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JESUS V. OCCEŇA and EFIGENIA C. OCCEŇA​ ​vs.​ H​ ON. However, Tropical Home’s complaint does not seek for its
RAMON V. JABSON, Presiding Judge of the Court of therefrom, but for the court “to modify the terms and
First Instance of Rizal, Branch XXVI; COURT OF conditions of the contract by fixing the proper shares that
APPEALS and TROPICAL HOMES, INC. should pertain to the parties out of the gross proceeds from
G.R. No. L-44349, October 29, 1976, Teehankee, ​J​. the sales of the subdivision lots.” Article 1267 of the Civil Code
does not grant the courts the authority to remake, modify or
Facts:​ Private respondent, Tropical Homes, entered into a revise the contract or to fix the division of shares between the
contract of subdivision with petitioner, Occena, whereby the parties as contractually stipulated with the force of law
former would develop a parcel of land owned by the latter into between the parties, so as to substitute its own terms for
subdivision lots. Under said contract, Occena would receive “an those covenanted by the parties themselves.
amount equivalent to forty percent (40%) of all the cash
receipts from the sales of the subdivision lots.” Tropical Home’s complaint for the modification of the contract
has no basis in law and hence, has no cause of action.
Later, however, Tropical Homes filed a complaint to the Court
of First Instance (CFI) “to modify the terms and conditions of NAGA TELEPHONE CO., INC.(NATELCO)AND LUCIANO
the contract by fixing the proper shares that should pertain to M.MAGGAY vs. THE COURT OF APPEALS AND
the parties out of the gross proceeds from the sales of the CAMARINES SURII ELECTRIC COOPERATIVE, INC.
subdivision lots.” The complaint was grounded by certain (CASURECO II)
events and changes in the circumstances which could not have G.R. No. 107112 February 24, 1994 Nocon, J.:
been foreseen by the parties at the time of the execution of
contract resulting to extreme difficulty in the performance of Facts: NATELCO entered into contract with Camarines Sur II
the obligation and Article 1267 of the Civil Code. Electric Cooperative for the use in operation of its telephone
service, electric light posts of CASURECO II and in return,
As alleged by Tropical Homes, these changes in the there will be free use of telephone connections as long as
circumstances were consisted of: “increase in the price of oil NATELCO need electric light posts. The contract provided
and its derivatives, worldwide spiraling increase in prices and under exhibit A that the term or period of this contract shall be
increase in the prices of all commodities including basic raw as long as the party of the first part has need for the electric
materials required for such development work.” It further light post of the party of the second part it being understood
alleged that such increase in the prices had risen to levels that this contract shall terminate when for any reason
which were “unanticipated, unimagined, and not within the whatsoever the party of the second is forced to stop,
remotest contemplation of the parties at the time said abandoned its operation as a public service and it becomes
agreement was entered into and to such degree that the necessary to remove the electric light post; After 10 years,
conditions and factors which formed the original basis of said CASURECO files for reformation of contract with damages, not
contract had been totally changed.” conforming to the guideline of National Electrification
Administration of reasonable compensation for use of posts.
In filing the complaint, Tropical Homes invoked Article 1267 of Compensation is worth P10, but the consumption of telephone
the Civil Code which provides that: “When the service has cables cost P2630 NATELCO, who used 319, without the
become so difficult as to be manifestly beyond the contract of P10 each, refused to pay. The latter barred by the
contemplation of the parties, the obligor may also be released prescription.
therefrom, in whole or in part.”
Issues: 1. Whether or not Article 1267 is applicable in this
Occena moved to dismiss the complaint for want of cause of case
action. Said motion was denied by the CFI and, subsequently, 2. Whether or not the action for reformation of
by the Court of Appeals. contract has prescribed
3. Whether or not the condition is purely potestative
Hence, this petition to the Supreme Court.
Held: Yes, Article 1267 of the Civil Code is applicable in the
Issue: ​Does Article 1267 of the Civil Code, on extreme present case which states that when the service has become
difficulty in the performance of the obligation as a ground for so difficult as to be manifestly beyond the contemplation of the
the release of the obligor from performance thereof, authorize parties, the obligor may be release therefrom in whole or in
the court to modify the terms and conditions of the contract? part. The term “service” should be understood as referring to
the “performance” of the obligation. Here, the obligation of
Ruling: No, Article 1267 of the Civil Code does not authorize private respondent consist in allowing petitioners to use Naga
the court to change the terms and conditions of the contract. City, which is the service contemplated in said article. It is not
a requirement that the contract be for future unusual change.
Assuming ​arguendo that Tropical Homes sufficiently Article 1267 states in our law the doctrine of unforeseen
established by evidence its factual allegations, then it could be events. This is said to be based on the discredited theory
released from performance of its obligations, in whole or in of ​rebus sic stantibus​ in public international law; under this
part, as provided by Article 1267 of the Civil Code. theory, the parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist the
contract also ceases to exist. Considering practical needs and

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the demands of equity and good faith, the disappearance of
the basis of a contract gives rise to a right to relief in favor of PHILIPPINE NATIONAL CONSTRUCTION
the party prejudiced. Here, the contract has become inequitous CORPORATION ​petitioner, vs​. COURT OF
or unfavorable or disadvantageous to the CASURECO II with APPEALS, MA. TERESA S. RAYMUNDO-ABARRA,
the expansion of the business of NATELCO and the increase in JOSE S. RAYMUNDO, ANTONIO S. RAYMUNDO,
the volume of its subscribers in Naga City and environs RENE S. RAYMUNDO, and AMADOR S.
through the years, necessitating the stringing of more and RAYMUNDO, r​ espondents. | D
​ avide, JR., J.
bigger telephone cable wires by NATELCO to CASURECO II FACTS:
electric post therefore the parties are release from their On November 18 1985, private respondents and
correlative obligations under the contract. Hence, it is just to petitioner entered into a contract of lease of a parcel of land
impose the following 1) NATELCO to pay CASURECO II for the owned by the former. The terms and conditions of said
use of its posts in Naga City and in the towns of Milaor, contract of lease are as follows:
Canaman, Magarao and Pili, Camarines Sur and in other places a) the lease shall be for a period of five (5) years
where NATELCO use CASURECO’S posts, the sum of ten which begins upon the issuance of permit by the Ministry of
(P10.00) pesos per post, per month, beginning January, 1989; Human Settlement and renewable at the option of the lessee
and 2) CASURECO II to pay petitioner the monthly dues of all
under the terms and conditions;
its telephones at the same rate being paid by the public b) the monthly rent is P20, 000.00 which shall be
beginning January, 1989. The peculiar circumstance of the increased yearly by 5% based on the monthly rate;
present case, as distinguished further from the Occeña case, c) the rent shall be paid yearly in advance;
necessitates exercise of our equity jurisdiction. d) the property shall be used as premises of a rock
crushing plant;
No, the action has not yet prescribed. What is reformed is not e.) termination of the contract shall be by mutual
the contract itself, but the instrument embodying the contract. agreement of the parties.
It follows that whether the contract is disadvantageous or not
is irrelevant to reformation and therefore, cannot be an On January 7, 1986, petitioner obtained permit from
element in the determination of the period for prescription of the Ministry which was to be valid for two (2) years unless
the action to reform. Article 1144 of the new civil code revoked by the Ministry. Later, private respondents requested
provides that the action on a written contract must be brought the payment of the first annual rental. But petitioner alleged
within ten (10) years from the time the right of action accrues. that the payment of rental should commence on the date of
Clearly, the ten (10) year period is to be reckoned from the the issuance of the industrial clearance not on the date of
time the right of action accrues which is not necessarily the signing of the contract. It then expressed its intention to
date of execution of the contract. As correctly ruled by Court of terminate the contract and decided to cancel the project due
Appeals, private respondent's right of action arose "sometime to financial and technical difficulties. However, petitioner
during the latter part of 1982 or in 1983 when according to refused to accede to respondent’s request and reiterated their
Atty. Luis General, Jr., he was asked by CASURO’s Board of demand for the payment of the first annual rental. But the
Directors to study said contract as it already appeared petitioner argued that it was only obligated to pay P20, 000.00
disadvantageous to (private respondent). CASURECO’s cause as rental for one month prompting private respondent to file
of action to ask for reformation of said contract should thus be an action against the petitioner for specific performance with
considered to have arisen only in 1982 or 1983, and from 1982 damages before the RTC of Pasig. The trial court rendered
to January 2, 1989 when the complaint in this case was filed, decision in favor of private respondents. Petitioner then
ten (10) years had not yet elapsed." appealed the decision of the trial court to the Court of Appeals
but the later affirmed the decision of the trial court and denied
Yes, the condition is purely potestative, because there is no the motion for reconsideration.
mutuality and equality between them under the afore-quoted
provision thereof since the life and continuity of said ISSUE:​ Whether or not petitioner can avail of the benefit of
agreement is made to depend as long as appellant needs Article 1267 of the New Civil Code.
CASURECO II electric posts. And this is precisely why, since
1977 when said agreement was executed and up to 1989 RULING: ​No. The petitioner cannot take refuge of the said
when this case was finally filed by plaintiff, it could do nothing article. Article 1267 of the New Civil Code provides that “when
to be released from or terminate said agreement the service has become so difficult as to manifestly beyond the
notwithstanding that its continued effect has become very contemplation of the parties, the obligor may also be released
disadvantageous and inequitous to it due to the expansion and therefrom, in whole or in part”. This article, which enunciates
increase of appellant's telephone services within Naga City and the doctrine of unforeseen events, is not, however an absolute
even outside the same, without a corresponding increase in application of the principle of rebus sic stantibus, which would
the ten (10) telephone units being used by plaintiff free of endanger the security of contractual relations. The parties to
charge, as well as the bad and inefficient service of said the contract must be presumed to have assumed the risks of
telephones to the prejudice and inconvenience of plaintiff and unfavorable developments. It is therefore only in absolutely
its customers. exceptional chances of circumstances that equity demands
assistance for the debtor. The principle of rebus sic stantibus
neither fits in with the facts of the case. Under this theory, the

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parties stipulate in the light of certain prevailing conditions,
and once these conditions cease to exist, the contract also On this date, petitioners paid P ​ 4
​ 10,854.47 by means of a
ceases to exist. Pilipinas Bank check bearing the notation: full payment of IGLF
LOAN.
In this case, petitioner averred that abrupt change in the The amount of ​P4 ​ 10,854.47 was the sum of the principal
political climate of the country after the EDSA Revolution and (​P2
​ 95,469.47) and the interest (​P1 ​ 65,385.00) less the partial
its poor financial condition rendered the performance of the payment of ​P5 ​ 0,000.00. Manphil, however, sent two demand
lease contract impractical and inimical to the corporate survival letters to petitioners seeking payment of the balance
of the petitioner. However, as held in Central Bank v. CA, mere of ​P2
​ 66,146.88. As petitioners did not respond, private
pecuniary inability to fulfill an engagement does not discharge respondent filed a case in the Regional Trial Court of Metro
a contractual obligation, nor does it constitute a defense of an Manila for the collection of ​P2 ​ 66,146.88 plus interests,
action for specific performance. penalties, and service charges or, in the alternative, for the
foreclosure of the mortgaged machineries.
The court further decided in favor of the private respondents
making the petitioner to pay the two (2) years of rent, in In their Answer, petitioners claimed that they had fully paid
consonance to the validity of the temporary permit. The their obligation to private respondent contending that some
damage to private respondents is beyond dispute; thus, they’re time after receiving the letter petitioner met with Carlos
entitled to indemnification. Sobrepeas, president of respondent corporation, during which
the latter agreed to waive the penalties and service charges,
provided petitioners paid the principal and interest, computed
as of July 31, 1986, less the earlier payment
​VICTOR YAM AND YEK SUN LENT, doing business of ​P5
​ 0,000.00. This is the reason why according to them they
under the name and style of Philippine Printing Works, only paid P​ ​410,854.47. Petitioners added that this fact of full
vs. CA and Manphil Investment Corporation payment is reflected in the voucher accompanying the Pilipinas
GR No. 104726 February 11, 1999 MENDOZA, ​J​.: Bank check they issued, which bore the notation full payment
of IGLF loan.
FACTS
Issue: ​Whether or not petitioners are liable for the payment of
On May 10, 1979, the parties in this case entered into a the penalties and service charges on their loan which, as of
Loan Agreement with Assumption of Solidary Liability whereby July 31, 1986, amounted to P​ ​266,146.88?
petitioners [Victor and Yek Sun] were given a loan
of ​P5
​ 00,000.00 by private respondent [Manphil Investment Ruling: ​Yes. Art. 1270, par. 2 of the Civil Code provides that
Corporation]. The contract provided for the payment of annual express condonation must comply with the forms of donation.
interest, monthly penalty, monthly service charge, and Art. 748, par. 3 provides that the donation and acceptance of a
attorneys fees. The loan was secured by a chattel mortgage on movable, the value of which exceeds ​P5​ ,000.00, must be made
the printing machinery in petitioners’ establishment. in writing, otherwise the same shall be void. In the case at bar,
it is undisputed that the alleged agreement to
Subsequently, Victor and Yek Sun obtained a second condone P ​ ​266,146.88 of the second IGLF loan was not
IGLF loan of P ​ ​300,000.00 evidenced by two promissory reduced in writing.
notes. For this purpose, a new loan agreement was entered
into by the parties containing identical provisions as the first Nonetheless, petitioners insist that the voucher covering the
one, except as to the annual interest which was increased and Pilipinas Bank check for P410,854.47, containing the notation
the service charge which was reduced. The deed of chattel that the amount is in full payment of IGLF loan, constitutes
mortgage was amended correspondingly. documentary evidence of such oral agreement. This contention
is without merit. The notation in full payment of IGLF loan
After almost 6 years, petitioners had paid their first loan merely states petitioners intention in making the payment, but
of ​P5
​ 00,000.00. The following year, Victor and Yek Sun made in no way does it bind private respondent. It would have been
a partial payment of ​P5
​ 0,000.00 on the second loan. They later a different matter if the notation appeared in a receipt issued
wrote Manphil Investment a letter proposing to settle their by respondent corporation, through its receiver, because then
obligation; hence, the latter reduce the penalty charges it would be an admission against interest. Indeed, if private
provided petitioners can pay their obligation on or before July respondent really condoned the amount in question,
30, 1986. petitioners should have asked for a certificate of full payment
from respondent corporation, as they did in the case of their
As of​ ​July 31, 1986, petitioners total liability to private first IGLF loan of ​P5
​ 00,000.00
respondent was P ​ ​727,001.35, broken down as follows:
Moreover, it is to be noted that the alleged agreement to
Principal 295,469.47 condone the amount in question was supposedly entered into
Interest 165,385.00 by the parties sometime in July 1986, that is, after respondent
Penalties 254,820.55 corporation had been placed under receivership on November
Service Charges 11,326.33 4, 1985. As held in Villanueva v. Court of Appeals the
TOTAL P​ 727,001.35 appointment of a receiver operates to suspend the authority of
a [corporation] and of its directors and officers over its

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property and effects, such authority being reposed in the Edvin deposited the said treasury check to their joint savings
receiver. Thus, Sobrepeas had no authority to condone the account.
debt.
On March 8, 1990, Edvin closed the Savings account and
transferred its funds amounting to P13,112.91 to the joint
GAN TION p
​ etitioner, vs​. HON. COURT OF APPEALS, savings account with his wife.
HON. JUDGE AGUSTIN P. MONTESA (CFI,
MANILA), ONG WAN SIENG, SHERIFF OF However, on January 16, the U.S. Treasury Warrant was
MANILA , ​respondents. M ​ akalintal, J. G
​ .R. No. dishonored as it was discovered that Emeteria Fernandez died
L-22490 May 21, 1969 three days prior to its issuance. The U.S. Department of
Treasury requested the Bank of the Philippine Islands for
FACTS: O ​ ng Wan Sieng (OWS), petitioner, was a tenant in refund. Upon calling the bank, Edvin was informed that the
certain premises owned by Gan Tion, respondent. In 1961, the treasury check was the subject of a claim by Citibank NA,
latter filed an ejectment case against the former for the correspondent of petitioner bank. While he assured BPI that he
alleged default payment of rents for two months would drop by to look into the matter, he also verbally
(August-September 1961) at 180/month. OWS contends that authorized to debit from his joint account the amount of
rent was only 160/month which he had offered to but was P10,556.00 as stated in the dishonored U.S. Treasury Warrant.
refused by the petitioner. The Municipal Court of Manila
favored the plaintiff but the Court of First Instance reversed it, Surprisingly, Edvin demanded from BPI the restitution of the
awarding OWS 500 in attorney’s fees. In 1963, Gan Tiong debited amount. He then filed a suit for damages against the
notified that rent would increase to 180/month, and demanded bank before the Regional Trial Court of Quezon City.
payment of unpaid rents amounting to 4k from 1961-1963.
OWS was able to obtain writ of execution for P 500 attorney’s ISSUE: Whether BPI has the legal right to apply the deposit to
fees but the petitioner complained that P500 should be the outstanding obligation under the principle of “legal
considered as partial legal compensation for the 4k debt of compensation”.
OWS. The appellate court accepted the petition but eventually
decided for the respondent, holding that although "respondent RULING: Yes, the Supreme Court ruled that applying legal
Ong (OWS) is indebted to the petitioner for unpaid rentals in compensation is proper.
an amount of more than P4,000.00," the sum of P500 could
not be the subject of legal compensation, it being a "trust fund Compensation shall take place when two persons, in their own
for the benefit of the lawyer, which would have to be turned right, are creditors and debtors of each other. Article 1290 of
over by the client to his counsel." the Civil Code provides that “when all the requisites mentioned
in Article 1279 are present, compensation takes effect by
ISSUE:​ Whether or not there has been legal compensation operation of law, and extinguishes both debts to the
between the petitioner Gan Tiong and respondent Ong Wan concurrent amount, even though the creditors and debtors are
Sieng not aware of the compensation.” Legal compensation operates
even against the will of the interested parties and ​even without
RULING: ​Yes. The P500 does not belong to the attorney but the consent of them​. Since this compensation takes place i​ pso
to the petitioner and that petitioner is the proper creditor of jure​, its effects arise on the very day on which all its requisites
P500. The amount of P500 may properly be the subject of concur. When used as a defense, it retroacts to the date when
legal compensation against the latter’s debts but it was unjust its requisites are fulfilled.
to ask petitioner to pay P500 when OWS owes him 4k. Article 1279 ​states that in order that compensation may be
proper, it is necessary:
Bank of the Philippine Islands vs Court of Appeals and (1) That each one of the obligors be bound principally, and
Edvin Reyes that he be at the same time a principal creditor of the other;
G.R. No. 116792, March 29, 1996 ​PUNO, J.: (2) That both debts consist in a sum of money, or if the things
due are consumable, they be of the same kind, and also of the
FACTS: Private respondent has two joint AND/OR account at same quality if the latter has been stated;
the Bank of the Philippine Islands Cubao Shopping Center
Branch. One was a joint account with his wife, Sonia S. Reyes (3) That the two debts be due;
while the other joint account was with his grandmother, (4) That they be liquidated and demandable;
Emeteria M. Fernandez. He regularly deposited in this account
he maintained with his grandmother, the U.S. Treasury (5) That over neither of them there be any retention or
Warrants payable to the order of Emeteria as her monthly controversy, commenced by third persons and communicated
pension. in due time to the debtor.
The elements of legal compensation are all present in the case
On December 28, 1989, Emeteria died without notifying the at bar. The obligors bound principally are at the same time
U.S. Treasury Department. With this, an amount of $377.03 creditors of each other. Petitioner bank stands as a debtor of
was still sent to Emeteria on January 1, 1990. On January 4, the private respondent, a depositor. At the same time, said

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oblirasi midterms  5 
bank is the creditor of the private respondent with respect to In the case of the $2,627.11, requisites Nos. 2
the dishonored U.S. Treasury Warrant which the latter illegally through 5 are apparently present, for both debts consist in a
transferred to his joint account. The debts involved consist of a sum of money, are both due, liquidated and demandable, and
sum of money. They are due, liquidated, and demandable. over neither of them is there a retention or controversy
They are not claimed by a third person. commenced by third persons and communicated in due time to
the debtor. However, as to the relationship created by the
telexed fund transfers from abroad: a contract between a
PHILIPPINE NATIONAL BANK, p ​ etitioner, vs.​ THE foreign bank and local bank asking the latter to pay an amount
COURT OF APPEALS and RAMON LAPEZ, doing business to a beneficiary is a stipulation p ​ our autrui. A stipulation p
​ our
under the name and style SAPPHIRE SHIPPING, autrui ​is a stipulation in favor of a third person. Thus, between
respondents PNB (as the local correspondent of the National Commercial
G.R. No. 108052. July 24, 1996. 259 SCRA 174 Bank of Jeddah) and Lapez as beneficiary, there is created an
Panganiban, J. implied trust pursuant to Art. 1453 of the Civil Code. The
parties are not both principally bound with respect to the
FACTS: ​ ​There were two instances, one in November 1980 $2,627.11 from Jeddah neither are they at the same time
and the other in January 1981 when Ramon Lapez's account principal creditor of the other.Therefore, the parties'
was doubly credited with the equivalents of $5,679.23 and obligations are not subject to compensation or set off under
$5,885.38, respectively, which amounted to an aggregate Art. 1279, for the reason that Lapez is not a principal debtor
amount of P87,380.44. PNB made a demand upon Lapez for nor is PNB a principal creditor insofar as the amount of
refund of the double or duplicated credits erroneously made on $2,627.11 is concerned. They are debtor and creditor only with
the latter’s account, by means of a letter dated October 23, respect to the double payments; but are trustee-beneficiary as
198. Such letter was answered by Lapez, and such was replied to the fund transfer of $2,627.11. Only​ ​Lapez is principally
to by PNB. bound as a debtor of PNB to the extent of the double
credits. On the other hand, PNB was an implied trustee, who
The two erroneous double payments made to Lapez's was obliged to deliver to the Citibank for the benefit of Lapez
accounts created an extra-contractual obligation on Lapez’s the sum of $2,627.11.
part in favor of PNB, under the principle of ​solutio indebiti. ​The
PNB appropriated the amounts of $2,627.11 and P34,340.38 The P34,340.38 subject of the supplemental
from remittances of Ramon Lapez’s principals abroad (the complaint is quite another thing. The retention and application
National Commercial Bank of Jeddah and in Libya, repectively) of the amount of P34,340.38 was done in​ ​a manner consonant
as compensation. The deduction was made by PNB not without with basic due process. Lapez, through counsel, communicated
the knowledge and consent of Lapez. his unequivocal and unconditional consent to the retention and
application of the amount in question. This is borne by the fact
ISSUE: ​Was PNB legally justified in making the compensation that the receipt is in the hands of Lapez, indicating that such
or set-off against the two remittances coursed through it in receipt was handed over to the him when he "paid" or allowed
favor of Ramon Lapez to recover on the double credits it the deduction from the amount of $28,392.38 from Libya.
erroneously made, based on the principle of ​solutio indebiti? Thus, insofar as the amount of P34,340.38 is concerned, all
the requirements of Art. 1279 are present, and the said
amount may properly be the subject of compensation or
RULING: ​NO, with regards to the compensation of $2,627.11, set-off. And since all the requisites of Art. 1279 are present
while YES with regards to the amount of P34,340.38. (insofar as the amount of P34,392.38 is concerned),
compensation takes place by operation of law (Art.
Article 1279 of the Civil Code provides: 1286​), a
​ lbeit only partial with respect to Lapez’s indebtedness
of P7,380.44.
"In order that compensation may prosper, it is necessary:

1. That each one of the obligors be bound CKH Industrial Development v. Court of Appeals, 272 SCRA
principally, and that he be at the same time 333 (1997)
a principal creditor of the other;
2. That both debts consists in a sum of money, SPOUSES ALEJANDRO MIRASOL and LILIA E. MIRASOL,
or if the things due are consumable, they be
petitioners,
of the same kind, and also of the same
quality if the latter has been stated; vs​. THE COURT OF APPEALS, PHILIPPINE NATIONAL
3. That the two debts be due; BANK, and PHILIPPINE EXCHANGE CO., INC.,
4. That they be liquidated and demandable; respondents.
5. That over neither of them there by any G.R. No. 128448. February 1, 2001 Quisumbing, J.:
retention or controversy, commenced by
third persons and communicated in due time
to the debtor." Facts: ​The Mirasols are sugarland owners and planters. In
1973-1974, they produced 70,501.08 piculs of sugar,

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oblirasi midterms  6 
25,662.36 of which were assigned for export. The following 1. Whether or not there was Compensation between the
crop year, their acreage planted to the same crop was lower, Mirasols and the PNB.
with 23,696.40 piculs marked for export. 2. Whether the Honorable Court of Appeals committed
manifest error in upholding the validity of the foreclosure
Private respondent Philippine National Bank (PNB) financed the on petitioners property and in upholding the validity of the
Mirasols sugar production venture for crop years, 1973-1974 dacion​ ​en​ p
​ ago​ in this case.
and 1974-1975 under a crop loan financing scheme. Under
said scheme, the Mirasols signed Credit Agreements, a Chattel Ruling:
Mortgage on Standing Crops, and a Real Estate Mortgage in 1. No, for legal compensation to take place, the
favor of PNB. The Chattel Mortgage empowered PNB as the requirements set forth in Articles 1278 and 1279 of the
petitioners attorney-in-fact to negotiate and to sell the latters Civil Code must be present. Said articles read as follows:
sugar in both domestic and export markets and to apply the Art. 1278. Compensation shall take place when two
proceeds to the payment of their obligations to it. persons, in their own right, are creditors and debtors
of each other.
In November, 1974, President Marcos issued PD 579 Art. 1279. In order that compensation may be
authorizing Philippine Exchange Co., Inc. (PHILEX) to purchase proper, it is necessary:
sugar allocated for export and authorized PNB to finance (1) That each one of the obligors be bound
PHILEX's purchases. The decree directed that whatever profit principally, and that he be at the same time a
PHILEX might realize was to be remitted to the government. principal creditor of the other;
Believing that the proceeds were more than enough to pay (2) That both debts consist in a sum of money, or if
their obligations, petitioners asked PNB for an accounting of the things due are consumable, they be of the same
the proceeds which it ignored. Petitioners continued to avail of kind, and also of the same quality if the latter has
other loans from PNB and to make unfunded withdrawals from been stated;
their accounts with said bank. PNB asked petitioners to settle (3) That the two debts are due;
their due and demandable accounts. As a result, petitioners, (4) That they be liquidated and demandable;
conveyed to PNB real properties by way of ​dacion en pago still (5) That over neither of them there be any retention
leaving an unpaid amount. PNB proceeded to extrajudicially or controversy, commenced by third persons and
foreclose the mortgaged properties. PNB still had a deficiency communicated in due time to the debtor.
claim.
In the present case, set-off or compensation cannot take
Petitioners continued to ask PNB to account for the proceeds, place between the parties because:
insisting that said proceeds, if properly liquidated, could offset
their outstanding obligations. PNB remained adamant in its First, neither of the parties are mutually creditors and
stance that under P.D. No. 579, there was nothing to account debtors of each other. Under P.D. No. 579, neither PNB
since under said law, all earnings from the export sales of nor PHILEX could retain any difference claimed by the
sugar pertained to the National Government. Mirasols in the price of sugar sold by the two firms. Thus,
as correctly found by the Court of Appeals, there was
On August 9, 1979, the Mirasols filed a suit for accounting, nothing with which PNB was supposed to have off-set
specific performance, and damages against PNB. Mirasols admitted indebtedness.

Petitioners now claim that the ​dacion en pago and the Second, compensation cannot take place where one claim,
foreclosure of their mortgaged properties were void for want of as in the instant case, is still the subject of litigation, as
consideration. Petitioners insist that the loans granted them by the same cannot be deemed liquidated.
PNB from 1975 to 1982 had been fully paid by virtue of legal
compensation. Hence, the foreclosure was invalid and of no 2. No, the petitioners arguments were unpersuasive. Both
effect, since the mortgages were already fully discharged. It is the lower court and the appellate court found that the
also averred that they agreed to the ​dacion only by virtue of a Mirasols admitted that they were indebted to PNB in the
martial law Arrest, Search, and Seizure Order (ASSO). sum stated in the latters counterclaim. Petitioners
nonetheless insist that the same can be offset by the
Issue: unliquidated amounts owed them by PNB for crop years

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oblirasi midterms  7 
1973-74 and 1974-75. Petitioners argument has no basis judgment of a competent court. In such a case, the person
in law. and the Government are in their own right both debtors and
creditors of each other, and compensation takes place by
operation of law in accordance with Article 1278 of the Civil
Villanueva vs. Tantuico Code. ​4​Absent, however, any such categorical admission by an
obligor or final adjudication, no legal compensation can take
G.R. No. L-53585 February 15, 1990 NARVASA,​ J. place, as this Court has already had occasion to rule in an early
case. Unless admitted by a debtor himself, the conclusion that
FACTS: Villanueva was a ​Government officer of the Bureau of he is in truth indebted to the Government cannot be definitely
Records Management who was designated Administrative and finally pronounced by a Government auditor, no matter
Officer and Training Coordinator of two (2) regional seminars how convinced he may be from his examination of the
of the Bureau, and who, as such, and having custody of pertinent records of the validity of that conclusion. Such a
seminar fees collected from the participants, authorized for declaration, that a government employee or officer is indeed
necessary expenses. The seminars were conducted pursuant to indebted to the Government, if it is to have binding authority,
a directive of the Secretary of General Services with a view to may only be made by a court. That determination is after all,
updating records management techniques. ​The seminar fees plainly a judicial, not an administrative function. No executive
were charged against the appropriations of the participants' officer or administrative body possesses such a power.
respective offices in accordance with a memo circular issued
by the Office of the President. ​All the fees collected,
P43,000.00 in the aggregate, were placed under Villanueva's
control and supervision, and were made disbursable only upon SILAHIS MARKETING CORPORATION, p ​ etitioner vs.
his authorization and for the purposes of the seminars INTERMEDIATE APPELLATE COURT and GREGORIO DE
specified in Seminar Operation Plans Numbered 001 and 002. LEON, doing business under the name and style of
"MARK INDUSTRIAL SALES", R ​ espondents​. ​G. R. No.
For both seminars, Villanueva authorized disbursements of L-74027 December 7, 1989
P41,148.20 in payment of the expenses incurred. The balance
of P1,851.80 was deposited with the Cashier of the Bureau of FERNAN, ​C.J
Records Management after the conclusion of the seminars, this
being evidenced by Official Receipt No. 0926496 dated October Facts: ​Petitioner Silahis Marketing Corporation seeks in this
8, 1975. petition for review on certiorari a reversal of the decision of the
then Intermediate Appellate Court (IAC) in AC-G.R. CV No.
It was subsequently discovered that employees and officers 67162 entitled "De Leon, etc. v. Silahis Marketing Corporation",
designated to take part in the seminars had earlier collected disallowing petitioner's counterclaim for commission to partially
from the offices or corporations to which they pertained, their offset the claim against it of private respondent Gregorio de
transportation expenses, per diems, and other allowances. For Leon for the purchase price of certain merchandise.
this reason, the Auditor of the Bureau of Records
Management, herein respondent Emiliana Cruz, disallowed the A review of the record shows that on various dates in October,
disbursement of seminar funds in the total amount of November and December, 1975, Gregorio de Leon (De Leon
P31,949.15 which Villanueva had authorized for the for short) doing business under the name and style of Mark
transportation expenses, food and other expenses of said Industrial Sales sold and delivered to Silahis Marketing
employees and officers. In Auditor Cruz's view, this amount Corporation (Silahis for short) various items of merchandise
should also have been deposited with the Cashier of the covered by several invoices in the aggregate amount of P
Bureau of Records Management. Auditor Cruz accordingly 22,213.75 payable within thirty (30) days from date of the
wrote to Villanueva demanding restitution. Villanueva covering invoices. Allegedly due to Silahis' failure to pay its
demurred, claiming that the seminar funds were private funds, account upon maturity despite repeated demands, de Leon
and they had been disbursed in pursuance to the objectives of filed before the then Court of First Instance of Manila a
the seminars. Cruz issued a certificate of permanent complaint for the collection of the said accounts including
disallowance under Sec. 624 of the Revised Administrative accrued interest thereon in the amount of P 661.03 and
Code, in virtue of which all money collectible by him from the attorney's fees of P 5,000.00 plus costs of litigation.
Government would be applied in satisfaction of the amount of
P31,949.15 which she had disallowed in audit. The answer admitted the allegations of the complaint insofar
ISSUE: Whether or not a legal compensation existed between as the invoices were concerned but presented as affirmative
Villanueva and the Government. defenses; [al a debit memo for P 22,200.00 as unrealized profit
for a supposed commission that Silahis should have received
RULING: ​No, a legal compensation did not exist between from de Leon for the sale of sprockets in the amount of P
Villanueva and the Government. While Section 624 of the 111,000.00 made directly to Dole Philippines, Incorporated by
Revised Administrative Code does indeed authorize the set-off the latter sometime in August 1975 without coursing the same
of a person's indebtedness to the Government against "any through the former allegedly in violation of the usual practice
money due him or his estate to be applied in satisfaction of concerning sale of merchandise to Dole Philippines, Inc.; and
such indebtedness," that indebtedness must be one that is [b] Silahis' claim that it is entitled to return the stainless steel
admitted by the alleged debtor or pronounced by final screen covered by Exhibits '6-A' and '6-B' which was found

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oblirasi midterms  8 
defective by its client, Borden International, Davao City, and to commission to the former involving the sale of sprockets to
have the corresponding amount cancelled from its account Dole Philippines, Inc. in the amount of P 111,000.00.
with de Leon.
Therefore, the questioned decision of respondent appellate
Issue: ​Whether or not private respondent is liable to the court is hereby AFFIRMED.
petitioner for the commission or margin for the direct sale
which the former concluded and consummated with Dole
Philippines, Incorporated without coursing the same through
herein petitioner. United Planters Sugar Milling Co., Inc (UPSUMCO) vs
The Honorable Court of Appeals, Philippine National
Ruling: ​No, the record shows particularly the debit memo Bank (PNB) and Asset Privatization Trust (APT), as
upon which petitioner's counterclaim rests and found nothing
contained therein to show that private respondent obligated Trustee of the Republic of the Philippines
himself to set-off or compensate petitioner's outstanding G.R. No. 126890, March 9, 2010 Peralta,J.
accounts with the alleged unrealized commission from the Facts:
assailed sale of sprockets in the amount of P 111,000.00 to In 1974, United Planters Sugar Milling Co., Inc (UPSUMCO)
Dole Philippines, Inc
obtained “takeoff loans” from PNB to finance the construction
Under Article 1279 of the Civil Code provides that: "In order of its sugar milling plant which were covered by a Credit
that compensation may be proper, it is necessary: Agreement dated November 5, 1974. These loans underwent
(1) that each one of the obligors be bound principally, three Restructuring Agreements on June 24, 1982, December
and that he be at the same time a principal creditor of 10, 1982 and May 9, 1984. The takeoff loans were secured a
the other;
(2) that both debts consist in a sum of money, or if real estate mortgage over two parcels of land where the
the things due are consumable, they be of the same milling plant stood and chattel mortgages over the machineries
kind, and also of the same quality if the latter has and equipment. In addition, UPSUMCO agreed to open and/or
been stated; maintain a deposit account with PNB whereby the latter has
(3) that the two debts be due; the authority at its option to apply to the payment of any
(4) that they be liquidated and demandable;
(5) that over neither of them there be any retention unpaid obligations of the client any/and all monies, securities
or controversy, commenced by third persons and which may be in its hands on deposit.
communicated in due time to the debtor.
“Operational Loans” which contained setoff clauses relative to
In the instant case that when all the requisites mentioned in
the application of payments from UPSUMCO’s bank accounts
Article 1279 of the Civil Code are present, compensation takes
effect by operation of law, even without the consent or were thereafter secured by UPSUMCO from PNB between 1984
knowledge of the creditors and debtors. Article 1279 requires, and 1987. These loans were secured by a pledge of contracts
among others, that in order that legal compensation shall take whereby UPSCUMCO assigned to PNB all its sugar produce for
place, ​"the two debts be due" and "they be liquidated PNB to sell and apply the proceeds to satisfy the indebtedness
and demandable." ​Compensation is not proper where the
claim of the person asserting the set-off against the other is arising from the operational loans.
not clear nor liquidated; compensation cannot extend to
unliquidated, disputed claim existing from breach of contract. On February 27, 1987, PNB assigned to the Government its
rights, titles and interests over UPSUMCO in compliance with
Moreover, the petitioner admits the validity of its outstanding Presidential Proclamation No.50. Subsequently, the
accounts with private respondent in the amount of P 22,213.75
as contained in its answer. But whether private respondent is Government turned over these rights, titles and interests to
liable to pay the petitioner a 20% margin or commission on Asset and Privatization Trust (APT).
the subject sale to Dole Philippines, Inc. is vigorously disputed.
This circumstance prevents legal compensation from taking APT and UPSUMCO agreed to an “uncontested and friendly
place.
foreclosure” of the mortgaged assets, in exchange for
The Court agrees with respondent appellate court that there is UPSUMCO’s waiver of its right of redemption. A Petition for
no evidence on record from which it can be inferred that there Extrajudicial Foreclosure Sale was executed on July 28,1987
was any agreement between the petitioner and private with PNB as the Mortgagee and APT as Assignee and
respondent prohibiting the latter from selling directly to Dole Transferee of PNB’s rights, titles and interests. On August 27,
Philippines, Incorporated. It cannot be asserted that the debit
memo was a contract binding between the parties considering 1987, a foreclosure sale was conducted wherein APT
that the same, as correctly found by the appellate court, was purchased the auctioned properties for P450 million.
not signed by private respondent nor was there any mention
therein of any commitment by the latter to pay any

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oblirasi midterms  9 
On September 3, 1987, seven days after the foreclosure sale, Conventional Compensation which takes place when the
UPSUMCO executed a Deed of Assignment giving APT the right parties agree to compensate their mutual obligations even
to redeem the foreclosed properties in exchange for or in in the absence of some requisites. The only requisites of
consideration of the latter condoning any deficiency amount it Conventional Compensation are (1) that each of the
may be entitled to recover from the Corporation under the parties can dispose of the credit he seeks to compensate,
Credit Agreement and the Restructuring Agreements they have and (2) that they agree to the mutual extinguishment of
entered into with PNB. their credits.

Despite the Deed of Assignment, UPSUMCO filed a complaint The absence of the mutual creditor-debtor relation
for sum of money and damages against PNB and APT before between the new creditor APT and UPSUMCO does not
the RTC of Bais City alleging that PNB and APT illegally negate the Conventional Compensation. As soon as PNB
appropriated funds belonging to UPSUMCO through (1) assigned its credit to APT, the mutual creditor-debtor
withdrawals made from the bank accounts of UPSUMCO from relation between PNB and UPSUMCO ceased to exist.
August 27, 1987 up to February 12, 1990; (2) application of However, PNB and UPSUMCO had agreed to a
proceeds from the sale of the sugar of UPSUMCO from August Conventional Compensation, a relationship which does not
27, 1987 up to December 4, 2987 and (3) payment from the require the presence of all the requisites under Article
funds of UPSUMCO with PNB for the operating expenses of the 1279. And PNB too had assigned all its rights as creditor
sugar mill after September 3, 1987, allegedly upon the to APT including its rights under Conventional
instruction of APT and consent of PNB. Compensation.

The RTC rendered judgment in favor of UPSUMCO. The CA 2. No, only the takeoff loans were condoned by APT. By the
reversed the RTC’s ruling contending that only the takeoff very language of the Deed of Assignment, it was evident
loans were condoned by the Deed of Assignment. In a that UPSUMCO’s allegation in its complaint that all of its
Decision and Resolution dated, November 28, 2006 and July accounts were condoned was not proven. Even if neither
11, 2007, respectively, the Court (Third Division) reversed and PNB nor APT had filed an answer, there would have been
set aside the CA Decision. Thereafter, the case was referred to no basis in fact for the trial court to conclude that all of
the Court en banc which reversed the Third Division ruling. UPSUMCO’s loans were condoned or issue reliefs as if all
the loans were condoned.
Issue/s:
1. Whether or not there was Compensation between The earlier rulings of the Court were predicated on a
UPSUMCO and APT. finding that there was a “friendly foreclosure” agreement
2. Whether or not both the takeoff loans and operational between APT and UPSUMCO, whereby APT agreed to
loans of UPSUMCO were condoned by APT. condone all of UPSUMCO’s outstanding obligations in
exchange for the latter’s waiver of its right to redeem the
Ruling: foreclosed property. However, no such agreement to that
1. Yes, there was Compensation between UPSUMCO and effect was ever committed to writing.
APT. It might seem that APT has no right to set-off
payments with UPSUMCO for under Article 1279, it is
NOVATION
necessary for compensation that obligors be bound
principally, and that he be at the same time a principal FUA CAM-LU, PLAINTIFF/APPELLEE,
creditor of the other. There is, concededly, no mutual VS. YAP FAUCO AND YAP SINGCO,
creditor-debtor relation between APT and UPSUMCO. DEFENDANTS/APPELLANTS
BENEFIT ASSOCIATION, INC., AND GRACIELA
However, the Court recognized the concept of ELEAZAR, RESPONDENTS.
Conventional Compensation, defined as occurring “when G.R. No. L-48797, July 30, 1943 ​TORRES, JR., J.
the parties agree to compensate their mutual obligations
even if some requisite is lacking, such as that provided in Facts
Article 1282”. It is intended to eliminate or overcome By virtue of a writ of execution, a certain parcel of land
belonging to the appellants, assessed at P3,550.00 was levied
obstacles which prevent ​ipso jure extinguishment of their upon the Provincial Sheriff who on November 15, 1933 made a
obligations. Legal Compensation takes place by operation notice duly posted in the conspicuous places and published in
of law when all the requisites are present, as opposed to the Mamera Press, that said land be sold at public auction on

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oblirasi midterms  10 
December 12, 1933. The appellants executed a mortgage in impliedly novated the judgment obligation.
favor of the appellee and their obligation was reduced to
P1220 payable in four installments. A camarin belonging to the Issue:
appellants was mortgage to the appellee; in case they would Whether or Not the deed of chattel mortgage novated the
fail to pay any installments they would pay 10 percent of the judgment of the CFI.
unpaid balance as attorney’s fees plus the costs of action. As a
result, the sale of the land did not take place. However, Ruling:
pursuant to an alias writ of execution issued to them the No. There was no clear and convincing evidence that there
Provincial Sheriff, without publishing a new notice, sold said was an implied novation in the execution of the chattel
land at a public auction to the appellee for P1,923.32 and he mortgage agreement. No substantial incompatibility between
then executed a final deed in favor of the appellee. On August the mortgage obligation and the judgment liability of the
29, 1939, the appellee instituted the present action in the respondent sufficient to justify a conclusion of implied
Court of First Instance against the appellants relied on the novation. The stipulation for the payment of the obligation
legal defenses that their obligation was novated by the under the terms of the deed of chattel mortgage serves only to
mortgage executed by them in favor of the appellee and that provide an express and specific method for its extinguishment
the sheriffs sale was void. – payment in two equal installments. The chattel mortgage
simply gave the respondent a method and more time to enable
Issues him to fully satisfy the judgment indebtedness. The chattel
(1) that their liability under the judgment has been mortgage agreement in no manner introduced any substantial
extinguished by the agreement and that accordingly there was modification of alteration of the judgment. Instead of
legally no judgment to execute; and extinguishing the obligation of the respondent arising from the
(2) that the auction sale was void not only because the judgment, the deed of chattel mortgage expressly ratified and
judgment sought to be executed has been extinguished but confirmed the existence of the same, amplifying only the mode
also because there was no publication thereof as required and period for compliance by the respondent.

Ruling
YES. Appellants liability under the judgment in the civil case G.R. No. L-25897 August 21, 1976
had been extinguished by the statement evidenced by the AGUSTIN DORMITORIO and LEONCIA D.
mortgage executed by them in favor of appellee. Although said DORMITORIO, ​petitioner vs. H
​ ONORABLE JOSE
mortgage did not expressly cancel the old obligation, this was FERNANDEZ, Judge of the Court of First Instance of
impliedly novated by reason of the incompatibility resulting Negros Occidental, Branch Bacolod City, and SERAFIN
from the fact that, whereas the judgment was for P1, 538.04 LAZALITA, r​ espondents.
payable at one time, did not provide for attorney’s fees, and
was not secured, the new obligation is for P1, 200 payable in FERNANDO, A
​ cting C.J.:
installments, stipulates for attorney’s fee, and is secured by a Facts:
mortgage. The later agreement did not merely extend the time The Municipality of Victorias is the owner of several parcels of
to pay the judgment, because it was therein recited that lands in Victorias, Negros Occidental. In 1948, it sold lot No.1
appellant promised to pay P1, 200 to appellee as a settlement Block 16 with an area of 230 sq. m. at 1 peso per sq. meter to
of said judgment. Said judgment cannot be said to have been Serafin Lazalita. Payment for said lot was completed in 1958.
settled, unless it was extinguished.
Lazalita had been in full and peaceful possession of the
said land for eight continuous years and he introduced
Eusebio S. Millar, petitioner, vs.The Hon. Court of permanent and invaluable improvements thereon such as fruit
Appeals and Antonio P. Gabriel, respondents trees, a house of strong materials, etc.
G.R. No. L-29981 April 30, 1971​ Castro, J.:
In 1955, Agustin and Leoncia Dormitorio also purchased
Facts: M​ illar obtained a favorable judgment from the CFI a land from the Municipality of Victorias. They bought Lot No.
condemning Antonio P. Gabriel to pay him the sum of 1,746.98 2, Block 16 having an area of 343 sq. meters at 1 peso per sq.
with the interest at 12% per annum from the date of the filing meter. They, however, have not taken actual possession of the
of the complaint, the sum of P400 as attorney’s fees, and the land.
costs of suit. The lower court issued the writ of the execution
on the basis of which the sheriff seized the respondent’s Willy’s In 1958, Dormitorio’s filed a suit for ejectment against
Ford jeep. The respondent, however, pleaded with the Lazalita. The Municipal Mayor and Council tried to settle the
petitioner to release the jeep under as arrangement whereby matter between the parties. A private surveyor was hired and
the respondent, to secure the payment of the judgment debt, it was found out that the lot sold by the Municipality to Lazalita
agreed to mortgage the vehicle in favor of petitioner. The was converted to the Municipal Road known as Jover Street
petitioner agreed to the arrangement; thus, the parties and the lot presently occupied by him is supposed to be Lot.
executed a chattel mortgage on the jeep. Resolution of the No. 2 bought by the Dormitorio’s.
controversy posed by the petition at bar hinges entirely on a
determination of whether or not the subsequent agreement of 1961- CFI rendered judgment in favor of the
the parties as embodied in the deed of chattel mortgage

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oblirasi midterms  11 
Dormitorios, ordering Lazalita to vacate the land and to pay a
monthly rental to the former at a rate of 20 pesos a month. REGALA, ​J.:

Lazalita, with the Dormitorios, then filed a case against FACTS:


the Municipality of Victorias because the value of the The appellants bought from the appellee a parcel of land in
improvement he made on the land have far exceeded the Quezon City known as Lot 7-K-2-G, Psd-26193. In view of an
purchase price. unpaid balance of P5,000.00 on account of the purchase price
of the lot, the appellants executed on January 4, 1957 a
The Municipality of Victorias, is willing to amicably settle promissory note representing the said account.
the case, by giving the plaintiff another lot, if they could open
their newly proposed subdivision, or pay back Lazalita the On the same date, the appellants and the Luzon Surety Co.,
amount necessary and just for him to acquire another lot for Inc. executed a bond in favor of the appellee, the undertaking
his residence and for the expenses of transferring his present for the payment of the parcel of land.
residential house thereto.
On June 20, 1958, when the obligation of the appellants
1965- The parties agreed and submitted an "Agreed became due and demandable, the Luzon Surety Co., Inc. paid
Stipulation of Facts" before the court. Accordingly, judgment to the appellee the sum of P5,000.00. Subsequently, the
was rendered based on the same. appellee demanded from the appellants the payment of
P655.89 corresponding to the alleged accumulated interests on
Thereafter, the Dormitorios filed a writ of execution for the principal of P5,000.00. Due to the refusal of the appellants
the enforcement of the earlier judgment by the Court ordering to pay the said interest, the appellee started this suit in the
Lazalita to pay 20 pesos monthly rental and to vacate said Municipal Court of Manila to enforce the collection thereof.
property. The petition was granted. However, Judge Fernandez
set aside said writ of execution on the ground that it was It is claimed that there was a novation and/or modification of
obtained by means of fraud, misrepresentation and the obligation of the appellants in favor of the appellee
concealment of the true facts of the case by making it appear because the appellee accepted without reservation the
that the case was still enforceable (even if it had already been subsequent agreement set forth in the surety bond despite its
novated by a subsequent agreement by the parties). It found failure to provide that it also guaranteed payment of accruing
out that the said order was granted based on a decision of the interest.
Court on Sept. 5, 1961 (prior to the Agreed Stipulation of Facts
submitted by both parties on Feb. 12, 1965) ISSUE:
Whether or not there is novation.
Issue:
Whether the judgment of the court had been novated and thus HELD:
can no longer be enforced? The rule is settled that novation by presumption has never
been favored. To be sustained, it needs to be established that
Ruling: the old and new contracts are incompatible in all points, or
Yes The agreement filed by the parties created between them that the will to novate appears by express agreement of the
new rights and obligations which naturally superseded the parties or in acts of similar import.
prior judgment. It is proper to show that there is animus
novandi between the parties for novation to properly take An obligation to pay a sum of money is not novated, in a new
effect. instrument wherein the old is ratified, by changing only the
terms of payment and adding other obligations not
In the case at bar, the presence of animus novandi is incompatible with the old one, or wherein the old contract is
undeniable. merely supplemented by the new one. The mere fact that the
creditor receives a guaranty or accepts payments from a third
Secondly, the decision resulting from a compromise had the person who has agreed to assume the obligation, when there
effect of res judicata. The parties therefore are bound by it. is no agreement that the first debtor shall be released from
The judge therefore committed no error in setting aside the responsibility does not constitute a novation, and the creditor
order of execution as the same had only set maters right. can still enforce the obligation against the original debtor.
(Straight v. Haskel, 49 Phil. 614; Pacific Commercial Co. v.
Doctrine: Sotto, 34 Phil. 237; Estate of Mota v. Serra, 47 Phil. 464;
A final executory judgment of a trial court may be novated by Duñgo v. Lopena​, supr​a ). In the instant case, the surety bond
subsequent agreement of the parties. is not a new and separate contract but an accessory of the
promissory note.

G.R. No. L-18411 December 17, 1966 WHEREFORE, the judgment appealed from should be, as it is
MAGDALENA ESTATES, INC.,​ plaintiff-appellee, hereby, affirmed, with costs against the appellants.
vs.
ANTONIO A. RODRIGUEZ and HERMINIA C.
RODRIGUEZ,​ defendants-appellants.

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oblirasi midterms  12 
Joseph Cochingyan, Jr. And Jose K. Villanueva the basis alone of the terms of the Trust Agreement and other
vs. ​R & B Surety And Insurance Company, Inc. documents submitted in evidence. The Court of First Instance
G.R. No. L-47369, ​June 30, 1987 F
​ eliciano, J. of Manila, rendered a decision in favor of R & B Surety.
Issue​:
Facts: ​In November 1963, Pacific Agricultural Suppliers, Inc.
(PAGRICO) applied for and was granted an increase in its line Whether or not the Trust Agreement had
of credit from P400,000.00 to P800,000.00 (the "Principal extinguished, by novation, the obligation of R & B Surety to
Obligation"), with the Philippine National Bank (PNB). To the PNB under the Surety Bond which, in turn, extinguished
secure PNB's approval, PAGRICO had to give a good and the obligations of the petitioners under the Indemnity
sufficient bond in the amount of P400,000.00, representing the Agreements.
increment in its line of credit, to secure its faithful compliance
Ruling​: No, the Surety Bond was not novated by the Trust
with the terms and conditions under which its line of credit
agreement. Both agreement can co-exist. The Trust
was increased. In compliance with this requirement, PAGRICO
Agreement merely furnished to PNB another party obligor to
submitted Surety Bond No. 4765, issued by the respondent R
the Principal Obligation in addition to PAGRICO and R & B
& B Surety and Insurance Co., Inc. (R & B Surety") in the
Surety.
specified amount in favor of the PNB. Under the terms of the
Surety Bond, PAGRICO and R & B Surety bound themselves Novation is the extinguishment of an obligation by the
jointly and severally to comply with the "terms and conditions substitution or change of the obligation by a subsequent one
of the advance line [of credit] established by the [PNB]." PNB which terminates it, either by changing its object or principal
had the right under the Surety Bond to proceed directly conditions, or by substituting a new debtor in place of the old
against R & B Surety "without the necessity of first exhausting one, or by subrogating a third person to the rights of the
the assets" of the principal obligor, PAGRICO. The Surety Bond creditor. Novation through a change of the object or principal
also provided that R & B Surety's liability was not to be limited conditions of an existing obligation is referred to as objective
to the principal sum of P400,000.00, but would also include (or real) novation. Novation by the change of either the person
"accrued interest" on the said amount "plus all expenses, of the debtor or of the creditor is described as subjective (or
charges or other legal costs incident to collection of the personal) novation. Novation may also be both objective and
obligation [of R & B Surety]" under the Surety Bond. subjective (mixed) at the same time. In both objective and
In consideration of R & B Surety's issuance of the subjective novation, a dual purpose is achieved-an obligation is
extinguished and a new one is created in lieu thereof.
Surety Bond, two Identical indemnity agreements were
entered into with R & B Surety: (a) one agreement dated 23 Novation is never presumed. If objective novation is to take
December 1963 was executed by the Catholic Church Mart place, it is imperative that the new obligation expressly declare
(CCM) and by petitioner Joseph Cochingyan, Jr, the latter that the old obligation is thereby extinguished, or that the new
signed not only as President of CCM but also in his personal obligation be on every point incompatible with the old
and individual capacity; and (b) another agreement dated 24 one. Novation is never presumed: it must be established either
December 1963 was executed by PAGRICO, Pacific Copra by the discharge of the old debt by the express terms of the
Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Ben Mr. new agreement, or by the acts of the parties whose intention
Villanueva signed both as Manager of PAGRICO and in his to dissolve the old obligation as a consideration of the
personal and individual capacity; Mr. Liu signed both as emergence of the new one must be clearly discernible.
President of PACOCO and in his individual and personal
If the old debtor is not released, no novation occurs and the
capacity.
third person who has assumed the obligation of the debtor
When PAGRICO failed to comply with its Principal becomes merely a co-debtor or surety or a co-surety.
Obligation to the PNB, the PNB demanded payment from R & B Subjective novation by a change in the person of the debtor is
Surety of the sum of P400,000.00, the full amount of the to occur, it is not enough that the juridical relation between
Principal Obligation. R & B Surety made a series of payments the parties to the original contract is extended to a third
to PNB by virtue of that demand totalling P70,000.00 person. It is essential that the old debtor be released from the
evidenced by detailed vouchers and receipts. R & B Surety in obligation, and the third person or new debtor take his place in
turn sent formal demand letters to petitioners Joseph the new relation.
Cochingyan, Jr. and Jose K. Villanueva for reimbursement of
Novation is not implied when the parties to the new obligation
the payments made by it to the PNB and for a discharge of its
expressly negated the lapsing of the old obligation. Neither can
liability to the PNB under the Surety Bond. When petitioners
the petitioners anchor their defense on implied novation.
failed to heed its demands, R & B Surety brought suit against
Absent an unequivocal declaration of extinguishment of a
Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben in
pre-existing obligation, a showing of complete incompatibility
the Court of First Instance of Manila.
between the old and the new obligation (and nothing else)
Petitioner Joseph Cochingyan, Jr. in his answer would sustain a finding of novation by implication. But where,
maintained that the Indemnity Agreement he executed in favor as in this case, the parties to the new obligation expressly
of R & B Surety and did not present any evidence at all to recognize the continuing existence and validity of the old one,
support his asserted defenses. Petitioner Villanueva did not where, in other words, the parties expressly negated the
submit any evidence either on his "accommodation" defense. lapsing of the old obligation, there can be no novation. The
The trial court was therefore constrained to decide the case on issue of implied novation is not reached at all.

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oblirasi midterms  13 
Applying the above principles to the instant case, it is Juana Rodriguez Avenue. This Avenue is a major thoroughfare
at once evident that the Trust Agreement does not expressly adjacent to the Broadway Centrum and was then closed to
terminate the obligation of R & B Surety under the Surety vehicular traffic because of the road expansion project of the
Bond. On the contrary, the Trust Agreement expressly provides Government.
for the continuing subsistence of that obligation by stipulating
that "[the Trust Agreement] shall not in any manner release" R Broadway agreed on 20 April 1982 to a "provisional and
& B Surety from its obligation under the Surety Bond. temporary agreement" wherein Tropical will pay a monthly
rental on the basis of 2% of gross receipts or P60,000.00,
In the present case, the Trustor under the Trust
whichever is higher. Tropical also committed to return 466.56
Agreement, the CCM, was already previously bound to R & B
square meters of their leased premises to Broadway
Surety under its Indemnity Agreement. Under the Trust
management.
Agreement, the Trustor also became directly liable to the PNB.
So far as the PNB was concerned, the effect of the Trust
Tropical refused to pay the increased and rent and continually
Agreement was that where there had been only two, there
negotiated a P60K or 2% of gross sales whichever is higher
would now be three obligors directly and solidarily bound in
monthly rate because of their “low sales volume”. Broadway
favor of the PNB: PAGRICO, R & B Surety and the Trustor. And
continually refused until Tropical took a different stance and
the PNB could proceed against any of the three, in any order
stated that Broadway cannot just arbitrarily and unilaterally
or sequence. Clearly, PNB never intended to release, and never
increase rentals and that they are not in a financial position to
did release, R & B Surety. Thus, R & B Surety, which was not a
agree to such an increase.-Broadway replied that if Tropical
party to the Trust Agreement, could not have intended to
continues to refuse heeding their demands, they are formally
release any of its own indemnitors simply because one of
serving them notice that they will implement par 5 of their
those indemnitors, the Trustor under the Trust Agreement,
lease contract.-Tropical filed a complaint a week later, seeking
became also directly liable to the PNB.
to prevent Broadway from invoking par 5 of their lease
contract and to decree that the rental provided for in the
letter-agreement in April 1982 “should subsist while the low
BROADWAY CENTRUM CONDOMINIUM CORPORATION​,
volume sales (of Tropical) still continue”
petitioner, vs. T
​ ROPICAL HUT FOOD MARKET, INC. and
THE HONORABLE COURT OF APPEALS​, respondents.
ISSUE: ​Whether or not the letter-agreement dated April 20,
G.R. No. 79642 July 5, 1993 Ponente: FELICIANO, J.
1982 novated the Lease Contract of November 28, 1980?
DOCTRINE:
RULING:
If objective novation is to take place, it is essential that the
No. By definition, novation is the extinguishment of an
new obligation expressly declare that the old obligation is to be
obligation by the substitution of that obligation with a
extinguished, or that new obligation be on every point
subsequent one, which terminates it, either by changing its
incompatible with the old one. Novation is never presumed; it
object or principal conditions (objective) or by substituting a
must be established either by the discharge of the old debt by
now debtor in place of the old one (subjective), or by
the express terms of the new agreement, or by the acts of the
subrogating a third person to the rights of the creditor. If
parties whose intention to dissolve the old obligation as a
objective novation is to take place, it is essential that the new
consideration of the emergence of the new one must be clearly
obligation expressly declare that the old obligation to be
manifested.
extinguished, or that now obligation be on every point
incompatible with the old one. Novation is never presumed; it
FACTS: ​Broadway Centrum Condominium Corporation
must be established either by the discharge of use old debt by
(Broadway) agreed to lease a 3,042.19 sqm portion of the
the express terms of the new agreement, or by the acts of the
Broadway Centrum Commercial Complex to Tropical Hut Food
parties whose intention to dissolve the old obligation as a
Market (Tropical) for a period of 10 years with rental rates as
consideration of the emergence of the new one must be clearly
follows:
manifested. The will to novate, whether totally or partially,
must appear by express agreement of the parties, by their acts
1st 3 years (Feb 1 1981 to Feb 1 1984) : Php120,000
which are too clear and unequivocal to be mistaken.
2nd 3 years (Feb 1 1984 to Feb 1 1987) : Php140,000
Last 4 years (Feb 1 1987 to Feb 1 1991) : Php165,000
It is clear that the letter-agreement of Apr 1982 did
not extinguish or alter the obligations of Tropical and the rights
During the first year of lessor-lessee relationship between
of Broadway under the Lease Contract of Nov 1980. It was
Broadway and Tropical, but on February 5, 1982 Tropical
expressly stated in the Apr 1982 agreement that it was a
wrote to Broadway requesting for a rental rate reduction due
“provisional agreement should not be interpreted as
to financial difficulties. Tropical Hut is paying a rental rate of
amendment to the contract entered into” by both parties.
6.08% of sales "which is too high for Tropical Hut-Broadway
There is nothing in the text of this agreement that could
considering that the present rental rates of other Tropical
suggest that the reduced concessional rental rates could not
branches are even below the normal rate of 1.5% on sales."
be terminated by Broadway without the consent of Tropical.
Negotiations between Broadway Centrum and Tropical Hut
Also, the course of negotiation between the two parties before
representatives were made. Tropical's officers recounted the
the execution of the letter-agreement clearly indicates that
low sales volume is a result of the temporary closure of Doña

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oblirasi midterms  14 
what they were negotiating was supposed to be only and service charges in the aggregate amount of P166,408.31.
temporary. He defaulted in the payment of this obligation.

Secondly, the Nov 1980 Lease Contract made it clear that a ISSUE:
temporary and provisional concessional reduction of rentals
that Broadway might grant was not to be construed as Whether or not the petitioner is liable as surety under the
alteration or waiver of any way to the terms of the lease Diamond card revolves around the effect of the upgrading by
contract itself. The course of discussions between the parties Danilo Alto of his card. Was the upgrading a novation of the
after the execution of the letter agreement shows that there original agreement governing the use of Danilo Alto's first
was no agreement that the reduction in rentals is to persist for credit card, as to extinguish that obligation and the Surety
the rest of the 10-year lease. Undertaking which was simply accessory to it?
Finally, the “low volume of sales” that Tropical was stating as
their cause for petitioning a reduction in rental rates was based RULING:
on feasibility study that Tropical had made on its own before Yes, there is no doubt that the upgrading was a novation of
Tropical and Broadway have entered into their 1980 lease the original agreement covering the first credit card issued to
contract. It was no more than an expression of Tropical’s own Danilo Alto, basically since it was committed with the intent of
expectations when it entered into the Contract of Lease. cancelling and replacing the said card. However, the novation
did not serve to release petitioner from her surety obligations
because in the Surety Undertaking she expressly waived
MOLINO v. SECURITY DINERS discharge in case of change or novation in the agreement
G.R. No. 136780, August 16, 2001 governing the use of the first credit card.
GONZAGA-REYES, J.:
The nature and extent of petitioner's obligations are set out in
FACTS: clear and unmistakable terms in the Surety Undertaking. She
The Security Diners International Corporation ("SDIC") declared that "​any change or novation in the Agreement or any
operates a credit card system under the name of Diners Club extension of time granted by SECURITY DINERS to pay such
through which it extends credit accommodation to its obligation, charges, and fees, shall not release (her) from this
cardholders for the purchase of goods and payment of services Surety Undertaking".
from its member establishments to be reimbursed later on by
The Court of Appeals rendered a decision ordering
the cardholder upon proper billing. There are two types of
defendant-appellee Jeanette D. Molino-Alto to pay
credit cards issued: one, the Regular (Local) Card which plaintiff-appellant Security Diners International, Inc. the
entitles the cardholder to purchase goods and pay services following:
from member establishments in an amount not exceeding
P10,000.00; and two, the Diamond (Edition) Card which 1. The sum of P166,408.31 plus interest of 3% per annum and
2% per month from November 9, 1988 until the obligation is
entitles the cardholder to purchase goods and pay services fully paid;
from member establishments in unlimited amounts. One of 2. The amount equivalent to 10% of the obligation mentioned
the requirements for the issuance of either of these cards is in the preceding paragraph as attorney's fees; and
that an applicant should have a surety. 3. Costs.

On July 24, 1987, Danilo A. Alto applied for a Regular (Local)


Card with SDIC. He got as his surety his own sister-in-law
Jeanette Molino Alto. Thus, Danilo signed the printed ROMEO C. GARCIA, p​ etitioner, vs.​ DIONISIO V.
application form and Jeanette signed the Surety Undertaking. LLAMAS, r​ espondent​.
G.R. No. 154127, December 8, 2003
The latter used this card and initially paid his obligations to
SDIC. On February 8, 1988, Danilo wrote SDIC a letter Facts: D
​ ocketed as Civil Case No. Q97-32-873, the complaint
requesting it to upgrade his Regular (Local) Diners Club Card alleged that on December 23, 1996, Garcia and De Jesus
to a Diamond (Edition) one. As a requirement of SDIC, Danilo borrowed P400, 000.00 from Llamas; that, on the same day,
secured from Jeanette her approval. The latter obliged and so they executed a promissory note wherein they bound
on March 2, 1988, she signed a note which states her
approval. themselves jointly and severally to pay the loan on or before
23 January 1997 with a 5% interest per month; that the loan
Danilo's request was granted and he was issued a Diamond has long been overdue and, despite repeated demands, Garcia
(Edition) Diners Club Card. He used this card and made and De Jesus have failed and refused to pay it.
purchases from member establishments. On October 1, 1988
Danilo had incurred credit charged plus appropriate interest

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oblirasi midterms  15 
Resisting the complaint, Garcia, in his Answer, averred that he himself jointly and severally liable with De Jesus, Garcia is
is relieved from any liability arising from the note inasmuch as therefore liable for the entire obligation.
the loan had been paid by De Jesus by means of a check dated
April 17, 1997; and that, in any event, the issuance of the ELSA B. REYES, PETITIONER,
check and Llamas’ acceptance thereof novated or superseded VS. COURT OF APPEALS, SECRETARY OF JUSTICE,
the note. AFP-MUTUAL BENEFIT ASSOCIATION, INC., AND
GRACIELA ELEAZAR, RESPONDENTS.
Respondent answered that there was no novation to speak of G.R. No. 120817, November 04, 1996 ​TORRES, JR., J.
because the check bounced. Facts
Petitioner Elsa Reyes, president of Eurotrust, and respondent
Issue:​ Whether there was novation of the obligation Graciela Eleazar, president of Bermic entered into a loan
agreement where the former extended P216,053,126.80 to the
latter. Bermic issued 21 postdated checks, which were
Ruling: dishonored by the drawee bank. Despite Eurotrust’s repeated
demands to pay, Eleazar failed to make good the dishonored
No, there was no novation took place. Under Article 1293 of checks, prompting Reyes to file against her several criminal
the Civil Code, novation shall take place when the following complaints for violation of B.P. 22 and estafa.
requisites concur:
1) There must be a previous valid obligation. Subsequently, Elsa Reyes was investigated by the Senate Blue
2) The parties concerned must agree to a new contract. Ribbon Committee for being involved in a large scale scam
3) The old contract must be extinguished. amounting to millions of pesos belonging to Instructional
4) There must be a valid new contract. Material Corporation (IMC).
In the instant case, the parties did not unequivocally declare Meanwhile, respondent AFP-MBAI which invested its funds
that the old obligation had been extinguished by the issuance with Eurotrust conducted its own investigation and found that
and the acceptance of the check, or that the check would take after Eurotrust delivered to AFP-MBAI the securities it
the place of the note. There is no incompatibility between the purchased, the former borrowed the same securities but failed
promissory note and the check. As the CA correctly observed, to return them to AFP-MBAI; and that the amounts paid by
the check had been issued precisely to answer for the AFP-MBAI to Eurotrust for those securities were in turn lent by
obligation. On the one hand, the note evidences the loan Elsa Reyes to Bermic and others.
obligation; and on the other, the check answers for it. Verily,
the two can stand together. The representatives of Eurotrust and Bermic agreed that
Also unmeritorious is Garcia’s argument that the obligation Bermic would directly settle its obligations with the real owners
was novated by the substitution of debtors. In order to change of the fund-AFP-MBAI. Bermic negotiated with AFP-MBAI and
the person of the debtor, the old one must be expressly paid P31,711.11 and a check of P1-million to the latter.
released from the obligation, and the third person or new
debtor must assume the formers place in the After investigation, the Office of the Provincial Prosecutor of
relation. Well-settled is the rule that novation is never Rizal issued a resolution dismissing the complaints filed by Elsa
presumed. Consequently, that which arises from a purported Reyes against Graciela Eleazar on the ground that when the
change in the person of the debtor must be clear and express. latter assumed the obligation of Reyes to AFP-MBAI, it
It is thus incumbent on Garcia to show clearly and constituted novation, extinguishing any criminal liability on the
unequivocally that novation has indeed taken place. part of Eleazar.
In the present case, Garcia has not shown that he was Reyes filed a petition for review of the said resolution with
expressly released from the obligation, that a third person was respondent Secretary of Justice contending that novation did
substituted in his place, or that the joint and solidary obligation not take place.
was cancelled and substituted by the solitary undertaking of
De Jesus. The CA aptly held that De Jesus was not a third The Secretary of Justice dismissed the petition holding that the
person to the obligation. From the beginning, he was a joint contract of loan between petitioner and respondent had been
and solidary obligor of the P400,000 loan; thus, he can be novated when they agreed that respondent Eleazar should
released from it only upon its extinguishment. Llamas’ settle her firm’s (BERMIC) loan obligations directly with
acceptance of his check did not change the person of the AFP-MBAI instead of settling it with petitioner Reyes. This
debtor, because a joint and solidary obligor is required to pay finding was affirmed by the respondent court.
the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is Issue
entitled to demand the satisfaction of the whole obligation Whether the decision of the Secretary of Justice and the
from any or all of the debtors. It is up to the former to respondent court, holding that the contract of loan between
determine against whom to enforce collection. Having made petitioner and respondent had been novated, is proper?

Ruling

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oblirasi midterms  16 
The Supreme Court held that no novation took place in this Pursuant to the memorandum of agreement delta
case. In order that a novation can take place, the following executed a deed of sale assigning to respondent, the
requisites must concur: promissory notes from petitioner. Respondent subsequently
1. There must be a previous valid obligation, sent a demand letter to petitioner requiring remitting payments
2. There must be an agreement of the parties concerned to a due on the promissory notes. Petitioner replied informing
new contract, respondent of the fact that delta had taken over its
3. There must be the extinguishment of the old contract, and management and operations.
4. There must be the validity of the new contract.
Issue: W
​ ON the Restructuring Agreement between CBLI and
There is no doubt that the last three essential requisites of Delta novated the 5 promissory notes Delta assigned to
novation are wanting in the instant case. No new agreement respondent SIHI
for substitution of creditor was forged among the parties
concerned which would take the place of the preceding Held: ​No. An agreement subsequently executed between a
contract. The absence of a new contract extinguishing the old seller and a buyer that provides for a different schedule and
one destroys any possibility of novation by conventional manner of payment, to restructure the mode of payments by
subrogation. the buyer so that it could settle its outstanding obligation
despite its delinquency in payment is not novation.
There was nothing therein that would evince that respondent Novation is the extinguishment of an obligation by the
AFP-MBAI agreed to substitute for the petitioner as the new substitution or change of the obligation by a subsequent one
creditor of respondent Eleazar in the contract of loan. There which terminates the first, either by changing the object or
was no mention whatsoever of AFP-MBAI’s consent to the new principal conditions, or by substituting the person of the
agreement between petitioner and respondent Eleazar much debtor, or subrogating a third person in the rights of the
less an indication of AFP-MBAI’s intention to be the substitute creditor.
creditor in the loan contract. Novation, in its broad concept, may either be
extinctive or modificatory. It is extinctive when an old
Well settled is the rule that novation by substitution of creditor obligation is terminated by the creation of a new obligation
requires an agreement among the three parties concerned – that takes the place of the former; it is merely modificatory
the original creditor, the debtor and the new creditor. It is a when the old obligation subsists to the extent it remains
new contractual relation based on the mutual agreement compatible with the amendatory agreement. For novation to
among all the necessary parties. Hence, there is no novation if take place, 4 essential requisites must be met, namely, (1) a
no new contract was executed by the parties. previous valid obligation; (2) an agreement of all parties
concerned to a new contract; (3) the extinguishment of the old
The fact that respondent Eleazar made payments to AFP-MBAI obligation; and (4) the birth of a valid new obligation.
and the latter accepted them does not ipso facto result in There are 2 ways which could indicate the presence
novation. There must be an express intention to novate – of novation and thus produce the effect of extinguishing an
animus novandi. Novation is never presumed. Article 1300 of obligation by another which substitutes the same. The first is
the Civil Code provides inter alia that conventional subrogation when novation has been explicitly or expressly stated and
must be clearly established in order that it may take effect. declared in unequivocal terms.
The second is implied novation. when the old and the
new obligations are incompatible on every point. The test of
California Bus Lines Inc. (CBLI) v. State Investment incompatibility is whether the 2 obligations can stand together,
House, Inc. (SIHI) each one having its independent existence. If they cannot,
G.R. No. 147950, Dec. 11, 2003 QUISUMBING, J.: they are incompatible, and the latter obligation novates the
first. Corollarily, changes that breed incompatibility must be
Facts: D​ elta Motors Corporation applied for financial essential in nature and not merely incidental.
assistance from respondent State Investment House, Inc., a The incompatibility must take place in any of the
domestic corporation engaged in the business of essential elements of the obligation, such as its object, cause
quasi-banking. SIHI agreed to extend a credit line to Delta or principal conditions thereof; otherwise, the change would be
which eventually became indebted to SIHI. merely modificatory in nature and insufficient to extinguish the
original obligation.
In April 1979 to May 1980, petitioner California Bus Lines, Inc. In this case, the attendant facts do not make out a
(CBLI), purchased on installment basis 35 units of M.A.N. case of novation. The restructuring agreement between Delta
Diesel Buses and 2 units of M.A.N. Diesel Conversion Engines and CBLI executed shows that the parties did not expressly
from Delta. CBLI defaulted on all payments due, it entered into stipulate that the restructuring agreement novated the
a restructuring agreement with Delta in Oct. 1981, to cover its promissory notes. Absent an unequivocal declaration of
overdue obligations under the promissory notes. extinguishment of the pre-existing obligation, only a showing
To secure the payment of the 35 buses, CBLI and its of complete incompatibility between the old and the new
president executed 16 promissory notes in favor of Delta. obligation would sustain a finding of novation by implication.
However, petitioner still had trouble meeting its obligations However, our review of its terms yields no incompatibility
with delta. This prompted Delta to threaten CBLI with the between the promissory notes and the restructuring
enforcement of the management takeover clause. agreement. Furthermore, obligation is not novated by an

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oblirasi midterms  17 
instrument that expressly recognizes the old, changes only the
terms of payment, and adds other obligations not incompatible Ruling:
with the old ones, or where the new contract merely Under Article 1293 of the Civil Code provides that; Novation
supplements the old one which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the
Chester Babst, petitioner, vs. The Hon. Court of Appeals creditor. Payment by the new debtor gives him the rights
and Bank of the Philippine Island, Elizalde Steel mentioned in articles 1236 and 1237.
Consolidated, Inc., and Pacific Multi-Corporation, BPI contends that in order to have a valid novation, there must
respondents be an express consent of the creditor.
G.R. No. 99398 January 26, 2001 Ynares-Santiago, J.: The Court of Appeals held that even if the account officer who
attended the June 1981 creditors' meeting had expressed
FACTS:​ On June 8, 1973, ELISCON obtained from CBTC a consent to the assumption by DBP of ELISCON' s debts, such
loan in the amount of P8,015,900.84, with interest at the rate consent would not bind BPI for lack of a specific authority
of 14% per annum, evidenced by a promissory note. ELISCON therefor. In its petition, ELISCON counters that the mere
defaulted in its payments, leaving an outstanding indebtedness presence of the account officer at the meeting necessarily
in the amount of P2,795,240.67 as of October 31, 1982.The meant that he was authorized to represent BPI in that
letters of credit, on the other hand, were opened for ELISCON creditors' meeting. Moreover, BPI did not object to the
by CBTC using the credit facilities of Pacific Multi-Commercial substitution of debtors, although it objected to the payment
Corporation (MULTI) with the said bank, pursuant to the formula submitted by DBP.
Resolution of the Board of Directors of MULTI. Subsequently, In the case at bar, Babst, MULTI and ELISCON all maintain
on September 26, 1978, Antonio Roxas Chua and Chester G. that due to the failure of BPI to register its objection to the
Babst executed a Continuing Suretyship, whereby they bound take-over by DBP of ELISCON's assets, at the creditors'
themselves jointly and severally liable to pay any existing meeting held in June 1981 and thereafter, it is deemed to have
indebtedness of MULTI to CBTC to the extent of P8,000,000.00 consented to the substitution of DBP for ELISCON as debtor.
each. Sometime in October 1978, CBTC opened for ELISCON in Novation, in its broad concept, may either be extinctive or
favor of National Steel Corporation three (3) domestic letters modificatory. It is extinctive when an old obligation is
of credit in the amounts of P1,946,805.73, P1,702,869.32 and terminated by the creation of a new obligation that takes the
P200,307.72, respectively, which ELISCON used to purchase place of the former; it is merely modificatory when the old
tin black plates from National Steel Corporation. ELISCON obligation subsists to the extent it remains compatible with the
defaulted in its obligation to pay the amounts of the letters of amendatory agreement. An extinctive novation results either
credit, leaving an amount of P3,963,372.08. On December 22, by changing the object or principal conditions (objective or
1980, BPI and CBTC entered into a merger, wherein BPI, as real), or by substituting the person of the debtor or
the surviving corporation, acquired all the assets and assumed subrogating a third person in the rights of the creditor
all the liabilities of CBTC. Meanwhile, ELISCON encountered (subjective or personal). Under this mode, novation would
financial difficulties and became heavily indebted to the have dual functions one to extinguish an existing obligation,
Development Bank of the Philippines (DBP). In order to settle the other to substitute a new one in its place requiring a
its obligations, ELISCON proposed to convey to DBP by way of conflux of four essential requisites, (1) a previous valid
dacion en pago all its fixed assets mortgaged with DBP, as obligation; (2) an agreement of all parties concerned to a new
payment for its total indebtedness. ELISCON called its creditors contract; (3) the extinguishment of the old obligation; and (4)
to a meeting to announce the take-over by DBP of its assets. the birth of a valid new obligation.
In October 1981, DBP formally took over the assets of The original obligation having been extinguished, the contracts
ELISCON, including its indebtedness to BPI. Thereafter, DBP of suretyship executed separately by Babst and MULTI, being
proposed formulas for the settlement of all of ELISCONs accessory obligations, are likewise extinguished.
obligations to its creditors, but BPI expressly rejected the WHEREFORE,​ the consolidated petitions are G ​ RANTED​. The
formula submitted to it for not being acceptable. BPI, as appealed Decision of the Court of Appeals, which held
successor-in-interest of CBTC, instituted with the Regional Trial ELISCON, MULTI and Babst solidarily liable for payment to BPI
Court of Makati, Branch 147, a complaint for sum of money of the promissory note and letters of credit, is R ​ EVERSED
against ELISCON, MULTI and Babst, which was docketed as and SET ASIDE​. BPI's complaint against ELISCON, MULTI
Civil Case No. 49226.ELISCON, in its Answer, argued that the and Babst is D​ ISMISSED​.
complaint was premature since DBP had made serious efforts
to settle its obligations with BPI. Babst also filed his Answer SPOUSES JOSE T. VALENZUELA and GLORIA
alleging that he signed the Continuing Suretyship on the VALENZUELA,​ Petitioners, vs.
understanding that it covers only obligations which MULTI KALAYAAN DEVELOPMENT & INDUSTRIAL
incurred solely for its benefit and not for any third-party CORPORATION,​ Respondent.
liability, and he had no knowledge or information of any G.R. No. 163244. June 22, 2009​ ​PERALTA, ​J.:
transaction between MULTI and ELISCON.
FACTS:​ Kalayaan Development & Industrial Corporation
Issue: discovered that Spouses Jose and Gloria Valenzuela had
Whether or not BPI consented to the assumption by DBP of occupied and built a house on a parcel of land it owned, and
the obligations of ELISCON. demanded that they vacate said property. Upon negotiation,

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oblirasi midterms  18 
however, petitioners and Kalayaan entered into a ​Contract to substitutes the same, it is imperative that it be so declared in
Sell​ wherein the petitioners would purchase 236 square meters unequivocal terms, or that the old and the new obligations be
of the subject property for P1,416,000 in twelve equal monthly on every point incompatible with each other." Novation is
installments. The contract further stated that upon failure to never presumed. Parties to a contract must expressly agree
pay any of said installments, petitioners would be liable for that they are abrogating their old contract in favor of a new
liquidated penalty at 3% a month compounded monthly until one. In the absence of an express agreement, novation takes
fully paid. Kalayaan would also execute the deed of absolute place only when the old and the new obligations are
sale ​only​ upon full payment. incompatible on every point. The test of incompatibility is
whether or not the two obligations can stand together, each
Petitioners were only able to pay monthly installments one having its independent existence. If they cannot, they are
amounting to a total of P208, 000.00. They then requested incompatible and the latter obligation novates the first.
Kalayaan to issue a deed of sale for 118 square meters of the
lot where their house stood, arguing that since they had paid In order that a novation can take place, the
half the purchase price, or a total of P708,000.00 representing concurrence of the following requisites are indispensable:
118 square meters of the property. Kalayaan, on the other 1) There must be a previous valid obligation;
hand, sent two demand letters asking petitioners to pay their 2) There must be an agreement of the parties
outstanding obligation including agreed penalties. concerned to a new contract;
3) There must be the extinguishment of the old
Gloria Valenzuela’s sister, Juliet Giron, assumed the contract; and
remaining balance for the 118 square meters of the subject 4) There must be the validity of the new contract.
property at P10,000.00 per month to Kalayaan, which the In the instant case, there is only one existing and
latter accepted for and in behalf of Gloria. Thereafter, binding contract between the parties, because Kalayaan never
Kalayaan demanded that petitioners pay their outstanding agreed to the creation of a new contract between them or
obligation, but were unheeded. Kalayaan then filed a Juliet. Kalayaan’s acceptance of several payments after it
Complaint for the Rescission of Contract and Damages against demanded that petitioners pay their outstanding obligation did
petitioners. The RTC of Caloocan rendered a Decision in favor not modify their original contract. Petitioners, admittedly, have
of Kalayaan, rescinding the contract between the parties and been in default; and Kalayaan’s acceptance of the late
ordering petitioners to vacate the premises. The CA affirmed payments is, at best, an act of tolerance on the part of
the RTC ruling. Kalayaan that could ​not have modified the contract.
Petitioners claim that there was a valid novation in FOUNDATION SPECIALISTS, INC., vs. BETONVAL
the present case. They aver that the CA failed to see that the READY CONCRETE INC. and STRONGHOLD INSURANCE
original contract between the petitioners and Kalayaan was CO., INC.,​ ​G.R. No. 170674 |​ A
​ ugust 24, 2009
altered, changed, modified and restructured, as a consequence
of the change in the person of the principal debtor ​(Sps. FACTS​: On separate dates, petitioner FSI and respondent
Valenzuela to Juliet) and the monthly amortization to be paid Betonval executed three contracts for the delivery of ready
for the subject property. When Kalayaan agreed to a monthly mixed concrete by Betonval to FSI. Betonval delivered the
amortization of P10,000.00 per month the original contract ready mixed concrete pursuant to the contracts but FSI failed
was changed, and that the same recognized Juliet’s capacity to to pay its outstanding balance. As an accommodation to FSI,
pay and her designation as the new debtor. Betonval extended the seven day credit period to 45 days.
Betonval demanded from FSI its balance. Betonval informed
FSI that further defaults would leave it no other choice but to
ISSUE:​ impose the stipulated interest for late payments and take
Whether or not the original contract was novated and appropriate legal action to protect its interest. While
the principal obligation to pay for the remaining half of the maintaining that it was still verifying the correctness of
subject property was transferred from petitioners to Juliet. Betonval’s claims, FSI sent Betonval a proposed schedule of
HELD:​ payments devised with a liability for late payments fixed at
No. The contract to sell was ​not novated when Juliet 24% p.a.
was allegedly designated as the new debtor and substituted
the petitioners in paying the balance of the purchase price. Thereafter, FSI paid Betonval according to the terms of its
proposed schedule of payments. It was able to reduce its debt,
Novation is the extinguishment of an obligation by the inclusive of the annual interest. Nevertheless, it failed to fully
substitution or change of the obligation by a subsequent one settle its obligation.
which extinguishes or modifies the first, either by changing the
object or principal conditions, or by substituting another in Betonval thereafter filed an action for sum of money and
place of the debtor​,​ or by subrogating a third person in the damages in the RTC. It also applied for the issuance of a writ
rights of the creditor. of preliminary attachment alleging that FSI employed fraud
when it contracted with Betonval and that it was disposing of
Article 1292 of the Civil Code provides that "In order its assets in fraud of its creditors.
that an obligation may be extinguished by another which

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oblirasi midterms  19 
FSI denied Betonval’s allegations and moved for the dismissal is well-settled that a party who does not appeal from the
of the complaint. FSI also filed a counterclaim and prayed for decision may not obtain any affirmative relief from the
AD, MD, ED and AF. appellate court other than what he has obtained from the
lower court whose decision is brought up on appeal.
The RTC issued a writ of preliminary attachment and approved
the P500,000 bond of Stronghold. MARIA SOLEDAD TOMIMBANG, Petitioner, vs. ATTY.
The RTC ruled for Betonval. However, it awarded JOSE TOMIMBANG, Respondent.
compensatory damages to FSI on the ground that the G.R. No. 165116 August 4, 2009 ​DEL CASTILLO, J
attachment of its properties was improper.
FSI and Stronghold separately filed MRs while Betonval filed a Facts:
motion for clarification and reconsideration. The RTC denied Soledad and Jose Tomimbang, petitioner and respondents in
both MRs.. All parties appealed to the CA. However, only the this case respectively, are siblings. Their parents donated to
respective appeals of Betonval and Stronghold were given due Soledad an eight-door apartment located at Santolan Road,
course because FSI’s appeal was dismissed for nonpayment of Murphy, QC with the condition that during their parents’
the appellate docket fees. The CA upheld the RTC order with lifetime, they shall retain control over the property and she
modification. FSI’s MR was denied, hence this petition for shall be the administrator thereof.
review on certiorari.
In 1995, Soledad applied for a loan from PAG-IBIG Fund to
finance the renovations on Unit H of the said apartment which
ISSUE​: she intended to use as her residence. She failed to obtain a
WON THERE WAS IMPROPER ATTACHMENT OF FSI’S loan, hence Jose offered to extend a credit line to her on the
PROPERTIES following conditions:
WON PETITIONER IS ENTITLED TO THE AMOUNT OF ACTUAL
DAMAGES PRAYED FOR (1) petitioner shall keep a record of all the advances;
(2) petitioner shall start paying the loan upon the completion
HELD​: WHEREFORE, the petition is hereby DENIED. of the renovation;
YES; Betonval’s application for the issuance of the writ of (3) upon completion of the renovation, a loan and mortgage
preliminary attachment was based on Section 1(d) and (e), agreement based on the amount of the advances made shall
Rule 57 of the ROC. However, the CA affirmed the RTC’s be executed by petitioner and respondent; and
factual findings that there was improper attachment of FSI’s (4) the loan agreement shall contain comfortable terms and
properties.. However, these are factual matters that have been conditions which petitioner could have obtained from
duly passed upon by the RTC and the CA and which are PAG-IBIG.
inappropriate in a petition for review.
Moreover, we agree with the RTC and the CA that FSI’s Soledad accepted Jose’s offer and the work began on the
properties were improperly attached. Betonval was not able to apartment units.
sufficiently show the factual circumstances of the alleged fraud
because fraudulent intent cannot be inferred from FSI’s mere Renovations on Units B to G were completed, and the work
nonpayment of the debt or failure to comply with its obligation. has just started on Unit
In Ng Wee v. Tankiansee, we held that the applicant must be when an altercation broke out between the parties.
able to demonstrate that the debtor intended to defraud the
creditor. Furthermore: Due to this conflict, the siblings entered into a new agreement
The fraud must relate to the execution of the agreement and whereby Soledad was to start making monthly payments on
must have been the reason which induced the other party into her loan. Upon Jose’s demand, Soledad turned over to him all
giving consent which he would not have otherwise given. To the records of the cash advances for the renovations.
constitute a ground for attachment in Section 1 (d), Rule 57 of Subsequently, or from June to October of 1997, Soledad made
the ROC, fraud should be committed upon contracting the monthly payments of P18,700 or P93,500.
obligation sued upon. A debt is fraudulently contracted if at the
time of contracting it the debtor has a preconceived plan or In October 1997, another quarrel arose between siblings, now
intention not to pay, as it is in this case. Fraud is a state of between Jose and another sister, Maricion who was defending
mind and need not be proved by direct evidence but may be the actions of Soledad. Because of said incident, they had a
inferred from the circumstances attendant in each case. hearing at the Barangay where Jose reminded Soledad of her
In other words, mere failure to pay its debt is, of and by itself, monthly dues. Soledad allegedly answered, “​ Kalimutan mo na
not enough to justify an attachment of the debtor’s ang pera, wala tayong pinirmahan. Hindi ako natatakot sa ‘yo.”
properties. A fraudulent intention not to pay (or not to comply Then she left Unit H and could no longer be found. The
with the obligation) must be present. renovations on Unit A were discontinued when her
NO; In its bid for a bigger award for actual damages it whereabouts could not be located. She also stopped making
allegedly suffered from the wrongful attachment of its monthly payments and even ignored the demand letter dated
properties, FSI enumerates the standby costs of December 2, 1997 sent by Jose’s counsel.
equipment and manpower standby costs it allegedly lost. We
cannot grant FSI’s prayer. FSI did not pursue its appeal to the
CA as shown by its failure to pay the appellate docket fees. It

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oblirasi midterms  20 
On February 2, 1998, Jose filed a complaint against Soledad This kind of novation presupposes a confluence of four
demanding that she pay the net amount of P3,989,802.25 plus essential requisites:
interest of 12% per annum from date of default. (1) a previous valid obligation;
(2) an agreement of all parties concerned to a new contract;
The RTC ruled in favor of Jose. Soledad filed an appeal but the (3) the extinguishment of the old obligation; and
Court of Appeals promulgated its decision affirming in toto said (4) the birth of a new valid obligation.
RTC judgment. A motion for reconsideration was denied.
Hence this petition for review on certiorari. Novation is merely modificatory where the change
brought about by any subsequent agreement is merely
ISSUES: incidental to the main obligation​ (e.g., a change in
(1) Whether or not Soledad’s obligation is due and interest rates or an extension of time to pay); in this instance,
demandable; the new agreement will not have the effect of extinguishing
(2) Whether or not interest should be imposed on the first but would merely supplement it or supplant some but
Soledad’s indebtedness, and if in the affirmative, not all of its provisions.
at what rate.
As can be gleaned from the foregoing, the aforementioned
RULING: four essential elements and the requirement that there be total
The Court ruled on the affirmative. incompatibility between the old and new obligation, apply only
to extinctive novation. In partial novation, only the terms and
The evidence on record clearly shows that after renovation of conditions of the obligation are altered, thus, the main
seven out of the eight apartment units had been completed, obligation is not changed and it remains in force.
petitioner and respondent agreed that the former shall already
start making monthly payments on the loan even if renovation As to computation of legal interest, the seminal ruling in
on the last unit (Unit A) was still pending. Eastern Shipping Lines, Inc. v. Court of Appeals controls.

Genaro Tomimbang, the younger brother of herein parties, The 12% per annum rate under CB Circular No. 416 shall apply
testified that a meeting was held among petitioner, only to loans or forbearance of money, goods, or credits, as
respondent, himself and their eldest sister Maricion, sometime well as to judgments involving such loan or forbearance of
during the first or second quarter of 1997, wherein respondent money, goods, or credit, while the 6% per annum under Art.
demanded payment of the loan, and petitioner agreed to pay. 2209 of the Civil Code applies "when the transaction involves
Indeed, petitioner began to make monthly payments from the payment of indemnities in the concept of damage arising
June to October of 1997 totalling ₱93,500.00.8 In fact, from the breach or a delay in the performance of obligations in
petitioner even admitted in her Answer with Counterclaim that general," with the application of both rates reckoned "from the
she had "started to make payments to plaintiff [herein time the complaint was filed until the [adjudged] amount is
respondent] as the same was in accord with her commitment fully paid." In either instance, the reckoning period for the
to pay whenever she was able; x x x ." commencement of the running of the legal interest shall be
subject to the condition "that the courts are vested with
Evidently, by virtue of the subsequent agreement, the parties discretion, depending on the equities of each case, on the
mutually dispensed with the condition that petitioner shall only award of interest.
begin paying after the completion of all renovations.
In accordance with the above ruling, since the obligation in
There was, in effect, a​ modificatory or partial novation​, of this case involves a loan and there is no stipulation in writing
petitioner's obligation. Article 1291 of the Civil Code provides, as to interest due, the rate of interest shall be 12% per annum
thus: computed from the date of extrajudicial demand.

Art. 1291. Obligations may be modified by: Petition in AFFIRMED with a modification that the award for
(1) Changing their object or principal conditions; attorney’s fees be deleted​.
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.

In ​Iloilo Traders Finance, Inc. v. Heirs of Sps. Soriano, Quinto v. People, 305 SCRA 709 (1999)
the Court expounded on the nature of novation, to wit: Facts:
On March 29, 1977, accused received jewelry worth 36k to
Novation may either be extinctive or modificatory, much being Aurelia (1 set of marques w/ briliantes worth 17,500, 1 solo
dependent on the nature of the change and the intention of ring 2 karats and 30 pts worth 16000, and 1 diamond ring
the parties. Extinctive novation is never presumed; there must rosetas worth 2,500).It was agreed that the same shall sell on
be an express intention to novate; x x x . commission basis and jewelries shall be returned 5 days after
An extinctive novation would thus have the twin effects of, receipt when not sold. Quinto asked Aurelia additional time but
first, extinguishing an existing obligation and, second, creating after 6 months and the latter failed to commission sale,
a new one in its stead. demanded from Quinto to return them yet she refused. Hence,
Aurelia filed estafa against Quinto.

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oblirasi midterms  21 
basic transaction, whether or not it was such that its
For Quinto, In 1975, both transacted business with Mrs. breach would not give rise to penal responsibility. The
Camacho which involved a ring valued at 40k, 20k was paid on criminal liability for estafa already committed is then not
cheque and 20k by instalment, Marques worth 16k and 1 ring affected by the subsequent novation of contract, for it is a
valued at 4k. Ms. Camacho failed to pay the balance of 13k public offense which must be prosecuted and punished by
(remaining). Leonida brought her to Aurelia and Aurelia agreed the State in its own conation.
for Camacho to pay in instalments. Another 2 karat diamond
ring worth 17k who the latter did not pay. Leonida brought ABELARDO B. LICAROS​ vs. A ​ NTONIO P. GATMAITAN,
Mrs. Ramos who gave a ring valued at 3k, next Mrs. Ramos G.R. No. 142838. August 9, 2001, GONZAGA-REYES, ​J​.
gave 5k and Leonida paid 2k. FACTS:
Abelardo Licaros decided to make a fund placement with
Ruling in RTC: Quinto is guilty of estafa. CA affirmed. Anglo-Asean bank sometime in the 1980s. Licaros, after having
Quinto contended that the parties effectively novated when the invested in Anglo-Asean, encountered tremendous and
latter consented to receive payment on instalments directly unexplained difficulties in retrieving, not only the interest or
from Mrs. Camacho to Mrs. Ramos. profits, but even the very investments he had put in
Anglo-Asean. Licaros then decided to seek the counsel of
Issue: Is the contention of Quinto correct? Antonio P. Gatmaitan, a reputable banker and investment
Held: No. manager who had been extending managerial, financial and
Ratio: investment consultancy services to various firms and
Novation may be: corporations both here and abroad. To Licaros relief,
1. Extinctive: change object/real obligation; substituting Gatmaitan was only too willing enough to help. Gatmaitan
person of the debtor; subrogating a 3​rd person to voluntarily offered to assume the payment of Anglo-Aseans
rights of creditor subjective or personal. indebtedness to Licaros subject to certain terms and
2. Modificatory: old obligation subsists to the extent that conditions. In order to effectuate and formalize the parties’
it remains compatible with amendatory agreement. respective commitments, the two executed a notarized
MEMORANDUM OF AGREEMENT on July 29, 1988.
Novation is never presumed. Animus novandi must appear by
express agreement of the parties or by their acts that are too Thereafter, Gatmaitan presented to Anglo-Asean the
clear and unequivocal to be mistaken. Memorandum of Agreement earlier executed by him and
Licaros for the purpose of collecting the latter’s placement
Ways to indicate presence of novation: thereat of U.S.$150,000.00. However, no formal response was
1. Novation is explicitly stated and declared in ever made by said bank to either Licaros or Gatmaitan and
unequivocal terms Anglo-Asean has not acted on Gatmaitans monetary claims.
2. Old and new obligations are incompatible with each
other. ISSUE: Is the Memorandum of Agreement between Licaros
and Gatmaitan one of conventional subrogation.
Requisites of Novation:
RULING:
1. Previous obligation
2. Agreement of all parties to new contract Yes, the Supreme Court ruled that the Memorandum of
3. Extinguishment of old obligation Agreement between Licaros and Gatmaitan is one of
4. Birth of valid new obligation. conventional subrogation. An assignment of credit has been
defined as the process of transferring the right of the assignor
There was no substitution of debtors because complainant to the assignee who would then have the right to proceed
merely acquiesced to the payment but did not give against the debtor. The assignment may be done gratuitously
consent to enter new contract. or onerously, in which case, the assignment has an effect
similar to that of a sale.
There are 2 forms of novation by substituting the debtor:
On the other hand, subrogation has been defined as the
1. Expromision: initiative of change by substituting the transfer of all the rights of the creditor to a third person, who
person of debtor substitutes him in all his rights. It may either be legal or
2. Delegacion: debtor offers, creditor accepts, 3​rd conventional. Legal subrogation is that which takes place
persons consents to the substitution and assumes the without agreement but by operation of law because of certain
obligation. acts. Conventional subrogation is that which takes place by
agreement of parties.
People vs. Nery​ provided that:
"It may be observed in this regard that novation is not one The general tenor of the foregoing definitions of the terms
of the means recognized by the Penal Code whereby subrogation and assignment of credit may make it seem that
criminal liability can be extinguished; hence, the role of they are one and the same which they are not. A noted expert
novation may only be either to prevent the rise of criminal in civil law notes their distinctions thus:
liability or to cast doubt on the true nature of the original

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oblirasi midterms  22 
Under our Code, however, conventional subrogation is not twice, as President of Astro and in his personal capacity. Roxas
identical to assignment of credit. In the former, the debtors also signed a Continuing Surety ship Agreement in favor of
consent is necessary; in the latter it is not Philtrust Bank, as President of Astro and as surety.
required. Subrogation extinguishes the obligation and gives
rise to a new one; assignment refers to the same right which Thereafter, Philguarantee, with the consent of Astro,
passes from one person to another. The nullity of an old guaranteed in favor of Philtrust the payment of 70% of Astro’s
obligation may be cured by subrogation, such that a new loan, subject to the condition that upon payment by
obligation will be perfectly valid; but the nullity of an obligation
is not remedied by the assignment of the creditor’s right to Philguanrantee of said amount, it shall be proportionally
another. subrogated to the rights of Philtrust against Astro. As a result
of Astro’s failure to pay its loan obligations, despite demands,
For our purposes, the crucial distinction deals with the Philguarantee paid 70% of the guaranteed loan to Philtrust.
necessity of the consent of the debtor in the original Subsequently, Philguarantee filed against Astro and Roxas a
transaction. In an assignment of credit, the consent of the complaint for sum of money with the RTC of Makati.
debtor is not necessary in order that the assignment may fully
produce legal effects. What the law requires in an assignment Roxas disclaims any liability on the instruments, alleging, inter
of credit is not the consent of the debtor but merely notice to alia, that he merely signed the same in blank and the phrases
him as the assignment takes effect only from the time he has “in his personal capacity” and “in his official capacity” were
knowledge thereof. A creditor may, therefore, validly assign his
credit and its accessories without the debtors consent. On the fraudulently inserted without his knowledge.
other hand, conventional subrogation requires an agreement The trial court ruled in favor of Philguarantee, stating that if
among the three parties concerned the original creditor, the
debtor, and the new creditor. It is a new contractual relation Roxas really intended to sign the instruments merely in his
based on the mutual agreement among all the necessary capacity as President of Astro, then he should have signed only
parties. Thus, Article 1301 of the Civil Code explicitly states once in the promissory note. On appeal, the Court of Appeals
that conventional subrogation of a third person requires the affirmed the RTC decision.
consent of the original parties and of the third person.
Issue: Whether or not PHILGUARANTEE can legally subrogate
The Supreme Court agree with the finding of the Court of the rights of PHILTRUST against Astro.
Appeals that the Memorandum of Agreement dated July 29,
1988 was in the nature of a conventional subrogation which Held: YES. Philguarantee has all the right to proceed against
requires the consent of the debtor, Anglo-Asean Bank, for its petitioner, it is subrogated to the rights of Philtrust to demand
validity. We note with approval the following pronouncement for and collect payment from both Roxas and Astro since it
of the Court of Appeals: already paid the value of 70% of Roxas and Astro Electronics
Corp’s loan obligation. In compliance with its contract of
Immediately discernible from above is the common feature of
contracts involving conventional subrogation, namely, the Guarantee in favor of Philtrust.
approval of the debtor to the subrogation of a third person in Subrogation is the transfer of all the rights of the creditor to a
place of the creditor. That Gatmaitan and Licaros had intended
to treat their agreement as one of conventional subrogation is third person, who substitutes him in all his rights. It may either
plainly borne by a stipulation in their Memorandum of be legal or conventional. Legal subrogation is that which takes
Agreement, to wit: place without agreement but by operation of law because of
certain acts. Instances of legal subrogation are those provided
WHEREAS, the parties herein have come to an agreement on in Article 1302 of the Civil Code. Conventional subrogation, on
the nature, form and extent of their mutual prestations which the other hand, is that which takes place by agreement of the
they now record herein w ​ ith the express conformity of the parties.
third parties ​concerned (emphasis supplied), which third party
is admittedly Anglo-Asean Bank. Roxas acquiescence is not necessary for subrogation to take
place because the instant case is one of the legal subrogation
ASTRO ELECTRONICS CORP. and PETER ROXAS vs. that occurs by operation of law, and without need of the
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE debtor’s knowledge. Further, Philguarantee, as guarantor,
CORPORATION became the transferee of all the rights of Philtrust as against
G.R. No. 136729. September 23, 2003 Roxas and Astro because the guarantor who pays is
AUSTRIA-MARTINEZ, J.: subrogated by virtue thereof to all the rights which the creditor
Facts: Astro was granted several loans by the Philippine Trust had against the debtor.
Company (Philtrust) amounting to P3, 000,000.00 with interest
and secured by three promissory notes. In each of these
promissory notes, it appears that petitioner Roxas signed

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