Banico vs. Stager

Reformation of a written instrument is proper despite the mistake of the drafting lawyer where the party seeking it proves by preponderant evidence, through the parties' contemporaneous and subsequent acts, that the instrument failed to express their true intention; the ten-year prescriptive period for reformation is interrupted by a written acknowledgment of the obligation.

Lydia Bernadette M. Stager owned a 6,100-square-meter property, Lot No. 199, in Barangay Manoc-Manoc, Boracay Island, which adjoined the sea on its eastern part, was generally flat at the center, and had an elevated rocky northern part. Ulysses Rudi V. Banico sought to acquire a portion suitable for building a beach resort. Their transactions were embodied in a Deed of Absolute Sale over an 800-square-meter portion and a contract to sell over an additional 400-square-meter portion, with the governing statutory backdrop supplied by Article 1359 of the New Civil Code on reformation and Articles 1144 and 1155 on prescription and interruption.

Lydia Bernadette M. Stager owned a 6,100-square-meter real property identified as Lot No. 199 in Barangay Manoc-Manoc, Boracay Island. The land adjoined the sea on its eastern part, was generally flat at the center, and had an elevated rocky northern part. In 1991, Lydia offered to sell the entire lot to Ulysses Rudi V. Banico, but he agreed only to buy an area suitable for building a beach resort. Ulysses' lawyer drafted a Deed of Absolute Sale over the 800-square-meter portion of the land for P350,000.00, and on February 8, 1992, Lydia and Ulysses signed the contract. The deed described the property as a portion of Lot No. 199 on its northern part, containing 800 square meters more or less, adjoining the Sibuyan Sea, bounded on the Northeast by the seashore of the Sibuyan Sea with a beachfront of 40 meters length, on the Southeast by the remaining portion of Lot No. 199, on the Northwest by Lot No. 200 of the Heirs of Sabiniano Castro, and on the Southwest by the remaining portion of Lot No. 199.

Upon payment of the purchase price, Ulysses took possession of the flat terrain and hired a surveyor. He discovered that the land described in the deed referred to the elevated and rocky portion, not the flat area he bought and occupied. Ulysses confronted Lydia, who promised to make the necessary corrections. At that time, Lydia convinced Ulysses to buy an additional 400-square-meter portion of Lot No. 199 adjacent to the flat terrain for P160,000.00 on installment basis. Ulysses agreed on the condition that Lydia would amend the deed of sale to reflect the correct location, area, and consideration. On October 19, 1992, the parties entered into a contract to sell over the 400-square-meter lot. Ulysses gave an initial payment and Lydia issued the corresponding receipt.

Meanwhile, Ulysses began constructing the resort and paid the remaining amount. In 1997, Ulysses asked Lydia to prepare the amended deed of sale, but she refused because he still had an unpaid balance of P12,000.00. Ulysses maintained that he had already paid Lydia more than P160,000.00. In 2001, Ulysses brought the matter to the barangay. Thereat, Lydia honored the transaction over the 800-square-meter lot and presented a notarized Deed of Absolute Sale dated December 6, 2001, containing the accurate description of the flat terrain. The deed stated a consideration of P80,000.00 from Rudy Ulysses Banico and described the 800-square-meter portion as bounded on the North by Lot 199-B, on the East by Proposed Brgy. Road, on the South by Lot 199-A-2, and on the West by Lot 199-C. Ulysses did not sign the deed because it failed to state the true consideration.

On July 9, 2002, Ulysses filed an action for specific performance and damages against Lydia before the Regional Trial Court, docketed as Civil Case No. 02-104001. In her answer, Lydia claimed that the contract over the 800-square-meter lot was distinct from the additional 400-square-meter lot. The first transaction was based on the consummated Deed of Absolute Sale dated February 8, 1992; she even executed a Deed of Absolute Sale dated December 6, 2001, but Ulysses rejected it. The second transaction transpired on October 19, 1992, but Ulysses failed to settle the balance of the purchase price. In 2012, Lydia died and was substituted by her compulsory heirs.

The RTC found that the lot first occupied by Ulysses was the one actually intended by the parties, that the mistake in the description was mutual, and that the parties were not experts in comprehending the technical description of the property. It examined the receipts and found that Ulysses still had a balance of P6,600.00 in the contract to sell over the 400-square-meter lot. The CA later found that several receipts did not prove payment and computed a balance of P5,860.00 out of the P160,000.00 purchase price.

• Reformation Despite Counsel's Drafting Error: Petitioner argued that the CA erred in ruling that the party who caused the ambiguity cannot ask to reform the contract; the fact that his lawyer drafted the original Deed of Absolute Sale should not prevent reformation because the instrument did not express the parties' true intention.
• Full Payment and Damages: Petitioner maintained that he fully paid the P160,000.00 purchase price under the contract to sell over the 400-square-meter lot and that he is entitled to damages; he also argued that the CA erred in appreciating the receipts and in finding that he still had an unpaid balance.
• Prescription and Written Acknowledgment: Petitioner argued that the prescriptive period for reformation was tolled when Lydia acknowledged her obligation and executed the December 6, 2001 Deed of Absolute Sale containing the accurate description of the 800-square-meter lot.

• Impropriety of Reformation: The Heirs of Lydia argued that the RTC erred in granting the reformation of the February 8, 1992 Deed of Absolute Sale and in ordering them to execute another contract of sale in favor of Ulysses.
• Separate Transactions: Lydia claimed in her answer that the contract over the 800-square-meter lot was distinct from the additional 400-square-meter lot; the first transaction was based on the consummated February 8, 1992 deed, while the second transpired on October 19, 1992 and Ulysses failed to settle the balance.
• Rescission of Contract to Sell: On reconsideration, the Heirs of Lydia prayed that the contract to sell over the 400-square-meter lot be declared ineffective given the long period during which Ulysses failed to pay the purchase price.

• Reformation of Instrument: Whether the February 8, 1992 Deed of Absolute Sale may be reformed despite the fact that Ulysses' counsel drafted it.
• Prescription: Whether Ulysses' action for reformation is barred by the ten-year prescriptive period.
• Unpaid Balance: Whether Ulysses still has an unpaid balance under the contract to sell over the 400-square-meter lot and, if so, in what amount.
• Rescission of Contract to Sell: Whether the contract to sell over the 400-square-meter lot should be rescinded or declared ineffective due to Ulysses' alleged failure to pay.
• Damages: Whether Ulysses and Lydia's heirs are entitled to damages.

• Reformation of Instrument: Yes. All requisites of Article 1359 of the New Civil Code concurred, and the drafting lawyer's mistake did not bar reformation where the parties' contemporaneous and subsequent acts showed that the deed did not express their true intention.
• Prescription: No. The ten-year prescriptive period was interrupted by Lydia's December 6, 2001 written acknowledgment, so the July 9, 2002 complaint was timely.
• Unpaid Balance: Yes, in the amount of P5,860.00. The debtor failed to prove full payment, and the CA's computation of the unpaid balance was affirmed.
• Rescission of Contract to Sell: No. Absent substantial breach, rescission was not allowed; Ulysses had paid a considerable amount and had to be permitted to complete payment.
• Damages: No. The mistake in the deed was not malicious or deliberate, and there was no substantial breach of the contract to sell warranting damages.

• Reformation of Instrument: Article 1359 of the New Civil Code allows reformation when there has been a meeting of the minds but the true intention is not expressed in the instrument by reason of mistake, fraud, inequitable conduct, or accident. The requisites are: (1) a meeting of the minds; (2) the instrument does not express the true intention of the parties; and (3) the failure is due to mistake, fraud, inequitable conduct, or accident. The onus probandi lies on the party seeking reformation. All requisites were present: Lydia conveyed the 800-square-meter portion to Ulysses for P350,000.00, showing a perfected contract of sale; the deed described the elevated rocky northern part even though Ulysses bought an area suitable for a beach resort and immediately occupied the flat terrain, surveyed it, and built the resort; and the erroneous technical description was a mistake. Lydia did not object to Ulysses' occupation and construction, promised to correct the description, offered the adjacent 400-square-meter lot, and later presented the December 6, 2001 notarized deed with the accurate description. Atilano vs. Atilano held that a buyer purchases real property as he sees it, by its physical metes and bounds, not by the lot number in the title; Sarming vs. Dy and Quiros vs. Arjona similarly allowed correction of erroneous land descriptions. Huibonhoa vs. Court of Appeals was distinguished because there the party merely relied on counsel's oversight and failed to prove the mistake, whereas Ulysses substantiated the true intention by preponderant evidence. The fact that Ulysses' counsel drafted the deed did not prevent reformation.
• Prescription: A suit for reformation may be barred by lapse of time, and the prescriptive period for actions based upon a written contract and for reformation is ten years under Article 1144 of the New Civil Code. The CA counted the period from February 8, 1992 and found the July 9, 2002 complaint late. Under Article 1155, however, prescription is interrupted when an action is filed, when there is a written extrajudicial demand by the creditor, or when there is a written acknowledgment of the debt by the debtor. Interruption renews the obligation and makes the full period run again; it is not mere suspension. Lydia's act of honoring the 800-square-meter transaction before the barangay and presenting the notarized December 6, 2001 Deed of Absolute Sale containing the accurate description amounted to an explicit acknowledgment of the obligation to execute an amended deed. The ten-year period thus commenced anew from December 6, 2001, making the July 9, 2002 complaint timely.
• Unpaid Balance: The finding that Ulysses still had a balance under the contract to sell over the 400-square-meter lot was a question of fact, and the RTC and CA findings were not disturbed. One who pleads payment has the burden of proving it, and the debtor must show with legal certainty that the obligation was discharged. The RTC rejected several receipts for lack of proof that they were for the 400-square-meter lot: Exhibits "C-10" and "C-24" were unsigned; Exhibit "C-9" was for pawned earrings; Exhibit "C-19" was denied by Lydia; Exhibit "C-12" was signed only by her son without stating a purpose; and Exhibits "C-3" and "C-7" did not establish payment specifically for the second lot. The receipts totaled P167,840.00; subtracting the rejected receipts worth P13,700.00 yielded P154,140.00 paid, leaving a balance of P5,860.00 out of the P160,000.00 purchase price. Under Nacar vs. Gallery Frames, et al., the balance earns 6% interest per annum from the RTC Decision on February 18, 2015 until full payment.
• Rescission of Contract to Sell: The CA correctly required the Heirs of Lydia to execute the corresponding deed of absolute sale over the 400-square-meter lot upon satisfaction of the unpaid balance. Ulysses had paid a considerable amount under the contract to sell, and absent substantial breach, rescission was not allowed; he had to be permitted to complete payment.
• Damages: Both the CA and RTC properly denied the parties' claims for damages. The mistake in the February 8, 1992 Deed of Absolute Sale over the 800-square-meter lot was not malicious or deliberate, and the parties were not aware of the error until the land was surveyed. There was likewise no substantial breach of the contract to sell over the 400-square-meter lot that would warrant an award of damages.

• Reformation of Instruments under Article 1359 — Reformation is available when there has been a meeting of the minds but the true intention is not expressed in the instrument by reason of mistake, fraud, inequitable conduct, or accident. The requisites are: (1) a meeting of the minds of the parties; (2) the instrument does not express the true intention of the parties; and (3) the failure is due to mistake, fraud, inequitable conduct, or accident. The party seeking reformation bears the onus probandi. The Court applied this doctrine because the deed misdescribed the lot but the parties' acts showed the flat terrain was intended.
• Sale by Physical Metes and Bounds — A person sells or buys real property as he sees it, in its actual setting and by its physical metes and bounds, not by the mere lot number assigned in the certificate of title. The Court applied this to treat the erroneous technical description as a correctible mistake, not a defect in consent or object.
• Lawyer's Mistake in Drafting — The mistake of the lawyer who drafted the instrument does not prevent reformation if the party seeking it proves by preponderant evidence that the instrument failed to express the true intention of the contracting parties. The Court distinguished Huibonhoa vs. Court of Appeals, where the party merely relied on counsel's oversight and failed to prove the alleged mistake.
• Prescription and Interruption by Written Acknowledgment — An action for reformation or upon a written contract prescribes in ten years. Prescription is interrupted by a written acknowledgment of the debt, which renews the obligation and causes the full period to run again; interruption is not mere suspension. The Court applied this to Lydia's December 6, 2001 notarized deed.
• Burden of Proving Payment — One who pleads payment has the burden of proving it; the debtor must show with legal certainty that the obligation has been discharged. The Court applied this to reject receipts not shown to be for the 400-square-meter lot.
• Rescission Requires Substantial Breach — Rescission is not allowed absent substantial breach of the contract. The Court applied this to deny rescission of the contract to sell because Ulysses had paid a considerable amount and should be allowed to complete payment.
• Damages for Mistake or Breach — Damages are not warranted where the mistake in the instrument is not malicious or deliberate and there is no substantial breach of the contract. The Court applied this to deny both parties' damage claims.

• "The lawyer's mistake in drafting the written instrument will not prevent its reformation if the contemporaneous and subsequent acts of the parties show that their true intention was not disclosed in the document." — This opening statement states the ratio decidendi on the effect of counsel's drafting error and anchors the allowance of reformation despite the deed having been prepared by Ulysses' lawyer.
• "In an action for reformation, the court does not attempt to make another contract for the parties but the instrument is made or construed to express or conform to their real intention." — This defines the nature and limit of reformation: the court corrects the instrument to reflect the parties' true agreement rather than creating a new contract.
• "The prescription of actions is interrupted when they are filed before the court, when there is a written extrajudicial demand by the creditors, and when there is any written acknowledgment of the debt by the debtor." — This is the controlling rule on interruption of prescription, applied to Lydia's December 6, 2001 notarized deed and making the July 9, 2002 complaint timely.
• "As a general rule, one who pleads payment has the burden of proving it. The debtor has the burden of showing with legal certainty that the obligation has been discharged by payment." — This states the evidentiary rule used to reject several receipts and to sustain the finding of a P5,860.00 unpaid balance.

• Atilano, et al. vs. Atilano, et al., 138 Phil. 240 (1969) — Cited for the rule that a buyer purchases real property as he sees it, by its physical metes and bounds, not by the lot number in the certificate of title; a simple mistake in drafting does not vitiate consent or the contract's validity.
• Sarming vs. Dy, 432 Phil. 685 (2002) — Cited as precedent where the Court reformed a document by changing the land designation because the totality of evidence showed the intended lot.
• Quiros vs. Arjona, 468 Phil. 1000 (2004) — Cited for the principle that an error in describing the exact location of the property is correctible by reformation and does not negate the principal object of the contract.
• Huibonhoa vs. Court of Appeals, 378 Phil. 386 (1999) — Distinguished; the oversight of a lawyer in drafting the instrument is not a reason for reformation where the party merely relies on counsel's oversight and fails to prove the alleged mistake.
• National Irrigation Administration vs. Gamit, 289 Phil. 914 (1992) — Cited for the requisites of an action for reformation and for the principle that the rigor of the written instrument is tempered to forestall mistake, fraud, inequitable conduct, or accident.
• Mata vs. Court of Appeals, 284 Phil. 36 (1992) — Cited for the rule that the onus probandi is upon the party who insists that the contract should be reformed.
• Nacar vs. Gallery Frames, et al., 716 Phil. 267 (2013) — Applied to impose 6% interest per annum on the P5,860.00 unpaid balance from the date of the RTC Decision until full payment.
• Ledesma vs. Court of Appeals, 295 Phil. 1070 (1993) — Cited for the effect of interruption of prescription: the obligation is renewed and the full period runs again.
• Provident Savings Bank vs. Court of Appeals, 294 Phil. 143 (1993) — Cited to distinguish interruption from suspension of the prescriptive period.

• Article 1359, New Civil Code — Allows reformation of an instrument when there has been a meeting of the minds but the true intention is not expressed by reason of mistake, fraud, inequitable conduct, or accident; applied to permit reformation of the February 8, 1992 Deed of Absolute Sale.
• Article 1144, New Civil Code — Provides the ten-year prescriptive period for actions based upon a written contract and for reformation; applied but the period was interrupted.
• Article 1155, New Civil Code — Provides that prescription is interrupted by filing an action, by a written extrajudicial demand by the creditor, or by a written acknowledgment of the debt by the debtor; applied to Lydia's December 6, 2001 notarized deed.
• Article 1305, New Civil Code — Defines a contract as a meeting of the minds between two persons whereby one binds himself to give something or render some service; cited in the Court's preliminary discussion.
• Rule 45, Rules of Court — The procedural vehicle for the Petition for Review on Certiorari assailing the CA Decision.

Peralta, C.J. (Chairperson), Caguioa, Reyes, J., Jr., and Lazaro-Javier, JJ., concurred.