VOL.

312,AUGUST17,1999 611
Bautistavs.PilarDevelopmentCorporation
*
G.R.No.135046.August17,1999.

SPOUSES FLORANTE and LAARNI BAUTISTA, petitioners, vs.

PILARDEVELOPMENTCORPORATION,respondent.

Civil Law Obligations and Contracts Novation The extinguishment

of an obligation by the substitution or change of the obligation by a
subsequentonewhichextinguishesormodifiesthefirstisanovationHow
novation is made Novation may either be express or implied.The first
promissory note was cancelled by the express terms of the second
promissorynote.Tocancelistostrikeout,torevoke,rescindorabandon,to
terminate.Infine,thefirstnotewasrevokedandterminated.Simplyput,it
was novated. The extinguishment of an obligation by the substitution or
changeoftheobligationbyasubsequentonewhichextinguishesormodifies
the first is a novation. Novation is made either by changing the object or
principal conditions, referred to as an objective or real novation or by
substituting the person of the debtor or subrogating a third person to the
rightsofthecreditor,whichisknownassubjectiveor

_______________

*FIRSTDIVISION.

612

612 SUPREMECOURTREPORTSANNOTATED

Bautistavs.PilarDevelopmentCorporation

personalnovation.Inbothobjectiveandsubjectivenovation,adualpurpose
is achievedan obligation is extinguished and a new one is created in lieu
thereof.Novationmayeitherbeexpress,whenthenewobligationdeclaresin
unequivocal terms that the old obligation is extinguished or implied, when
thenewobligationisoneverypointincompatiblewiththeoldone.Express
novationtakesplacewhenthecontractingpartiesexpresslydisclosethattheir
objectinmakingthenewcontractistoextinguishtheoldcontract,otherwise
theoldcontractremainsinforceandthenewcontractismerelyaddedtoit,
andeachgivesrisetoanobligationstillinforce.
Same Same Same Four essential requisites of novation. Novation
has four (4) essential requisites: (1) the existence of a previous valid
obligation (2) the agreement of all parties to the new contract (3) the
extinguishmentoftheoldcontractand(4)thevalidityofthenewone.Inthe
instantcase,allfourrequisiteshavebeencompliedwith.
Same Same Interests Circular No. 905 removed the ceiling on
interest rates for secured and unsecured loans regardless of maturity.On
December 1, 1979, the Monetary Board of the Central Bank of the
PhilippinesissuedCircularNo.705whichfixedtheeffectiverateofinterest
onloantransactionswithmaturitiesofmorethan730daystotwentyoneper
cent(21%)perannumforbothsecuredandunsecuredloans.OnJanuary28,
1980,TheMonetaryBoardissuedCircularNo.712reiteratingtheeffective
interest rate of 21% on said loan transactions. On January 1, 1983, CB
CircularNo.905,seriesof1982,tookeffect.ThisCirculardeclaredthatthe
rate of interest on any loan or forbearance of any money, goods or credits,
regardless of maturity and whether secured or unsecured, shall not be
subject to any ceiling prescribed under or pursuant to the Usury Law, as
amended. In short, Circular No. 905 removed the ceiling on interest rates
forsecuredandunsecuredloans,regardlessofmaturity.

PETITIONforreviewoncertiorariofadecisionandaresolutionof
theCourtofAppeals.

ThefactsarestatedintheopinionoftheCourt.
FloranteA.Bautistaforpetitioners.

613

VOL.312,AUGUST17,1999 613
Bautistavs.PilarDevelopmentCorporation

BienvenidoM.Tagorioforrespondent.

PUNO,J.:

ThispetitionforreviewseekstoreverseandsetasidetheDecision1
andResolutionoftheCourtofAppealsinCAG.R.CVNo.51363
which reversed the Decision of the2 Regional Trial Court, Makati,
Branch138inCivilCaseNo.17702.
Thefollowingfactsareuncontroverted.
In 1978, petitioner spouses Florante and Laarni Bautista
purchasedahouseandlotinPilarVillage,LasPias,MetroManila.
To partially finance the purchase, they obtained from the Apex
Mortgage & Loan Corporation (Apex) a loan in the amount of
P100,180.00. They executed a promissory note on December 22,
1978 obligating themselves, jointly and severally, to pay the
principalsumofP100,180.00withinterestrateof12%andservice
charge of 3% for a period of 240 months,
3
or twenty years, from
date,inmonthlyinstallmentsofP1,378.83. Latepaymentswereto
be charged a penalty of one and onehalf per cent (1 1/2%) of the
amount due. In the same promissory note, petitioners authorized
Apex to increase the rate of interest and/or service charges
withoutnoticetothemintheeventthatalaw,PresidentialDecreeor
anyCentralBankregulationshouldbeenactedincreasingthelawful
4
rate of interest and service charges on the loan. Payment of the
promissorynotewassecuredbyasecondmortgageonthehouseand
5
lotpurchasedbypetitioners.
Petitioner spouses failed to pay several installments. On
September20,1982,theyexecutedanotherpromissorynoteinfavor
ofApex.ThisnotewasintheamountofP142,326.43

______________

1PennedbyJusticeConradoM.Vasquez,Jr.andconcurredinbyJusticesFerminA.

Martin,Jr.andTeodoroP.Regino.
2PennedbyJudgeSixtoMarella,Jr.

3PromissoryNotewithAuthoritytoAssignCredit,paragraph1,Rollo,p.67.

4Id.,par.3.

5Id.,par.10,Rollo,p.68.

614

614 SUPREMECOURTREPORTSANNOTATED
Bautistavs.PilarDevelopmentCorporation

at the increased interest rate of twentyone per cent (21%) per

annumwithnoprovisionforservicechargebutwithpenaltycharge
of11/2%forlatepayments.Paymentwastobemadeforaperiodof
196 months or 16.33 years in monthly installments of P2,576.68,
inclusiveofprincipalandinterest.Petitionerspousesalsoauthorized
Apex to increase/decrease the rate of interest and/or service
chargesonthenoteintheeventanylaworCentralBankregulation
6
shallbepassedincreasingordecreasingthesame.
In November 1983, petitioner spouses again failed to pay the
installments.OnJune6,1984,Apexassignedthesecondpromissory
notetorespondentPilarDevelopmentCorporationwithoutnoticeto
petitioners.
On August 31, 1987, respondent corporation, as successorin
interestofApex,institutedagainstpetitionerspousesCivilCaseNo.
17702 before the Regional Trial Court, Makati, Branch 138.
Respondent corporation sought to collect from petitioners the
amount of P140,515.11 representing the unpaid balance of the
principaldebtfromNovember23,1983,includinginterestattherate
oftwentyonepercent(21%)underthesecondpromissorynote,and
25%and36%perannuminaccordancewithCentralBankCircular
No.905,seriesof1982.Respondentalsosoughtpaymentoftenper
7
cent(10%)oftheamountdueasattorneysfees.
In their answer, petitioner spouses mainly contended that the
terms of the second promissory note increasing the interest rate to
21%andtheescalationclausesauthorizingApextoincreaseinterest
rates pursuant to any law or Central Bank regulation are null
8
and
voidintheabsenceofadeescalationclauseinthesamenote.
Afterpretrial,bothpartiessubmittedthecasefordecisiononthe
soleissueoftheinterestrate.

______________

6Id.,pars.3and9seealsoComment,p.4,Rollo,p.154.

7Complaint,pp.12,AnnexDtothePetition,Rollo,pp.5455.

8Answer,pp.23,AnnexEtothePetition,Rollo,pp.6263.

615

VOL.312,AUGUST17,1999 615
Bautistavs.PilarDevelopmentCorporation

ThetrialcourtrenderedjudgmentonSeptember22,1995.Itordered
petitioner spouses to pay respondent corporation the sum of
P140,515.11,withinterestattherateof12%perannum,plusservice
charge,viz.:

WHEREFORE,judgmentisherebyrenderedasfollows:

(a) Plaintiff is entitled to collect from the defendants the amount of

P140,515.11 with interest at the rate of 12% per annum from
November23,1983untiltheamountisfullypaidplusthestipulated
servicecharge
(b) Orderingdefendantsasjointandseveralobligorstopayplaintiffthe
amountstatedinparagraph(a)hereof
(c) Counterclaimisherebydismissed.

Nopronouncementastocosts.
9
SOORDERED.

BothpartiesappealedtotheCourtofAppeals.InaDecisiondated
May 14, 1998, the appellate court reversed the trial court by
applyingtheinterestrateof21%perannum,andaddingattorneys
feesof10%.Thus:

IN VIEW OF ALL THE FOREGOING, the appealed judgment is hereby

REVERSED and SET ASIDE and a new one entered ordering the
defendantstopaytheplaintiffstheamountofP142,326.43,asprincipalwith
interestattherateof21%fromNovember23,1983untiltheamountisfully
paidthesumequivalentto10%oftheamountdueasattorneysfeesandthe
costsofthissuit. 10
SOORDERED.

Petitionerspousesmovedforreconsideration.InaResolutiondated
August 18, 1998, the Court of Appeals denied the motion but
reducedtheprincipalamountoftheobligationfromP142,326.42to
11
P140,515.11.
Hencethisrecourse.

_______________

9RTCDecision,p.5,AnnexCtothePetition,Rollo,p.53.

10CADecision,p.7,AnnexAtothePetition,Rollo,p.46.

11CAResolution,AnnexBtothePetition,Rollo,p.48.

616

616 SUPREMECOURTREPORTSANNOTATED
Bautistavs.PilarDevelopmentCorporation

PetitionerspousesclaimthattheCourtofAppealserred:

IN RULING THAT THE TWO (2) PROMISSORY NOTES EXECUTED

BYTHEPARTIESAREINDEPENDENTOFEACHOTHER.
CONVERSELY, IN NOT RULING THAT THE SAID PROMISSORY
NOTESCONSTITUTEASINGLELOANTRANSACTION.

II

INRULINGTHATTHEAPPLICABLERATEOFINTERESTIS21%
PER ANNUM AS STIPULATED IN THE SECOND PROMISSORY
NOTE.
CONVERSELY, IN NOT RULING THAT THE ESCALATION OF
INTEREST RATE FROM 12% PER ANNUM (1ST PROMISSORY
NOTE) TO 21% PER ANNUM (2ND PROMISSORY NOTE) IS
UNLAWFUL.

III

IN RULING THAT 10% OF THE AMOUNT DUE IS AWARDABLE

ASATTORNEYSFEES.
CONVERSELY, IN NOT RULING THAT THE AWARD OF 10%
ATTORNEYS FEES IS NOT PROPER UNDER THE
CIRCUMSTANCES.

IV
 IN RULING THAT NOTICE OF ASSIGNMENT OF CREDIT IS
POINTLESSANDUNSUSTAINABLE.
CONVERSELY,INNOTRULINGTHATNOTICETOTHEDEBTOR
ISREQUIREDWHENCREDITISASSIGNED.

IN NOT RULING THAT UNDER THE CIRCUMSTANCES

PETITIONERS
12
ARE ENTITLED TO MORAL AND EXEMPLARY
DAMAGES.

The controversy in this petition involves the rate of interest

respondentcreditorisentitledtocollectonpetitionersloan:

_______________

12Petition,pp.1112,Rollo,pp.2122.

617

VOL.312,AUGUST17,1999 617
Bautistavs.PilarDevelopmentCorporation

whetheritbe12%underthepromissorynoteofDecember22,1978,
or21%underthepromissorynoteofSeptember20,1982.
Petitionersclaimthattheinterestrateof12%perannumshould
be adjudged inasmuch as the two promissory notes constitute one
transaction.Allegedly,thefirstnotedefinedthetermsandconditions
of the loan while the second note is merely an extension of and
derives its existence from the former. Hence,
13
the second note is
governedbythestipulationsinthefirstnote.
The two promissory notes are identically entitled Promissory
NotewithAuthoritytoAssignCredit.Thenoteswerepreparedby
Apexinstandardformandconsistoftwo(2)pageseach.Exceptfor
one or two stipulations, they contain the same provisions and the
same blanks for the amount of the loan and other pertinent data
subject of each note. However, on the upper right portion of the
secondnote,thereappearsatypewrittenentrywhichreads:
14
ThiscancelsPN#A38778datedDecember22,1978.

Correspondingly, on the face of each page of the first promissory

note, i.e., PN No. A38778 dated December 22, 1978, the word
Cancelled is boldly stamped twice with the date September 16,
198215 and a signature written in a space inside the letters of the
word.
Thefirstpromissorynotewascancelledbytheexpresstermsof
the second promissory note. To16cancel is to strike out, to revoke,
rescindorabandon,toterminate. Infine,thefirstnotewasrevoked
andterminated.Simplyput,itwasnovated.Theextinguishmentof
an obligation by the substitution or change of the obligation by a
subsequentonewhichextin

________________

13Petition,pp.1214,Rollo,pp.2224Reply,pp.13,Rollo,pp.159161.

14Rollo,p.56.

15Rollo,pp.6768.

16Cancel,BlacksLawDictionary,4thed.(1951).

618

618 SUPREMECOURTREPORTSANNOTATED
Bautistavs.PilarDevelopmentCorporation
17
guishesormodifiesthefirstisanovation. Novationismadeeither
by changing the object or principal conditions, referred to as an
objectiveorrealnovationorbysubstitutingthepersonofthedebtor
or subrogating a third person to the rights of
18
the creditor, which is
known as subjective or personal novation. In both objective and
subjective novation, a dual purpose is achievedan obligation
19
is
extinguished and a new one is created in lieu thereof. Novation
may either be express, when the new obligation declares in
unequivocaltermsthattheoldobligationisextinguishedorimplied,
whenthenewobligationisoneverypointincompatiblewiththeold
20
one. Express novation takes place when the contracting parties
expresslydisclosethattheirobjectinmakingthenewcontractisto
extinguish the old contract, otherwise the old contract remains in
forceandthenewcontractismerelyaddedtoit,andeachgivesrise
21
toanobligationstillinforce.
Novationhasfour(4) essential requisites: (1) the existence of a
previousvalidobligation(2)theagreementofallpartiestothenew
contract (3) the extinguishment
22
of the old contract and (4) the
validityofthenewone. Intheinstantcase,allfourrequisiteshave
beencompliedwith.Thefirstpromis

_______________

17Articles1291and1292,CivilCodeTolentino,CivilCode,vol.4,p.381(1991)

Aquino,CivilCode,vol.2,p.344(1990).
18 Article 1291, Civil Code Tolentino, supra, at 381383 Aquino, supra, at 344

349.
19Cochingyan,Jr.v.R&BSuretyIns.Co.,Inc.,151 SCRA 339,349(1987)De

Cortesv.Venturanza,79SCRA709,722723(1977).
20 Article 1292, Civil Code Fortune Motors (Phils.) Corporation v. Court of
Appeals,267SCRA653,668(1997)Cochingyan,Jr.v.R&BSuretyandInsurance
Co., Inc., supra, at 349 Board of Liquidators v. Floro, 110 Phil. 482, 488 (1960)
Zapantav.DeRotaeche,21Phil.154,159(1912).
21Tolentino,CivilCode, vol. 4, p. 384 (1991) citing Philippine National Bank v.

Granada,CAG.R.No.13919R,July20,1955.
22Reyes v. Court of Appeals,264 SCRA 35, 43 (1996) Tiu Siuco v. Habana, 45

Phil.707,712(1924)Zapantav.DeRotaeche,supraseealsoTolentino,supra,at382.

619

VOL.312,AUGUST17,1999 619
Bautistavs.PilarDevelopmentCorporation

sory note was a valid and subsisting contract when petitioner

spousesandApexexecutedthesecondpromissorynote.Thesecond
promissory note absorbed the unpaid principal and interest of
P142,326.43 in the first note which amount became the principal
debt therein, payable at a higher interest rate of 21% per annum.
Thus,thetermsofthesecondpromissorynoteprovidedforahigher
principal,ahigherinterestrate,andahighermonthlyamortization,
alltobepaidwithinashorterperiodof16.33years.Thesechanges
are substantial
23
and constitute the principal conditions of the
obligation. Both parties voluntarily accepted the terms of the
second note and also in the same note, they unequivocally
stipulated to extinguish the first note. 24Clearly, there was animus
novandi,anexpressintentiontonovate. Thefirstpromissorynote
was cancelled and replaced by the second note. This second note
becamethenewcontractgoverningthepartiesobligations.
In their second assigned error, petitioners contend that in the
secondpromissorynote,theescalationoftheinterestratefrom12%
to21%perannumisunlawfulandcannotbeimposedforfailureof
the escalation provisions to include valid deescalation clauses. In
theabsenceofdeescalationclauses,theCourtofAppealsallegedly
erred in applying Central Bank Circulars Nos. 705, 712 and 905
issued by 25the Monetary Board of the Central Bank of the
Philippines.
Atthetimethepartiesexecutedthefirstpromissorynotein1978,
theinterestof12%wasthemaximumratefixedbytheUsuryLaw 26
for loans secured by a mortgage upon registered real estate. On
December1,1979,theMonetaryBoardoftheCentralBankofthe
27
Philippines issuedCircularNo.

_______________

23SeeTolentino,supra,at386.

24TiuSiucov.Habana,supra,at713.

25Petition,pp.1520Rollo,pp.2530.

26Section2,ActNo.2655(TheUsuryLaw).
 27TheMonetaryBoardoftheCentralBankofthePhilippineswasauthorizedby

P.D.No.116effectivein1973toprescribethemaximumrateorratesofinterestfor
theloanorrenewalthereofor

620

620 SUPREMECOURTREPORTSANNOTATED
Bautistavs.PilarDevelopmentCorporation

705 which fixed the effective rate of interest on loan transactions

withmaturitiesofmorethan730daystotwentyonepercent(21%)
28
per annum for both secured and unsecured loans. On January 28,
1980, The Monetary Board issued Circular No. 712 reiterating
29
the
effectiveinterestrateof21%onsaidloantransactions. OnJanuary
1, 1983, CB Circular No. 905, series of 1982, took effect. This
Circulardeclaredthattherateofinterestonanyloanorforbearance
ofanymoney,goodsorcredits,regardlessofmaturityandwhether
securedorunsecured,shallnotbesubjecttoanyceilingprescribed
30
under or pursuant to the Usury Law, as amended. In short,
Circular No. 905 removed the ceiling on interest
31
rates for secured
andunsecuredloans,regardlessofmaturity.
When the second promissory note was executed on September
20,1982,CentralBankCircularsNos.705and712werealreadyin
effect. These Circulars fixed the effective interest rate for secured
loantransactionswithmaturitiesofmorethan730days,i.e.,two(2)
years,at21%perannum.Theinterestrateof21%providedinthe
second promissory note was therefore authorized under these
Circulars.

_______________

theforbearanceofanymoney,goodsorcredits,andtochangesuchrateswhenever
warrantedbyprevailingeconomicandsocialconditions(Section1a,ActNo.2655,as
amendedbyP.D.116).
28 Paragraph 4 CB Circular No. 705 is entitled Superseding Circular No. 586,

Prescribing Ceilings on the Rates of Interest on Loans and Yields on Purchases of

Instruments by Banks and NonBank Financial Intermediaries. This Circular
amendedCircularNo.586promulgatedonJanuary1,1978fixingtheeffectiverateof
interestbybanksandnonbankfinancialintermediariesatnineteenpercent(19%).
29 Circular No. 712 amended Circular No. 705 to include nonstock savings and

loanassociationsinthecoverageofparagraphs3and4ofCircularNo.705.
30 Section 1, Circular No. 905, series of 1982. This Circular, by Sec. 33 thereof,

tookeffectonJanuary1,1983.
31 Republic Planters Bank v. Court of Appeals, 216 SCRA 738, 748 (1992)
PhilippineNationalBankv.CourtofAppeals,196SCRA536,544(1991).

621
 VOL.312,AUGUST17,1999 621
Bautistavs.PilarDevelopmentCorporation

The question of whether the escalation clauses in the second

promissorynotearevalidisirrelevant.Respondentcorporationhas
signified that it is collecting petitioners debt only at the fixed
interest rate of 21% per annum, as expressly agreed upon in the
secondpromissorynote,notattheescalatedratesauthorizedunder
32
theescalationclauses. TheCourtofAppealsthereforedidnoterrin
applying the interest rate of 21% to petitioners loan under the
secondpromissorynote.
NeitherdidtheCourtofAppealserrinimposingattorneysfees
of ten per cent (10%) on the amount due. The award of attorneys
feesisexpresslystipulatedinthefourthparagraphofthepromissory
noteitself,viz.:

In case of nonpayment of the amount of this note or any portion of it on

demandwhengivendue,oranyotheramount/sdueonaccountofthisnote,
the entire obligation shall become due and demandable, and if for the
enforcement of the payment thereof, APEX MORTGAGE AND LOANS
CORP. is constrained to entrust the case to its attorneys, I/We, jointly and
severally, bind myself/ourselves to pay TEN (10%) per cent on the amount
due on the note as attorneys fees, such amount in no case to be less than
FIVE HUNDRED (P500.00)33
PESOS in addition to the legal fees and other
incidentalexpenses.

Petitionerslackofbadfaithinresistingimpositionoftheincreased
interest rate cannot serve to mitigate their liability for liquidated
damages.PetitionerFloranteBautistaisalawyerandheshouldhave
been aware of the effects of the stipulations in the second
promissorynoteandthepertinentCBCircularsonhisobligation.At
the same time, there is no showing that the amount of liquidated
damagesisiniquitousandunconscionableforthiscourttoequitably
34
reducethesame.

_______________

32Comment,pp.34,Rollo,pp.153154.

33Rollo,p.56.

34Article2227,CivilCode.

622

622 SUPREMECOURTREPORTSANNOTATED
Bautistavs.PilarDevelopmentCorporation

Finally,thefactthatpetitionerswerenotnotifiedoftheassignment
of their credit by Apex to herein respondent corporation is not
 material. In the eighth paragraph of the second promissory note,
petitionersexpresslywaivednoticetoanyassignmentofcredit,viz.:

ItisunderstoodthatAPEXMORTGAGEANDLOANSCORPORATION
hastherighttoassignthispromissorynote,ormakeuseofitascollateralin
favorofanythirdpersonwhomsoeverandthiswillconstituteasanauthority
35
thereforewaiverofnoticeofsuchactiontaken[sic].

Thepurposeofthenoticeisonlytoinformthedebtorthatfromthe
dateoftheassignment,paymentshouldbemadetotheassigneeand
36
nottotheoriginalcreditor.
IN VIEW WHEREOF, the petition is denied and the Decision
andResolutionoftheCourtofAppealsinCAG.R.CVNo.51363
areaffirmed.
SOORDERED.

Davide,Jr.(C.J.,Chairman),Kapunan,PardoandYnares
Santiago,JJ.,concur.

PetitiondeniedQuestioneddecisionandresolutionaffirmed.

Note.Novation is never presumed, and in the absence of an

expressagreement,novationtakesplaceonlywhentheoldandthe
newobligationsareincompatibleoneverypoint.(Rillovs.Courtof
Appeals,274SCRA461[1997])

o0o

_______________

35Rollo,p.56.

36Rodriguezv.CourtofAppeals,207SCRA553,559(1992).

623

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