4. Reformation of Instruments

REFORMATION OF INSTRUMENTS

It is a remedy to conform to the real intention of the parties due to mistake, fraud, inequitable conduct, accident. (Art. 1359, NCC)

It is a remedy of amending or rectifying the instrument which purports to be the agreement of the parties to express their real intention, when the same is not expressed therein by reason of mistake, fraud, inequitable conduct, or accident.

Reformation is a remedy in equity by means of which a written instrument is made or construed to express or confirm the real intention of the parties when some error or mistake is committed. (Pineda, 2009)

Rationale: It would be unjust and inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties. (Report of the Code Commission)

Requisites in Reformation of Instruments

Reformation of an instrument requires:

• A meeting of the minds between the parties to the contract;
• An instrument that does not express their true intention;
• A failure to express that intention due to mistake, accident, relative simulation, fraud, or inequitable conduct;
• Pleadings that put in issue the facts on which reformation is sought; and
• Strong, clear, and convincing proof of the mistake, accident, relative simulation, fraud, or inequitable conduct.

Distinctions between Reformation and Annulment

NOTE: When there is no meeting of the minds, the proper remedy is annulment, and not reformation. (Pineda, 2000)

The fundamental distinction between reformation of an instrument and annulment of a contract is that the first presupposes a perfectly valid contract in which there has been a valid meeting of the minds of the contracting parties, while the second is based on a defective contract in which there has been no meeting of the minds because the consent is vitiated. (Jurado, 2010)

Q: Multi-Realty Development Corporation (Multi-Realty) built Makati Tuscany, a 26-storey condominium building located at the corner of Ayala Avenue and Fonda Street, Makati City. Makati Tuscany had a total of 160 units, with 156 ordinary units from the 2nd to the 25th floors and four (4) penthouse units on the 26th floor. It also had 270 parking slots which were apportioned as follows: one (1) parking slot for each ordinary unit; two (2) parking slots for each penthouse unit; and the balance of 106 parking slots were allocated as common areas.

Pursuant to R.A. No. 4726, or the Condominium Act, Multi-Realty created and incorporated Makati Tuscany Condominium Corporation (MATUSCO) to hold title over and manage Makati Tuscany's common areas. That same year, Multi-Realty executed a Deed of Transfer of ownership of Makati Tuscany's common areas to MATUSCO.

Multi-Realty filed a complaint for damages and/or reformation of instrument with prayer for TRO and/or preliminary injunction against MATUSCO. Multi-Realty alleged in its complaint that of the 106 parking slots designated in the Master Deed as part of the common areas, only eight (8) slots were intended to be guest parking slots; thus, it retained ownership of the remaining 98 parking slots.

Multi-Realty claimed that its ownership over the 98 parking slots was mistakenly not reflected in the Master Deed "since the documentation and the terms and conditions therein were all of first impression," considering that Makati Tuscany was one of the first condominium developments in the Philippines. Is there a need to reform the Master Deed and the Deed of Transfer?

A: NO. Reformation of an instrument is a remedy in equity where a valid existing contract is allowed by law to be revised to express the true intentions of the contracting parties. The rationale is that it would be unjust to enforce a written instrument which does not truly reflect the real agreement of the parties. In reforming an instrument, no new contract is created for the parties, rather, the reformed instrument establishes the real agreement between the parties as intended, but for some reason, was not embodied in the original instrument.

MATUSCO does not deny that it stayed silent when Multi-Realty sold the parking slots on several occasions or that it offered to buy the parking slots from Multi-Realty on at least two (2) occasions. It excuses itself by saying that just like Multi-Realty, it "also labored under a mistaken appreciation of the nature and ownership of the ninety-eight (98) parking slots in question.”

Both parties recognized Multi-Realty’s ownership of the parking slots. MATUSCO initially respected Multi-Realty's ownership despite the Master Deed's and Deed of Transfer's stipulations. It was MATUSCO that changed its position decades after it acted as if it accepted Multi-Realty's ownership. (Makati Tuscany Condominium Corporation v. Multi- Realty Development Corporation, G.R. 185530, 18 Apr. 2018)

Operation and Effect of Reformation

It relates back to, and takes effect from, the time of its original execution, especially as between the parties. (Tolentino, 2002)

Reformation of instruments may be availed of judicially or extrajudicially.

Basis and Nature of the Remedy

The remedy of reformation of an instrument is based on the principle of equity where, to express the true intention of the contracting parties, an instrument already executed is allowed by law to be reformed. The right of reformation is necessarily an invasion or limitation of the parol evidence rule, since, when a writing is reformed, the result is that an oral agreement is by court decree, made legally effective. The remedy, being an extraordinary one, must be subject to the limitations as may be provided by law. A suit for reformation of an instrument must be brought within the period prescribed by law, otherwise, it will be barred by the mere lapse of time. (Rosello-Bentir v. Leanda, G.R. No. 128991, April 12, 2000)

When Remedy Allowed

• Mutual mistake – When the mutual mistake of the parties causes the failure of the instrument to disclose their agreement; (Art. 1361, NCC) Requisites:
• The mistake should be of fact;
• The same should be proved by clear and convincing evidence; and
• The mistake should be common to both parties to the instrument. (BPI v. Fidelity Surety, Co. G.R. No. L- 26743, 19 Oct. 1927)
• Mistake on one party and fraud on the other – In such a way that the instrument does not show their true intention, the party who was mistaken may ask for the reformation of the instrument; (Art. 1362, NCC)
• Mistake on one party’s part and concealment by the other – When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former; (Art. 1363, NCC)
• Ignorance, lack of skill, negligence or bad faith – When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties; and (Art. 1364, NCC)
• Right of repurchase – If the 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. (Art. 1365, NCC)

Persons who can Ask for the Reformation of the Instrument

It may be ordered at the instance of:

• If the mistake is mutual – either party or his successor-in-interest may file an action.; or
• If the parties reached an agreement but fraud or another ground caused the instrument to misstate it – the injured party or his heirs and assigns are the only person given legal standing to sue. If the defect prevented a meeting of minds, the proper remedy is annulment, not reformation. (Civil Code, arts. 1359 and 1362)

NOTE: In reformation of contracts, what is reformed is not the contract itself, but the instrument embodying the contract. It follows that whether the contract is disadvantageous or not, is irrelevant to reformation and therefore, cannot be an element in the determination of the period for prescription of the action to reform. (Pineda, 2000)

• Real vs. Consensual Contracts; Forms, Reformation and Interpretation – Civil Code, arts. 1356-1379

DEFEECTIVE CONTRACTS

Civil Code 1380 - 1422

CHAPTER 6

Rescissible Contracts

Article 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)

Article 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof;

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;

(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to rescission. (1291a)

Article 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. (1292)

Article 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. (1294)

Article 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n)

Article 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss. (1295)

Article 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to contracts approved by the courts. (1296a)

Article 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation.

Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission.

In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence. (1297a)

Article 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them.

If there are two or more alienations, the first acquirer shall be liable first, and so on successively. (1298a)

Article 1389. The action to claim rescission must be commenced within four years.

For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known. (1299)

CHAPTER 7

Voidable Contracts

Article 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. (n)

Article 1391. The action for annulment shall be brought within four years.

This period shall begin:

In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases.

In case of mistake or fraud, from the time of the discovery of the same.

And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. (1301a)

Article 1392. Ratification extinguishes the action to annul a voidable contract. (1309a)

Article 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. (1311a)

Article 1394. Ratification may be effected by the guardian of the incapacitated person. (n)

Article 1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. (1312)

Article 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. (1313)

Article 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. (1302a)

Article 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law.

In obligations to render service, the value thereof shall be the basis for damages. (1303a)

Article 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. (1304)

Article 1400. Whenever the person obliged by the decree of annulment to return the thing can not do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date. (1307a)

Article 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff. (1314a)

Article 1402. As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him. (1308)

CHAPTER 8

Unenforceable Contracts (n)

Article 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers;

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

(a) An agreement that by its terms is not to be performed within a year from the making thereof;

(b) A special promise to answer for the debt, default, or miscarriage of another;

(c) An agreement made in consideration of marriage, other than a mutual promise to marry;

(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum;

(e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein;

( f ) A representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract.

Article 1404. Unauthorized contracts are governed by article 1317 and the principles of agency in Title X of this Book.

Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them.

Article 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357.

Article 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated.

If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception.

Article 1408. Unenforceable contracts cannot be assailed by third persons.

CHAPTER 9

Void and Inexistent Contracts

Article 1409. The following contracts are inexistent and void from the beginning:

(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;

(2) Those which are absolutely simulated or fictitious;

(3) Those whose cause or object did not exist at the time of the transaction;

(4) Those whose object is outside the commerce of men;

(5) Those which contemplate an impossible service;

(6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;

(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

Article 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.

Article 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. (1305)

Article 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking;

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise. (1306)

Article 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment.

Article 1414. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or property.

Article 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands allow recovery of money or property delivered by the incapacitated person.

Article 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.

Article 1417. When the price of any article or commodity is determined by statute, or by authority of law, any person paying any amount in excess of the maximum price allowed may recover such excess.

Article 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit.

Article 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency.

Article 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced.

Article 1421. The defense of illegality of contract is not available to third persons whose interests are not directly affected.

Article 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.

RESCISSIBLE CONTRACTS