THE BANK OF THE PHILIPPINE ISLANDS, PLAINTIFF AND APPELLEE, VS. LAGUNA COCOANUT OIL COMPANY AND FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, DEFENDANTS. FIDELITY & SURET…

On
April 26, 1920, the Laguna Cocoanut Oil Company executed the following
promissory note in favor of the Philippine Vegetable Oil Company:

“P50,000.00

“One
month after date we promise to pay to the Philippine Vegetable Oil
Company, Inc., or order at City of Manila, Philippine Islands, the sum
of fifty thousand pesos (P50,000), Philippine currency; value received.

“In
case of non-payment of this note at maturity, we are to pay interest at
the rate of nine per cent (9%) per annum on the said amount and the
further sum of P5,000 in full, without any deduction as and for costs,
expenses and attorneys’ fees for collection whether actually incurred
or not.

“Manila, Philippine Islands, April 26, 1920.

		“LAGUNA COCOANUT OIL CO.
	“By BALDOMERO COSME
		“President”

On May 3 of the same year, the defendant and appellant Fidelity &
Surety Company of the Philippine Islands made the following notation on
the note:

“For value received, we hereby
obligate ourselves to hold the Laguna Cocoanut Oil Co. harmless against
loss for having discounted the foregoing note at the value stated
therein.”

On May 4 the payee of the note,
the Philippine Vegetable Oil Company, endorsed it in blank and
delivered it to the plaintiff, who paid the Philippine Vegetable Oil
Company the sum of P50,000 therefor. After maturity of the note, demand
for its payment was made on the Laguna Cocoanut Oil Company, the
Philippine Vegetable Oil Company and the Fidelity & Surety Company
of the Philippine Islands, all of whom refused to pay, the Laguna
Cocoanut Oil Company being admittedly insolvent.

On August
25, 1922, the Bank of the Philippine Islands brought the present action
against the Laguna Cocoanut Oil Company and the Fidelity & Surety
Company of the Philippine Islands for the recovery of the amount of the
note. In the original complaint the plaintiff pleaded the note with its
indorsements by copy and alleged that the Fidelity & Surety Company
of the Philippine Islands by having undertaken to hold the Laguna
Cocoanut Oil Company harmless for having discounted the note,
contracted the obligation to pay said note on behalf of the Laguna
Cocoanut Oil Company and to be surety for the latter. A demurrer to the
complaint was sustained and the plaintiff thereupon filed an amended
complaint which in translation reads as follows:

“Comes
now the plaintiff through the undersigned attorneys and files complaint
against said defendants, and for cause of action, alleges:

“First.
That the plaintiff, as well as the defendants, is a corporation duly
organized and operating under the laws of these Islands, the former
engaged in banking business, while the first of the defendants is
engaged in the manufacture of oil, and the second in the suretyship
business, all of them with central office in the City of Manila: the
first on Plaza de Cervantes; the Laguna Cocoanut Oil Co. in Filipinas
Building, office of Mr. Mauricio Cruz; and the Fidelity & Surety
Co. of the Philippine Islands in the Monte de Piedad Building, Plaza
Goiti.

“Second. That on April 26, 1920, the Laguna Cocoanut
Oil Co., duly represented by its president Baldomero Cosme, executed a
note in favor of the Philippine Vegetable Oil Co., Inc., for the sum of
P50,000 payable one month after the date of said note, binding itself
in case of non-payment of said note at its maturity, to pay interest at
the rate of 9 per cent per annum upon said sum, and, in addition, the
sum of P5,000, as costs, expenses and attorneys’ fees, whether or not
they may have really been incurred; and that on or before May 26, 1920,
said note was discounted by the Philippine Vegetable Oil Co., Inc., and
endorsed in blank to plaintiff, through its treasurer Chas. A. Ayton
duly authorized to that effect, in consideration of the sum of P50,000
which was paid him by the plaintiff.

“Third. That the
Fidelity & Surety Co. of the Philippine Islands bound itself to pay
to any holder of said note its value, in case the Laguna Cocoanut Oil
Co. should fail to do so.

“Fourth. That notwithstanding the
demands made upon the Laguna Cocoanut Oil Co., as well as on the
Fidelity & Surety Co. of the Philippine Islands, for the payment of
said note with interest thereon at the rate of 9 per cent from May 26,
1920, none of them has paid any amount whatsoever on account of either
the interest or the principal of said note.

“Wherefore, the
plaintiff prays the court that judgment be rendered, sentencing the
Laguna Cocoanut Oil Co. to pay the P50,000 value of said note, with
interest thereon at the rate of 9 per cent per annum from May 26, 1920,
with legal interest upon the interest due from the filing of this
complaint until full payment of said interests and principal, and, in
addition, the sum of P5,000 for costs, expenses and attorneys’ fees;
and in case the Laguna Cocoanut Oil Co. should fail to pay the amounts
claimed, that the Fidelity & Surety Co. of the Philippine Islands
be sentenced to pay them. The plaintiff prays, furthermore, for any
such other relief as may be just and equitable.”

The amended complaint was demurred to by the defendant, the Fidelity
& Surety Company. The demurrer was sustained by the court below,
but on appeal to this court the decision was reversed and the case
remanded for trial upon the merits.^[1]
The Fidelity & Surety Company thereupon filed an answer admitting
the corporate existence of the parties and the due execution of the
note, and that it was unpaid, but denied all other allegations in the
complaint. The Laguna Cocoanut Oil Company made no defense. At the
trial, the case was submitted to the court upon the following
stipulation of facts:

“First. That on April
26, 1920, the Laguna Cocoanut Oil Co., a corporation organized and
existing under the laws of these Islands, thru its president Baldomero
Cosme duly authorized to that effect, executed a note in favor of the
Philippine Vegetable Oil Company, another corporation established and
doing business in accordance with the laws of these Islands, a
promissory note in words and figures following:

(Here follows copy of the note.)

“Second.
That the Fidelity & Surety Co. of the Philippine Islands is a
surety corporation organized and operating under the laws of these
Islands, duly represented by its vice-president J. Elmer Delaney and
its secretary-treasurer A. D. Tanner, stated the following at the
bottom of said note:

(Copy of the notation of the Fidelity & Surety Company’s guarantee as hereinbefore quoted.)

“Third.
That on or about May 4, 1920, the Philippine Vegetable Oil Company duly
represented by its treasurer Charles D. Ayton, endorsed said note in
blank to the plaintiff, another corporation organized and operating
under the laws of these Islands, in consideration of the sum of P50,000
which was paid it by the plaintiff, signing on the back of said note as
follows: ‘PHILIPPINE VEGETABLE OIL CO., INC. BY CHAS. D. AYTON, Treasurer:

“Fourth.
That neither the Philippine Vegetable Oil Co., nor the Laguna Cocoanut
Oil Company nor the Fidelity and Surety Company of the Philippine
Islands has paid any part of the principal or interest of said note,
notwithstanding the demand made on them for its payment.

“Fifth. That the Laguna Cocoanut Oil Co. has no property to make payment of said note.”

Upon the pleadings and the agreed statement of facts, the trial court
rendered judgment against the Fidelity & Surety Company of the
Philippine Islands for the full amount of the note, with interest at
the rate of 9 per cent per annum from the 26th day of May, 1920, until
complete payment, and for the sum of P5,000, as costs, expenses and
attorney’s fees. From this judgment the Fidelity & Surety Company
appeals and makes the following assignments of error:

“I.
The trial court erred in holding that in the instrument Exhibit A the
words ‘the Bank of the Philippine Islands’ should be substituted for
the words ‘the Laguna Cocoanut Oil Company.’

“II. The
trial court erred in giving judgment to plaintiff against the defendant
Fidelity & Surety Company of the Philippine Islands for the sum of
fifty thousand pesos (P50,000), with interest at the rate of nine per
cent per annum from the 26th day of May, 1920, with five thousand pesos
(P5,000) as attorneys’ fees.

“III. The trial court erred in overruling defendant’s motion for a new trial.”

In our opinion the assignments of error are well taken. The trial court
based its decision on the finding of fact that a mistake had been made
in the undertaking of the Fidelity & Surety Company appearing on
the note, and held that the instrument should be read in part: “We
hereby obligate ourselves to hold the Bank of the Philippine Islands
harmless against loss” instead of: “We hereby obligate ourselves to
hold the Laguna Cocoanut Oil Company harmless against loss.” The court
further said:

“It matters little that the
complaint contains no allegation of the error. If by the context itself
of the obligation of suretyship subscribed by the Fidelity & Surety
Co. of the Philippine Islands and other facts and circumstances
appearing in the stipulation of facts, such an error is shown and the
true intention of the parties can be ascertained, the court cannot
ignore such error and the intention of the parties, and it is its duty
to enforce the obligation contracted by the Fidelity & Surety Co.
of the Philippine Islands, as it may appear, after said error is
corrected and the true intention of the parties ascertained. The
obligation subscribed by the Fidelity & Surety Co. of the
Philippine Islands having been set forth in the stipulation of facts,
the court taking into account all the facts appearing in said
stipulation has jurisdiction to find the true intention of the parties
and give effect to the obligation according to said intention.

“In
the amended complaint it was alleged that the Fidelity & Surety Co.
of the Philippine Islands secured the payment of the note to any holder
thereof. This allegation undoubtedly includes the one that said
corporation secured the Bank of the Philippine Islands against any loss
it may suffer, in subscribing the obligation of suretyship; and if
there were any variance between said allegation and the facts
established by the evidence that the Fidelity & Surety Co. of the
Philippine Islands, by subscribing said obligation of suretyship,
secured the Bank of the Philippine Islands against any loss the latter
may suffer for having discounted the note, the plaintiff may under
section 109 of the Code of Civil Procedure amend that allegation to
make it conform with the finding of fact made by the court.”

It is evident that the court below underestimated the importance of
pleading the supposed mistake in the complaint. The judgment as it
stands clearly involves a reformation of the contract of guaranty and
it is elementary that the facts upon which relief by reformation is
sought must be put in issue by the pleadings. Ruling Case Law states
the rule as follows:

“A court of equity
cannot reform an instrument except on allegations which make out a case
for the equitable remedy asked. The allegations must show that the
instrument sought to be reformed fails to express the real agreement or
transaction between the parties by reason of their mutual mistake or on
account of fraud of one of them or fraud or inequitable condition on
one side and mistake on the other. * * *” (23 Ruling Case Law, page
360.) And section 109 of the Code of Civil Procedure does not alter
this rule. In the case of Ramirez vs. Orientalist Co. and Fernandez, (38 Phil., 634, 646), this court said:

“It
is true that it is declared in section 109 of the Code of Civil
Procedure that immaterial variances between the allegations of a
pleading and the proof shall be disregarded and the facts shall be
found according to the evidence. The same section, however, recognizes
the necessity for an amendment of the pleadings, in all cases where the
variance is substantial, to bring them into conformity with the facts
proved. That section has, in our opinion, by no means abrogated the
general and fundamental principle that relief can only be granted upon
matters which are put in issue by the pleadings. A judgment must be in
conformity with the case made in the pleadings and established by the
proof, and relief cannot be granted that is substantially inconsistent
with either. A party can no more succeed upon a case proved but not
alleged than upon a case alleged but not proved. This rule, of course,
operates with like effect upon both parties, and applies equally to the
defendant’s special defense as to the plaintiff’s cause of action.”

It is true, as asserted by counsel for the appellee, that there are
cases where courts have proceeded as a mere matter of construction of a
contract to substitute the real name of a party for that of a party
erroneously written, but in all of these cases it will be found that
the contracts themselves left no possible doubt as to who the real
parties were and as to the real intent of the document. Perhaps the
best example of this class of cases and the most favorable to the
appellee’s contention is that of Richmond vs. Woodward (32 Vt.,
833), cited in the appellee’s brief. In that case the defendant,
Woodward, as principal, and the other defendants as sureties, executed
to the plaintiff, described therein as Sheriff of Windsor County, a
bond, in the penal sum of ten thousand dollars, with the following
condition: ” ‘The condition of the above obligation is such that,
whereas, the above bounden Harvey H. Woodward, has been appointed by
Lorenzo Richmond, sheriff as aforesaid, a deputy sheriff within and for
the county of Windsor, and has taken a deputation to that effect. Now
if the said Minot Wheeler shall at all times, save the said Lorenzo
Richmond, sheriff as aforesaid, harmless from all damages, risk,
liabilities, or causes of liability, in consequence of neglect,
misconduct, malfeasance, or misfeasance, in the matters appertaining to
the said office of sheriff, then the above obligation is void and of no
effect, otherwise in full force and effect.’ The name ‘Minot Wheeler’
occurred nowhere else in the instrument. Held that the bond
should be construed the same as if the name ‘Harvey H. Woodward’ had
been originally written therein in place of ‘Minot Wheeler.'”

It will be noted that it appeared in the bond that Woodward was the
deputy sheriff, that he gave the bond and that the name of the “said
Minot Wheeler” did not appear elsewhere in the bond. The error was
clearly a clerical one and the intent of the document could not
possibly be in doubt.

Such is not the case here. The writing
upon which the action is brought does not in terms show any obligation
in favor of the plaintiff and the action can only be maintained upon
the theory that the writing does not express the true intent of the
parties. We may surmise that the guarantee in question was intended for
the benefit of the party who subsequently discounted the note, but we
cannot be certain. The note may have been merely an accommodation note
and the guarantee may have been intended for the protection of the
maker in the event of the discounting of the note or its transfer to a
third party. The appellee contends that this hypothesis is negatived by
the fact that the words “value received” appear in the note as quoted
in the stipulation of facts. But that proves nothing definitely or
conclusively. Unless otherwise stated in the instrument, a negotiable
promissory note implies prima facie valuable consideration
moving to the maker whether the words “value received” appear in it or
not. (Negotiable Instruments Law, section 24; 3 R. C. L., 927.)

An accommodation note showing on its face in express terms that it had
been issued for no consideration would be of little or no use to the
payee, and for that reason, if for no other, practically all
accommodation notes are so drawn as to either express or imply a
valuable consideration prima facie. There is therefore
nothing in the note here in question to distinguish it from an ordinary
accommodation note. This being so and the guarantee of the Fidelity
& Surety Company by its terms being in favor of the maker of the
note, there is at least a possibility that the defendant, if called
upon to do so, might have been able to prove that the note was given as
an accommodation to the Vegetable Oil Company. This possibility
existing, the court was not justified in virtually reforming the
document by mere construction without proper pleadings. In this
connection it should be borne in mind that contracts of suretyship and
guarantee are strictly construed in favor of the surety or guarantor.

Section 285 of the Code of Civil Procedure provides that “a mistake or
imperfection of the writing or its failure to express the true intent
and agreement of the parties” must be put in issue by the pleadings in
order to render evidence other than the writing itself admissible. This
is an old and useful rule and its observance should be insisted upon.
The defendant-appellant in the present case had the right to be timely
apprised by the pleadings of the plaintiff’s contention that the
writing containing the contract of “guaranty was imperfect and did not
show the true agreement and he should have been given the opportunity
to prove, if he could, that no mistake had been made or, if one was
made, to produce other defenses which might have been available. The
failure to give him that opportunity is not merely a technical error;
it goes to the merits and is a reversible error.

In view of
the fact that the case has been pending for several years, that it has
been before this court once before, and that the plaintiff has had
ample opportunity to remedy the defect in its pleadings, we would be
warranted in definitely absolving the appellant from the complaint, but
the majority of the court is of the opinion that the plaintiff should
be given another opportunity to prosecute its claim.

The
judgment appealed from is reversed and the action is dismissed without
prejudice to the bringing of another action upon the same cause. No
costs will be allowed. So ordered.

Avanceña, C. J., Street, Romualdez, and Villa-Real, JJ., concur.
Johnson, J., dissents.

Malcolm and Johns, JJ.,
concurring and dissenting: The plaintiff neither pleaded nor proved
mistake in the contract, although given repeated opportunities to amend
its complaint and to offer its evidence. Accordingly, the defendant
should not be further molested. In our judgment, the complaint should
be definitely dismissed, without reservation. That is our vote.

Villamor, J., dissenting: In my opinion the judgment appealed from should be affirmed.

---

^[1] 44 Phil., 618.