Reformation of Instruments: When Can a Contract Be Changed

When a written contract fails to reflect what the parties truly agreed upon, Philippine law offers a remedy: reformation of instruments. Under Article 1361 of the Civil Code, a contract may be reformed when a mutual mistake of the parties caused the written instrument to fail in disclosing their real agreement. However, as the Supreme Court clarified in Globe Asiatique Realty Holdings Corporation v. Union Bank of the Philippines (G.R. No. 229339, July 29, 2019), reformation is not automatic—and courts will not shortcut the process when the facts are genuinely disputed.

The Case: A Dispute Over Deeds of Assignment

Globe Asiatique entered into a Memorandum of Agreement with Union Bank, under which the bank agreed to purchase installment accounts receivables arising from Globe Asiatique's sale of condominium units. To implement the arrangement, Globe Asiatique executed Deeds of Assignment and Special Powers of Attorney in favor of Union Bank covering several condominium units.

Later, Globe Asiatique sought to reform these documents, claiming that the parties only intended to assign rights over the receivables—not the parcels of land themselves. It argued that the documents were the result of a mutual mistake and filed a complaint for reformation.

Union Bank disputed this, asserting that the Deeds of Assignment were actually intended as security for a credit facility. It denied any mutual mistake, claiming that if any mistake existed, it was only on Globe Asiatique's part.

The Issue: Summary Judgment or Full Trial?

Globe Asiatique moved for summary judgment, arguing that Union Bank had admitted all material allegations and that no genuine issue of fact remained. The trial court denied the motion, and the Court of Appeals affirmed. The Supreme Court was asked to determine whether the lower courts committed grave abuse of discretion in denying the motion.

The Ruling: Disputed Facts Require a Trial

The Supreme Court denied Globe Asiatique's petition, affirming the lower courts' decisions. The Court emphasized that summary judgment is proper only when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.

A "genuine issue" is one that calls for the presentation of evidence, as distinguished from an issue that is fictitious or contrived. Where the parties present conflicting factual positions, summary judgment cannot replace a full trial.

In this case, Union Bank's answer contained specific denials and affirmative defenses. It disputed the allegation of mutual mistake and asserted that the Deeds of Assignment served as security. These conflicting positions created genuine issues that could only be resolved through trial.

The Court also noted that when a complaint raises the issue that a contract does not express the true intention of the parties—as reformation cases inherently do—a trial should be conducted to receive the parties' respective evidence.

The Standard for Grave Abuse of Discretion

The Court reiterated that grave abuse of discretion exists only when a court acts in a capricious or whimsical manner equivalent to lack of jurisdiction. The abuse must be patent and gross, amounting to an evasion of a positive duty or a virtual refusal to perform a duty enjoined by law.

Since the trial court's denial of summary judgment was supported by legal and factual bases, no grave abuse of discretion could be attributed to it. Doubts about the propriety of summary judgment must be resolved against its grant, giving the opposing party the benefit of all favorable inferences.

Practical Takeaways

• Mutual mistake is the key. For reformation under Article 1361 of the Civil Code, both parties must have been mistaken. A mistake by only one party is generally insufficient.
• Written documents are presumed correct. Courts do not lightly rewrite contracts. The party seeking reformation bears the burden of proving that the writing fails to reflect the true agreement.
• Summary judgment is a limited remedy. It is available only when facts are undisputed. If the opposing party raises genuine factual disputes—such as denying mutual mistake—a full trial is necessary.
• Reformation is not a substitute for due diligence. Review contracts carefully before signing. Reformation is a remedy for mutual mistake, not a tool to escape unfavorable terms discovered later.
• Expect litigation to be fact-intensive. Reformation cases often hinge on evidence of the parties' intent, including negotiations, correspondence, and conduct. Be prepared for a trial on the merits.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.