OBLICON FINALS 3-6, 2018 ACJUCO 1
G.R. No. L-18411 December 17, 1966
MAGDALENA ESTATES, INC., plaintiff-
appellee,
vs.
ANTONIO A. RODRIGUEZ and HERMINIA C.
RODRIGUEZ, defendants-appellants.
Roxas and Sarmiento for plaintiff-appelle.
Somero, Baclig and Savello for defendants-
appellants.
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 date of the judicial
demand, the sum of P100.00 as attorney's 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:
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
Estates, 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:
(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:
. . . 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-G, Psd-26193, with an area of 2191
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.
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
demanded from the appellants the payment of
P655.89 corresponding to the alleged
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:
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 (appellee's) right 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
OBLICON FINALS 3-6, 2018 ACJUCO 2
Articles 1235 and 1253 of the Civil Code
provide:
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.
ART. 1253. If the debt produces interest,
payment of the principal shall not be deemed to
have been made until the interests have been
recovered.
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-G, 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-G, Psd-26193, . . . ." The appellee did not
protest nor object when it accepted the payment
of P5,000.00 because it knew that 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.
 OBLICON FINALS 3-6, 2018 ACJUCO 3

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. Haskel, 49 Phil. 614; Pacific
Commercial Co. v. Sotto, 34 Phil. 237; Estate of
Mota v. Serra, 47 Phil. 464; Duñgo 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 the appellants.

G.R. No. 79642 July 5, 1993
BROADWAY CENTRUM CONDOMINIUM
CORPORATION, petitioner,
vs.
TROPICAL HUT FOOD MARKET, INC. and
THE HONORABLE COURT OF
APPEALS, respondents.
Gozon, Berenguer, Fernandez & Defensor Law
Offices for petitioner.
Romulo, Mabanta, Buenaventura, Sayoc &
Delos Angeles Law Office for respondent.
FELICIANO, J.:
Petitioner Broadway Centrum Condominium
Corporation ("Broadway") and private
respondent Tropical Hut Food Market. Inc.
("Tropical") executed an 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 reads as follows:
3. BASIC RENTAL ON LEASED
PREMISES — LESSEE agrees to
pay LESSOR a basic monthly
rental on the leased promises 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 promises from December
1, 1980 to January 31. 1961. The
basic rental shall be increased to
ONE HUNDRED FORTY
THOUSAND PESOS
OBLICON FINALS 3-6, 2018 ACJUCO 4
(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, 1967 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 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.
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 Tropical's rental
payments to Broadway were equivalent to
7.31% of Tropical's actual sales of
P17,246,103.00 in 1981, while "[Tropical's]
gross profit, rate [was] only 10%." Tropical went
on to say that the rental specified in that contract
had been "based merely on [Tropical's)
projections that [Tropical] could reach an
average sale of P120,000.00 a day;" however,
Tropical's 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:
[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 1962, Broadway responded to
Tropical's latter by stating that it (Broadway)
believed that the problems of Tropical's
supermarket in the Broadway Centrum were
within the control of Tropical's 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:
. . . 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% increased 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 coffee shop outlets and half of the
temporary suspension of the
original rate of rental stipulated in
OBLICON FINALS 3-6, 2018 ACJUCO 5
our contract of lease and not an
amendment thereto.2 (Emphases
supplied)
Officers of Tropical met with the President of
Broadway and during this conference, Tropical's
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 Doña 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. Broadway's President, Mrs. Cita
Fernandez Orosa, was aware that the
temporary closure of the Doña Juana Rodriguez
Avenue had affected the business of all the
Broadway's tenants, including Tropical. She,
therefore, agreed on 20 April 1982 to a
"provisional and temporary agreement" which
agreement needs to be quoted in full:
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
hallway.

Finally we wish to remind you that
the temporary alteration in
rental is conditioned on your good
faith implementation an 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.
C o n f o r m e: 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
Doña 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,
wasprovisionally reduced" to P60,000.00 a
month or 2% of gross receipts whichever is
higher "without waving any of [Broadway's]
rights under our rental agreement." Broadway
then went on to say that:
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.
OBLICON FINALS 3-6, 2018 ACJUCO 6
This increase, however, shall be
implemented gradually as
follows: P80,000.00 effective
January, 1983 and P100,000.00
effective April, 1993 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 mare
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 mater. We
are sure that you will agree with us
that this rate is very low and
cannot therefore be sustained
indefinitely.5 (Emphases
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 Broadway's
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
presentprovisional rates until such
time that more sales are achieved.
(Emphasis supplied)

Mr. Luis Que's appeal was, however, found
unsatisfactory by Broadway. In a letter dated 13
January 1983, Broadway said:
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
increased.6(Emphasis supplied).
Tropical continued its renegotiation efforts. In
another letter dated 29 March 1983, Broadway's
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.
OBLICON FINALS 3-6, 2018 ACJUCO 7
Tropical responded to the statement of account
sent by Broadway by pleading, once more, in a
letter dated 15 April 1983, that Tropical's
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
Tropical's last counter-offer was not acceptable
to Broadway. In a letter dated 22 April 1983,
Broadway's President wrote to Mr. Luis Que
stating that "the matter was no longer
negotiable":
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
8
foregoing. (Emphasis supplied).
On 5 May 1983, Mr. Mariano Gue, adopting a
new and much harder posture than Mr. Luis Que
had, wrote to Broadway as follows:

. . . 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 then 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
9
increase. (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:
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 appealed 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 underscores 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 amendment
to the lease contract and this was
done merely as an assistance.
There is, therefore, absolutely no
OBLICON FINALS 3-6, 2018 ACJUCO 8
basis to your claim that we cannot
arbitrarily and unilaterally increase
the rentals. We strongly feel
that we should have instead been
the recipient 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 Tropical's 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
Tropical's sales volume "remains low."
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:
WHEREFORE, judgment, is
hereby rendered in favor of the
plaintiff and against the defendant
as follows:
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 leased 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
promises afterplaintiff has
achieved its projected daily sales
average is fixed as follows:
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;
OBLICON FINALS 3-6, 2018 ACJUCO 9
February 1, 1987 to February 1, 1991 —
P54.24 per square mater or P139,702.00.
Correspondingly, defendant's 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 hold
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 hove been overcome, the
following rental rates:
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 latter-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

now debtor in place of the old one, or by
subrogating a third person to the rights of the
creditor. 12Novation 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 in extinguished and a news 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 to be
extinguished, or that now obligation be on every
point incompatible with the old one. 14 Novation
is never presumed; it must be established either
by the discharge of use 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 role 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 1992 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
temporaryagreement to a reduction of
[Tropical's] monthly rental —." The letter-
agreement, as noted earlier, also contained the
following sentence:
This provisional agreement
should not be interpreted as
OBLICON FINALS 3-6, 2018 ACJUCO 10
amendment to the contract
entered into by us.
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 Tropical's supermarket at the
Broadway Centrum. The non-specification by
Broadway (who had prepared the letter-
agreement an 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 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:
32. NON-WAIVER OF
CONDITIONS & COVENANTS —
The failure of the LESSOR to
insist upon strict performance of
any of the terms, conditions and
stipulation 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 express in writing

and signed by the
16
LESSOR. (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."
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.
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 Broadway's 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 [Tropical's] 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
OBLICON FINALS 3-6, 2018 ACJUCO 11
"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
Centrum's] 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 Tropical's income from
concessionaires at its Broadway Centrum
Supermarket. Turning down Mr. Que's last
counter-officer, Mrs. Orosa of Broadway on 22
April 1983 once again stressed that:
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. Tropical's 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 it's own, before Tropical and
Broadway executed their 28 November 1980
Contract of Lease. That feasibility study was no
mare than an expression of Tropical's 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."
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 Tropical's 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
OBLICON FINALS 3-6, 2018 ACJUCO 12
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 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:
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;
 OBLICON FINALS 3-6, 2018 ACJUCO 13

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
Court's 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
attorney's 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. 136780. August 16, 2001]


JEANETTE D. MOLINO, petitioner,
vs. 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:
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.
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:
16. SURETY. The cardholder shall furnish an
adequate surety or sureties acceptable to
OBLICON FINALS 3-6, 2018 ACJUCO 14
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.
The Surety Undertaking signed by Jeanette
states:
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.
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:
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.
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. xxx [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
OBLICON FINALS 3-6, 2018 ACJUCO 15
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 no 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.
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:
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 vs. 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.
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:
WHEREFORE, the appealed Decision is
REVERSED and one is rendered ordering
defendant-appellee Jeanette D. Molino-Alto to
pay plaintiff-appellant Security Diners
International, Inc. the following:
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.
OBLICON FINALS 3-6, 2018 ACJUCO 16
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:
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 xxx .[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.
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 vs. Court of Appeals, supra:
xxx 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
cancelling and replacing the said
card. However, the novation did not serve to
release petitioner from her surety obligations
because in the Surety Undertaking she
expressly waived 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:
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
OBLICON FINALS 3-6, 2018 ACJUCO 17
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 a contract are clear and leave no
doubt upon the intention of the contracting
parties, the literal meaning of its stipulations
shall control.
This case is no different from Pacific Banking
Corporation vs. IAC, 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:
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. xxx
xxxxxxxxxxx

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:
x x x. 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 satisified or paid. (italics supplied)
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
OBLICON FINALS 3-6, 2018 ACJUCO 18
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:
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 stipulations 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.
 OBLICON FINALS 3-6, 2018 ACJUCO 19

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. 147950. December 11, 2003]
CALIFORNIA BUS LINES, INC., petitioner,
vs. 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 assigned to respondent
State Investment House, Inc.
The facts, as culled from the records, are as
follows:
Sometime in 1979, Delta Motors
CorporationM.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
OBLICON FINALS 3-6, 2018 ACJUCO 20
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. DionisioLlamas, 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 PasayCity). 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
OBLICON FINALS 3-6, 2018 ACJUCO 21
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 for certiorari and prohibition, docketed
as CA-G.R. SP No. 08378. On July 31, 1987,
the Court of Appeals granted SIHIspetition 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.
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
[29]
Manila. SIHIsmotion 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 PilipinasBank, by Order dated
September 16, 1987[32] of Branch 13 of the RTC
of Manila.
OBLICON FINALS 3-6, 2018 ACJUCO 22
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:
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

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
OBLICON FINALS 3-6, 2018 ACJUCO 23
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. An[42] 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] Novationhas 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
OBLICON FINALS 3-6, 2018 ACJUCO 24
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
[57]
one. In Tible v. Aquino and Pascual v. Lacsa
mana[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
[59]
implication. 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:
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. 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.
The restructuring agreement, for its part, had
the following provisions:

WHEREAS, CBL and LLAMAS admit their past
due installment on the following promissory
notes:
a. PN Nos. 16 to 26 (11 units)
Past Due as of September
1981 P1,411,434.00
b. PN Nos. 52 to 57 (24 units)
Past Due as of September
1981 P1,105,353.00
WHEREAS, the parties agreed to restructure
the above-mentioned past due installments
under the following terms and conditions:
a. PN Nos. 16 to 26 (11 units) 37 months
PN Nos. 52 to 57 (24 units) 46 months
b. Interest Rate: 16% per annum
c. Documentation Fee: 2% per annum
d. Penalty previously incurred
Restructuring fee: 4% p.a.
e. Mode of Payment: Daily Remittance
NOW, THEREFORE, for and in consideration of
the foregoing premises, the parties hereby
agree and covenant as follows:
1. That the past due installment referred to
above plus the current and/or falling due
amortization as of October 1, 1981 for
Promissory Notes Nos. 16 to 26 and 52 to 57
shall be paid by CBL and/or LLAMAS in
accordance with the following schedule of
payments:
Daily payments of P11,000.00 from
October 1 to December 31, 1981
Daily payments of P12,000.00 from
OBLICON FINALS 3-6, 2018 ACJUCO 25
January 1, 1982 to March 31, 1982
Daily payments of P13,000.00 from
April 1, 1982 to June 30, 1982
30, Daily payments of P14,000.00 from
July 1, 1982 to September 30, 1982
Daily payments of P15,000.00 from
30,
October 1, 1982 to December 31, 1982
Daily payments of P16,000.00 from
January 1, 1983 to June 30, 1983
Daily payments of P17,000.00 from
July 1, 1983
2. CBL or LLAMAS shall remit to DMC on or
before 11:00 a.m. everyday the daily cash
payments due to DMC in accordance with the
schedule in paragraph 1. DMC may send a
and collector to receive the amount due
at CBLs premises. All delayed remittances shall
be charged additional 2% penalty interest per
month.
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 52 to 57.
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. units. Records needed by the
DMC representatives in monitoring said
operations shall be made available by CBL and
LLAMAS.
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 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.
6. In the event that CBL and LLAMAS fail to
remit the daily remittance agreed upon and the
total accumulated unremitted amount has
reached and (sic) equivalent of Sixty (60) days,
DMC and Silverio shall exercise any or all of the
following options:
(a) The whole sum remaining then unpaid plus
2% penalty per month and 16% interest per
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 equivalent to 25% of the amount
due for attorneys fees and expenses of
collection, whether actually incurred or not, in
addition to the cost of suit;
(b) To enforce in accordance with law, their
rights under the Chattel Mortgage over various
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
(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.
7. DMC and SILVERIO shall insure to CBL
continuous supply of spare parts for the M.A.N.
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
on a moving 6-month requirement to be
prepared and submitted by CBL, and
acceptable to DMC, within the first week of each
month.
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 the Chattel Mortgage over various
M.A.N. Diesel Buses with Nos. CM No. 80-39,
80-40, 80-41, 80-42, 80-43, 80-44 and CM No.
80-15 as well as the Deed of Pledge executed
OBLICON FINALS 3-6, 2018 ACJUCO 26
by Mr. Llamas shall continue to secure the
obligation until full payment.
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 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 vs. 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:
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]
OBLICON FINALS 3-6, 2018 ACJUCO 27
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:
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 intervenor's 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.
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
OBLICON FINALS 3-6, 2018 ACJUCO 28
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
agreementand 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
OBLICON FINALS 3-6, 2018 ACJUCO 29
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.