You are on page 1of 11

corporation that he was terminating

FIRST DIVISION
the loans and demanded from the
latter payment in the total amount of
US$150,000 plus unpaid interests
[G.R. No. 161135. April 8, 2005] in the total amount of US$13,500. [2]

On 2 February 1999, private


respondent Christian filed with the
SWAGMAN HOTELS AND Regional Trial Court of Baguio City,
TRAVEL, INC., petitioner, Branch 59, a complaint for a sum of
vs. HON. COURT OF money and damages against the
APPEALS, and NEAL B. petitioner corporation, Hegerty, and
CHRISTIAN, respondents. Atty. Infante. The complaint alleged
as follows: On 7 August 1996, 14
DECISION March 1997, and 14 July 1997, the
DAVIDE, JR., C.J.: petitioner, as well as its president
and vice-president obtained loans
May a complaint that lacks a from him in the total amount of
cause of action at the time it was US$150,000 payable after three
filed be cured by the accrual of a years, with an interest of 15% per
cause of action during the annum payable quarterly or every
pendency of the case? This is the three months. For a while, they paid
basic issue raised in this petition for an interest of 15% per annum every
the Courts consideration. three months in accordance with
Sometime in 1996 and 1997, the three promissory notes.
petitioner Swagman Hotels and However, starting January 1998
Travel, Inc., through Atty. Leonor L. until December 1998, they paid him
Infante and Rodney David Hegerty, only an interest of 6% per annum,
its president and vice-president, instead of 15% per annum, in
respectively, obtained from private violation of the terms of the three
respondent Neal B. Christian loans promissory notes. Thus, Christian
evidenced by three promissory prayed that the trial court order
notes dated 7 August 1996, 14 them to pay him jointly and
March 1997, and 14 July 1997. solidarily the amount of
Each of the promissory notes is in US$150,000 representing the total
the amount of US$50,000 payable amount of the loans; US$13,500
after three years from its date with representing unpaid interests from
an interest of 15% per annum January 1998 until December
payable every three months. In a[1]
1998; P100,000 for moral
letter dated 16 December 1998, damages; P50,000 for attorneys
Christian informed the petitioner fees; and the cost of the suit.
[3]
The petitioner corporation, ordered the petitioner corporation to
together with its president and vice- pay Christian the amount of
president, filed an Answer raising $100,000 representing the principal
as defenses lack of cause of action obligation covered by the
and novation of the principal promissory notes dated 7 August
obligations. According to them, 1996 and 14 March 1997, plus
Christian had no cause of action interest of 6% per month thereon
because the three promissory notes until fully paid, with all interest
were not yet due and demandable. payments already paid by the
In December 1997, since the defendant to the plaintiff to be
petitioner corporation was deducted therefrom.
experiencing huge losses due to
The trial court ratiocinated in
the Asian financial crisis, Christian
this wise:
agreed (a) to waive the interest of
15% per annum, and (b) accept (1) There was no novation of
payments of the principal loans in defendants obligation to the plaintiff.
installment basis, the amount and Under Article 1292 of the Civil Code,
period of which would depend on there is an implied novation only if the
the state of business of the old and the new obligation be on every
petitioner corporation. Thus, the point incompatible with one another.
petitioner paid Christian capital
repayment in the amount of The test of incompatibility between the
US$750 per month from January two obligations or contracts, according
1998 until the time the complaint to an imminent author, is whether they
was filed in February 1999. The can stand together, each one having an
petitioner and its co-defendants independent existence. If they cannot,
then prayed that the complaint be they are incompatible, and the
dismissed and that Christian be subsequent obligation novates the first
ordered to pay P1 million as moral (Tolentino, Civil Code of the
damages; P500,000 as exemplary Philippines, Vol. IV, 1991 ed., p. 384).
damages; and P100,000 as Otherwise, the old obligation will
attorneys fees.[4]
continue to subsist subject to the
In due course and after hearing, modifications agreed upon by the
the trial court rendered a parties. Thus, it has been written that
decision on 5 May 2000 declaring
[5] accidental modifications in an existing
the first two promissory notes dated obligation do not extinguish it by
7 August 1996 and 14 March 1997 novation. Mere modifications of the
as already due and demandable debt agreed upon between the parties
and that the interest on the loans do not constitute novation. When the
had been reduced by the parties changes refer to secondary agreement
from 15% to 6% per annum. It then and not to the object or principal
conditions of the contract, there is no defendants obligation are not yet due
novation; such changes will produce and demandable then, he may
modifications of incidental facts, but nevertheless recover on the first two
will not extinguish the original promissory notes in view of the
obligation. Thus, the acceptance of introduction of evidence showing that
partial payments or a partial remission the obligations covered by the two
does not involve novation (id., p. 387). promissory notes are now due and
Neither does the reduction of the demandable.
amount of an obligation amount to a
novation because it only means a (3) Individual defendants Rodney
partial remission or condonation of the Hegerty and Atty. Leonor L. Infante
same debt. can not be held personally liable for the
obligations contracted by the defendant
In the instant case, the Court is of the corporation it being clear that they
view that the parties merely intended to merely acted in representation of the
change the rate of interest from 15% defendant corporation in their capacity
per annum to 6% per annum when the as General Manager and President,
defendant started paying $750 per respectively, when they signed the
month which payments were all promissory notes as evidenced by
accepted by the plaintiff from January Board Resolution No. 1(94) passed by
1998 onward. The payment of the the Board of Directors of the defendant
principal obligation, however, remains corporation (Exhibit 4). [6]

unaffected which means that the


defendant should still pay the plaintiff In its decision of 5 September
[7]

$50,000 on August 9, 1999, March 14, 2003, the Court of Appeals denied
2000 and July 14, 2000. petitioners appeal and
affirmed in toto the decision of the
(2) When the instant case was filed on trial court, holding as follows:
February 2, 1999, none of the
promissory notes was due and In the case at bench, there is no
demandable. As of this date however, incompatibility because the changes
the first and the second promissory referred to by appellant Swagman
notes have already matured. Hence, consist only in the manner of payment.
payment is already due. ...

Under Section 5 of Rule 10 of the 1997 Appellant Swagmans interpretation that


Rules of Civil Procedure, a complaint the three (3) promissory notes have
which states no cause of action may be been novated by reason of appellee
cured by evidence presented without Christians acceptance of the monthly
objection. Thus, even if the plaintiff payments of US$750.00 as capital
had no cause of action at the time he repayments continuously even after the
filed the instant complaint, as filing of the instant case is a little bit
strained considering the stiff promissory notes have become due and
requirements of the law on novation demandable.
that the intention to novate must appear
by express agreement of the parties, or The afore-quoted rule allows a
by their acts that are too clear and complaint which states no cause of
unequivocal to be mistaken. Under the action to be cured either by evidence
circumstances, the more reasonable presented without objection or, in the
interpretation of the act of the appellee event of an objection sustained by the
Christian in receiving the monthly court, by an amendment of the
payments of US$750.00 is that appellee complaint with leave of court (Herrera,
Christian merely allowed appellant Remedial Law, Vol. VII, 1997 ed., p.
Swagman to pay whatever amount the 108).[8]

latter is capable of. This interpretation


is supported by the letter of demand Its motion for reconsideration
dated December 16, 1998 wherein having been denied by the Court of
appellee Christian demanded from Appeals in its Resolution of 4
appellant Swagman to return the December 2003, the petitioner
[9]

principal loan in the amount of came to this Court raising the


US$150,000 plus unpaid interest in the following issues:
amount of US$13,500.00
I. WHERE THE DECISION OF THE
... TRIAL COURT DROPPING TWO
DEFENDANTS HAS BECOME
Appellant Swagman, likewise, FINAL AND EXECUTORY, MAY
contends that, at the time of the filing THE RESPONDENT COURT OF
of the complaint, appellee Christian APPEALS STILL STUBBORNLY
ha[d] no cause of action because none CONSIDER THEM AS
of the promissory notes was due and APPELLANTS WHEN THEY DID
demandable. NOT APPEAL?

Again, We are not persuaded. II. WHERE THERE IS NO CAUSE


OF ACTION, IS THE DECISION OF
... THE LOWER COURT VALID?

In the case at bench, while it is true that III. MAY THE RESPONDENT
appellant Swagman raised in its COURT OF APPEALS VALIDLY
Answer the issue of prematurity in the AFFIRM A DECISION OF THE
filing of the complaint, appellant LOWER COURT WHICH IS
Swagman nonetheless failed to object INVALID DUE TO LACK OF
to appellee Christians presentation of CAUSE OF ACTION?
evidence to the effect that the
IV. WHERE THERE IS A Cause of action, as defined in
VALID NOVATION, MAY Section 2, Rule 2 of the 1997 Rules
THE ORIGINAL TERMS OF of Civil Procedure, is the act or
CONTRACT WHICH HAS BEEN omission by which a party violates
NOVATED STILL PREVAIL? [10]
the right of another. Its essential
elements are as follows:
The petitioner harps on the 1. A right in favor of the plaintiff by
absence of a cause of action at the whatever means and under
time the private respondents whatever law it arises or is
complaint was filed with the trial created;
court. In connection with this, the 2. An obligation on the part of the
petitioner raises the issue of named defendant to respect or
novation by arguing that its not to violate such right; and
obligations under the three 3. Act or omission on the part of
promissory notes were novated by such defendant in violation of
the renegotiation that happened in the right of the plaintiff or
constituting a breach of the
December 1997 wherein the private obligation of the defendant to
respondent agreed to waive the the plaintiff for which the latter
interest in each of the three may maintain an action for
promissory notes and to accept recovery of damages or other
appropriate relief.[11]
US$750 per month as installment
payment for the principal loans in It is, thus, only upon the
the total amount of US$150,000. occurrence of the last element that
Lastly, the petitioner questions the a cause of action arises, giving the
act of the Court of Appeals in plaintiff the right to maintain an
considering Hegerty and Infante as action in court for recovery of
appellants when they no longer damages or other appropriate relief.
appealed because the trial court
It is undisputed that the three
had already absolved them of the
promissory notes were for the
liability of the petitioner corporation.
amount of P50,000 each and
On the other hand, the private uniformly provided for (1) a term of
respondent asserts that this petition three years; (2) an interest of 15 %
is a mere ploy to continue delaying per annum, payable quarterly; and
the payment of a just obligation. (3) the repayment of the principal
Anent the fact that Hegerty and loans after three years from their
Atty. Infante were considered by the respective dates. However, both the
Court of Appeals as appellants, the Court of Appeals and the trial court
private respondent finds it found that a renegotiation of the
immaterial because they are not three promissory notes indeed
affected by the assailed decision happened in December 1997
anyway. between the private respondent and
the petitioner resulting in the trial court should have therefore
reduction not waiver of the interest dismissed his complaint.
from 15% to 6% per annum, which
Despite its finding that the
from then on was payable monthly,
petitioner corporation did not violate
instead of quarterly. The term of the
the modified terms of the three
principal loans remained
promissory notes and that the
unchanged in that they were still
payment of the principal loans were
due three years from the respective
not yet due when the complaint was
dates of the promissory notes.
filed, the trial court did not dismiss
Thus, at the time the complaint was
the complaint, citing Section 5, Rule
filed with the trial court on 2
10 of the 1997 Rules of Civil
February 1999, none of the three
Procedure, which reads:
promissory notes was due yet;
although, two of the promissory Section 5. Amendment to conform to or
notes with the due dates of 7 authorize presentation of evidence.
August 1999 and 14 March 2000 When issues not raised by the pleadings
matured during the pendency of the are tried with the express or implied
case with the trial court. Both courts consent of the parties, they shall be
also found that the petitioner had treated in all respects as if they had
been religiously paying the private been raised in the pleadings. Such
respondent US$750 per month from amendment of the pleadings as may be
January 1998 and even during the necessary to cause them to conform to
pendency of the case before the the evidence and to raise these issues
trial court and that the private may be made upon motion of any party
respondent had accepted all these at any time, even after judgment; but
monthly payments. failure to amend does not affect the
With these findings of facts, it result of the trial of these issues. If
has become glaringly obvious that evidence is objected to at the trial on
when the complaint for a sum of the ground that it is not within the
money and damages was filed with issues made by the pleadings, the court
the trial court on 2 February 1999, may allow the pleadings to be amended
no cause of action has as yet and shall do so with liberality if the
existed because the petitioner had presentation of the merits of the action
not committed any act in violation of and the ends of substantial justice will
the terms of the three promissory be subserved thereby. The court may
notes as modified by the grant a continuance to enable the
renegotiation in December 1997. amendment to be made.
Without a cause of action, the
private respondent had no right to According to the trial court, and
maintain an action in court, and the sustained by the Court of Appeals,
this Section allows a complaint that
does not state a cause of action to cured by evidence presented during
be cured by evidence presented the trial.
without objection during the trial.
However, the curing effect
Thus, it ruled that even if the private
under Section 5 is applicable only if
respondent had no cause of action
a cause of action in fact exists at
when he filed the complaint for a
the time the complaint is filed, but
sum of money and damages
the complaint is defective for failure
because none of the three
to allege the essential facts. For
promissory notes was due yet, he
example, if a complaint failed to
could nevertheless recover on the
allege the fulfillment of a condition
first two promissory notes dated 7
precedent upon which the cause of
August 1996 and 14 March 1997,
action depends, evidence showing
which became due during the
that such condition had already
pendency of the case in view of the
been fulfilled when the complaint
introduction of evidence of their
was filed may be presented during
maturity during the trial.
the trial, and the complaint may
Such interpretation of Section 5, accordingly be amended
Rule 10 of the 1997 Rules of Civil thereafter. Thus,
[13]
in Roces v.
Procedure is erroneous. Jalandoni, this Court upheld the
[14]

trial court in taking cognizance of an


Amendments of pleadings are
otherwise defective complaint which
allowed under Rule 10 of the 1997
was later cured by the testimony of
Rules of Civil Procedure in order
the plaintiff during the trial. In that
that the actual merits of a case may
case, there was in fact a cause of
be determined in the most
action and the only problem was
expeditious and inexpensive
the insufficiency of the allegations
manner without regard to
in the complaint. This ruling was
technicalities, and that all other
reiterated in Pascua v. Court of
matters included in the case may
Appeals. [15]

be determined in a single
proceeding, thereby avoiding It thus follows that a complaint
multiplicity of suits. Section 5
[12]
whose cause of action has not yet
thereof applies to situations wherein accrued cannot be cured or
evidence not within the issues remedied by an amended or
raised in the pleadings is presented supplemental pleading alleging the
by the parties during the trial, and to existence or accrual of a cause of
conform to such evidence the action while the case is
pleadings are subsequently pending. Such an action is
[16]

amended on motion of a party. prematurely brought and is,


Thus, a complaint which fails to therefore, a groundless suit, which
state a cause of action may be should be dismissed by the court
upon proper motion seasonably evidence as an exhibit, the trial court
filed by the defendant. The was not authorized to take it into
underlying reason for this rule is account. (Bastida vs. Menzi & Co.
that a person should not be [1933], 58 Phil., 188.) But in none of
summoned before the public these cases or in any other case have
tribunals to answer for complaints we held that if a right of action did not
which are immature. As this Court exist when the original complaint was
eloquently said in Surigao Mine filed, one could be created by filing an
Exploration Co., Inc. v. Harris: [17]
amended complaint. In some
jurisdictions in the United States what
It is a rule of law to which there is, was termed an imperfect cause of
perhaps, no exception, either at law or action could be perfected by suitable
in equity, that to recover at all there amendment (Brown vs. Galena Mining
must be some cause of action at the & Smelting Co., 32 Kan., 528; Hooper
commencement of the suit. As vs. City of Atlanta, 26 Ga. App., 221)
observed by counsel for appellees, and this is virtually permitted in
there are reasons of public policy why Banzon and Rosauro vs. Sellner
there should be no needless haste in ([1933], 58 Phil., 453); Asiatic
bringing up litigation, and why people Potroleum [sic] Co. vs. Veloso ([1935],
who are in no default and against 62 Phil., 683); and recently in Ramos
whom there is yet no cause of action vs. Gibbon (38 Off. Gaz., 241). That,
should not be summoned before the however, which is no cause of action
public tribunals to answer complaints whatsoever cannot by amendment or
which are groundless. We say supplemental pleading be converted
groundless because if the action is into a cause of action: Nihil de re
immature, it should not be entertained, accrescit ei qui nihil in re quando jus
and an action prematurely brought is a accresceret habet.
groundless suit.
We are therefore of the opinion, and so
It is true that an amended complaint hold, that unless the plaintiff has a
and the answer thereto take the place of valid and subsisting cause of action
the originals which are thereby at the time his action is commenced,
regarded as abandoned (Reynes vs. the defect cannot be cured or
Compaa General de Tabacos [1912], 21 remedied by the acquisition or
Phil. 416; Ruyman and Farris vs. accrual of one while the action is
Director of Lands [1916], 34 Phil., 428) pending, and a supplemental
and that the complaint and answer complaint or an amendment setting
having been superseded by the up such after-accrued cause of action
amended complaint and answer thereto, is not permissible. (Emphasis ours).
and the answer to the original
complaint not having been presented in
Hence, contrary to the holding facts. Such exception obtains in the
of the trial court and the Court of present case. [20]

Appeals, the defect of lack of cause


This Court finds to be contrary
of action at the commencement of
to the evidence on record the
this suit cannot be cured by the
finding of both the trial court and the
accrual of a cause of action during
Court of Appeals that the
the pendency of this case arising
renegotiation in December 1997
from the alleged maturity of two of
resulted in the reduction of the
the promissory notes on 7 August
interest from 15% to 6% per annum
1999 and 14 March 2000.
and that the monthly payments of
Anent the issue of novation, this US$750 made by the petitioner
Court observes that the petitioner were for the reduced interests.
corporation argues the existence of
It is worthy to note that the cash
novation based on its own version
voucher dated January
of what transpired during the
1998 states that the payment of
[21]

renegotiation of the three


US$750 represents INVESTMENT
promissory notes in December
PAYMENT. All the succeeding cash
1997. By using its own version of
vouchers describe the payments
facts, the petitioner is, in a way,
from February 1998 to September
questioning the findings of facts of
1999 as CAPITAL
the trial court and the Court of
REPAYMENT. All these cash
[22]

Appeals.
vouchers served as receipts
As a rule, the findings of fact of evidencing private respondents
the trial court and the Court of acknowledgment of the payments
Appeals are final and conclusive made by the petitioner: two of which
and cannot be reviewed on appeal were signed by the private
to the Supreme Court as long as
[18]
respondent himself and all the
they are borne out by the record or others were signed by his
are based on substantial representatives. The private
evidence. The Supreme Court is
[19]
respondent even identified and
not a trier of facts, its jurisdiction confirmed the existence of these
being limited to reviewing only receipts during the
errors of law that may have been hearing. Significantly, cognizant
[23]

committed by the lower courts. of these receipts, the private


Among the exceptions is when the respondent applied these payments
finding of fact of the trial court or the to the three consolidated principal
Court of Appeals is not supported loans in the summary of payments
by the evidence on record or is he submitted to the court. [24]

based on a misapprehension of
Under Article 1253 of the Civil
Code, if the debt produces interest,
payment of the principal shall not conformably with their new
be deemed to have been made until agreement and even continued
the interest has been covered. In paying during the pendency of the
this case, the private respondent case, the private respondent had no
would not have signed the receipts cause of action to file the complaint.
describing the payments made by It is only upon petitioners default in
the petitioner as capital repayment the payment of the monthly
if the obligation to pay the interest amortizations that a cause of action
was still subsisting. The receipts, as would arise and give the private
well as private respondents respondent a right to maintain an
summary of payments, lend action against the petitioner.
credence to petitioners claim that
Lastly, the petitioner contends
the payments were for the principal
that the Court of Appeals
loans and that the interests on the
obstinately included its President
three consolidated loans were
Infante and Vice-President Hegerty
waived by the private respondent
as appellants even if they did not
during the undisputed renegotiation
appeal the trial courts decision
of the loans on account of the
since they were found to be not
business reverses suffered by the
personally liable for the obligation of
petitioner at the time.
the petitioner. Indeed, the Court of
There was therefore a novation Appeals erred in referring to them
of the terms of the three promissory as defendants-appellants;
notes in that the interest was nevertheless, that error is no cause
waived and the principal was for alarm because its ruling was
payable in monthly installments of clear that the petitioner corporation
US$750. Alterations of the terms was the one solely liable for its
and conditions of the obligation obligation. In fact, the Court of
would generally result only in Appeals affirmed in toto the
modificatory novation unless such decision of the trial court, which
terms and conditions are means that it also upheld the latters
considered to be the essence of the ruling that Hegerty and Infante were
obligation itself. The resulting
[25]
not personally liable for the
novation in this case was, therefore, pecuniary obligations of the
of the modificatory type, not the petitioner to the private respondent.
extinctive type, since the obligation
In sum, based on our
to pay a sum of money remains in
disquisition on the lack of cause of
force.
action when the complaint for sum
Thus, since the petitioner did of money and damages was filed by
not renege on its obligation to pay the private respondent, the petition
the monthly installments
in the case at bar is impressed with
merit.
WHEREFORE, the petition is
hereby GRANTED. The Decision of
5 September 2003 of the Court of
Appeals in CA-G.R. CV No. 68109,
which affirmed the Decision of 5
May 2000 of the Regional Trial
Court of Baguio, Branch 59,
granting in part private respondents
complaint for sum of money and
damages, and its Resolution of 4
December 2003, which denied
petitioners motion for
reconsideration are hereby
REVERSED and SET ASIDE. The
complaint docketed as Civil Case
No. 4282-R is hereby DISMISSED
for lack of cause of action.
No costs.
SO ORDERED.
Quisumbing, Ynares-Santiago,
Carpio, and Azcuna, JJ., concur.