unless C is in good faith.

5. Other Instances Specially Declared by Law

B. Rescission—Art. 1380

1. Definition

It is a relief to protect one of the parties or a third person from all injury and damage
which the contract may cause, to protect some preferential right.

2. As distinguished from rescission under Art. 1191

Principle

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case the
obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission
even after he has chosen fulfillment if the latter should become impossible.

Vs

ART. 1383. The action for rescission is subsidiary; it cannot be instituted when the
party suffering damage has no other legal means to obtain reparation for the same.

ART. 1384. Rescission shall be only to the extent necessary to cover the caused.

The general rule is that rescission of a contract will not be permitted for a slight
casual breach, but only for such substantial and fundamental breach as to defeat
the very object of the parties in making the agreement. The question of whether a
breach of contract substantial depends upon the attendant circumstances.

Case
Universal Food Corp. v. CA, 33 SCRA 1 (1970)
3. Requisites: (1383, 1385, 1389)

a) The party suffering damage must have no other legal means to obtain reparation
for the same.
b) The party causing the loss must be able to return what has been received by him.
c) The thing/object of the contract is not in the legal possession of third persons in
good faith.
d) The action must be brought within the proper prescriptive period.

4. Effect of rescission—Art. 1389

GENERAL RULE: Four years from the date the contract was entered into.

EXCEPTIONS:
a) Persons under guardianship – 4 years from termination of incapacity.
b) Absentees – 4 years from the time the domicile is known.

a. With respect to third persons who acquired the thing in good faith—Art.
1385, 2nd and 3rd par.

5. Extent of rescission—Art. 1384

RULE: Rescission shall only be to the extent necessary to cover the damages caused.

6. Presumption of fraud (Badges of Fraud)—Art. 1384

In determining whether or not a sale is fraudulent, the following attending such sale
are indications of fraud:

1. The fact that the consideration of the conveyance is fictitious or is inadequate.

2. A transfer made by a debtor after suit has been begun and while it is pending
him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, when there are
present other of the above circumstances.
7. The failure of the vendee to take exclusive possession of all of the property.
In determining whether or not a certain conveyance is fraudulent the question every
case is:
1. Whether the conveyance was a bona fide transaction or a trick and
contrivance to defeat creditors, (bona fide intent) or
2. Whether it conserves to the debtor a special right (good consideration)

It is not sufficient that it is founded on good consideration or is made with bona fide
intent: it must have both elements. If defective in either of these particulars although
good between the parties, it is voidable as to creditors.

The test as to whether or not a conveyance is fraudulent: does it prejudice the rights
of creditors?

a. Badges of fraud

Case

Oria vs. Memicking, 21 Phil. 243 (1912)

FACTS:
1. Gutierrez brought an action against Oria for the recovery of sums of
money.
2. Oria subsequently entered into a contract with Manuel for the purpose of
selling and transferring to the latter all of the property owned by Oria.
Including in these properties is the steamship Serantes, the subject of this
litigation.
3. CFI ruled in favor of Gutierrez and the sheriff immediately levied upon the
steamship Serantes and announced it for public auction.
4. Manuel claimed ownership, but still the public auction proceeded, and
Gutierrez became the purchaser of the steamship.
5. Manuel filed an action against Gutierrez, but the trial court dismissed the
action in favor of Gutierrez.

ISSUE/S & HELD:

1. Whether the sale between Manuel and Oria was valid.

NO. It was not valid. Every one of the badges of fraud above enumerated
is present.

Tested by the inquiry “does the sale prejudice the rights of creditors” the
result is clear. The sale in the form in which it was made leaves the
creditors substantially without recourse.

And since the record shows that there was no property with which the
judgment in question could be
 paid, the defendant Gutierrez was obliged to resort to and levy upon the
steamer in suit.

Siguan v. Lim et al., 318 SCRA 725 (1999)

FACTS:
1. Lim issued to SIGUAN two checks but was dishonored.
2. Subsequently after litigation, Lim was convicted of violation of BP 22.
3. Prior to that, a deed of donation was purportedly executed by Lim over
parcels of land in favor of her children. New TCT’s were issued in favor of
donee-children.
4. SIGUAN filed an accion pauliana to rescind the Deed of Donation and to
declare as void the new TCT alleging that Lim, through the Deed of
Donation, fraudulently transferred all her real property to her children in
bad faith and in fraud of creditors.

ISSUE/S & HELD:

1. Whether the Deed of Donation was made in fraud of the creditor and,
therefore, rescissible.

NO. The Contract is not rescissible since the four requirements for
rescission of a gratuitous contract are not present.

The action to rescind contracts in fraud of creditors or accion pauliana has

the following requisites:
1) the plaintiff asking for rescission has a credit prior to the alienation
although demandable later;
2) debtor has made a subsequent contract conveying a patrimonial to
a person;
3) creditor has no other legal remedy to satisfy his claim;
4) act being impugned is fraudulent;
5) third person who received the property conveyed, if it is by onerous
title has been an accomplice in the fraud.

The alleged debt of LIM in favor of SIGUAN was incurred in August 1990,
while the deed of donation was purportedly executed on 10 August 1989.
Hence, the first requisite is not present.

The third requisite was not met. An action for rescission is but a subsidiary
remedy which cannot be instituted except when the party suffering
damage has no other legal means. It is, therefore, essential that the party
asking for rescission prove that he has exhausted all other legal means to
obtain satisfaction of his claim. SIGUAN did not prove that she did.
 The fourth requisite is not present. For presumption of fraud to apply, it
must be established that the donor did not leave adequate properties
which creditors might have recourse for the collection of their credits. Lim
had properties when the deed of donation was executed.

SIGUAN failed to discharge the burden of proving any of the circumstances

from which fraud can be inferred (badges of fraud). Accordingly, since the
four requirements for the rescission of a gratuitous contract are not
present in this case, SIGUANS's action must fail.

Suntay v. CA., supra

Frederico Suntay owns a rice mill in Bulacan. He applied as a miller-

contractor but was disapproved because of several unpaid loans. To
circumvent it, he allowed his Raphael (respondent) , his nephew, to make the
application on his behalf. They executed a deed of sale for and consideration
of P20,000 to transfer the rice mill property to Raphael. After 3 months, the
property was repurchased by Frederico for the same consideration. The
document for the repurchase, however, was not a deed of sale but a real
estate mortgage. Frederico demanded Raphael to transfer the title, but the
latter refused claiming that the reconveyance was a dacion en pago in lieu of
attorney’s fees in consideration of the legal services rendered by him as
counsel for his uncle’s business. Frederico contends that the sale was merely
simulated for the purpose of accommodation.

Was the contract simulated?

YES. The deed of sale was simulated and thus null and void. The sale was mas never
intended to have a binding and legal effect between the parties. The court
considered the history and relationship of trust, interdependence, and intimacy
between the two parties as an unmistakable badge of simulation. When their
relationship turned sour, Rafael, in all probability, knew where to hit Federico where
it really hurt because he had been privy to most of Federico's business and personal
dealings and transactions.

The most protuberant index of simulation is the complete absence of an attempt in

any manner on the part of Rafael to assert his rights of ownership property. After
the sale, he should have entered the land and occupied the premises thereof. He
did not even attempt to. If he stood as owner, he would have collected rentals from
Federico for the use and occupation of the land and its improvements. All that Rafael
had was a title in his name.

The failure of Rafael to take exclusive possession of the property allegedly sold to
him is a clear badge of fraud. The fact that, notwithstanding the title transfer,
Federico remained in actual possession, cultivation and occupation of the disputed
 lot from the time the deed of sale was executed until the present, is a circumstance
which is unmistakably added proof of the fictitiousness of the said transfer, the
same being contrary to the principle of ownership.

Moreover, the sale and repurchase was closely esecuted at exactly the same price;
the amount in consideration was grossly inadequate given the location and value of
the property; and finally, Frederico was liquid enough to pay Raphael for his legal
fees that he doesn’t need to transfer an income-producing property.

Liability for acquiring in bad faith the things alienated in fraud of creditors—Art. 1388

EFFECT OF BAD FAITH: The acquirer/alienator must return or indemnify the frauded creditors (if
he cannot return).

If there are 2 or more alienations, the first acquirer shall be liable first, and so on successively