demanded from the appellants the payment of P655.
89 corresponding to the alleged
[G.R. No. L-18411. December 17, 1966.]
MAGDALENA ESTATES, INC., Plaintiff-Appellee, v. ANTONIO A. RODRIGUEZ and
HERMINIA C. RODRIGUEZ, Defendants-Appellants.
DECISION
REGALA, J.:
Appeal from the decision of the Court of First Instance of Manila ordering the defendants-
appellants to pay jointly and severally to the plaintiff-appellee the sum of P655.89, plus legal
interest thereon from the date of the judicial demand, the sum of P100.00 as attorneys fees, and
to pay the costs.
The appellants bought from the appellee a parcel of land in Quezon City known as Lot 7-K-2-G,
Psd-26193. In view of an unpaid balance of P5,000.00 on account of the purchase price of the
lot, the appellants executed on January 4, 1957, the following promissory note representing the
said account:jgc:chanrobles.com.ph
"PROMISSORY NOTE
P5,000.00
Manila, January 4, 1957
We, the spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, jointly and
severally promise to pay the Magdalena Estate, Inc., or order, at its offices in the City of Manila,
without any demand the sum of FIVE THOUSAND PESOS (P5,000.00), Philippine currency,
with interest at the rate of Nine Per Cent (9%) per annum, within sixty (60) days from January 7,
1957. The sum of P5,000.00 represents the balance of the purchase price of the parcel of land
known as Lot 7-K- 2-G, Psd-26193, containing an area of 2,191 square meters, Quezon City.
(Sgd.) Antonio A. Rodriguez
(T.) ANTONIO A. RODRIGUEZ
(Sgd.) Herminia C. Rodriguez
(T.) HERMINIA C. RODRIGUEZ
Signed in the Presence of:chanrob1es virtual 1aw library
(Sgd.) ILLEGIBLE
(Sgd.) ILLEGIBLE"
On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in favor of the
appellee, the undertaking thereof being embodied therein as follows:jgc:chanrobles.com.ph
". . . comply with the obligation to pay the amount of P5,000.00 representing balance of the
purchase price of a parcel of land known as Lot 7-K-2-C, Psd-26193, with an area of 2,191
square meters, Quezon City, covered by Transfer Certificate of Title No. 13 (6947), Quezon City,
within a period of sixty (60) days from January 7, 1957; That the Surety shall be notified in
writing within Ten (10) days from moment of default otherwise, this undertaking is automatically
null and void."cralaw virtua1aw library
On June 20, 1958, when the obligation of the appellants became due and demandable, the
Luzon Surety Co., Inc. paid to the appellee the sum of P5,000.00. Subsequently, the appellee
accumulated interests on the principal of P5,000.00. Due to the refusal of the appellants to pay
the said interest, the appellee started this suit in the Municipal Court of Manila to enforce the
collection thereof. The said court, on February 5, 1959, rendered judgment in favor of the
appellee and against the appellants, ordering the latter to pay jointly and severally the appellee
the sum of P655.89 with interest thereon at the legal rate from November 10, 1958, the date of
the filing of the complaint, until the whole amount is fully paid. Not satisfied with that judgment,
appellants appealed to the Court of First Instance of Manila, where the case was submitted for
decision on the pleadings. The Court of First Instance of Manila rendered the judgment stated at
the outset of this decision.
On appeal directly to this Court, the following errors are assigned:chanrob1es virtual 1aw library
I. The lower court erred in concluding as a fact from the pleadings that the plaintiff-appellee
demanded, and the Luzon Surety Co., Inc. refused, the payment of interest in the amount of
P655.89, and in not finding and declaring that said plaintiff-appellee waived or condoned the
said interests.
II. The lower court erred in not finding and declaring that the obligation of the defendants-
appellants in favor of the plaintiff- appellee was totally extinguished by payment and/or
condonation.
III. The lower court erred in not finding and declaring that the promissory note executed by the
defendants-appellants in favor of the plaintiff-appellee was, insofar as the said document
provided for the payment of interests, novated when the plaintiff-appellee unqualifiedly accepted
the surety bond which merely guaranteed payment of the principal in the sum of P5,000.00.
Appellants claim that the pleadings do not show that there was demand made by the appellee
for the payment of accrued interest and what could be deduced therefrom was merely that the
appellee demanded from the Luzon Surety Co., Inc., in the capacity of the latter as surety, the
payment of the obligation of the appellants, and said appellee accepted unqualifiedly the amount
of P5,000.00 as performance by the obligor and/or obligors of the obligation in its favor. It is
further claimed that the unqualified acceptance of payment made by the Luzon Surety Co., Inc.
of P5,000.00 or only the amount of the principal obligation and without exercising its (appellees)
rights to apply a portion of P655.89 thereof to the payment of the alleged interest due despite its
presumed knowledge of its right to do so, the appellee showed that it waived or condoned the
interests due, because Articles 1235 and 1253 of the Civil Code provide:jgc:chanrobles.com.ph
"Art. 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with."cralaw virtua1aw library
"Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have
been made until interests have been recovered."cralaw virtua1aw library
We do not agree with the contention of the appellants. It is very clear in the promissory note that
the principal obligation is the balance of the purchase price of the parcel of land known as Lot 7-
K-2-C, Psd-26193, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co.,
Inc. undertook "to pay the amount of P5,000.00 representing balance of the purchase price of a
parcel of land known as Lot 7-K-2-C, Psd-26193, . . ." The appellee did not protest nor object
when it accepted the payment of P5,000.00 because it knew that was the complete amount
undertaken by the surety as appearing in the contract. The liability of a surety is not extended,
by implication, beyond the terms of his contract. 1 It is for the same reason that the appellee
cannot apply a part of the P5,000.00 as payment for the accrued interest. Appellants are relying
on Article 1253 of the Civil Code, but the rules contained in Articles 1252 to 1254 of the Civil
Code apply to a person owing several debts of the same kind of* a single creditor. They cannot
be made applicable to a person whose obligation as a mere surety is both contingent and
singular; his liability is confined to such obligation, and he is entitled to have all payments made
applied exclusively to said application and to no other. 2 Besides, Article 1253 of the Civil Code
is merely directory, and not mandatory. 3 Inasmuch as the appellee cannot protest for non-
payment of the interest when it accepted the amount of P5,000.00 from the Luzon Surety Co.,
Inc., nor apply a part of that amount as payment for the interest, we cannot now say that there
was a waiver or condonation on the interest due.

It is claimed that there was a novation and/or modification of the obligation of the appellants in
favor of the appellee because the appellee accepted without reservation the subsequent
agreement set forth in the surety bond despite its failure to provide that it also guaranteed
payment of accruing interest.

The rule is settled that novation by presumption has never been favored. To be sustained, it
needs to be established that the old and new contracts are incompatible in all points, or that the
will to novate appears by express agreement of the parties or in acts of similar import. 4

An obligation to pay a sum of money is not novated, in a new instrument wherein the old is
ratified, by changing only the terms of payment and adding other obligations not incompatible
with the old one, 5 or wherein the old contract is merely supplemented by the new one. 6 The
mere fact that the creditor receives a guaranty or accepts payments from a third person who has
agreed to assume the obligation, when there is no agreement that the first debtor shall be
released from responsibility, does not constitute a novation, and the creditor can still enforce the
obligation against the original debtor. (Straight v. Haskell, 49 Phil. 614; Pacific Commercial Co. v.
Sotto, 34 Phil. 237; Estate of Mota v. Serra, 47 Phil. 464; Dugo v. Lopena, supra). In the instant
case, the surety bond is not a new and separate contract but an accessory of the promissory
note.

WHEREFORE, the judgment appealed from should be, as it is hereby, affirmed, with costs
against theAppellant.

Concepcion, C.J., Reyes, J. B. L., Barrera, Dizon, Makalintal, Bengzon, J. P., Zaldivar, Sanchez
and Castro, JJ., concur.

[G.R. No. L-47369. June 30, 1987.] This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977
JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, Petitioners, v. R & B SURETY as one involving only questions of law and, therefore, falling within the exclusive appellate
AND INSURANCE COMPANY, INC., Respondent. jurisdiction of this Court under Section 17, Republic Act 296, as amended.

DECISION In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted
an increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with
FELICIANO, J.: the Philippine National Bank (PNB). To secure PNBs approval, PAGRICO had to give a good
and sufficient bond in the amount of P400,000.00, representing the increment in its line of credit,
to secure its faithful compliance with the terms and conditions under which its line of credit was
increased. In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765,
issued by the respondent R & B Surety and Insurance Co., Inc. ("R & B Surety") in the specified
amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety
bound themselves jointly and severally to comply with the "terms and conditions of the advance
line [of credit] established by the [PNB]." PNB had the right under the Surety Bond to proceed
directly against R & B Surety "without the necessity of first exhausting the assets" of the principal
obligor, PAGRICO. The Surety Bond also provided that R & B Suretys liability was not to be
limited to the principal sum of P400,000.00, but would also include "accrued interest" on the said
amount "plus all expenses, charges or other legal costs incident to collection of the obligation [of
R & B Surety]" under the Surety Bond.
In consideration of R & B Suretys issuance of the Surety Bond, two identical indemnity
agreements were entered into with R & B Surety: (a) one agreement dated 23 December 1963
was executed by the Catholic Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr.; the
latter signed not only as President of CCM but also in his personal and individual capacity; and
(b) another agreement dated 24 December 1963 was executed by PAGRICO, Pacific Copra
Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Beh; Mr. Villanueva signed both as
Manager of PAGRICO and in his personal and individual capacity; Mr. Liu signed both as
President of PACOCO and in his individual and personal capacity.
Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R
& B Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms
and conditions set forth in said SURETY BOND for a period beginning . . . until the same is
CANCELLED and/or DISCHARGED." The Indemnity Agreements further
provided:jgc:chanrobles.com.ph
"(b) INDEMNITY: To indemnify the SURETY COMPANY for any damage, prejudice, loss,
costs, payments, advances and expenses of whatever kind and nature, including [of] attorneys
fees, which the CORPORATION may, at any time, become liable for, sustain or incur, as
consequence of having executed the above mentioned Bond, its renewals, extensions or
substitutions and said attorneys fees [shall] not be less than twenty [20%] per cent of the total
amount claimed by the CORPORATION in each action, the same to be due, demandable and
payable, irrespective of whether the case is settled judicially or extrajudicially and whether the
amount has been actually paid or not;
(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: The said
indemnities will be paid to the CORPORATION as soon as demand is received from the Creditor
or upon receipt of Court order or as soon as it becomes liable to make payment of any sum
under the terms of the above-mentioned Bond, its renewals, extensions, modifications or
substitutions, whether the said sum or sums or part thereof, have been actually paid or not.
We authorize the SURETY COMPANY, to accept in any case and at its entire discretion, from
any of us, payments on account of the pending obligations, and to grant extension to any of us,
to liquidate said obligations, without necessity of previous knowledge of [or] consent from the
other obligors.
x x x Agreement in favor of R & B Surety only "for accomodation purposes" and that it did not express
(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. Any payment or
disbursement made by the SURETY COMPANY on account of the above-mentioned Bonds, its
renewals, extensions or substitutions, either in the belief that the SURETY COMPANY was
obligate[dl to make such payment or in the belief that said payment was necessary in order to
avoid greater losses or obligations for which the SURETY COMPANY might be liable by virtue of
the terms of the above-mentioned Bond, its renewals, extensions or substitutions, shall be final
and will not be disputed by the undersigned, who jointly and severally bind themselves to
indemnify the SURETY COMPANY of any and all such payments as stated in the preceeding
clauses.
x x x
When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded
payment from R & B Surety of the sum of P400,000.00, the full amount of the Principal
Obligation. R & B Surety made a series of payments to PNB by virtue of that demand totalling
P70,000.00 evidenced by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph Cohingyan, Jr. and Jose K.
Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its
liability to the PNB under the Surety Bond. When petitioners failed to heed its demand, R & B
Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Beh in the
Court of First Instance of Manila, praying principally that judgment be
rendered:jgc:chanrobles.com.ph
"b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of P20,412.20
representing the unpaid premiums for Surety Bond No. 4765 from 1965 up to 1968, and the
additional amount of P5,103.05 yearly until the Surety Bond No. 4765 is discharged, with
interest thereon at the rate of 12% per annum; [and]
c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of P400,000.00
representing the total amount of the Surety Bond No. 4765 with interest thereon at the rate of
12% per annum on the amount of P70,000.00 which had been paid to the Phil. National Bank
already, the interest to begin from the month of September, 1966;
x x x
Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he
executed in favor of R & B Surety: (i) did not express the true intent of the parties thereto in that
he had been asked by R & B Surety to execute the Indemnity Agreement merely in order to
make it appear that R & B Surety had complied with the requirements of the PNB that credit
lines be secured; (ii) was executed so that R & B Surety could show that it was complying with
the regulations of the Insurance Commission concerning bonding companies; (iii) that R & B
Surety had assured him that the execution of the agreement was a mere formality and that he
was to be considered a stranger to the transaction between the PNB and R & B Surety; and (iv)
that R & B Surety was estopped from enforcing the Indemnity Agreement as against him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity
their true intention; (ii) that the Principal Obligation of PAGRICO to the PNB secured by the
Surety Bond had already been assumed by CCM by virtue of a Trust Agreement entered into
with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay the
Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity
Agreement was thereby extinguished by novation arising from the change of debtor under the
Principal Obligation; and (iv) that the filing of the complaint was premature, considering that R &
B Surety filed the case against him as indemnitor although the PNB had not yet proceeded
against R & B Surety to enforce the latters liability under the Surety Bond.
Petitioner Cochingyan, however, did not present any evidence at all to support his asserted
defenses. Petitioner Villanueva did not submit any evidence either on his "accomodation"
defense. The trial court was therefore constrained to decide the case on the basis alone of the
terms of the Trust Agreement and other documents submitted in evidence.
In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in favor of R
& B Surety, the dispositive portion of which reads as follows:jgc:chanrobles.com.ph
"Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph
Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and severally, unto the plaintiff the sum of
400,000,00, representing the total amount of their liability on Surety Bond No. 4765, and interest
at the rate of 6% per annum on the following amounts:chanrob1es virtual 1aw library
On P14,000.00 from September 27, 1966;
On P4,000.00 from November 28, 1966;
On P4,000.00 from December 14, 1966;
On P4,000.00 from January 19, 1967;
On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 22, 1967;
On P8,000.00 from September 14, 1967;
On P8,000.00 from November 28, 1967; and
On P8,000.00 from February 26, 1968.
until full payment; (b) ordering said defendants to pay, jointly and severally, unto the plaintiff the
sum of P20,412.00 as the unpaid premiums for Surety Bond No. 4765, with legal interest
thereon from the filing of plaintiffs complaint on August 1, 1968 until fully paid, and the further
sum of P4,000.00 as and for attorneys fees and expenses of litigation which this Court deems
just and equitable.
There being no showing the summons was duly served upon the defendant Liu Tua Beh who
has filed no answer in this case, plaintiffs complaint is hereby dismissed as against defendant
Liu Tua Beh without prejudice.
Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of
Appeals which, as already noted, certified the case to us as one raising only questions of law.
The issues we must confront in this appeal are:chanrob1es virtual 1aw library
1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B
Surety to the PNB under the Surety Bond which, in turn, extinguished the obligations of the
petitioners under the Indemnity Agreements;
2. whether the Trust Agreement extended the term of the Surety Bond so as to release
petitioners from their obligation as indemnitors thereof as they did not give their consent to the
execution of the Trust Agreement; and
3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit
against R & B Surety for the forfeiture of its Surety Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on
28 December 1965 (two years after the Surety Bond and the Indemnity Agreements were
executed) between: (1) Jose and Susana Cochingyan, Sr., doing business under the name and
style of the Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s]; (2)
Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary.
The Trust Agreement provided, in pertinent part, as follows:chanrob1es virtual 1aw library
WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by the
R & B Surety and Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers, Inc.
(PAGRICO) on December 21, 1963, in favor of the BENEFICIARY in connection with the
application of PAGRICO for an advance line of P400,000.00 to P800,000.00;
WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance &
Surety Co., Inc. (CONSOLACION) in the amount of P900,000.00 in favor of the BENEFICIARY
to secure certain credit facilities extended by the BENEFICIARY to the Pacific Copra Export Co.,
Inc. (PACOCO);
WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective
obligations in favor of the BENEFICIARY guaranteed by the bonds issued by the R & B and the
CONSOLACION, respectively, and by reason of said default, the BENEFICIARY has demanded
compliance by the R & B and the CONSOLACION of their respective obligations under the
aforesaid bonds;
WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the
indemnity agreements aforementioned executed by him in favor of R & B and the
CONSOLACION, respectively and in order to forestall impending suits by the BENEFICIARY
against said companies, he is willing as he hereby agrees to pay the obligations of said
companies in favor of the BENEFICIARY in the total amount of P1,300,000 without interest from
the net profits arising from the procurement of reparations consumer goods made thru the
allocation of WARVETS;
x x x
1. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the purpose
of paying to the BENEFICIARY Philippine National Bank in the manner stated hereunder, the
obligations of the R & B under the R & B Bond No. G-4765 for P400,000.00 dated December 23,
1963, and of the CONSOLACION under The Consolacion Bond No. G-5938 of June 3, 1964 for
P900,000.00 or the total amount of P1,300,000.00 without interest from the net profits arising
from the procurement of reparations consumer goods under the Memorandum of Settlement and
Deeds of Assignment of February 2, 1959 through the allocation of WARVETS;
x x x
6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims against R &
B and CONSOLACION, subject of the bond mentioned above. In the meantime that this TRUST
AGREEMENT is being implemented, the BENEFICIARY hereby agrees to forthwith reinstate the
R & B and the CONSOLACION as among the companies duly accredited to do business with
the BENEFICIARY and its branches, unless said companies have been blacklisted for reasons
other than those relating to the obligations subject of the herein TRUST AGREEMENT;
x x x
9. This agreement shall not in any manner release the R & B and CONSOLACION from their
respective liabilities under the bonds mentioned above." (Emphasis supplied)
There is no question that the Surety Bond has not been cancelled or fully discharged 2 by
payment of the Principal Obligation. Unless, therefore, the Surety Bond has been extinguished
by another means, it must still subsist. And so must the supporting Indemnity Agreements. 3
We are unable to sustain petitioners claim that the Surety Bond and their respective obligations
under the Indemnity Agreements were extinguished by novation brought about by the
subsequent execution of the Trust Agreement.
Novation is the extinguishment of an obligation by the substitution or change of the obligation by
a subsequent one which terminates it, either by changing its object or principal conditions, or by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of
the creditor. 4 Novation through a change of the object or principal conditions of an existing
obligation is referred to as objective (or real) novation. Novation by the change of either the
person of the debtor or of the creditor is described as subjective (or personal) novation. Novation
may also be both objective and subjective (mixed) at the same time. In both objective and
subjective novation, a dual purpose is achieved an obligation is extinguished and a new one
is created in lieu thereof. 5
If objective novation is to take place, it is imperative that the new obligation expressly declare
that the old obligation is thereby extinguished, or that the new obligation be on every point
incompatible with the old one. 6 Novation is never presumed: it must be established either by
the discharge of the old debt by the express terms of the new agreement, or by the acts of the
parties whose intention to dissolve the old obligation as a consideration of the emergence of the
new one must be clearly discernible. 7
Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough
that the juridical relation between the parties to the original contract is extended to a third
person. It is essential that the old debtor be released from the obligation, and the third person or
new debtor take his place in the new relation. If the old debtor is not released. no novation
occurs and the third person who has assumed the obligation of the debtor becomes merely a co-
debtor or surety or a co-surety. 8
Applying the above principles to the instant case, it is at once evident that the Trust Agreement
does not expressly terminate the obligation of R & B Surety under the Surety Bond. On the
contrary, the Trust Agreement expressly provides for the continuing subsistence of that
obligation by stipulating that" [the Trust Agreement] shall not in any manner release" R & B
Surety from its obligation under the Surety Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal
declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility
between the old and the new obligation (and nothing else) would sustain a finding of novation by
implication. 9 But where, as in this case, the parties to the new obligation expressly recognize
the continuing existence and validity of the old one, where, in other words, the parties expressly
negated the lapsing of the old obligation, there can be no novation. The issue of implied novation
is not reached at all.
What the trust agreement did was, at most, merely to bring in another person or persons the
Trustor[s] to assume the same obligation that R & B Surety was bound to perform under the
Surety Bond. It is not unusual in business for a stranger to a contract to assume obligations
thereunder; a contract of surety ship or guarantee is the classical example. The precise legal
effect is the increase of the number of persons liable to the obligee, and not the extinguishment
of the liability of the first debtor. 10 Thus, in Magdalena Estates v. Rodriguez, 11 we held
that:jgc:chanrobles.com.ph
" [t]he mere fact that the creditor receives a guaranty or accepts payments from a third person
who has agreed to assume the obligation, when there is no agreement that the first debtor shall
be released from responsibility, does not constitute a novation, and the creditor can still enforce
the obligation against the original debtor."cralaw virtua1aw library
In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already
previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement,
the Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect
of the Trust Agreement was that where there had been only two, there would now be three
obligors directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the
Trustor. And the PNB could proceed against any of the three, in any order or sequence. Clearly,
PNB never intended to release, and never did release, R & B Surety. Thus, R & B Surety, which
was not a party to the Trust Agreement, could not have intended to release any of its own
indemnitors simply because one of those indemnitors, the Trustor under the Trust Agreement,
became also directly liable to the PNB.
2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor
under the 24 December 1963 Indemnity Agreement with R & B Surety was extinguished when
the PNB agreed in the Trust Agreement "to hold in abeyance any action to enforce its claims
against [R & B Surety]."
The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in
solidum) to the [R & B Surety] to become SURETY upon a SURETY BOND demanded by
and in favor of [PNB] in the sum of [P400.000.00] for the faithful compliance of the terms and
conditions set forth in said SURETY BOND ." This part of the Agreement suggests that the
indemnitors (including the petitioners) would become co-sureties on the Security Bond in favor
of PNB. The record, however, is bereft of any indication that the petitioners-indemnitors ever in
fact became co-sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record
goes, remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could
not have directly demanded payment of the Principal Obligation from the petitioners. Thus, we
do not see how Article 2079 of the Civil Code which provides in part that" [a]n extension
granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty" could apply in the instant case. The petitioner-indemnitors are, as it were, second-
tier parties so far as the PNB was concerned and any extension of time granted by PNB to any
of the first-tier obligors (PAGRICO, R & B Surety and the trustor[s]) could not prejudice the
second-tier parties.
There is another reason why petitioner Villanuevas contention must fail. PNBs undertaking
under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B
Surety did not extend the maturity of R & B Suretys obligation under the Surety Bond. The
Principal Obligation had in fact already matured, along with that of R & B Surety, by the time the
Trust Agreement was entered into. Petitioners obligations under the Indemnity Agreements had,
in turn, already similarly matured, for those obligations were to mature "as soon as [R & B
Surety] became liable to make payment of any sum under the terms of the [Surety Bond]
whether the said sum or sums or part thereof have been actually paid or not." Thus, the situation
was that precisely envisaged in Article 2079:jgc:chanrobles.com.ph
" [t]he mere failure on the part of the creditor to demand payment after the debt has become due
does not of itself constitute any extension of time referred to herein." (Emphasis supplied).
The theory behind Article 2079 is that an extension of time given to the principal debtor by the
creditor without the suretys consent would deprive the surety of his right to pay the creditor and
to be immediately subrogated to the creditors remedies against the principal debtor upon the
original maturity date. The surety is said to be entitled to protect himself against the contingency
of the principal debtor or the indemnitors becoming insolvent during the extended period. The
underlying rationale is not present in the instant case. As this Court has held,
"mere delay or negligence in proceeding against the principal will not discharge a surety unless
there is between the creditor and the principal debtor a valid and binding agreement therefor,
one which tends to prejudice [the surety] or to deprive it of the power of obtaining indemnity by
presenting a legal objection for the time, to the prosecution of an action on the original security."
12

In the instant case, there was nothing to prevent the petitioners from tendering payment, if they
were so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon
becoming subrogated to such remedies as R & B Surety may have against PAGRICO.

3. The last issue can be disposed of quickly, Clauses (b) and (c) of the Indemnity Agreements
(quoted above) allow R & B Surety to recover from petitioners even before R & B Surety shall
have paid the PNB. We have previously held similar indemnity clauses to be enforceable and
not violative of any public policy. 13

The petitioners lose sight of the fact that the Indemnity Agreements are contracts of
indemnification not only against actual loss but against liability as well. 14 While in a contract of
indemnity against loss an indemnitor will not be liable until the person to be indemnified makes
payment or sustains loss, in a contract of indemnity against liability, as in this case, the
indemnitors liability arises as soon as the liability of the person to be indemnified has arisen
without regard to whether or not he has suffered actual loss. 15 Accordingly, R & B Surety was
entitled to proceed against petitioners not only for the partial payments already made but for the
full amount owed by PAGRICO to the PNB.

Summarizing, we hold that:chanrob1es virtual 1aw library

(1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist.
The Trust Agreement merely furnished to PNB another party obligor to the Principal Obligation in
addition to PAGRICO and R & B Surety.

(2) The undertaking of the PNB to "hold in abeyance any action to enforce its claim" against R &
B Surety did not amount to an "extension granted to the debtor" without petitioners consent so
as to release petitioners from their undertaking as indemnitors of R & B Surety under the
Indemnity Agreements; and

(3) Petitioners are indemnitors of R & B Surety against both payments to and liability for
payments to the PNB. The present suit is therefore not premature despite the fact that the PNB
has not instituted any action against R & B Surety for the collection of its matured obligation
under the Surety Bond.

WHEREFORE, the petitioners appeal is DENIED for lack of merit and the decision of the trial
court is AFFIRMED in toto. Costs against the petitioners.

SO ORDERED.

[G.R. No. 79642. July 5, 1993.]

BROADWAY CENTRUM CONDOMINIUM CORPORATION, Petitioner, v. TROPICAL HUT
FOOD MARKET, INC. and THE HONORABLE COURT OF APPEALS, Respondents.

FELICIANO, J.:

Petitioner Broadway Centrum Condominium Corporation ("Broadway") and private respondent

Tropical Hut Food Market, Inc. ("Tropical") executed on 28 November 1980 a contract of lease.
Broadway, as lessor, agreed to lease a 3,042.19 square meter portion of the Broadway Centrum
Commercial Complex for a period of ten (10) years, commencing from 1 February 1981 and
expiring on 1 February 1991, "renewable for a like period upon the mutual agreement of both
parties." The rental provision of this contract read as follows:jgc:chanrobles.com.ph
"3. BASIC RENTAL ON LEASED PREMISES LESSEE agrees to pay LESSOR a basic
monthly rental on the leased premises in the amount of ONE HUNDRED TWENTY THOUSAND
PESOS (P120,000.00) Philippine Currency, during the first three (3) years of this lease contract
from February 1, 1981 to February 1, 1984, allowing two (2) months grace period on rental for
renovation/improvements on the leased premises from December 1, 1980 to January 31, 1981.
The basic rental shall be increased to ONE HUNDRED FORTY THOUSAND PESOS
(P140,000.00) per month during the next three (3) years from February 1, 1984 to February 1,
1987, and ONE HUNDRED SIXTY FIVE THOUSAND PESOS (P165,000.00) per month during
the last four (4) years from February 1, 1987 to February 1, 1991.
The first basic monthly rental shall be paid in advance to the LESSOR on or before December 1,
1980. Succeeding basic monthly rentals starting March, 1981 shall be paid by LESSEE to
LESSOR, without the necessity of a previous demand or the services of a collector, within the
first five (5) days of the month to which said rental shall correspond, at the office of the LESSOR
at Broadway Centrum." 1
During the first year of the lessor-lessee relationship between Broadway and Tropical, no
problems were apparently experienced by either of them. On 5 February 1982, however,
Tropical wrote to Broadway stating that Tropicals rental payments to Broadway were equivalent
to 7.31% of Tropicals actual sales of P17,246,103.00 in 1981, while" [Tropicals] gross profit rate
[was] only 10%." Tropical went on to say that the rental specified in that contract had been
"based merely on [Tropicals] projections that [Tropical] could reach an average sale of
P120,000.00 a day;" however, Tropicals total sales projection for 1982 was only
P23,000,000.00. This would mean again a rental rate of 6.08% of sales "which is too high for
Tropical Hut-Broadway considering that the present rental rates of other Tropical branches are
even below the normal rate of 1.5% on sales." Accordingly, Tropical made the following proposal
to Broadway:jgc:chanrobles.com.ph
" [Tropical] would therefore propose to reduce the present monthly rental to P50,000.00 or 2.0%
of their monthly sales whichever is higher, up to the end of the third year after which it shall
again be subject to renegotiations." (Emphasis supplied)
On 4 March 1982, Broadway responded to Tropicals letter by stating that it (Broadway) believed
that the problems of Tropicals supermarket in the Broadway Centrum were within the control of
Tropicals management. Broadway offered six (6) suggestions which, if implemented, should
result in increased sales for Tropical of at least 15% in the succeeding months. In the meantime,
Broadway made the following counter-proposal consisting of conditional reduction of the
stipulated rental by P20,000.00 for a limited period of four (4) months:jgc:chanrobles.com.ph
". . . Meantime, we are agreeable to a conditional reduction of your rental by P20,000.00 per
month for four months starting this month on a trial basis; that is, the P20,000.00 per month
reduction in rental will be paid back to us and spread over the last six months of the years
should the target of 15% increase in sales be achieved by the fourth month. However, should
your sales not increased by 5% in spite of the improvements you have introduced, the reduction
in rental of P20,000.00 per month of P80,000.00 for four months will not have to be paid
anymore. In other words, the monthly reduction in rental is conditioned upon your not achieving
the desired 15% increase in sales volume by the fourth month assuming you implement all of
the above changes.
It is understood, however, that any reduction in rental extended is merely a temporary
suspension of the original rate of rental stipulated in our contract of lease and not an
amendment thereto." 2 (Emphasis supplied)
Officers of Tropical met with the President of Broadway and during this conference, Tropicals
officers recounted the "low sales volume" that the Tropical Supermarket in the Broadway
Centrum was experiencing, apparently as a result of the temporary closure of Dona Juana
Rodriguez Avenue. 3 This Avenue is a major thoroughfare adjacent to the Broadway Centrum
and was then closed to vehicular traffic because of the road expansion project of the
Government. Broadways President, Mrs. Cita Fernandez Orosa, was aware that the temporary
closure of the Dona Juana Rodriguez Avenue had affected the business of all the Broadways
tenants, including Tropical. She, therefore, agreed on 20 April 1982 to a "provisional and
temporary agreement" which agreement needs to be quoted in full:jgc:chanrobles.com.ph
"Further to our letter dated April 6, 1982, we hereby make formal our provisional and temporary
agreement to a reduction of your monthly rental on the basis of 2% of gross receipts or
P60,000.00 whichever is higher. Gross receipts should be construed as the total sales and
receipts from sublessees of your area and from whatever source arising from the area leased by
you. This provisional arrangement should not be interpreted as amendment to the lease contract
entered into between us.
We invite your attention to the fact that, as agreed upon, you have committed to return by the
end of April a certain portion of your leased premises totalling 466.56 square meters and
presently occupied by your drug store and coffee shop outlets and half of the hallway.
Finally we wish to remind you that the temporary alteration in rental is conditioned on your good
faith implementation on the suggestions we conveyed to you in our letter of March 4, 1982
regarding the operations of the supermarket and shall not commence until the area mentioned
above to be surrendered is actually surrendered.
Should you find the foregoing in accordance with our previous verbal agreement, please signify
your acceptance by signing above the word conforme.
Thank you for your continued patronage.
Conforme: Very truly yours,
Tropical Hut Food Broadway Centrum
Market, Inc. Condominium Corp.
By: (Signed) By:(Signed)" 4
(Emphasis supplied)
Months later, the road expansion project at the Dona Juana Rodriguez Avenue was completed.
By a letter dated 15 December 1982, addressed to Tropical, Broadway referred to the rental
which "as of last April 20, 1982, was provisionally reduced" to P60,000.00 a month or 2% of
gross receipts whichever is higher "without waving any of [Broadways] rights under our rental
agreement." Broadway then went on to say that:jgc:chanrobles.com.ph
"After careful deliberation, we regret that this concession can no longer be extended in its
present form. We, therefore, advising that we shall increase the monthly rental to P100,000.00.
This increase, however, shall be implemented gradually as follows: P80,000.00 effective
January, 1983 and P100,000.00 effective April, 1983 until further notice.
Considering the fact that you collect a monthly gross rental of P24,600.00 from your
concessionaires (other forms of income not considered), the previous temporary arrangement
afforded you more than sufficient respite from whatever business constraints you may have had
then. The consequent effect of said temporary arrangement is your payment of a monthly rental
of P35,400.00 or an effective rate of P14.32 only per square meter. We are sure that you will
agree with us that this rate is very very low and cannot therefore be sustained indefinitely." 5
(Emphasis supplied)

While the rental rate above fixed by Broadway was higher than that set out in the provisional and
temporary agreement of the parties of 20 April 1982, the rates so fixed were nonetheless lower
than that stipulated in their contract of 28 November 1980. Tropical, however, was not satisfied
with the adjusted rates fixed by Broadway. In a letter dated 4 January 1983, Mr. Luis Que of
Tropical wrote to Broadways President appealing to Broadway "to fix our monthly rental at
P60,000.00 or 2% of our gross receipts whichever is higher." In this letter, Mr. Que expressly
hoped that
" [Broadway would] understand our position, and may we reiterate our appeal to maintain our
present provisional rates until such time that more sales are achieved." (Emphasis supplied)
Mr. Luis Ques appeal was, however, found unsatisfactory by Broadway. In a letter dated 13
January 1983, Broadway said:jgc:chanrobles.com.ph
"We are replying to your letter of January 4, 1983. While it may be admitted that you are
incurring losses in your operations, the same is not a monopoly experienced solely by your
corporation. Broadway Centrum itself has had its share of business setbacks but we have
nevertheless decided to absorb part of your losses last year by agreeing to a temporary
reduction of your monthly rental. However, as we have stated in our December 15, 1982 letter,
this concession can no longer be extended in its present form which continues to be a
considerable reduction on the provisions of our existing long term contract. Consequently, we
have to reiterate our advise on you regarding your rental increase." 6 (Emphasis supplied)
Tropical continued its renegotiation efforts. In another letter dated 29 March 1983, Broadways
President wrote to Mr. Luis Que turning down his request for reconsideration. Broadway,
however, was evidently desirous of keeping Tropical as a tenant if possible and so stated that
the P100,000.00 monthly rental would begin, not on April 1983 as stated in its letter of 15
December 1982 but rather on July 1983. By a letter dated 9 April 1983, the Credit and Collection
Officer of Broadway sent Mr. Luis Que a bill for P81,320.00 representing the accrued differential
of P20,000.00 per month between the rental which Broadway was willing to grant to Tropical
(P80,000.00 per month starting 1 January 1983 and up to 30 June 1983) and the P60,000.00
per month or 2% of gross receipts whichever is higher, under the temporary and provisional
letter-agreement of 20 April 1982.
Tropical responded to the statement of account sent by Broadway by pleading, once more, in a
letter dated 15 April 1983, that Tropicals present rentals of P60,000.00 monthly or 2% of gross
receipts, whichever is higher, "would at least stay until we have somehow recovered," to which
Tropical proposed, however, to add 20% of its income from concessionaires (i.e.,
concessionaires at Tropical-Broadway Supermarket). 7
Tropicals last counter-offer was not acceptable to Broadway. In a letter dated 22 April 1983,
Broadways President wrote to Mr. Luis Que stating that "the matter was no longer negotiable"
:jgc:chanrobles.com.ph
"We are responding to your letter of April 15, 1983 proposing a counter offer to the payment of
your rentals. You will remember that in our last meeting our position on the matter has been
unequivocably stated. The temporary arrangement of reducing your monthly rentals was
extended as an assistance. This had caused us to lose P620,000.00 on rental income.
You will agree that this is a sizeable amount which had tremendous adverse effects on our
financial position. This can no longer be sustained.
We reiterate, therefore, that the matter is no longer negotiable and we strongly urge you to settle
your obligation to minimize the 2% penalty on delayed payments provided for in our contract.
We trust that you will see the merits of the foregoing." 8 (Emphasis supplied)
On 5 May 1983, Mr. Mariano Que, adopting a new and much harder posture than Mr. Luis Que
had, wrote to Broadway as follows:jgc:chanrobles.com.ph
". . ., I could only confirm what I told you in our conference that we cannot afford any increase in
rentals in the space occupied by us at Broadway Centrum. And I could only repeat what is
contained in the letter sent you by our Mr. Luis Que dated April 15, 1983. We cannot agree to an
increase in rentals at this time. To do so would put us in a financial situation worse than we were
in before we agreed to reduce the leased premises and adjust the rentals. Our position is that
you cannot arbitrarily and unilaterally increase the rentals. This is a matter which should be
mutually agreed upon by us and as stated, we are not in a financial position to agree to such an
increase." 9 (Emphasis supplied)
On the same day, 5 May 1983, Mrs. Orosa wrote to Mr. Mariano Que expressing shock and
dismay at the posture suddenly adopted by the latter. Mrs. Orosa wrote:jgc:chanrobles.com.ph
"We are replying to your letter of May 5, 1983 categorically stating that your position is that we
cannot arbitrarily and unilaterally increase the rentals. We are appalled by the apparent attempt
to distort the very crystal clear arrangement we reached last April 20, 1982 anent the temporary
alteration of your rentals. We hereby attached a xerox copy of said agreement with our italics to
refresh your memory.
We have exhaustively, repeatedly but patiently labored to explain to you the temporary and
provisional arrangement to reduce your monthly rentals is not an amendment to the lease
contract and this was done merely as an assistance. There is, therefore, absolutely no basis to
your claim that we cannot arbitrarily and unilaterally increase the rentals. We strongly feel that
we should have instead been the recipient of an act of gratitude from you.
In view therefore of your obstinate decision to blur your view and continue refusing to heed our
demands, we are hereby formally serving you notice that if you still fail to pay your back
accounts amounting to P100,000.00 exclusive of penalty charges by Monday, May 9, 1983,
paragraph five (5) of our lease contract will be implemented." 10 (Emphasis supplied)
A week later, on 12 May 1983, Tropical filed a complaint before the Regional Trial Court, Quezon
City, seeking a restraining order or preliminary injunction to prevent Broadway from invoking and
implementing Section 5 of their Lease Contract and asking the court to decree that the rental
provided for in the letter-agreement of 20 April 1982 "should subsist while the low volume of
sales [of Tropical] still continues." A restraining order was issued by the trial court ex parte the
next day and a preliminary injunction was granted on 2 June 1983, upon Tropicals filing of a
bond in the amount of P100,000.00.
On 6 January 1984, while trial before the Regional Trial Court was pending, Broadway informed
Tropical that the basic rental would be increased to P140,000.00 per month during the next three
(3) years from 1 February 1984 to 1 February 1987 in accordance with paragraph (3) of the
Lease Contract dated 28 November 1980.
Tropical reacted by filing a supplemental complaint with the trial court raising for the first time the
issue of whether or not the letter-agreement dated 20 April 1982 had novated the Lease
Contract of 28 November 1980. Tropical alleged that the original Contract of Lease had been
novated in its principal conditions i.e., the area subject to the lease and the lease rentals
by the letter-agreement dated 20 April 1982 and that the reduced lease rates set out in the letter-
agreement are to subsist while Tropicals sales volume "remains low."cralaw virtua1aw library
Petitioner, upon the other hand, vehemently denied that the original Lease Contract had been
novated by the letter-agreement of 20 April 1982.
In time, the trial court rendered its decision dated 14 March 1985, the dispositive portion of
which reads as follows:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant
as follows:chanrob1es virtual 1aw library
1. The writ of preliminary injunction previously issued is made permanent;
2. The reduced rental provided for in the letter-agreement of April 20, 1982 (Exh.G or 5) shall
subsist or be effective during the period that a plaintiff cannot achieve its projected daily sales
average as envisioned in its feasibility study;
3. The contract of lease dated November 28, 1980 (Exh.A or 1) is declared as partially novated
or modified by the letter-agreement;
4. The amount of monthly rentals payable by plaintiff for the reduced area of the leased
premises after plaintiff has achieved its projected daily sales average is fixed as
follows:chanrob1es virtual 1aw library
February 1, 1981 to February 1, 1984- P39.45 per square meter or P101,609.00;
February 1, 1984 to February 1, 1987- P46.02 per square meter or P118,530.00;
February 1, 1987 to February 1, 1991- P54.24 per square meter or P139,702.00.
Correspondingly, defendants counterclaim is dismissed.
Costs against the defendant. So Ordered." 11 (Emphasis supplied)
On appeal, the Court of Appeals affirmed the decision of the trial court. The Court of Appeals
held that the letter-agreement dated 20 April 1982 had novated the principal conditions of the
Lease Contract. The Court of Appeals also held that the reduction in the rentals was not entirely
a gratuitous accommodation on the part of Broadway since the reduction of the leased space by
466.56 square meters, possession of which was returned by Tropical to Broadway, constituted
valuable consideration for the reduction of rentals while the "low sales volume" of Tropical
continued. The Court of Appeals corrected a microscopic arithmetical error committed by the trial
court and in effect directed Tropical to pay, when its "low sales volume" shall have been
overcome, the following rental rates:chanrob1es virtual 1aw library
From 1 February 1984 up to 1 February 1987- P118,529.15 per month;
From 1 February 1987 up to 1 February 1991- P139,695.07 per month.
Petitioner Broadway now asks us to review and set aside the Decision of the Court of Appeals.
The sole issue confronting us here is whether or not the letter-agreement dated 20 April 1982
had novated the Contract of Lease of 28 November 1980.
We start with the basic conception that novation is the extinguishment of an obligation by the
substitution of that obligation with a subsequent one, which terminates it, either by changing its
object or principal conditions or by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. 12 Novation through a change of the
object or principal conditions of an existing obligation is referred to as objective (or real)
novation. Novation by the change of either the person of the debtor or of the creditor is
described as subjective (or personal) novation. Novation may also be objective and subjective
(mixed) at the same time. In both objective and subjective novation, a dual purpose is achieved
an obligation is extinguished and a new one is created in lieu thereof. 13
If objective novation is to take place, it is essential that the new obligation expressly declare that
the old obligation is to be extinguished, or that new obligation be on every point incompatible
with the old one. 14 Novation is never presumed; it must be established either by the discharge
of the old debt by the express terms of the new agreement, or by the acts of the parties whose
intention to dissolve the old obligation as a consideration of the emergence of the new one must
be clearly manifested. 15 It is hardly necessary to add that the rule that novation is never
presumed, is not avoided by merely referring to partial novation. The will to novate, whether
totally or partially, must appear by express agreement of the parties, by their acts which are too
clear and unequivocal to be mistaken.
Applying the above principles to the case at bar, it is entirely clear to the court that the letter-
agreement of 20 April 1982 did not extinguish or alter the obligations of respondent Tropical and
the rights of petitioner Broadway under their lease contract dated 28 November 1980.
In the first place, the letter-agreement of 20 April 1982 was, by its own terms, a "provisional and
temporary agreement to a reduction of [Tropicals] monthly rental ." The letter-agreement, as
noted earlier, also contained the following sentence:jgc:chanrobles.com.ph
"This provisional agreement should not be interpreted as amendment to the lease contract
entered into by us."cralaw virtua1aw library
The same letter also referred to the reduction of rental as a "temporary alteration in rental" which
was "conditioned" upon good faith implementation by Tropical of the six (6) principal suggestions
Broadway had conveyed to Tropical concerning improvement of the operations of Tropicals
supermarket at the Broadway Centrum. The non-specification by Broadway (who had prepared
the letter-agreement on which Tropical placed its conforme) of the period of time during which
the reduced rentals would remain in effect, only meant that Broadway retained for itself the
discretionary right to return to the original contractual rates of rental whenever Broadway felt it
appropriate to do so. There is nothing in the text of the 20 April 1982 letter-agreement to suggest
that the reduced concessional rental rates could not be terminated by Broadway without the
consent of Tropical.
In the second place, the formal notarized Lease Contract of 28 November 1980 made it clear
that a temporary and provisional concessional reduction of rentals which Broadway might grant
to Tropical was not to be construed as alteration or waiver of any of the terms of the Lease
Contract itself. That Lease Contract provided, among other things, as
follows:jgc:chanrobles.com.ph
"32. NON-WAIVER OF CONDITIONS & COVENANTS The failure of the LESSOR to insist
upon strict performance of any of the terms, conditions and stipulations hereof shall not be
deemed a relinquishment or waiver of any right or remedy that said LESSOR may have, nor
shall it be construed as a waiver of any subsequent breach of, or default in the terms, conditions
and covenants hereof, which terms, conditions and covenants shall continue under this Contract
and shall be deemed to have been made unless expressed in writing and signed by the
LESSOR." 16 (Emphasis supplied)
In the third place, the course of negotiations between Broadway and Tropical before the
execution of their letter-agreement of 20 April 1982, quite clearly indicated that what they were
negotiating was a temporary and provisional reduction of rentals. Thus, Tropical itself, in its letter
to Broadway dated 5 February 1982, quoted earlier, had proposed reduction of rentals from the
stipulated contractual rates to P50,000.00 per month or 2% of monthly sales, whichever is
higher, "up to the end of the third year after which it shall again subject to renegotiation."cralaw
virtua1aw library
Broadways reply dated 4 March 1982 heavily underscored that:jgc:chanrobles.com.ph
"Any reduction in rental extended is merely a temporary suspension of the original rate of rental
stipulated in our contract of lease and not an amendment thereto."cralaw virtua1aw library
In the fourth place, the course of discussions between Broadway and Tropical, as disclosed in
their correspondence, after execution of the 20 April 1982 letter-agreement, shows that the
reduction of rentals agreed upon in the letter-agreement was not to persist for the rest of the life
of the ten (10)-year Contract of Lease. That correspondence is bereft of any sign of mutual
agreement or recognition that the reduced rentals had so permanently replaced the contract
stipulations on rentals as to have become immune to change save by common consent of
Tropical and Broadway. Quite the contrary. In Broadways letter to Tropical dated 15 December
1982, Mrs. Orosa referred to the letter-agreement of 20 April 1982 which "provisionally reduced
to P60,000.00 a month or 2% of [Tropicals] gross receipts, whichever is higher, without waiving
any of our right under our rental agreement." This 15 December 1982 letter, quoted earlier, in an
obvious effort to be conciliatory, did not try to go back immediately to the contract stipulation of
P120,000.00 monthly rental from 1 February 1981 to 1 February 1984. Instead, Broadway
proposed P80,000.00 per month effective January 1983 and P100,000.00 per month effective
April 1983 "until further notice." In its reply letter of 4 January 1983, Tropical appealed to
Broadway to maintain "our present provisional rates until such time that more sales are
achieved." In its rejoinder of 13 January 1983, Broadway stressed that though it had its own
share of business set backs, it had "nevertheless decided to absorb part of [Tropical-Broadway
Centrums] losses last year by agreeing to a temporary reduction of the monthly rental." At the
same time, Broadway stressed that "this concession" could no longer be extended "in its present
form which continues to be a considerable reduction on the provisions of our existing long-term
contract." Finally, in his last letter of 15 April 1983, Mr. Luis Que of Tropical appealed once more
to Broadway to continue the reduction in rental under the 20 April 1982 letter-agreement "until
we have somehow recovered" and then, at the same time, offered to increase that reduced
rental by adding to it 20% of Tropicals income from concessionaires at its Broadway Centrum
supermarket. Turning down Mr. Ques last counter-officer, Mrs. Orosa of Broadway on 22 April
1983 once again stressed that:jgc:chanrobles.com.ph
"The temporary arrangement of reducing your monthly rentals was extended as an assistance.
This had caused us to lose P620,000.00 on rental income." (Emphasis supplied)
It is thus clear to the Court that Tropical was attempting to modify its formal Lease Contract with
Broadway by implying or inserting terms into the 20 April 1982 letter-agreement which are not
found in that letter-agreement. Under both the Civil Code and our case law on novation and as
well the express terms of the 28 November 1980 Contract of Lease, only evidence of the
clearest and most explicit kind will suffice for that purpose. Tropicals theory that Broadway had
agreed in the 20 April 1982 letter-agreement to maintain the reduced rental so long as Tropical
was suffering from a "low volume of sales" appears to us as an afterthought, imaginative and
original no doubt, but still an afterthought. Tropical did not pretend to have reached agreement
with Broadway on what level of sales would constitute the critical "low volume of sales." And so,
the trial court ended up with the truly extraordinary recourse of referring to the feasibility study
that Tropical had made on its own, before Tropical and Broadway executed their 28 November
1980 Contract of Lease. That feasibility study was no more than an expression of Tropicals own
expectations when it entered into the 1980 Contract of Lease; yet the trial court held that the
reduced rentals were to remain in effect until Tropical achieved its own expectations concerning
its sales at the Broadway Centrum, which presumably were not "low."cralaw virtua1aw library
Tropical, in its Memorandum, stressed that Broadway had supplied the number of customers
which Tropical had inputted in its feasibility study. Whatever number Broadway may have
submitted to Tropical in their pre-contract negotiations was no more than an estimate or
speculation as to the number of customers that might be coming into the then proposed Tropical
Supermarket at the Broadway Centrum. We do not understand Tropical to have suggested that
that number constituted a representation on the part of Broadway which turned out to be false
and which vitiated Tropicals consent to the original 1980 Contract of Lease. Neither do we
understand Tropical to be suggesting that Broadway had warranted to Tropical that a certain
number of customers would in fact be visiting the then proposed Tropical Supermarket at
Broadway Centrum. The 1980 Contract of Lease itself was totally silent as to any such estimated
or expected number of customers either as a representation or as a warranty on the part of
Broadway. That silence rendered any estimate which Broadway may have conveyed to Tropical,
quite immaterial. 17
We turn to the holding of the Court of Appeals that the surrender of 466.56 square meters of
leased space by Tropical to Broadway constituted valuable consideration, acceptance of which
disabled Broadway from insisting on the original terms of their Contract of Lease. Under the view
we have taken above of the legal effects of the 20 April 1982 letter-agreement, this supposed
valuable consideration appears quite immaterial. We must, nonetheless, note that comparison of
the lease rentals reduced and the floor space surrendered yields a strong presumption that
Broadway could not have agreed to the supposed partial novation. The rentals were reduced by
Broadway by 50% (from P120,000.00 to P60,000.00 per month). The floor space was reduced
by slightly over 15% only. No substantial relationship existed between the amount of the
reduction of rental and the area of the space returned by Tropical. Hence, no reasonable
presumption can be indulged that return of part of the leased space constituted consideration for
the reduction of rental rates. In that Contract of Lease, moreover, the rentals were stipulated for
a specified portion of the Broadway Centrum having a total floor area of 3,042.19 square meters;
the rental rate was not specified on a per square meter basis.
We conclude that the Court of Appeals fell into reversible error when it affirmed the decision of
the trial court. We believe and so hold that the letter-agreement of 20 April 1982 did not
constitute a novation, whether partial or total, of the 28 November 1980 Contract of Lease
between Broadway and Tropical.
WHEREFORE, for all the foregoing, the Petition for Review on Certiorari is hereby GIVEN DUE
COURSE, and the Comment filed by private respondent Tropical is hereby TREATED as its
Answer and the Decision dated 30 January 1987 of the Court of Appeals and the Decision dated
14 March 1985 of the trial court are hereby REVERSED and SET ASIDE. A new judgment is
hereby entered dismissing the complaint filed by private respondent Tropical , and requiring
private respondent Tropical to pay to petitioner Broadway the following rental rates:chanrob1es
virtual 1aw library
1. P80,000.00 per month from 1 January 1983 up to 30 June 1983;
2. P100,000.00 per month from 1 July 1983 up to 31 January 1984;
3. P140,000.00 per month from 1 February 1984 to 1 February 1987; and
4. P160,000.00 per month from 1 February 1987 to 31 January 1991.
The penalty of 2% per month on unpaid rentals specified in Section 5 of the 28 November 1980
Contract of Lease is, in the exercise of the Courts discretion, hereby equitably REDUCED to ten
percent (10%) per annum computed from accrual of such rentals as above specified until fully
paid. In addition, private respondent Tropical shall pay to petitioner Broadway attorneys fees in
the amount of ten percent (10%) (and not twenty percent [20%] as specified in Section 33 of the
Contract of Lease) of the total amount due and payable to petitioner Broadway under this
Decision. Costs against private Respondent.
SO ORDERED.
[G.R. No. 120817. November 4, 1996.]
ELSA B. REYES, Petitioner, v. COURT OF APPEALS, SECRETARY OF JUSTICE, AFP-
MUTUAL BENEFIT ASSOCIATION, INC., and GRACIELA ELEAZAR, Respondents.
DECISION
TORRES, JR., J.:
Petitioner assails the respondent courts decision 1 dated May 12, 1995 which sustained the two
resolutions of the respondent Secretary of Justice, namely: 1) the Resolution dated January 23,
1992 affirming the resolution of the Provincial Prosecutor of Rizal dismissing the complaints of
petitioner against private respondent Eleazar in I.S. Nos. 91-2853, 91-4328 to 29, 91-4585 to 91
and 91-4738 to 39 for violations of B.P. Blg. 22 and estafa under Article 315, par. 4, no. 2 (d) of
the Revised Penal Code, and 2) the Resolution dated January 12, 1993 affirming the resolution
of the City Prosecutor of Quezon City finding a prima facie case in I.S. No. 92-926 for violation of
B.P. Blg. 22 and estafa filed by respondent AFP-Mutual Benefit Association, Inc. (AFP-MBAI, for
brevity) against petitioner Reyes.
The facts as summarized by the respondent court are as follows:jgc:chanrobles.com.ph
"Elsa Reyes is the president of Eurotrust Capital Corporation (EUROTRUST), a domestic
corporation engaged in credit financing. Graciela Eleazar, private respondent, is the president of
B.E. Ritz Mansion International Corporation (BERMIC), a domestic enterprise engaged in real
estate development. The other respondent, Armed Forces of the Philippines Mutual Benefit
Asso., Inc. (AFP-MBAI), is a corporation duly organized primarily to perform welfare services for
the Armed Forces of the Philippines.
A. Re: Resolution dated January 23, 1992
In her various affidavits-complaints with the Office of the Provincial Prosecutor of Rizal, Elsa
Reyes alleges that Eurotrust and Bermic entered into a loan agreement. Pursuant to the said
contract, Eurotrust extended to Bermic P216,053,126.80 to finance the construction of the
latters Ritz Condominium and Gold Business Park. The loan was without collateral but with
higher interest rates than those allowed by the banks. In turn, Bermic issued 21 postdated
checks to cover payments of the loan packages. However, when those checks were presented
for payment, the same were dishonored by the drawee bank, Rizal Commercial Banking
Corporation (RCBC), due to stop payment order made by Graciela Eleazar. Despite Eurotrusts
notices and repeated demands to pay, Eleazar failed to make good the dishonored checks,
prompting Reyes to file against her several criminal complaints for violation of B.P. 22 and estafa
under Article 315, 4th paragraph, No. 2 (d) of the Revised Penal Code.
Graciela Eleazar, in her counter-affidavits, asserts that beginning December 1989, Eurotrust
extended to Bermic several loan packages amounting to P190,336,388.86. For its part, Bermic
issued several postdated checks to cover payments of the principal and interest of every loan
packages involved.
Subsequently, Elsa Reyes was investigated by the Senate Blue Ribbon Committee. She was
involved in a large scale scam amounting to millions of pesos belonging to Instructional Material
Corporation (IMC), an agency under the Department of Education, Culture and Sports.
Meanwhile, respondent AFP-MBAI which invested its funds with Eurotrust, by buying from it
government securities, conducted its own investigation and found that after Eurotrust delivered
to AFP-MBAI the securities it purchased, the former borrowed the same securities but failed to
return them to AFP-MBAI; and that the amounts paid by AFP-MBAI to Eurotrust for those
securities were in turn lent by Elsa Reyes to Bermic and others.
When Eleazar came to know that the funds originally loaned by Eurotrust to Bermic belonged to
AFP-MBAI, she, as President of Bermic, requested a meeting with Eurotrust representatives.
Thus, on February 15, 1991, the representatives of Eurotrust and Bermic agreed that Bermic
would directly settle its obligations with the real owners of the fund-AFP-MBAI and DECS-IMC.
This agreement was formalized in two letters dated March 19, 1991. Pursuant to this
understanding, Bermic negotiated with AFP-MBAI and DECS-IMC and made payments to the
latter. In fact, Bermic paid AFP-MBAI P31,711.11 and a check of P1-million.
However, Graciela Eleazar later learned that Elsa Reyes continued to collect on the postdated
checks issued by her (Eleazar) contrary to their agreement. So, Bermic wrote to Eurotrust to
hold the amounts "in constructive trust" for the real owners. But Reyes continued to collect on
the other postdated checks dated April 17 to June 28, 1991. Upon her counsels advise, Eleazar
had the payment stopped. Hence, her checks issued in favor of Eurotrust were dishonored.
After investigation, the Office of the Provincial Prosecutor of Rizal issued a resolution dismissing
the complaints filed by Elsa Reyes against Graciela Eleazar on the ground that when the latter
assumed the obligation of Reyes to AFP-MBAI, it constituted novation, extinguishing any
criminal liability on the part of Eleazar.
Reyes filed a petition for review of the said resolution with respondent Secretary of Justice
contending that novation did not take place.
The Secretary of Justice dismissed the petition holding that "the novation of the loan agreement
prevents the rise of any incipient criminal liability since the novation had the effect of canceling
the checks and rendering without effect the subsequent dishonor of the already cancelled
checks.
B. Re: Resolution dated January 12, 1993
At the time of the pendency of the cases filed by Elsa Reyes against Graciela Eleazar, AFP-
MBAI lodged a separate complaint for estafa and a violation of BP 22 against Elsa Reyes with
the office of the city prosecutor of Quezon city docketed as I.S. 92-926. The affidavit of Gudelia
Dinapo a member of the investigating committee formed by AFP-MBAI to investigate the
anomalies committed by Eurotrust/Reyes, shows that between August 1989 and September
1990, Eurotrust offered to sell to AFP-MBAI various marketable securities, including government
securities, such as but not limited to treasury notes, treasury bills, Land Bank of the Philippines
Bonds and Asset Participation Certificates.
Relying on a canvass conducted by one of its employees, Cristina Cornista, AFP-MBAI decided
to purchase several securities amounting to P120,000,000.00 from Eurotrust. From February
1990 to September 1990, a total of 21 transactions were entered into between Eurotrust and
AFP-MBAI. Eurotrust delivered to AFP-MBAI treasury notes amounting to P73 million. However,
Eurotrust fraudulently borrowed all those treasury notes from the AFP-MBAI for purposes of
verification with the Central Bank. Despite AFP-MBAIs repeated demands, Eurotrust failed to
return the said treasury notes. Instead it delivered 21 postdated checks in favor of AFP-MBAI
which were dishonored upon presentment for payment. Eurotrust nonetheless made partial
payment to AFP-MBAI amounting to P35,151,637.72. However, after deducting this partial
payment, the amounts of P73 million treasury notes with interest and P35,151,637.72 have
remained unpaid. Consequently, AFP-MBAI filed with the Office of the City Prosecutor of
Quezon City a complaint for violation of BP 22 and estafa against Elsa Reyes.
Reyes interposed the defense of novation and insisted that AFP-MBAIs claim of unreturned P73
million worth of government securities has been satisfied upon her payment of P30 million. With
respect to the remaining P43 million, the same was paid when Eurotrust assigned its
Participation Certificates to AFP-MBAI.
Eventually, the Office of the City Prosecutor of Quezon City issued a resolution recommending
the filing of an information against Reyes for violation of BP 22 and estafa.
Whereupon, Reyes filed a petition for review with respondent Secretary of Justice. The latter
dismissed the petition on the ground that only resolutions of the prosecutors dismissing criminal
complaints are cognizable for review by the Department of Justice." 2
On February 2, 1994, petitioner seeking the nullification of either of the two resolutions of the
respondent Secretary of Justice filed a petition for certiorari, prohibition and mandamus 3 with
the respondent court which, however, denied and dismissed her petition. Her motion for
reconsideration 4 was likewise denied in a Resolution 5 dated June 27, 1995. Hence, this
present petition.
The first Department of Justice Resolution dated January 23, 1992 which sustained the
Provincial Prosecutors decision dismissing petitioners complaints against respondent Eleazar
for violation of B.P. 22 and estafa ruled that the contract of loan between petitioner and
respondent Eleazar had been novated when they agreed that respondent Eleazar should settle
her firms (BERMIC) loan obligations directly with AFP-MBAI and DECS-IMC instead of settling it
with petitioner Reyes. This finding was affirmed by the respondent court which pointed out that
"the first contract was novated in the sense that there was a substitution of creditor" 6 when
respondent Eleazar, with the agreement of Reyes, directly paid her obligations to AFP-MBAI.
We cannot see how novation can take place considering the surrounding circumstances which
negate the same. The principle of novation by substitution of creditor was erroneously applied in
the first questioned resolution involving the contract of loan between petitioner and respondent
Eleazar.
Admittedly, in order that a novation can take place, the concurrence of the following requisites 7
is indispensable:chanrob1es virtual 1aw library
1. there must be a previous valid obligation,
2. there must be an agreement of the parties concerned to a new contract,
3. there must be the extinguishment of the old contract, and
4. there must be the validity of the new contract.
Upon the facts shown in the record, there is no doubt that the last three essential requisites of
novation are wanting in the instant case. No new agreement for substitution of creditor was
forged among the parties concerned which would take the place of the preceding contract. The
absence of a new contract extinguishing the old one destroys any possibility of novation by
conventional subrogation. In concluding that a novation took place, the respondent court relied
on the two letters dated March 19, 1991, 8 which, according to it, formalized petitioners and
respondent Eleazars agreement that BERMIC would directly settle its obligation with the real
owners of the funds the AFP MBAI and DECS IMC. 9 Be that as it may, a cursory reading of
these letters, however, clearly and unmistakably shows that there was nothing therein that would
evince that respondent AFP-MBAI agreed to substitute for the petitioner as the new creditor of
respondent Eleazar in the contract of loan. It is evident that the two letters merely gave
respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI and
DECS-IMC. It is essentially an agreement between petitioner and respondent Eleazar only.
There was no mention whatsoever of AFP-MBAIs consent to the new agreement between
petitioner and respondent Eleazar much less an indication of AFP-MBAIs intention to be the
substitute creditor in the loan contract. Well settled is the rule that novation by substitution of
creditor requires an agreement among the three parties concerned the original creditor, the
debtor and the new creditor. 10 It is a new contractual relation based on the mutual agreement
among all the necessary parties. Hence, there is no novation if no new contract was executed by
the parties. Article 1301 of the Civil Code is explicit, thus:jgc:chanrobles.com.ph
" Conventional subrogation of a third person requires the consent of the original parties and of
the third person."cralaw virtua1aw library
The fact that respondent Eleazar made payments to AFP-MBAI and the latter accepted them
does not ipso facto result in novation. There must be an express intention to novate animus
novandi. 11 Novation is never presumed. 12 Article 1300 of the Civil Code provides inter alia that
conventional subrogation must be clearly established in order that it may take effect.
Notwithstanding our disagreement with the decision of the respondent court and the ruling of the
Secretary of Justice that a novation by substitution of creditor has taken place, we opt not to
disturb the Resolution of the respondent Secretary of Justice dated January 23, 1992 finding a
prima facie case against the petitioner in as much as it had already become final. It appears that
petitioner filed two motions for reconsideration to the said resolution, the first one on February 6,
1992 and the second one in June 2, 1992. These two motions were, however, denied by the
respondent Secretary of Justice, the last denial was contained in a Resolution dated June 25,
1992 which was received by petitioner on July 9, 1992. Petitioner made no prompt attempt to
question the said resolutions before the proper forum. It took her almost seventeen months
(from July 9, 1992 to February 2, 1994) to challenge the January 23, 1992 Resolution when she
filed the petition for certiorari with the respondent court on February 2, 1994, 13 which resolved
to affirm the aforesaid resolution of the Secretary of Justice.
Petitioner who chose her forum but unfortunately lost her claim is bound by such adverse
judgment on account of finality of judgment, otherwise, there would be no end to litigation.
Litigation must end and terminate sometime and somewhere, and it is essential to an effective
administration of justice that once a judgment has become final, the issue or cause therein
should be laid at rest. 14 While the respondent Secretary of Justice was in error in applying the
rule on novation in the January 23, 1992 Resolution, such irregularity, however, does not affect
the validity of the proceedings in the Department of Justice. Erroneous application of a legal
principle cannot bring a judgment that has already attained the status of finality to an absolute
nullity under the well entrenched rule of finality of judgment. The basic rule of finality of judgment
is grounded on the fundamental principle of public policy and sound practice that at the risk of
occasional error, the judgment of court and award of quasi-judicial agencies must become final
at some definite date fixed by law. 15
We find no plausible explanation nor justifiable reason offered by petitioner for the obvious delay
or omission to take a timely action against the questioned resolution. She is apparently guilty of
laches which bars her from seeking relief in a court of law after she intentionally and
unreasonably fails to guard of her rights. Laches is the failure or neglect for unreasonable and
unexplained length of time to do that which by exerting due diligence could/should have been
done earlier. 16 Petitioners omission to assert her right to avail of the remedies in law within a
reasonable time warrants a presumption that she abandoned it or declined to assert it. The law
serves those who are vigilant and diligent and not those who sleep when the law requires them
to act. 17
It bears emphasis that the above pronouncement we laid down applies only pro hac vice. This
Court in affirming the questioned resolution despite the erroneous application of a legal principle
acted according to what the peculiar circumstances of the instant case demand. Its factual
setting led us to consider that to sustain the resolution is but the proper action to take in this
particular case.
Regarding the second Resolution of respondent Secretary of Justice dated January 12, 1993
which affirms the City Prosecutors finding of a prima facie case against petitioner for violation of
B.P. Blg. 22 and estafa involving the contract of sale of securities, petitioner avers that she could
not be held criminally liable for the crime charged because the contract of sale of securities
between her and respondent AFP-MBAI was novated by substitution of debtor. According to
petitioner, the obligation assumed by respondent Eleazar pursuant to the authority given by her
to respondent Eleazar in a letter dated March 19, 1991 was precisely her (petitioners) obligation
to respondent AFP-MBAI under the contract of sale of securities. She claims that private
respondent Eleazar, instead of fulfilling her obligation under the contract of loan to pay petitioner
the amount of debts, assumed petitioners obligation under the contract of sale to make
payments to respondent AFP-MBAI directly. 18
This contention is bereft of any legal and factual basis. Just like in the first questioned resolution,
no novation took place in this case. A thorough examination of the records shows that no hard
evidence was presented which would expressly and unequivocably demonstrate the intention of
respondent AFP-MBAI to release petitioner from her obligation to pay under the contract of sale
of securities. It is a rule that novation by substitution of debtor must always be made with the
consent of the creditor. 19 Article 1293 of the Civil Code is explicit, thus:jgc:chanrobles.com.ph
"Novation which consists in substituting a new debtor in the place of the original one, may be
made even without or against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237."cralaw
virtua1aw library
The consent of the creditor to a novation by change of debtor is as indispensable as the
creditors consent in conventional subrogation in order that a novation shall legally take place.
The mere circumstance of AFP-MBAI receiving payments from respondent Eleazar who
acquiesced to assume the obligation of petitioner under the contract of sale of securities, when
there is clearly no agreement to release petitioner from her responsibility, does not constitute
novation, at most, it only creates a juridical relation of co-debtorship or suretyship on the part of
respondent Eleazar to the contractual obligation of petitioner to AFP-MBAI and the latter can still
enforce the obligation against the petitioner. In Ajax Marketing and Development Corporation v.
Court of Appeals, 20 which is relevant in the instant case, we stated that
"In the same vein, to effect a subjective novation by a change in the person of the debtor, it is
[G.R. No. 99398. January 26, 2001.]
CHESTER BABST, Petitioner, v. COURT OF APPEALS, BANK OF THE PHILIPPINE
ISLANDS, ELIZALDE STEEL CONSOLIDATED, INC., and PACIFIC MULTI-COMMERCIAL
CORPORATION,Respondents.
[G.R. No. 104625. January 26, 2001.]
ELIZALDE STEEL CONSOLIDATED, INC., Petitioner, v. COURT OF APPEALS, BANK OF
THE PHILIPPINE ISLANDS, PACIFIC MULTI-COMMERCIAL CORPORATION and CHESTER
BABST,Respondents.
DECISION
YNARES-SANTIAGO, J.:
These consolidated petitions seek the review of the Decision dated April 29, 1991 of the Court of
Appeals in CA-G.R. CV No. 17282 1 entitled, "Bank of the Philippine Islands, Plaintiff-Appellee
versus Elizalde Steel Consolidated, Inc., Pacific Multi-Commercial Corporation, and Chester G.
Babst, Defendants-Appellants." chanrob1es virtua1 1aw 1ibrary
The complaint was commenced principally to enforce payment of a promissory note and three
domestic letters of credit which Elizalde Steel Consolidated, Inc. (ELISCON) executed and
opened with the Commercial Bank and Trust Company (CBTC).
On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of P8,015,900.84, with
interest at the rate of 14% per annum, evidenced by a promissory note. 2 ELISCON defaulted in
its payments, leaving an outstanding indebtedness in the amount of P2,795,240.67 as of
October 31, 1982. 3
The letters of credit, on the other hand, were opened for ELISCON by CBTC using the credit
facilities of Pacific Multi-Commercial Corporation (MULTI) with the said bank, pursuant to the
Resolution of the Board of Directors of MULTI adopted on August 31, 1977 which
reads:chanrob1es virtual 1aw library
WHEREAS, at least 90% of the Companys gross sales is generated by the sale of tin-plates
manufactured by Elizalde Steel Consolidated, Inc.;
necessary that the old debtor be released expressly from the obligation, and the third person or
new debtor assumes his place in the relation. There is no novation without such release as the
third person who has assumed the debtors obligation becomes merely a co-debtor or surety. . . .
Novation arising from a purported change in the person of the debtor must be clear and
express . . ."cralaw virtua1aw library
In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the
Roman Law jurisprudence, the principle novatio non praesumitur that novation is never
presumed. At bottom, for novation to be a jural reality, its animus must be ever present, debitum
pro debito basically extinguishing the old obligation for the new one.
The foregoing elements are found wanting in the case at bar.
ACCORDINGLY, finding no reversible error in the decision appealed from dated May 12, 1995,
the same is hereby AFFIRMED in all respects.
SO ORDERED.
WHEREAS, it is to the best interests of the Company to continue handling said tin-plate line;
WHEREAS, Elizalde Steel Consolidated, Inc. has requested the assistance of the Company in
obtaining credit facilities to enable it to maintain the present level of its tin-plate manufacturing
output and the Company is willing to extend said requested assistance;
NOW, THEREFORE, for and in consideration of the foregoing premises
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT & GENERAL
MANAGER, ANTONIO ROXAS CHUA, be, as he is hereby empowered to allow and authorize
ELIZALDE STEEL CONSOLIDATED, INC. to avail and make use of the Credit Line of PACIFIC
MULTI-COMMERCIAL CORPORATION with the COMMERCIAL BANK & TRUST COMPANY
OF THE PHILIPPINES, Makati, Metro Manila;
RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation guarantee, as it does
hereby guarantee, solidarily, the payment of the corresponding Letters of Credit upon maturity of
the same;
RESOLVED, FINALLY, That copies of this resolution be furnished the Commercial Bank & Trust
Company of the Philippines, Makati, Metro Manila, for their information. 4
Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst executed a
Continuing Suretyship, 5 whereby they bound themselves jointly and severally liable to pay any
existing indebtedness of MULTI to CBTC to the extent of P8,000,000.00 each.
Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel Corporation
three (3) domestic letters of credit in the amounts of P1,946,805.73, 6 P1,702,869.32 7 and
P200,307.72, 8 respectively, which ELISCON used to purchase tin black plates from National
Steel Corporation. ELISCON defaulted in its obligation to pay the amounts of the letters of credit,
leaving an outstanding account, as of October 31, 1982, in the total amount of P3,963,372.08. 9
On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into a
merger, wherein BPI, as the surviving corporation, acquired all the assets and assumed all the
liabilities of CBTC. 10
Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the
Development Bank of the Philippines (DBP). In order to settle its obligations, ELISCON
proposed to convey to DBP by way of dacion en pago all its fixed assets mortgaged with DBP,
as payment for its total indebtedness in the amount of P201,181,833.16. On December 28,
1978, ELISCON and DBP executed a Deed of Cession of Property in Payment of Debt. 11
In June 1981, ELISCON called its creditors to a meeting to announce the take-over by DBP of its
assets.
In October 1981, DBP formally took over the assets of ELISCON, including its indebtedness to
BPI. Thereafter, DBP proposed formulas for the settlement of all of ELISCONs obligations to its
creditors, but BPI expressly rejected the formula submitted to it for not being acceptable. 12
Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC, instituted with the
Regional Trial Court of Makati, Branch 147, a complaint 13 for sum of money against ELISCON,
MULTI and Babst, which was docketed as Civil Case No. 49226.
ELISCON, in its Answer, 14 argued that the complaint was premature since DBP had made
serious efforts to settle its obligations with BPI.chanrob1es virtua1 1aw 1ibrary
Babst also filed his Answer alleging that he signed the Continuing Suretyship on the
understanding that it covers only obligations which MULTI incurred solely for its benefit and not
for any third party liability, and he had no knowledge or information of any transaction between
MULTI and ELISCON. 15
MULTI, for its part, denied knowledge of the merger between BPI and CBTC, and averred that
the guaranty under its board resolution did not cover purchases made by ELISCON in the form
of trust receipts. It set up a cross-claim against ELISCON alleging that the latter should be held
liable for any judgment which the court may render against it in favor of BPI. 16
On February 20, 1987, the trial court rendered its Decision, 17 the dispositive portion of which
reads:chanrob1es virtual 1aw library
WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor of the
plaintiff and against all the defendants:chanrob1es virtual 1aw library
1) Ordering defendant ELISCON to pay the plaintiff the amount of P2,795,240.67 due on the
promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of
P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982;
2) Ordering defendant ELISCON to pay the plaintiff interests and related charges on the
principal of said promissory note of P2,102,232.02 at the rates provided in said note from and
after 31 October 1982 until full payment thereof, and on the principal of the three (3) domestic
letters of credit of P3,564,349.25 interests and related charges at the rates provided in said
letters of credit, from and after 31 October 1982 until full payment;
3) Ordering defendant ELISCON to pay interests at the legal rate on all interests and related
charges but unpaid as of the filing of this complaint, until full payment thereof;
4) Ordering defendant ELISCON to pay attorneys fees equivalent to 10% of the total amount
due under the preceding paragraphs;
5) Ordering defendants Pacific Multi-Commercial Corporation and defendant Chester Babst to
pay, jointly and severally with defendant ELISCON, the total sum of P3,963,372.08 due on the
three (3) domestic letters of credit as of 31 October 1982 with interests and related charges on
the principal amount of P3,963,372.08 at the rates provided in said letters of credit from 30
October 1982 until fully paid, but to the extent of not more than P8,000,000.00 in the case of
defendant Chester Babst;
6) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to
pay, jointly and severally plaintiff interests at the legal rate on all interests and related charges
already accrued but unpaid on said three (3) domestic letters of credit as of the date of the filing
of this Complaint until full payment thereof;chanrob1es virtua1 1aw 1ibrary
7) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to
pay, jointly and severally, attorneys fees of not less than 10% of the total amount due under
paragraphs 5 and 6 hereof. With costs.
SO ORDERED.
In due time, ELISCON, MULTI and Babst filed their respective notices of appeal. 18
On April 29, 1991, the Court of Appeals rendered the appealed Decision as follows:chanrob1es
virtual 1aw library
WHEREFORE, the judgment appealed from is MODIFIED, to now read (with the underlining to
show the principal changes from the decision of the lower court) thus:chanrob1es virtual 1aw
library
1) Ordering appellant ELISCON to pay the appellee BPI the amount of P2,731,005.60 due on
the promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of
P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982;
2) Ordering appellant ELISCON to pay the appellee BPI interests and related charges on the
principal of said promissory note of P2,102,232.02 at the rates provided in said note from and
after 31 October 1982 until full payment thereof, and on the principal of the three (3) domestic
letters of credit of P3,564,349.25 interests and related charges at the rates provided in said
letters of credit, from and after 31 October 1982 until full payment;
3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate on all interests and
related charges but unpaid as of the filing of this complaint, until full payment thereof;
4) Ordering appellant Pacific Multi-Commercial Corporation and appellant Chester G. Babst to
pay appellee BPI, jointly and severally with appellant ELISCON, the total sum of P3,963,372.08
due on the three (3) domestic letters of credit as of 31 October 1982 with interest and related
charges on the principal amount of P3,963,372.08 at the rates provided in said letters of credit
from 30 October 1982 until fully paid, but to the extent of not more than P8,000,000.00 in the
case of defendant Chester Babst;
5) Ordering appellant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay,
jointly and severally, appellee BPI interests at the legal rate on all interests and related charges
already accrued but unpaid on said three (3) domestic letters of credit as of the date of the filing
of this Complaint until full payment thereof and the plaintiffs lawyers fees in the nominal amount
of P200,000.00;
6) Ordering appellant ELISCON to reimburse appellants Pacific Multi-Commercial Corporation
and Chester Babst whatever amount they shall have paid in said Eliscons behalf particularly
referring to three (3) letters of credit as of 31 October 1982 and other related charges.cNo costs.
SO ORDERED. 19
ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which was,
however, denied in a Resolution dated March 9, 1992. 20 Subsequently, ELISCON filed a
petition for review oncertiorari, docketed as G.R. No. 104625, on the following
grounds:chanrob1es virtual 1aw library
A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO RECOVER FROM
PETITIONER ELISCON THE LATTERS OBLIGATION WITH COMMERCIAL BANK AND
TRUST COMPANY (CBTC)

B. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN ELISCON AND BPI
THERE BEING A PRIOR CONSENT TO AND APPROVAL BY BPI OF THE SUBSTITUTION BY
DBP AS DEBTOR IN LIEU OF THE ORIGINAL DEBTOR, ELISCON, THEREBY RELEASING
ELISCON FROM ITS OBLIGATION TO BPI.
C. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER BABST CANNOT
LAWFULLY RECOVER FROM ELISCON WHATEVER AMOUNT THEY MAY BE REQUIRED TO
PAY TO BPI AS SURETIES OF ELISCONS OBLIGATION TO BPI; THEIR CAUSE OF ACTION
MUST BE DIRECTED AGAINST DBP AS THE NEWLY SUBSTITUTED DEBTOR IN PLACE OF
ELISCON.
D. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO AN ACT OF
GOVERNMENT WHICH WAS A FORTUITOUS EVENT EXCULPATING ELISCON FROM
FURTHER LIABILITIES TO RESPONDENT BPI.
E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY RESPONDENT BPI THE
AMOUNTS STATED IN THE DISPOSITIVE PORTION OF RESPONDENT COURT OF
APPEALS DECISION. 21
BPI filed its Comment 22 raising the following arguments, to wit:chanrob1es virtual 1aw library
1. Respondent BPI is legally entitled to recover from ELISCON, MULTI and Babst the past due
obligations with CBTC prior to the merger of BPI with CBTC.
2. BPI did not give its consent to the DBP take-over of ELISCON. Hence, no valid novation has
been effected.
3. Express consent of creditor to substitution should be recorded in the books.
4. Petitioner Chester G. Babst and respondent MULTI are jointly and solidarily liable to BPI for
the unpaid letters of credit of ELISCON.
5. The question of the liability of ELISCON to BPI has been clearly established.
6. Since MULTI and Chester G. Babst are guarantors of the debts incurred by ELISCON, they
may recover from the latter what they may have paid for on account of that guaranty.chanrob1es
virtua1 1aw 1ibrary
Chester Babst filed a Comment with Manifestation, 23 wherein he contends that the suretyship
agreement he executed with Antonio Roxas Chua was in favor of MULTI; and that there is
nothing therein which authorizes MULTI, in turn, to guarantee the obligations of ELISCON.
In its Comment, 24 MULTI maintained that inasmuch as BPI had full knowledge of the purpose
of the meeting in June 1981, wherein the takeover by DBP of ELISCON was announced, it was
incumbent upon the said bank to formally communicate its objection to the assumption of
ELISCONs liabilities by DBP in answer to the call for the meeting. Moreover, there was no
showing that the availment by ELISCON of MULTIs credit facilities with CBTC, which was
supposedly guaranteed by Antonio Roxas Chua, was indeed authorized by the latter pursuant to
the resolution of the Board of Directors of MULTI.
In compliance with this Courts Resolution dated March 17, 1993, 25 the parties submitted their
respective memoranda.
Meanwhile, in a petition for review filed with this Court, which was docketed as G.R. No. 99398,
Chester Babst alleged that the Court of Appeals acted without jurisdiction and/or with grave
abuse of discretion when:chanrob1es virtual 1aw library
1. IT AFFIRMED THE LOWER COURTS HOLDING THAT THERE WAS NO NOVATION
INASMUCH AS RESPONDENT BANK OF THE PHILIPPINE ISLANDS (OR BPI) HAD PRIOR
CONSENT TO AND APPROVAL OF THE SUBSTITUTION AS DEBTOR BY THE
DEVELOPMENT BANK OF THE PHILIPPINES (OR DBP) IN THE PLACE OF ELIZALDE
STEEL CONSOLIDATED, INC. (OR ELISCON) IN THE LATTERS OBLIGATION TO BPI.
2. IT CONFIRMED THE LOWER COURTS CONCLUSION THAT THERE WAS NO IMPLIED
CONSENT OF THE CREDITOR BANK OF THE PHILIPPINE ISLANDS TO THE
SUBSTITUTION BY DEVELOPMENT BANK OF THE PHILIPPINES OF THE ORIGINAL
DEBTOR ELIZALDE STEEL CONSOLIDATED, INC.
3. IT AFFIRMED THE LOWER COURTS FINDING OF LACK OF MERIT OF THE
CONTENTION OF ELISCON THAT THE FAILURE OF THE OFFICER OF BPI, WHO WAS
PRESENT DURING THE MEETING OF ELISCONS CREDITORS IN JUNE 1981 TO VOICE
HIS OBJECTION TO THE ANNOUNCED TAKEOVER BY THE DBP OF THE ASSETS OF
ELISCON AND ASSUMPTION OF ITS LIABILITIES, CONSTITUTED AN IMPLIED CONSENT
TO THE ASSUMPTION BY DBP OF THE OBLIGATIONS OF ELISCON TO BPI.
4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER OF THE ENTIRE ELISCON
WAS AN ACT OF GOVERNMENT CONSTITUTING A FORTUITOUS EVENT EXCULPATING
ELISCON FROM ANY LIABILITY TO BPI.
5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP AND BPI RELIEVED
ELISCON, MULTI AND BABST OF ANY LIABILITY TO BPI.
6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES SOLIDARILY WITH ELISCON
WITH RESPECT TO THE OBLIGATION INVOLVED HERE.chanrob1es virtua1 1aw 1ibrary
7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST ELISCON ORDERING THE
LATTER TO PAY THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF THE
DECISION; AND ORDERING PETITIONER AND MULTI TO PAY SAID AMOUNTS JOINTLY
AND SEVERALLY WITH ELISCON. 26
Petitioner Babst alleged that DBP sold all of ELISCONs assets to the National Development
Company, for the latter to take over and continue the operation of its business. On September
11, 1981, the Board of Governors of the DBP adopted Resolution No. 2817 which states that
DBP shall enter into a contractual arrangement with NDC for the latter to pay ELISCONs
creditors, including BPI in the amount of P4,015,534.54. This was followed by a Memorandum of
Agreement executed on May 4, 1983 by and between DBP and NDC, wherein they stipulated,
inter alia, that NDC shall pay to ELISCONs creditors, through DBP, the amount of
P299,524,700.00. Among the creditors mentioned in the agreement was BPI, with a listed credit
of P4,015,534.54.
Furthermore, petitioner Babst averred that the assets of ELISCON which were acquired by the
DBP, and later transferred to the NDC, were placed under the Asset Privatization Trust pursuant
to Proclamation No. 50, issued by then President Corazon C. Aquino on December 8, 1986.
In its Comment, 27 BPI countered that by virtue of its merger with CBTC, it acquired all the
latters rights and interest including all receivables; that in order to effect a valid novation by
substitution of debtors, the consent of the creditor must be express; that in addition, the consent
of BPI must appear in its books, it being a private corporation; that BPI intentionally did not
consent to the assumption by DBP of the obligations of ELISCON because it wanted to preserve
intact its causes of action and legal recourse against Pacific Multi-Commercial Corporation and
Babst as sureties of ELISCON and not of DBP; that MULTI expressly bound itself solidarily for
ELISCONs obligations to CBTC in its Resolution wherein it allowed the latter to use its credit
facilities; and that the suretyship agreement executed by Babst does not exclude liabilities
incurred by MULTI on behalf of third parties, such as ELISCON.
ELISCON likewise filed a Comment, 28 wherein it manifested that of the seven errors raised by
Babst in his petition, six are arguments which ELISCON itself raised in its previous pleadings. It
is only the sixth assigned error that the Court of Appeals erred in finding that MULTI and
Babst bound themselves solidarily with ELISCON that ELISCON takes exception to. More
particularly, ELISCON pointed out the contradictory positions taken by Babst in admitting that he
bound himself to pay the indebtedness of MULTI, while at the same time completely disavowing
and denying any such obligation. It stressed that should MULTI or Babst be finally adjudged
liable under the suretyship agreement, they cannot lawfully recover from ELISCON, but from the
DBP which had been substituted as the new debtor.
MULTI filed its Comment, 29 admitting the correctness of the petition and adopting the Comment
of ELISCON insofar as it is not inconsistent with the positions of Babst and MULTI.
At the outset, the preliminary issue of BPIs right of action must first be addressed. ELISCON
and MULTI assail BPIs legal capacity to recover their obligation to CBTC. However, there is no
question that there was a valid merger between BPI and CBTC. It is settled that in the merger of
two existing corporations, one of the corporations survives and continues the business, while the
other is dissolved and all its rights, properties and liabilities are acquired by the surviving
corporation. 30 Hence, BPI has a right to institute the case a quo.
We now come to the primordial issue in this case whether or not BPI consented to the
assumption by DBP of the obligations of ELISCON.chanrob1es virtua1 1aw 1ibrary
Article 1293 of the Civil Code provides:chanrob1es virtual 1aw library
Novation 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 creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and
1237.
BPI contends that in order to have a valid novation, there must be an express consent of the
creditor. In the case of Testate Estate of Mota, Et. Al. v. Serra, 31 this Court held:chanrob1es
virtual 1aw library
It should be noted that in order to give novation its legal effect, the law requires that the creditor
should consent to the substitution of a new debtor. This consent must be given expressly for the
reason that, since novation extinguishes the personality of the first debtor who is to be
substituted by a new one, it implies on the part of the creditor a waiver of the right that he had
before the novation, which waiver must be express under the principle of renuntiatio non
prsumitur, recognized by the law in declaring that a waiver of right may not be performed
[should read: presumed] unless the will to waive is indisputably shown by him who holds the
right. 32
The import of the foregoing ruling, however, was explained and clarified by this Court in the later
case of Asia Banking Corporation v. Elser 33 in this wise:chanrob1es virtual 1aw library
The aforecited article 1205 [now 1293] of the Civil Code does not state that the creditors
consent to the substitution of the new debtor for the old be express, or given at the time of the
substitution, and the Supreme Court of Spain, in its judgment of June 16, 1908, construing said
article, laid down the doctrine that "article 1205 of the Civil Code does not mean or require that
the creditors consent to the change of debtors must be given simultaneously with the debtors
consent to the substitution, its evident purpose being to preserve the creditors full right, it is
sufficient that the latters consent be given at any time and in any form whatever, while the
agreement of the debtors subsists." The same rule is stated in the Enciclopedia Juridica
Espaola, volume 23, page 503, which reads: "The rule that this kind of novation, like all others,
must be express, is not absolute; for the existence of the consent may well be inferred from the
acts of the creditor, since volition may as well be expressed by deeds as by words." The
understanding between Henry W. Elser and the principal director of Yangco, Rosenstock & Co.,
Inc., with respect to Luis R. Yangcos stock in said corporation, and the acts of the board of
directors after Henry W. Elser had acquired said shares, in substituting the latter for Luis R.
Yangco, are a clear and unmistakable expression of its consent. When this court said in the case
of Estate of Mota v. Serra (47 Phil., 464), that the creditors express consent is necessary in
order that there may be a novation of a contract by the substitution of debtors, it did not wish to
convey the impression that the word "express" was to be given an unqualified meaning, as
indicated in the authorities or cases, both Spanish and American, cited in said decision. 34
Subsequently, in the case of Vda. e Hijos de Pio Barretto y Cia., Inc. v. Albo & Sevilla, Inc., Et
Al., 35 this Court reiterated the rule that there can be implied consent of the creditor to the
substitution of debtors.
In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to
register its objection to the take-over by DBP of ELISCONs assets, at the creditors meeting
held in June 1981 and thereafter, it is deemed to have consented to the substitution of DBP for
ELISCON as debtor.chanrob1es virtua1 1aw 1ibrary
We find merit in the argument. Indeed, there exist clear indications that BPI was aware of the
assumption by DBP of the obligations of ELISCON. In fact, BPI admits that
"the Development Bank of the Philippines (DBP), for a time, had proposed a formula for the
settlement of Eliscons past obligations to its creditors, including the plaintiff [BPI], but the
formula was expressly rejected by the plaintiff as not acceptable (long before the filing of the
complaint at bar)." 36
The Court of Appeals held that even if the account officer who attended the June 1981 creditors
meeting had expressed consent to the assumption by DBP of ELISCONs debts, such consent
would not bind BPI for lack of a specific authority therefor. In its petition, ELISCON counters that
the mere presence of the account officer at the meeting necessarily meant that he was
authorized to represent BPI in that creditors meeting. Moreover, BPI did not object to the
substitution of debtors, although it objected to the payment formula submitted by DBP.
Indeed, the authority granted by BPI to its account officer to attend the creditors meeting was an
authority to represent the bank, such that when he failed to object to the substitution of debtors,
he did so on behalf of and for the bank. Even granting arguendo that the said account officer
was not so empowered, BPI could have subsequently registered its objection to the substitution,
especially after it had already learned that DBP had taken over the assets and assumed the
liabilities of ELISCON. Its failure to do so can only mean an acquiescence in the assumption by
DBP of ELISCONs obligations. As repeatedly pointed out by ELISCON and MULTI, BPIs
objection was to the proposed payment formula, not to the substitution itself.
BPI gives no cogent reason in withholding its consent to the substitution, other than its desire to
preserve its causes of action and legal recourse against the sureties of ELISCON. It must be
remembered, however, that while a surety is solidarily liable with the principal debtor, his
obligation to pay only arises upon the principal debtors failure or refusal to pay. A contract of
surety is an accessory promise by which a person binds himself for another already bound, and
agrees with the creditor to satisfy the obligation if the debtor does not. 37 A surety is an insurer
of the debt; he promises to pay the principals debt if the principal will not pay. 38
In the case at bar, there was no indication that the principal debtor will default in payment. In
fact, DBP, which had stepped into the shoes of ELISCON, was capable of payment. Its
authorized capital stock was increased by the government. 39 More importantly, the National
Development Company took over the business of ELISCON and undertook to pay ELISCONs
creditors, and earmarked for that purpose the amount of P4,015,534.54 for payment to BPI. 40
Notwithstanding the fact that a reliable institution backed by government funds was offering to
pay ELISCONs debts, not as mere surety but as substitute principal debtor, BPI, for reasons
known only to itself, insisted in going after the sureties. The course of action chosen taxes the
credulity of this Court. At the very least, suffice it to state that BPIs actuation in this regard runs
counter to the good faith covenant in contractual relations, provided for by the Civil Code, to
wit:chanrob1es virtual 1aw library
ARTICLE 19. Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith.chanrob1es
virtua1 1aw 1ibrary
ARTICLE 1159. Obligations arising from contract have the force of law between the contracting
parties and should be complied with in good faith.
BPIs conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON
as debtor. Hence, there was a valid novation which resulted in the release of ELISCON from its
obligation to BPI, whose cause of action should be directed against DBP as the new debtor.
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an
old obligation is terminated by the creation of a new obligation that takes the place of the former;
it is merely modificatory when the old obligation subsists to the extent it remains compatible with
the amendatory agreement. An extinctive novation results either by changing the object or
principal conditions (objective or real), or by substituting the person of the debtor or subrogating
a third person in the rights of the creditor (subjective or personal). Under this mode, novation
would have dual functions one to extinguish an existing obligation, the other to substitute a
new one in its place requiring a conflux of four essential requisites, (1) a previous valid
obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of
the old obligation; and (4) the birth of a valid new obligation. 41
The original obligation having been extinguished, the contracts of suretyship executed
separately by Babst and MULTI, being accessory obligations, are likewise extinguished. 42
Hence, BPI should enforce its cause of action against DBP. It should be stressed that
notwithstanding the lapse of time within which these cases have remained pending, the
prescriptive period for BPI to file its action was interrupted when it filed Civil Case No. 49226. 43
WHEREFORE, the consolidated petitions are GRANTED. The appealed Decision of the Court of
Appeals, which held ELISCON, MULTI and Babst solidarily liable for payment to BPI of the
promissory note and letters of credit, is REVERSED and SET ASIDE. BPIs complaint against
ELISCON, MULTI and Babst is DISMISSED.
SO ORDERED.
[G.R. No. 136780. August 16, 2001.]
JEANETTE D. MOLINO, Petitioner, v. SECURITY DINERS INTERNATIONAL
CORPORATION,Respondent.
DECISION
GONZAGA-REYES, J.:
Assailed by this petition for review on certiorari is the decision of the Court of Appeals dated
September 28, 1998 1 which held petitioner liable as surety for the outstanding credit card debts
of Danilo Alto with herein respondent corporation.
The decision of the Court of Appeals satisfactorily sums up the facts that led to the filing of this
case:chanrob1es virtual 1aw library
The Security Diners International Corporation ("SDIC) operates a credit card system under the
name of Diners Club through which it extends credit accommodation to its cardholders for the
purchase of goods and payment of services from its member establishments to be reimbursed
later on by the cardholder upon proper billing. There are two types of credit cards issued: one,
the Regular (Local) Card which entitles the cardholder to purchase goods and pay services from
member establishments in an amount not exceeding P10,000.00; and two, the Diamond
(Edition) Card which entitles the cardholder to purchase goods and pay services from member
establishments in unlimited amounts. One of the requirements for the issuance of either of these
cards is that an applicant should have a surety.chanrob1es virtua1 1aw 1ibrary
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 application
form (Exhibit A) and Jeanette signed the Surety Undertaking (Exhibit A-5"). Attached to the
Application Form was an Agreement (Use of Diners Club Card), paragraph 16 of which
reads:chanrob1es virtual 1aw library
16. SURETY. The cardholder shall furnish an adequate surety or sureties acceptable to
Security Diners who shall be jointly and severally liable with the cardholder to pay Security
Diners all the obligations and charges incurred and credit extended on the basis of the card. In
the event the surety/sureties furnished the cardholder are discharged the cardholder must
furnish a new surety or sureties acceptable to Security Diners within thirty (30) days. Otherwise
the cardholders privileges shall be automatically terminated in accordance with Section 11
hereof."cralaw virtua1aw library
The Surety Undertaking signed by Jeanette states:jgc:chanrobles.com.ph
"I/WE, the undersigned, bind myself/ourselves jointly and severally with Mr. Danilo Alto to pay
SECURITY DINERS INTERNATIONAL CORPORATION, hereinafter referred to as Security
Diners all the obligations and charges including but not limited to fees, interest, attorneys fees
and all other costs incurred by him/her in connection with the use of the DINERS CLUB CARD in
accordance with the terms and conditions governing the issuance and use of the Diners Club
Card. Any change or novation in the agreement or any extension of time granted by SECURITY
DINERS to pay such obligations, charges and fees, shall not release me/us from this Surety
Undertaking, it being understood that said undertaking is a continuing one and shall subsist and
bind me/us until all such obligations, charges and fees have been fully paid and
satisfied.chanrob1es virtua1 1aw 1ibrary
It is understood that the indication of a credit limit to the cardholder shall not relieve me/us of
liability for charges and all other amounts voluntarily incurred by the cardholder in excess of the
credit limit.
On the basis of the completed and signed Application Form and Surety Undertaking, the SDIC
issued to Danilo Diners Card No. 36510293216-0006. The latter used this card and initially paid
his obligations to SDIC. On February 8, 1988, Danilo wrote SDIC a letter (Exhibit "B") requesting
it to upgrade his Regular (Local) Diners Club Card to a Diamond (Edition) one. As a requirement
of SDIC, Danilo secured from Jeanette her approval. The latter obliged and so on March 2,
1988, she signed a Note (Exhibit C) which states:jgc:chanrobles.com.ph
"This certifies that I, Jeanette D. Molino, approve of the request of Danilo and Gloria Alto with
Card No. 3651-203216 0006 and 3651-203412-5007 to upgrade their card from regular to
diamond edition."cralaw virtua1aw library
Danilos request was granted and he was issued a Diamond (Edition) Diners Club Card. He
used this card and made purchases (Exhibits "D", "D-1" to "D-7") from member establishments.
On October 1, 1988 Danilo had incurred credit charged plus appropriate interest and service
charges in the aggregate amount of P166,408.31. He defaulted in the payment of this
obligation.
SDIC demanded of Danilo and Jeanette to pay said obligation but they did not pay. So, on
November 9, 1988, SDIC filed an action to collect said indebtedness against Danilo and
Jeanette. This was docketed in the Regional Trial Court of Makati, Branch 145 as Civil Case No.
88-2381 . . . 2
Defendant Danilo Alto failed to file an Answer, and during the pre-trial conference respondent
moved to have the complaint dismissed against him, without prejudice to a subsequent re-filing.
Petitioner was left as the lone defendant, sued in her capacity as surety of Danilo.
In the Answer with Compulsory Counterclaim that she filed with the RTC, petitioner claimed that
her liability under the Surety Undertaking was limited to P10,000.00 and that she did not
expressly and categorically agree to act as surety for Danilo in an amount higher than
P10,000.00. 3 By way of counterclaim, she asked for moral and exemplary damages.
On August 19, 1991, the trial court rendered a decision dismissing the complaint for failure of
respondent to prove its case by a preponderance of the evidence. It found that while petitioner
clearly bound herself as surety under the terms of Danilo Altos Regular Diners Club Card, there
was no evidence that after the card had been upgraded to Diamond (Edition) petitioner
consented or agreed to act as surety for Danilo. Exhibit "C" or Exhibit "1", inter alia, which was a
note bearing petitioners signature certifying to her approval of Danilos request to have his card
upgraded should be read simply as a statement of and objection to his request for upgrading,
and not as an assumption of liability for the debts that Danilo may later owe through the said
card. 4 The trial court also took note of the testimony of Alfredo Vicente, an officer of respondent,
who opined that the consent to be bound as surety to an upgraded card should be categorical 5
and not in a simple "no objection" form.chanrob1es virtual law library
The trial court went on further to state that petitioner was not liable for any amount, not even for
P10,000.00 which is the maximum credit limit for Regular Diners Club Cards, since at the time of
the upgrading Danilo had no outstanding credit card debts. 6 This is evident from the fact that
Danilos request for upgrading was approved, since one of the requirements for the approval of a
request for the upgrading of a credit card from Regular to Diamond is that the applicant must
have paid all his billings for the last three months prior to his request.
Hence, the trial court disposed of the case with these pronouncements:chanrob1es virtual 1aw
library
WHEREFORE, judgment is rendered dismissing the complaint against defendant Jeanette D.
Molino-Alto for failure of the plaintiff to prove its case by a clear preponderance of evidence.
Said defendants counterclaim is also dismissed.
No pronouncement as to costs.
SO ORDERED. 7
The Court of Appeals found contrary to the lower court, and declared that the Surety
Undertaking signed by petitioner when Danilo Alto first applied for a Regular Diners Club Card
clearly applied to the unpaid purchases of Danilo Alto under the Diamond card. In holding thus,
the Court of Appeals referred to the terms of the said Surety Undertaking, which stated that any
change or novation in the agreement on the use of the Diners Club card does not release the
surety from his obligations, it being understood that the undertaking is a continuing one which
subsists until all obligations and charges under the subject credit card are paid and satisfied. It
also cited Pacific Banking Corporation v. Intermediate Appellate Court, 8 a 1991 decision which
held the surety liable to the extent of the credit cardholders indebtedness, under the clear terms
of the Guarantors Undertaking that the surety signed with the credit card company.
The Court of Appeals further declared that it was erroneous of the trial court to conclude that
petitioner was completely relieved of liability under Danilo Altos credit card since the Surety
Undertaking she signed remained valid and enforceable even after the upgrading of the said
card; besides, petitioner herself admitted that she was liable to the extent of
P10,000.00.chanrob1es virtua1 1aw 1ibrary
Additionally, the Court of Appeals reduced the attorneys fees (stipulated in the Agreement for
the Use of Diners Club Card) from 25% to 10% of the amount due, judging this to be a more
reasonable rate under the circumstances.
The dispositive portion of the decision of the Court of Appeals reads:chanrob1es virtual 1aw
library
WHEREFORE, the appealed Decision is REVERSED and one is rendered ordering defendant-
appellee Jeanette D. Molino-Alto to pay plaintiff-appellant Security Diners Intentional, Inc. the
following:chanrob1es virtual 1aw library
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 fully paid;
2. The amount equivalent to 10% of the obligation mentioned in the preceding paragraph as
attorneys fees; and
3. Costs.
SO ORDERED. 9
Petitioners motion for reconsideration of the above decision was denied for lack of merit on
December 1, 1998. Hence, the petition before us, which assigns the following errors:chanrob1es
virtual 1aw library
I.
The material findings of the Court of Appeals, which are contrary to those of the lower court are
erroneous.
II.
The findings of the Court of Appeals are conflicting and/or without citation of specific evidence
on which they are based.
III.
The Court of Appeals erred in disregarding the applicable legal principle established by this
Honorable Court that, unlike in ordinary solidary debtors, the surety does not incur liability unless
the principal debtor is held liable. 10
Petitioner posits that she did not expressly give her consent to be bound as surety under the
upgraded card. She points out that the note she signed, marked as Exhibit "C", registering her
approval of the request of Danilo Alto to upgrade his card, renders the Surety Undertaking she
signed under the terms of the previous card "without probative value, immaterial and irrelevant
as it covers only the liability of the surety in the use of the regular credit card by the principal
debtor . . . . 11" She argues further that because the principal debtor, Danilo Alto, was not held
liable, having been dropped as a defendant, she could not be said to have incurred liability as
surety.chanrob1es virtua1 law library

The petition is devoid of merit.
The resolution of whether petitioner is liable as surety under the Diamond card revolves around
the effect of the upgrading by Danilo Alto of his card. Was the upgrading a novation of the
original agreement governing the use of Danilo Altos first credit card, as to extinguish that
obligation and the Surety Undertaking which was simply accessory to it?
Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit
declaration, or by material incompatibility (implied novation). As we stated in Fortune Motors v.
Court of Appeals, supra:chanrob1es virtual 1aw library
. . . The test of incompatibility is whether the two obligations can stand together, each one having
its independent existence. If they cannot, they are incompatible and the latter obligation novates
the first. Novation must be established either by the express terms of the new agreement or by
the acts of the parties clearly demonstrating the intent to dissolve the old obligation as a
consideration for the emergence of the new one. The will to novate, whether totally or partially,
must appear by express agreement of the parties, or by their acts which are too clear or
unequivocal to be mistaken.
There is no doubt that the upgrading was a novation of the original agreement covering the first
credit card issued to Danilo Alto, basically since it was committed with the intent of canceling
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 discharge in case of
change or novation in the agreement governing the use of the first credit card.
The nature and extent of petitioners obligations are set out in clear and unmistakable terms in
the Surety Undertaking. Thus:chanrob1es virtual 1aw library
1. She bound herself jointly and severally with Danilo Alto to pay SDIC all obligations and
charges in the use of the Diners Club Card, including fees, interest, attorneys fees, and costs;
2. She declared that "any change or novation in the Agreement or any extension of time granted
by SECURITY DINERS to pay such obligation, charges, and fees, shall not release (her) from
this Surety Undertaking" ;
3." (S)aid undertaking is a continuous one and shall subsist and bind (her) until all such
obligations, charges and fees have been fully paid and satisfied" ; and
4. "The indication of a credit limit to the cardholder shall not relieve (her) of liability for charges
and all other amounts voluntarily incurred by the cardholder in excess of said credit limit." 12
We cannot give any additional meaning to the plain language of the subject undertaking. The
extent of a suretys liability is determined by the language of the suretyship contract or bond
itself. 13 Article 1370 of the Civil Code provides: "If the terms of contract are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall
control." chanrob1es virtua1 1aw 1ibrary
This case is no different from Pacific Banking Corporation v. CA, supra, correctly applied by the
Court of Appeals, which involved a Guarantors Undertaking (although thus denominated, it was
in substance a contract of surety signed by the husband for the credit card application of his
wife. Like herein petitioner, the husband also argued that his liability should be limited to the
credit limit allowed under his wifes card but the Court declared him liable to the full extent of his
wifes indebtedness. Thus:chanrob1es virtual 1aw library
We need not look elsewhere to determine the nature and extent of private respondent Roberto
Regala, Jr.s undertaking. As a surety he bound himself jointly and severally with the debtor
Celia Regala "to pay the Pacific Banking Corporation upon demand, any and all indebtedness,
obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by Pacific Banking Corporation.. . . .
x x x
It is likewise not disputed by the parties that the credit limit granted to Celia Regala was
P2,000.00 per month and that Celia Regala succeeded in using the card beyond the original
period of its effectivity, October 29, 1979. We do not agree, however, that Roberto Jr.s liability
should be limited to that extent. Private respondent Roberto Regala, Jr., as surety of his wife,
expressly bound himself up to the extent of the debtors (Celias) indebtedness likewise
expressly waiving any "discharge in case of any change or novation of the terms and conditions
in connection with the issuance of the Pacificard credit card." Roberto, in fact, made his
commitment as a surety a continuing one, binding upon himself until all the liabilities of Celia
Regala have been fully paid. All these were clear under the "Guarantors Undertaking" Roberto
signed, thus:jgc:chanrobles.com.ph
". . . Any changes of or novation in the terms and conditions in connection with the issuance or
use of said Pacificard, or any extension of time to pay such obligations, charges or liabilities
shall not in any manner release me/us from the responsibility hereunder, it being understood that
the undertaking is a continuing one and shall subsist and bind me/us until all the liabilities of the
said Celia Syjuco Regala have been fully satisfied or paid." (Emphasis supplied)chanrob1es
virtua1 1aw 1ibrary
As a last-ditch measure, petitioner asseverates that, being merely a surety, a pronouncement
should first be made declaring the principal debtor liable before she herself can be proceeded
against. The argument, which is hinged upon the dropping of Danilo as defendant in the
complaint, is bereft of merit.
The Surety Undertaking expressly provides that petitioners liability is solidary. A surety is
considered in law as being the same party as the debtor in relation to whatever is adjudged
touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. 14
Although the contract of a surety is in essence secondary only to a valid principal obligation, his
liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of
another although he possesses no direct or personal interest over the obligations nor does he
receive any benefit therefrom. 15 There being no question that Danilo Alto incurred debts of
P166,408.31 in credit card advances, an obligation shared solidarily by petitioner, respondent
was certainly within its rights to proceed singly against petitioner, as surety and solidary debtor,
without prejudice to any action it may later file against Danilo Alto, until the obligation is fully
satisfied. This is so provided under Article 1216 of the Civil Code:chanrob1es virtual 1aw library
The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which
may be subsequently directed against the others, so long as the debt has not been fully
collected.
Petitioner is a graduate of business administration, and possesses considerable work
experience in several banks. She knew the full import and consequence of the Surety
Undertaking that she executed. She had the option to withdraw her suretyship when Danilo
upgraded his card to one that permitted unlimited purchases, but instead she approved the
upgrading. While we commiserate in the financial predicament she now faces, it is also evident
that the liability she incurred is only the legitimate consequence of an undertaking that she freely
and intelligently obliged to. Prospective sureties to credit card applicants would be well-advised
to study carefully the terms of the agreements prepared by the credit card companies before
giving their consent, and pay heed to speculations that could lead to onerous effects, like in the
present case where the credit applied for was limitless. At the same time, it bears articulating
that although courts in appropriate cases may equitably reduce the award for penalty as
provided under such suretyship agreements if the same is iniquitous or unconscionable, 16 we
are unable to give relief to petitioner by way of reducing the amount of the principal liability as
surety under the circumstances of this case.chanrob1es virtua1 1aw 1ibrary
WHEREFORE, the petition is dismissed for lack of merit The decision of the Court of Appeals is
AFFIRMED in all respects.
SO ORDERED.
[G.R. No. 154127. December 8, 2003.]
ROMEO C. GARCIA, Petitioner, v. DIONISIO V. LLAMAS, Respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the express assent of the
parties or by the complete incompatibility between the old and the new agreements. Petitioner
herein fails to show either requirement convincingly; hence, the summary judgment holding him
liable as a joint and solidary debtor stands.chanrob1es virtua1 1aw 1ibrary
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, seeking to nullify the
November 26, 2001 Decision 2 and the June 26, 2002 Resolution 3 of the Court of Appeals (CA)
in CA-GR CV No. 60521. The appellate court disposed as follows:jgc:chanrobles.com.ph
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it
pertains to [Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the
modification that the award for attorneys fees and cost of suit is DELETED. The portion of the
judgment that pertains to . . . Eduardo de Jesus is SET ASIDE and VACATED. Accordingly, the
case against . . . Eduardo de Jesus is REMANDED to the court of origin for purposes of
receiving ex parte [Respondent] Dionisio Llamas evidence against . . . Eduardo de Jesus." 4
The challenged Resolution, on the other hand, denied petitioners Motion for Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:jgc:chanrobles.com.ph
"This case started out as a complaint for sum of money and damages by . . . [Respondent]
Dionisio Llamas against . . . [Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil
Case No. Q97-32-873, the complaint alleged that on 23 December 1996[,] [petitioner and de
Jesus] borrowed P400,000.00 from [respondent]; that, on the same day, [they] executed a
promissory note wherein they bound themselves jointly and severally to pay the loan on or
before 23 January 1997 with a 5% interest per month; that the loan has long been overdue and,
despite repeated demands, [petitioner and de Jesus] have failed and refused to pay it; and that,
by reason of the[ir] unjustified refusal, [respondent] was compelled to engage the services of
counsel to whom he agreed to pay 25% of the sum to be recovered from [petitioner and de
Jesus], plus P2,000.00 for every appearance in court. Annexed to the complaint were the
promissory note above-mentioned and a demand letter, dated 02 May 1997, by [respondent]
addressed to [petitioner and de Jesus].
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability
under the promissory note because he signed it merely as an accommodation party for . . . de
Jesus; and, alternatively, that he is relieved from any liability arising from the note inasmuch as
the loan had been paid by . . . de Jesus by means of a check dated 17 April 1997; and that, in
any event, the issuance of the check and [respondents] acceptance thereof novated or
superseded the note.
" [Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder asserting that the
loan remained unpaid for the reason that the check issued by . . . de Jesus bounced, and that
[Petitioner] Garcias answer was not even accompanied by a certificate of non-forum shopping.
Annexed to the reply were the face of the check and the reverse side thereof.
"For his part, . . . de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the supposed
P400,000.00 loan, he received only P360,000.00, the P40,000.00 having been advance interest
thereon for two months, that is, for January and February 1997; that[,] in fact[,] he paid the sum
of P120,000.00 by way of interests; that this was made when [respondents] daughter, one Nits
Llamas-Quijencio, received from the Central Police District Command at Bicutan, Taguig, Metro
Manila (where . . . de Jesus worked), the sum of P40,000.00, representing the peso equivalent
of his accumulated leave credits, another P40,000.00 as advance interest, and still another
P40,000.00 as interest for the months of March and April 1997; that he had difficulty in paying
the loan and had asked [respondent] for an extension of time; that [respondent] acted in bad
faith in instituting the case, [respondent] having agreed to accept the benefits he (de Jesus)
would receive for his retirement, but [respondent] nonetheless filed the instant case while his
retirement was being processed; and that, in defense of his rights, he agreed to pay his counsel
P20,000.00 [as] attorneys fees, plus P1,000.00 for every court appearance.chanrob1es virtua1
1aw 1ibrary
"During the pre-trial conference, . . . de Jesus and his lawyer did not appear, nor did they file any
pre-trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even manifested
that he would no [longer] present evidence. Given this development, the trial court gave
[respondent] permission to present his evidence ex parte against . . . de Jesus; and, as regards
[Petitioner] Garcia, the trial court directed [respondent] to file a motion for judgment on the
pleadings, and for [Petitioner] Garcia to file his comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him to
present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting
his defense to a judgment on the pleadings. Subsequently, [respondent] filed a [M]anifestation/
[M]otion to submit the case for judgment on the pleadings, withdrawing in the process his
previous motion. Thereunder, he asserted that [petitioners and de Jesus] solidary liability under
the promissory note cannot be any clearer, and that the check issued by de Jesus did not
discharge the loan since the check bounced." 5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the
case as follows:jgc:chanrobles.com.ph
"WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of
[respondent] and against [petitioner and De Jesus], who are hereby ordered to pay, jointly and
severally, the [respondent] the following sums, to wit:chanrob1es virtual 1aw library
1) P400,000.00 representing the principal amount plus 5% interest thereon per month from
January 23, 1997 until the same shall have been fully paid, less the amount of P120,000.00
representing interests already paid by . . . de Jesus;
2) P100,000.00 as attorneys fees plus appearance fee of P2,000.00 for each day of [c]ourt
appearance, and;
3) Cost of this suit." 6
Ruling of the Court of Appeals
The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against
De Jesus. According to the appellate court, his Answer raised genuinely contentious issues.
Moreover, he was still required to present his evidence ex parte. Thus, respondent was not ipso
facto entitled to the RTC judgment, even though De Jesus had been declared in default. The
case against the latter was therefore remanded by the CA to the trial court for the ex parte
reception of the formers evidence.
As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed
to raise even a single genuine issue regarding any material fact.
The appellate court ruled that no novation express or implied had taken place when
respondent accepted the check from De Jesus. According to the CA, the check was issued
precisely to pay for the loan that was covered by the promissory note jointly and severally
undertaken by petitioner and De Jesus. Respondents acceptance of the check did not serve to
make De Jesus the sole debtor because, first, the obligation incurred by him and petitioner was
joint and several; and, second, the check which had been intended to extinguish the
obligation bounced upon its presentment.chanrob1es virtua1 1aw 1ibrary
Hence, this Petition. 7
Issues
Petitioner submits the following issues for our consideration:chanrob1es virtual 1aw library
"I
Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies
in the instant case as . . . Eduardo de Jesus had expressly assumed sole and exclusive liability
for the loan obligation he obtained from . . . Respondent Dionisio Llamas, as clearly evidenced
by:chanrob1es virtual 1aw library
a) Issuance by . . . de Jesus of a check in payment of the full amount of the loan of P400,000.00
in favor of Respondent Llamas, although the check subsequently bounced[;]
b) Acceptance of the check by the . . . Respondent. . . which resulted in [the] substitution by . . .
de Jesus or [the superseding of] the promissory note;
c) . . . de Jesus having paid interests on the loan in the total amount of P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of . . . de Jesus that due to financial
difficulties, he be given an extension of time to pay his loan obligation and that his retirement
benefits from the Philippine National Police will answer for said obligation.
"II
Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of
petitioner that he was merely an accommodation party, despite the fact that the promissory note
provided for a joint and solidary liability, should have been given weight and credence
considering that subsequent events showed that the principal obligor was in truth and in fact . . .
de Jesus, as evidenced by the foregoing circumstances showing his assumption of sole liability
over the loan obligation.
III
Whether or not judgment on the pleadings or summary judgment was properly availed of by
Respondent Llamas, despite the fact that there are genuine issues of fact, which the Honorable
Court of Appeals itself admitted in its Decision, which call for the presentation of evidence in a
full-blown trial." 8
Simply put, the issues are the following: 1) whether there was novation of the obligation; 2)
whether the defense that petitioner was only an accommodation party had any basis; and 3)
whether the judgment against him be it a judgment on the pleadings or a summary judgment
was proper.
The Courts Ruling
The Petition has no merit
First Issue:chanrob1es virtual 1aw library
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting
that novation took place, either through the substitution of De Jesus as sole debtor or the
replacement of the promissory note by the check. Alternatively, the former argues that the
original obligation was extinguished when the latter, who was his co-obligor, "paid" the loan with
the check.chanrob1es virtua1 1aw 1ibrary
The fallacy of the second (alternative) argument is all too apparent. The check could not have
extinguished the obligation, because it bounced upon presentment. By law, 9 the delivery of a
check produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations,
by substituting a new debtor in place of the old one, or by subrogating a third person to the rights
of the creditor. 10 Article 1293 of the Civil Code defines novation as
follows:jgc:chanrobles.com.ph
"Art. 1293. Novation 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 creditor. Payment by the new debtor gives him rights mentioned in articles 1236
and 1237."cralaw virtua1aw library
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from and may even
be made without the knowledge of the debtor, since it consists of a third persons assumption
of the obligation. As such, it logically requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the consent of these three persons are necessary.
11 Both modes of substitution by the debtor require the consent of the creditor. 12
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new one that takes the place of the former. It is merely
modificatory when the old obligation subsists to the extent that it remains compatible with the
amendatory agreement. 13 Whether extinctive or modificatory, novation is made either by
changing the object or the principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person to the rights of the creditor, an
act known as subjective or personal novation. 14 For novation to take place, the following
requisites must concur:chanrob1es virtual 1aw library
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract. 15
Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point. 16 The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence. 17
Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been extinguished by the
issuance and the acceptance of the check, or that the check would take the place of the note.
There is no incompatibility between the promissory note and the check. As the CA correctly
observed, the check had been issued precisely to answer for the obligation. On the one hand,
the note evidences the loan obligation; and on the other, the check answers for it. Verily, the two
can stand together.chanrob1es virtua1 1aw 1ibrary
Neither could the payment of interests which, in petitioners view, also constitutes novation 18
change the terms and conditions of the obligation. Such payment was already provided for in
the promissory note and, like the check, was totally in accord with the terms thereof.
Also unmeritorious is petitioners argument that the obligation was novated by the substitution of
debtors. In order to change the person of the debtor, the old one must be expressly released
from the obligation, and the third person or new debtor must assume the formers place in the
relation. 19 Well-settled is the rule that novation is never presumed. 20 Consequently, that which
arises from a purported change in the person of the debtor must be clear and express. 21 It is
thus incumbent on petitioner to show clearly and unequivocally that novation has indeed taken
place.
In the present case, petitioner has not shown that he was expressly released from the obligation,
that a third person was substituted in his place, or that the joint and solidary obligation was
cancelled and substituted by the solitary undertaking of De Jesus. The CA aptly
held:jgc:chanrobles.com.ph
". . . Plaintiffs acceptance of the bum check did not result in substitution by de Jesus either, the
nature of the obligation being solidary due to the fact that the promissory note expressly
declared that the liability of appellants thereunder is joint and [solidary.] Reason: under the law, a
creditor may demand payment or performance from one of the solidary debtors or some or all of
them simultaneously, and payment made by one of them extinguishes the obligation. It therefore
follows that in case the creditor fails to collect from one of the solidary debtors, he may still
proceed against the other or others . . ." 22
Moreover, it must be noted that for novation to be valid and legal, the law requires that the
creditor expressly consent to the substitution of a new debtor. 23 Since novation implies a
waiver of the right the creditor had before the novation, such waiver must be express. 24 It
cannot be supposed, without clear proof, that the present respondent has done away with his
right to exact fulfillment from either of the solidary debtors.25cralaw:red
More important, De Jesus was not a third person to the obligation. From the beginning, he was a
joint and solidary obligor of the P400,000 loan; thus, he can be released from it only upon its
extinguishment. Respondents acceptance of his check did not change the person of the debtor,
because a joint and solidary obligor is required to pay the entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of
the whole obligation from any or all of the debtors. 26 It is up to the former to determine against
whom to enforce collection. 27 Having made himself jointly and severally liable with De Jesus,
petitioner is therefore liable 28 for the entire obligation. 29
Second Issue:chanrob1es virtual 1aw library
Accommodation Party
Petitioner avers that he signed the promissory note merely as an accommodation party; and
that, as such, he was released as obligor when respondent agreed to extend the term of the
obligation.
This reasoning is misplaced, because the note herein is not a negotiable instrument. The note
reads:jgc:chanrobles.com.ph
"PROMISSORY NOTE
"P400,000.00
"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND
PESOS, Philippine Currency payable on or before January 23, 1997 at No. 144 K-10 St.
Kamias, Quezon City, with interest at the rate of 5% per month or fraction thereof.chanrob1es
virtua1 1aw 1ibrary
"It is understood that our liability under this loan is jointly and severally [sic].
"Done at Quezon City, Metro Manila this 23rd day of December, 1996." 30
By its terms, the note was made payable to a specific person rather than to bearer or to order 31
a requisite for negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence,
petitioner cannot avail himself of the NILs provisions on the liabilities and defenses of an
accommodation party. Besides, a non-negotiable note is merely a simple contract in writing and
is evidence of such intangible rights as may have been created by the assent of the parties. 32
The promissory note is thus covered by the general provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the
promissory note. Under Article 29 of Act 2031, an accommodation party is liable for the
instrument to a holder for value even if, at the time of its taking, the latter knew the former to be
only an accommodation party. The relation between an accommodation party and the party
accommodated is, in effect, one of principal and surety the accommodation party being the
surety. 33 It is a settled rule that a surety is bound equally and absolutely with the principal and
is deemed an original promisor and debtor from the beginning. The liability is immediate and
direct. 34
Third Issue:chanrob1es virtual 1aw library
Propriety of Summary Judgment or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the pleadings and a
summary judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may
be rendered after a summary hearing if the pleadings, supporting affidavits, depositions and
admissions on file show that (1) except as to the amount of damages, there is no genuine issue
regarding any material fact; and (2) the moving party is entitled to a judgment as a matter of law.
A summary judgment is a procedural device designed for the prompt disposition of actions in
which the pleadings raise only a legal, not a genuine, issue regarding any material fact. 35
Consequently, facts are asserted in the complaint regarding which there is yet no admission,
disavowal or qualification; or specific denials or affirmative defenses are set forth in the answer,
but the issues are fictitious as shown by the pleadings, depositions or admissions. 36 A
summary judgment may be applied for by either a claimant or a defending party. 37
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the
[G.R. No. 147950. December 11, 2003.]
CALIFORNIA BUS LINES, INC., Petitioner, v. STATE INVESTMENT HOUSE,
INC., Respondent.
DECISION
QUISUMBING, J.:
In this petition for review, California Bus Lines, Inc., assails the decision, 1 dated April 17, 2001,
of the Court of Appeals in CA-G.R. CV No. 52667, reversing the judgment 2 , dated June 3,
1993, of the Regional Trial Court of Manila, Branch 13, in Civil Case No. 84-28505 entitled State
Investment House, Inc. v. California Bus Lines, Inc., for collection of a sum of money. The Court
of Appeals held petitioner California Bus Lines, Inc., liable for the value of five promissory notes
pleadings is proper when an answer fails to render an issue or otherwise admits the material
allegations of the adverse partys pleading. The essential question is whether there are issues
generated by the pleadings. 38 A judgment on the pleadings may be sought only by a claimant,
who is the party seeking to recover upon a claim, counterclaim or cross-claim; or to obtain a
declaratory relief. 39
Apropos thereto, it must be stressed that the trial courts judgment against petitioner was
correctly treated by the appellate court as a summary judgment, rather than as a judgment on
the pleadings. His Answer 40 apparently raised several issues that he signed the promissory
note allegedly as a mere accommodation party, and that the obligation was extinguished by
either payment or novation. However, these are not factual issues requiring trial. We quote with
approval the CAs observations:jgc:chanrobles.com.ph
"Although Garcias [A]nswer tendered some issues, by way of affirmative defenses, the
documents submitted by [respondent] nevertheless clearly showed that the issues so tendered
were not valid issues. Firstly, Garcias claim that he was merely an accommodation party is
belied by the promissory note that he signed. Nothing in the note indicates that he was only an
accommodation party as he claimed to be. Quite the contrary, the promissory note bears the
statement: It is understood that our liability under this loan is jointly and severally [sic].
Secondly, his claim that his co-defendant de Jesus already paid the loan by means of a check
collapses in view of the dishonor thereof as shown at the dorsal side of said check." 41
From the records, it also appears that petitioner himself moved to submit the case for judgment
on the basis of the pleadings and documents. In a written Manifestation, 42 he stated that
"judgment on the pleadings may now be rendered without further evidence, considering the
allegations and admissions of the parties." 43
In view of the foregoing, the CA correctly considered as a summary judgment that which the trial
court had issued against petitioner.
WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.chanrob1es virtua1 1aw 1ibrary
SO ORDERED.
assigned to respondent State Investment House, Inc.chanrob1es virtua1 1aw 1ibrary
The facts, as culled from the records, are as follows:chanrob1es virtual 1aw library
Sometime in 1979, Delta Motors Corporation M.A.N. Division (Delta) applied for financial
assistance from respondent State Investment House, Inc. (hereafter SIHI), a domestic
corporation engaged in the business of quasi-banking. SIHI agreed to extend a credit line to
Delta for P25,000,000.00 in three separate credit agreements dated May 11, June 19, and
August 22, 1979. 3 On several occasions, Delta availed of the credit line by discounting with
SIHI some of its receivables, which evidence actual sales of Deltas vehicles. Delta eventually
became indebted to SIHI to the tune of P24,010,269.32. 4
Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc. (hereafter CBLI),
purchased on installment basis 35 units of M.A.N. Diesel Buses and two (2) units of M.A.N.
Diesel Conversion Engines from Delta. To secure the payment of the purchase price of the 35
buses, CBLI and its president, Mr. Dionisio O. Llamas, executed sixteen (16) promissory notes in
favor of Delta on January 23 and April 25, 1980. 5 In each promissory note, CBLI promised to
pay Delta or order, P2,314,000 payable in 60 monthly installments starting August 31, 1980, with
interest at 14% per annum. CBLI further promised to pay the holder of the said notes 25% of the
amount due on the same as attorneys fees and expenses of collection, whether actually
incurred or not, in case of judicial proceedings to enforce collection. In addition to the notes,
CBLI executed chattel mortgages over the 35 buses in Deltas favor.
When CBLI defaulted on all payments due, it entered into a restructuring agreement with Delta
on October 7, 1981, to cover its overdue obligations under the promissory notes. 6 The
restructuring agreement provided for a new schedule of payments of CBLIs past due
installments, extending the period to pay, and stipulating daily remittance instead of the
previously agreed monthly remittance of payments. In case of default, Delta would have the
authority to take over the management and operations of CBLI until CBLI and/or its president,
Mr. Dionisio Llamas, remitted and/or updated CBLIs past due account. CBLI and Delta also
increased the interest rate to 16% p.a. and added a documentation fee of 2% p.a. and a 4% p.a.
restructuring fee.
On December 23, 1981, Delta executed a Continuing Deed of Assignment of Receivables 7 in
favor of SIHI as security for the payment of its obligations to SIHI per the credit agreements. In
view of Deltas failure to pay, the loan agreements were restructured under a Memorandum of
Agreement dated March 31, 1982. 8 Delta obligated itself to pay a fixed monthly amortization of
P400,000 to SIHI and to discount with SIHI P8,000,000 worth of receivables with the
understanding that SIHI shall apply the proceeds against Deltas overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to threaten
CBLI with the enforcement of the management takeover clause. To pre-empt the take-over, CBLI
filed on May 3, 1982, a complaint for injunction 9, docketed as Civil Case No. 0023-P, with the
Court of First Instance of Rizal, Pasay City, (now Regional Trial Court of Pasay City). In due
time, Delta filed its amended answer with applications for the issuance of a writ of preliminary
mandatory injunction to enforce the management takeover clause and a writ of preliminary
attachment over the buses it sold to CBLI. 10 On December 27, 1982, 11 the trial court granted
Deltas prayer for issuance of a writ of preliminary mandatory injunction and preliminary
attachment on account of the fraudulent disposition by CBLI of its assets.
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta executed a Deed of
Sale 12 assigning to SIHI five (5) of the sixteen (16) promissory notes 13 from California Bus
Lines, Inc. At the time of assignment, these five promissory notes, identified and numbered as
80-53, 80-54, 80-55, 80-56, and 80-57, had a total value of P16,152,819.80 inclusive of interest
at 14% per annum.
SIHI subsequently sent a demand letter dated December 13, 1983, 14 to CBLI requiring CBLI to
remit the payments due on the five promissory notes directly to it. CBLI replied informing SIHI of
Civil Case No. 0023-P and of the fact that Delta had taken over its management and operations.
15
As regards Deltas remaining obligation to SIHI, Delta offered its available bus units, valued at
P27,067,162.22, as payment in kind. 16 On December 29, 1983, SIHI accepted Deltas offer,
and Delta transferred the ownership of its available buses to SIHI, which in turn acknowledged
full payment of Deltas remaining obligation. 17 When SIHI was unable to take possession of the
buses, SIHI filed a petition for recovery of possession with prayer for issuance of a writ of
replevin before the RTC of Manila, Branch 6, docketed as Civil Case No. 84-23019. The Manila
RTC issued a writ of replevin and SIHI was able to take possession of 17 bus units belonging to
Delta. SIHI applied the proceeds from the sale of the said 17 buses amounting to
P12,870,526.98 to Deltas outstanding obligation. Deltas obligation to SIHI was thus reduced to
P20,061,898.97. On December 5, 1984, Branch 6 of the RTC of Manila rendered judgment in
Civil Case No. 84-23019 ordering Delta to pay SIHI this amount.
Thereafter, Delta and CBLI entered into a compromise agreement on July 24, 1984, 18 in Civil
Case No. 0023-P, the injunction case before the RTC of Pasay. CBLI agreed that Delta would
exercise its right to extrajudicially foreclose on the chattel mortgages over the 35 bus units. The
RTC of Pasay approved this compromise agreement the following day, July 25, 1984. 19
Following this, CBLI vehemently refused to pay SIHI the value of the five promissory notes,
contending that the compromise agreement was in full settlement of all its obligations to Delta
including its obligations under the promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 84-28505, against
CBLI in the Regional Trial Court of Manila, Branch 34, to collect on the five (5) promissory notes
with interest at 14% p.a. SIHI also prayed for the issuance of a writ of preliminary attachment
against the properties of CBLI. 20
On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of chattel mortgages
pursuant to its compromise agreement with CBLI. On January 2, 1985, Delta filed in the RTC of
Pasay a motion for execution of the judgment based on the compromise agreement. 21 The
RTC of Pasay granted this motion the following day. 22
In view of Deltas petition and motion for execution per the judgment of compromise, the RTC of
Manila granted in Civil Case No. 84-28505 SIHIs application for preliminary attachment on
January 4, 1985. 23 Consequently, SIHI was able to attach and physically take possession of
thirty-two (32) buses belonging to CBLI. 24 However, acting on CBLIs motion to quash the writ
of preliminary attachment, the same court resolved on January 15, 1986, 25 to discharge the
writ of preliminary attachment. SIHI assailed the discharge of the writ before the Intermediate
Appellate Court (now Court of Appeals) in a petition forcertiorari and prohibition, docketed as
CA-G.R. SP No. 08378. On July 31, 1987, the Court of Appeals granted SIHIs petition in CA-GR
SP No. 08378 and ruled that the writ of preliminary attachment issued by Branch 34 of the RTC
Manila in Civil Case No. 84-28505 should stay. 26 The decision of the Court of Appeals attained
finality on August 22, 1987. 27
Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the sheriff of Pasay City
conducted a public auction and issued a certificate of sheriffs sale to Delta on April 2, 1987,
attesting to the fact that Delta bought 14 of the 35 buses for P3,920,000. 28 On April 7, 1987,
the sheriff of Manila, by virtue of the writ of execution dated March 27, 1987, issued by Branch 6
of the RTC of Manila in Civil Case No. 84-23019, sold the same 14 buses at public auction in
partial satisfaction of the judgment SIHI obtained against Delta in Civil Case No. 84-
23019.chanrob1es virtua1 1aw 1ibrary
Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the RTC of Manila
in view of the retirement of the presiding judge of Branch 34. Subsequently, SIHI moved to sell
the sixteen (16) buses of CBLI which had previously been attached by the sheriff in Civil Case
No. 84-28505 pursuant to the January 4, 1985, Order of the RTC of Manila. 29 SIHIs motion
was granted on December 16, 1987. 30 On November 29, 1988, however, SIHI filed an urgent
ex-parte motion to amend this order claiming that through inadvertence and excusable
negligence of its new counsel, it made a mistake in the list of buses in the Motion to Sell
Attached Properties it had earlier filed. 31 SIHI explained that 14 of the buses listed had already
been sold to Delta on April 2, 1987, by virtue of the January 3, 1985 Order of the RTC of Pasay,
and that two of the buses listed had been released to third party, claimant Pilipinas Bank, by
Order dated September 16, 1987 32 of Branch 13 of the RTC of Manila.
CBLI opposed SIHIs motion to allow the sale of the 16 buses. On May 3, 1989, 33 Branch 13 of
the RTC of Manila denied SIHIs urgent motion to allow the sale of the 16 buses listed in its
motion to amend. The trial court ruled that the best interest of the parties might be better served
by denying further sales of the buses and to go direct to the trial of the case on the merits. 34
After trial, judgment was rendered in Civil Case No. 84-28505 on June 3, 1993, discharging
CBLI from liability on the five promissory notes. The trial court likewise favorably ruled on CBLIs
compulsory counterclaim. The trial court directed SIHI to return the 16 buses or to pay CBLI
P4,000,000 representing the value of the seized buses, with interest at 12% p.a. to begin from
January 11, 1985, the date SIHI seized the buses, until payment is made. In ruling against SIHI,
the trial court held that the restructuring agreement dated October 7, 1981, between Delta and
CBLI novated the five promissory notes; hence, at the time Delta assigned the five promissory
notes to SIHI, the notes were already merged in the restructuring agreement and cannot be
enforced against CBLI.

SIHI appealed the decision to the Court of Appeals. The case was docketed as CA-G.R. CV No.
52667. On April 17, 2001, the Court of Appeals decided CA-G.R. CV No. 52667 in this
manner:chanrob1es virtual 1aw library
WHEREFORE, based on the foregoing premises and finding the appeal to be meritorious, We
find defendant-appellee CBLI liable for the value of the five (5) promissory notes subject of the
complaint a quo less the proceeds from the attached sixteen (16) buses. The award of attorneys
fees and costs is eliminated. The appealed decision is hereby REVERSED. No costs.
SO ORDERED. 35
Hence, this appeal where CBLI contends that:chanrob1es virtual 1aw library
I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE RESTRUCTURING
AGREEMENT BETWEEN DELTA AND THE PETITIONER DID NOT SUBSTANTIALLY NOVATE
THE TERMS OF THE FIVE PROMISSORY NOTES.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE AGREEMENT
BETWEEN DELTA AND THE PETITIONER IN THE PASAY CITY CASE DID NOT SUPERSEDE
AND DISCHARGE THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING VALIDITY OF THE
PRELIMINARY ATTACHMENT AND EXONERATING THE RESPONDENT OF MALEFACTIONS
IN PRESERVING AND ASSERTING ITS RIGHTS THEREUNDER. 36
Essentially, the issues are (1) whether the Restructuring Agreement dated October 7, 1981,
between petitioner CBLI and Delta Motors, Corp. novated the five promissory notes Delta
Motors, Corp. assigned to respondent SIHI, and (2) whether the compromise agreement in Civil
Case No. 0023-P superseded and/or discharged the subject five promissory notes. The issues
being interrelated, they shall be jointly discussed.
CBLI first contends that the Restructuring Agreement did not merely change the incidental
elements of the obligation under all sixteen (16) promissory notes, but it also increased the
obligations of CBLI with the addition of new obligations that were incompatible with the old
obligations in the said notes. 37 CBLI adds that even if the restructuring agreement did not
totally extinguish the obligations under the sixteen (16) promissory notes, the July 24, 1984,
compromise agreement executed in Civil Case No. 0023-P did. 38 CBLI cites paragraph 5 of the
compromise agreement which states that the agreement between it and CBLI was in "full and
final settlement, adjudication and termination of all their rights and obligations as of the date of
(the) agreement, and of the issues in (the) case." According to CBLI, inasmuch as the five
promissory notes were subject matters of the Civil Case No. 0023-P, the decision approving the
compromise agreement operated as res judicata in the present case. 39
Novation has been defined as the extinguishment of an obligation by the substitution or change
of the obligation by a subsequent one which terminates the first, either by changing the object or
principal conditions, or by substituting the person of the debtor, or subrogating a third person in
the rights of the creditor. 40
Novation, in its broad concept, may either be extinctive or modificatory. 41 It is extinctive when
an old obligation is terminated by the creation of a new obligation that takes the place of the
former; it is merely modificatory when the old obligation subsists to the extent it remains
compatible with the amendatory agreement. 42 An extinctive novation results either by changing
the object or principal conditions (objective or real), or by substituting the person of the debtor or
subrogating a third person in the rights of the creditor (subjective or personal). 43 Novation has
two functions: one to extinguish an existing obligation, the other to substitute a new one in its
place. 44 For novation to take place, four essential requisites have to be met, namely, (1) a
previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the
extinguishment of the old obligation; and (4) the birth of a valid new obligation. 45
Novation is never presumed, 46 and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and unequivocal
to be mistaken. 47
The extinguishment of the old obligation by the new one is a necessary element of novation
which may be effected either expressly or impliedly. 48 The term "expressly" means that the
contracting parties incontrovertibly disclose that their object in executing the new contract is to
extinguish the old one. 49 Upon the other hand, no specific form is required for an implied
novation, and all that is prescribed by law would be an incompatibility between the two contracts.
50 While there is really no hard and fast rule to determine what might constitute to be a sufficient
change that can bring about novation, the touchstone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation and thereby produce
the effect of extinguishing an obligation by another which substitutes the same. The first is when
novation has been explicitly stated and declared in unequivocal terms. The second is when the
old and the new obligations are incompatible on every point. The test of incompatibility is
whether the two obligations can stand together, each one having its independent existence. 51 If
they cannot, they are incompatible and the latter obligation novates the first. 52 Corollarily,
changes that breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the obligation, such as its
object, cause or principal conditions thereof; otherwise, the change would be merely
modificatory in nature and insufficient to extinguish the original obligation. 53
The necessity to prove the foregoing by clear and convincing evidence is accentuated where the
obligation of the debtor invoking the defense of novation has already matured. 54
With respect to obligations to pay a sum of money, this Court has consistently applied the well-
settled rule that the obligation is not novated by an instrument that expressly recognizes the old,
changes only the terms of payment, and adds other obligations not incompatible with the old
ones, or where the new contract merely supplements the old one. 55
In Inchausti & Co. v. Yulo 56 this Court held that an obligation to pay a sum of money is not
novated in a new instrument wherein the old is ratified, by changing only the term of payment
and adding other obligations not incompatible with the old one. In Tible v. Aquino 57 and Pascual
v. Lacsamana 58 this Court declared that it is well settled that a mere extension of payment and
the addition of another obligation not incompatible with the old one is not a novation thereof.
In this case, the attendant facts do not make out a case of novation. The restructuring
agreement between Delta and CBLI executed on October 7, 1981, shows that the parties did not
expressly stipulate that the restructuring agreement novated the promissory notes. Absent an
unequivocal declaration of extinguishment of the pre-existing obligation, only a showing of
complete incompatibility between the old and the new obligation would sustain a finding of
novation by implication. 59 However, our review of its terms yields no incompatibility between
the promissory notes and the restructuring agreement.
The five promissory notes, which Delta assigned to SIHI on September 13, 1983, contained the
following common stipulations:chanrob1es virtual 1aw library
1. They were payable in 60 monthly installments up to July 31, 1985;
2. Interest: 14% per annum;
3. Failure to pay any of the installments would render the entire remaining balance due and
payable at the option of the holder of the notes;
4. In case of judicial collection on the notes, the maker (CBLI) and co-maker (its president, Mr. Daily payments of P16,000.00 from
Dionisio O. Llamas, Jr.) were solidarily liable of attorneys fees and expenses of 25% of the
amount due in addition to the costs of suit. January 1, 1983 to June 30, 1983
Daily payments of P17,000.00 from
The restructuring agreement, for its part, had the following provisions:chanrob1es virtual 1aw
library July 1, 1983

WHEREAS, CBL and LLAMAS admit their past due installment on the following promissory 2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily cash
notes:chanrob1es virtual 1aw library payments due to DMC in accordance with the schedule in paragraph 1. DMC may send a
collector to receive the amount due at CBLs premises. All delayed remittances shall be charged
a. PN Nos. 16 to 26 (11 units) additional 2% penalty interest per month.

Past Due as of September 30, 1981 P1,411,434.00 3. All payments shall be applied to amortizations and penalties due in accordance with
paragraph of the restructured past due installments above mentioned and PN Nos. 16 to 26 and
b. PN Nos. 52 to 57 (24 units) 52 to 57.

Past Due as of September 30, 1981 P1,105,353.00 4. DMC may at anytime assign and/or send its representatives to monitor the operations of CBL
pertaining to the financial and field operations and service and maintenance matters of M.A.N.
WHEREAS, the parties agreed to restructure the above-mentioned past due installments under units. Records needed by the DMC representatives in monitoring said operations shall be made
the following terms and conditions:chanrob1es virtual 1aw library available by CBL and LLAMAS.

a. PN Nos. 16 to 26 (11 units) 37 months 5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52 to 57, CBL or
LLAMAS shall remit in lump sum whatever balance is left after deducting all payments made
PN Nos. 52 to 57 (24 units) 46 months from what is due and payable to DMC in accordance with paragraph 1 of this agreement and PN
Nos. 16 to 26 and 52 to 57.
b. Interest Rate: 16% per annum
6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed upon and the total
c. Documentation Fee: 2% per annum accumulated unremitted amount has reached and (sic) equivalent of Sixty (60) days, DMC and
Silverio shall exercise any or all of the following options:chanrob1es virtual 1aw library
d Penalty previously incurred and Restructuring fee: 4% p.a.
(a) The whole sum remaining then unpaid plus 2% penalty per month and 16% interest per
e. Mode of Payment: Daily Remittance annum on total past due installments will immediately become due and payable. In the event of
judicial proceedings to enforce collection, CBL and LLAMAS will pay to DMC an additional sum
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereby equivalent to 25% of the amount due for attorneys fees and expenses of collection, whether
agree and covenant as follows:chanrob1es virtual 1aw library actually incurred or not, in addition to the cost of suit;

1. That the past due installment referred to above plus the current and/or falling due amortization (b) To enforce in accordance with law, their rights under the Chattel Mortgage over various
as of October 1, 1981 for Promissory Notes Nos. 16 to 26 and 52 to 57 shall be paid by CBL M.A.N. Diesel bus with Nos. CU 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and 80-15, and/or
and/or LLAMAS in accordance with the following schedule of payments:chanrob1es virtua1 1aw
1ibrary (c) To take over management and operations of CBL until such time that CBL and/or LLAMAS
have remitted and/or updated their past due account with DMC.
Daily payments of P11,000.00 from
7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the M.A.N.
October 1 to December 31, 1981 Diesel Buses and shall make available to CBL at the price prevailing at the time of purchase, an
inventory of spare parts consisting of at least ninety (90%) percent of the needs of CBL based
Daily payments of P12,000.00 from on a moving 6-month requirement to be prepared and submitted by CBL, and acceptable to
DMC, within the first week of each month.
January 1, 1982 to March 31, 1982
Daily payments of P13,000.00 from 8. Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN
Nos. 16 to 26 and 52 to 57 shall continue to govern the relationship between the parties and that
April 1, 1982 to June 30, 1982 the Chattel Mortgage over various M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41,
Daily payments of P14,000.00 from 80-42, 80-43, 80-44 and CM No. 80-15 as well as the Deed of Pledge executed by Mr. Llamas
shall continue to secure the obligation until full payment.
July 1, 1982 to September 30, 1982
Daily payments of P15,000.00 from 9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary Public
Alberto G. Doller and to instruct him not to proceed with the public auction sale of the shares of
October 1, 1982 to December 31, 1982 stock of CBL subject-matter of the Deed of Pledge of Shares. LLAMAS, on the other hand,
undertakes to move for the immediate dismissal of Civil Case No. 9460-P entitled "Dionisio O.
Llamas v. Alberto G. Doller, Et. Al.", Court of First Instance of Pasay, Branch XXIX. 60
It is clear from the foregoing that the restructuring agreement, instead of containing provisions
"absolutely incompatible" with the obligations of the judgment, expressly ratifies such obligations
in paragraph 8 and contains provisions for satisfying them. There was no change in the object of
the prior obligations. The restructuring agreement merely provided for a new schedule of
payments and additional security in paragraph 6 (c) giving Delta authority to take over the
management and operations of CBLI in case CBLI fails to pay installments equivalent to 60
days. Where the parties to the new obligation expressly recognize the continuing existence and
validity of the old one, there can be no novation. 61 Moreover, this Court has ruled that an
agreement subsequently executed between a seller and a buyer that provided for a different
schedule and manner of payment, to restructure the mode of payments by the buyer so that it
could settle its outstanding obligation in spite of its delinquency in payment, is not tantamount to
novation. 62
The addition of other obligations likewise did not extinguish the promissory notes. In Young v. CA
63 , this Court ruled that a change in the incidental elements of, or an addition of such element
to, an obligation, unless otherwise expressed by the parties will not result in its extinguishment.
In fine, the restructuring agreement can stand together with the promissory notes.
Neither is there merit in CBLIs argument that the compromise agreement dated July 24, 1984,
in Civil Case No. 0023-P superseded and/or discharged the five promissory notes. Both Delta
and CBLI cannot deny that the five promissory notes were no longer subject of Civil Case No.
0023-P when they entered into the compromise agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no more right to
compromise the same. Deltas limited authority to collect for SIHI stipulated in the September 13,
1985, Deed of Sale cannot be construed to include the power to compromise CBLIs obligations
in the said promissory notes. An authority to compromise, by express provision of Article 1878
64 of the Civil Code, requires a special power of attorney, which is not present in this case.
Incidentally, Deltas authority to collect in behalf of SIHI was, by express provision of the
Continuing Deed of Assignment, 65 automatically revoked when SIHI opted to collect directly
from CBLI.
As regards CBLI, SIHIs demand letter dated December 13, 1983, requiring CBLI to remit the
payments directly to SIHI effectively revoked Deltas limited right to collect in behalf of SIHI. This
should have dispelled CBLIs erroneous notion that Delta was acting in behalf of SIHI, with
authority to compromise the five promissory notes.
But more importantly, the compromise agreement itself provided that it covered the rights and
obligations only of Delta and CBLI and that it did not refer to, nor cover the rights of, SIHI as the
new creditor of CBLI in the subject promissory notes. CBLI and Delta stipulated in paragraph 5
of the agreement that:chanrob1es virtual 1aw library
5. This COMPROMISE AGREEMENT constitutes the entire understanding by and between the
plaintiffs and the defendants as well as their lawyers, and operates as full and final settlement,
adjudication and termination of all their rights and obligations as of the date of this agreement,
and of the issues in this case. 66
Even in the absence of such a provision, the compromise agreement still cannot bind SIHI under
the settled rule that a compromise agreement determines the rights and obligations of only the
parties to it. 67 Therefore, we hold that the compromise agreement covered the rights and
obligations only of Delta and CBLI and only with respect to the eleven (11) other promissory
notes that remained with Delta.
CBLI next maintains that SIHI is estopped from questioning the compromise agreement because
SIHI failed to intervene in Civil Case No. 0023-P after CBLI informed it of the takeover by Delta
of CBLIs management and operations and the resultant impossibility for CBLI to comply with its
obligations in the subject promissory notes. CBLI also adds that SIHIs failure to intervene in
Civil Case No. 0023-P is proof that Delta continued to act in SIHIs behalf in effecting collection
under the notes.
The contention is untenable. As a result of the assignment, Delta relinquished all its rights to the
subject promissory notes in favor of SIHI. This had the effect of separating the five promissory
notes from the 16 promissory notes subject of Civil Case No. 0023-P. From that time, CBLIs
obligations to SIHI embodied in the five promissory notes became separate and distinct from
CBLIs obligations in eleven (11) other promissory notes that remained with Delta. Thus, any
breach of these independent obligations gives rise to a separate cause of action in favor of SIHI
against CBLI. Considering that Deltas assignment to SIHI of these five promissory notes had
the effect of removing the said notes from Civil Case No. 0023-P, there was no reason for SIHI
to intervene in the said case. SIHI did not have any interest to protect in Civil Case No. 0023-P.
Moreover, intervention is not mandatory, but only optional and permissive. 68 Notably, Section 2,
69 Rule 12 of the then 1988 Revised Rules of Procedure uses the word may in defining the
right to intervene. The present rules maintain the permissive nature of intervention in Section 1,
Rule 19 of the 1997 Rules of Civil Procedure, which provides as follows:chanrob1es virtual 1aw
library
SEC. 1. Who may intervene. A person who has a legal interest in the matter in litigation, or in
the success of either of the parties, or an interest against both, or is so situated as to be
adversely affected by a distribution or other disposition of property in the custody of the court or
of an officer thereof may, with leave of court, be allowed to intervene in the action. The court
shall consider whether or not the intervention will unduly delay or prejudice the adjudication of
the rights of the original parties, and whether or not the intervenors rights may be fully protected
in a separate proceeding. 70
Also, recall that Delta transferred the five promissory notes to SIHI on September 13, 1983 while
Civil Case No. 0023-P was pending. Then as now, the rule in case of transfer of interest
pendente lite is that the action may be continued by or against the original party unless the
court, upon motion, directs the person to whom the interest is transferred to be substituted in the
action or joined with the original party. 71 The non-inclusion of a necessary party does not
prevent the court from proceeding in the action, and the judgment rendered therein shall be
without prejudice to the rights of such necessary party. 72
In light of the foregoing, SIHIs refusal to intervene in Civil Case No. 0023-P in another court
does not amount to an estoppel that may prevent SIHI from instituting a separate and
independent action of its own. 73 This is especially so since it does not appear that a separate
proceeding would be inadequate to protect fully SIHIs rights. 74 Indeed, SIHIs refusal to
intervene is precisely because it considered that its rights would be better protected in a
separate and independent suit.chanrob1es virtua1 1aw 1ibrary
The judgment on compromise in Civil Case No. 0023-P did not operate as res judicata to
prevent SIHI from prosecuting its claims in the present case. As previously discussed, the
compromise agreement and the judgment on compromise in Civil Case No. 0023-P covered only
Delta and CBLI and their respective rights under the 11 promissory notes not assigned to SIHI.
In contrast, the instant case involves SIHI and CBLI and the five promissory notes. There being
no identity of parties and subject matter, there is no res judicata.
CBLI maintains, however, that in any event, recovery under the subject promissory notes is no
longer allowed by Article 1484(3) 75 of the Civil Code, which prohibits a creditor from suing for
the deficiency after it has foreclosed on the chattel mortgages. SIHI, being the successor-in-
interest of Delta, is no longer allowed to recover on the promissory notes given as security for
the purchase price of the 35 buses because Delta had already extrajudicially foreclosed on the
chattel mortgages over the said buses on April 2, 1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the present case. The extrajudicial foreclosure of the
chattel mortgages Delta effected cannot prejudice SIHIs rights. As stated earlier, the assignment
of the five notes operated to create a separate and independent obligation on the part of CBLI to
SIHI, distinct and separate from CBLIs obligations to Delta. And since there was a previous
revocation of Deltas authority to collect for SIHI, Delta was no longer SIHIs collecting agent.
CBLI, in turn, knew of the assignment and Deltas lack of authority to compromise the subject
notes, yet it readily agreed to the foreclosure. To sanction CBLIs argument and to apply Article
1484 (3) to this case would work injustice to SIHI by depriving it of its right to collect against
CBLI who has not paid its obligations.
That SIHI later on levied on execution and acquired in the ensuing public sale in Civil Case No.
84-23019 the buses Delta earlier extrajudicially foreclosed on April 2, 1987, in Civil Case No.
0023-P, did not operate to render the compromise agreement and the foreclosure binding on
SIHI. At the time SIHI effected the levy on execution to satisfy its judgment credit against Delta in
Civil Case No. 84-23019, the said buses already pertained to Delta by virtue of the April 2, 1987
auction sale. CBLI no longer had any interest in the said buses. Under the circumstances, we
cannot see how SIHIs belated acquisition of the foreclosed buses operates to hold the
compromise agreement and consequently Article 1484(3) applicable to SIHI as CBLI
contends. CBLIs last contention must, therefore, fail. We hold that the writ of execution to
enforce the judgment of compromise in Civil Case No. 0023-P and the foreclosure sale of April
2, 1987, done pursuant to the said writ of execution affected only the eleven (11) other
promissory notes covered by the compromise agreement and the judgment on compromise in
Civil Case No. 0023-P.
In support of its third assignment of error, CBLI maintains that there was no basis for SIHIs
application for a writ of preliminary attachment. 76 According to CBLI, it committed no fraud in
contracting its obligation under the five promissory notes because it was financially sound when
it issued the said notes on April 25, 1980. 77 CBLI also asserts that at no time did it falsely
represent to SIHI that it would be able to pay its obligations under the five promissory notes. 78
According to CBLI, it was not guilty of fraudulent concealment, removal, or disposal, or of
fraudulent intent to conceal, remove, or dispose of its properties to defraud its creditors; 79 and
that SIHIs bare allegations on this matter were insufficient for the preliminary attachment of
CBLIs properties. 80
The question whether the attachment of the sixteen (16) buses was valid and in accordance with
law, however, has already been resolved with finality by the Court of Appeals in CA-G.R. SP No.
08376. In its July 31, 1987, decision, the Court of Appeals upheld the legality of the writ of
preliminary attachment SIHI obtained and ruled that the trial court judge acted with grave abuse
of discretion in discharging the writ of attachment despite the clear presence of a determined
scheme on the part of CBLI to dispose of its property. Considering that the said Court of Appeals
decision has already attained finality on August 22, 1987, there exists no reason to resolve this
question anew. Reasons of public policy, judicial orderliness, economy and judicial time and the
interests of litigants as well as the peace and order of society, all require that stability be
accorded the solemn and final judgments of courts or tribunals of competent jurisdiction. 81
Finally, in the light of the justness of SIHIs claim against CBLI, we cannot sustain CBLIs
contention that the Court of Appeals erred in dismissing its counterclaim for lost income and the
value of the 16 buses over which SIHI obtained a writ of preliminary attachment. Where the
party who requested the attachment acted in good faith and without malice, the claim for
damages resulting from the attachment of property cannot be sustained. 82
WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CA-G.R. CV No.
52667 is AFFIRMED. Petitioner California Bus Lines, Inc., is ORDERED to pay respondent State
Investment House, Inc., the value of the five (5) promissory notes subject of the complaint in
Civil Case No. 84-28505 less the proceeds from the sale of the attached sixteen (16) buses. No
pronouncement as to costs.
SO ORDERED.