BAUTISTA Vs PILAR DEVELOPMENT Case Digest

BAUTISTA Vs PILAR DEVELOPMENT

g.r.no. 135046 august 17, 1999

FACTS: In 1978, petitioner spouses Florante and Laarni Bautista purchased a house and lot in Pilar
Village, Las Pinas, Metro Manila. To partially finance the purchase, they obtained from the Apex
Mortgage & Loan Corporation a loan in the amount of P100,180.00. They executed a promissory note on
December 22, 1978 obligating themselves, jointly and severally, to pay the "principal sum of P100,180.00
with interest rate of 12% and service charge of 3%" for a period of 240 months, or twenty years, from
date, in monthly installments of P1,378.83. Late payments were to be charged a penalty of one and one-
half per cent (1 1/2%) of the amount due. In the same promissory note, petitioners authorized Apex to
"increase the rate of interest and/or service charges" without notice to them in the event that a law,
Presidential Decree or any Central Bank regulation should be enacted increasing the lawful rate of
interest and service charges on the loan. Payment of the promissory note was secured by a second
mortgage on the house and lot purchased by petitioners.Petitioner spouses failed to pay several
installments. On September 20, 1982, they executed another promissory note in favor of Apex. This note
was in the amount of P142,326.43 at the increased interest rate of twenty-one per cent (21%) per annum
with no provision for service charge but with penalty charge of 1 1/2% for late payments.

ISSUE: Whether or not there was valid novation in the case at bar?

RULING: Novation has four (4) essential requisites: (1) the existence of a previous valid obligation; (2)
the agreement of all parties to the new contract; (3) the extinguishment of the old contract; and (4) the
validity of the new one. In the instant case, all four requisites have been complied with. The first
promissory note was a valid and subsisting contract when petitioner spouses and Apex executed the
second promissory note. The second promissory note absorbed the unpaid principal and interest of
P142,326.43 in the first note which amount became the principal debt therein, payable at a higher interest
rate of 21% per annum. Thus, the terms of the second promissory note provided for a higher principal, a
higher interest rate, and a higher monthly amortization, all to be paid within a shorter period of 16.33
years. These changes are substantial and constitute the principal conditions of the obligation. Both
parties voluntarily accepted the terms of the second note; and also in the same note, they unequivocally
stipulated to extinguish the first note. Clearly, there was animus novandi, an express intention to novate.
The first promissory note was cancelled and replaced by the second note. This second note became the
new contract governing the parties' obligations.