OBLICON (Novation - Requisites) |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.
( payment of interest in the amount of P655.89, and in not finding and
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
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 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
OBLICON (Novation - Requisites) |2
debts of the same kind of a single creditor. They cannot be made applicable to a person
whose obligation as a mere surety is both contingent and singular; his liability is
confined to such obligation, and he is entitled to have all payments made applied
exclusively to said application and to no other. 2 Besides, Article 1253 of the Civil
Code is merely directory, and not mandatory.3 Inasmuch as the appellee cannot protest
for non-payment of the interest when it accepted the amount of P5,000.00 from the
Luzon Surety Co., Inc., nor apply a part of that amount as payment for the interest, we
cannot now say that there was a waiver or condonation on the interest due.
It is claimed that there was a novation and/or modification of the obligation of the
appellants in favor of the appellee because the appellee accepted without reservation
the subsequent agreement set forth in the surety bond despite its failure to provide that
it also guaranteed payment of accruing interest.
The rule is settled that novation by presumption has never been favored. To be
sustained, it needs to be established that the old and new contracts are incompatible in
all points, or that the will to novate appears by express agreement of the parties or in
acts of similar import.4
An obligation to pay a sum of money is not novated, in a new instrument wherein the
old is ratified, by changing only the terms of payment and adding other obligations not
incompatible with the old one, 5 or wherein the old contract is merely supplemented by
the new one.6 The mere fact that the creditor receives a guaranty or accepts payments
from a third person who has agreed to assume the obligation, when there is no
agreement that the first debtor shall be released from responsibility does not constitute
a novation, and the creditor can still enforce the obligation against the original debtor.
(Straight v. 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. L-29981 April 30, 1971

EUSEBIO S. MILLAR, petitioner,  March 31, 1957 — EIGHT HUNDRED FIFTY (P850) PESOS;
vs.
THE HON. COURT OF APPEALS and ANTONIO P. GABRIEL, respondents.
Fernandez Law Office and Millar and Esguerra for petitioner.
Francisco de la Fuente for respondents.
 
CASTRO, J.:
On February 11, 1956, Eusebio S. Millar (hereinafter referred to as the petitioner)
obtained a favorable judgment from the Court of First Instance of Manila, in civil case
27116, condemning Antonio P. Gabriel (hereinafter referred to as the respondent) to
pay him the sum of P1,746.98 with interest at 12% per annum from the date of the
filing of the complaint, the sum of P400 as attorney's fees, and the costs of suit. From
the said judgment, the respondent appealed to the Court of Appeals which, however,
dismissed the appeal on January 11, 1957.
Subsequently, on February 15, 1957, after remand by the Court of Appeals of the case,
the petitioner moved ex parte in the court of origin for the issuance of the
corresponding writ of execution to enforce the judgment. Acting upon the motion, the
lower court issued the writ of execution applied for, on the basis of which the sheriff
of Manila seized the respondent's Willy's Ford jeep (with motor no. B-192297 and
plate no. 7225, Manila, 1956).
The respondent, however, pleaded with the petitioner to release the jeep under an
arrangement whereby the respondent, to secure the payment of the judgement debt,
agreed to mortgage the vehicle in favor of the petitioner. The petitioner agreed to the
arrangement; thus, the parties, on February 22, 1957, executed a chattel mortgage on
the jeep, stipulating, inter alia, that
This mortgage is given as security for the payment to the said
EUSEBIO S. MILLAR, mortgagee, of the judgment and other
incidental expenses in Civil Case No. 27116 of the Court of First
Instance of Manila against Antonio P. Gabriel, MORTGAGOR, in
the amount of ONE THOUSAND SEVEN HUNDRED (P1,700.00)
PESOS, Philippine currency, which MORTGAGOR agrees to pay as
follows:
OBLICON (Novation - Requisites) |3
April 30, 1957 — EIGHT HUNDRED FIFTY (P850.00) PESOS.
Upon failure of the respondent to pay the first installment due on March 31, 1957, the
petitioner obtained an alias writ of execution. This writ which the sheriff served on the
respondent only on May 30, 1957 — after the lapse of the entire period stipulated in
the chattel mortgage for the respondent to comply with his obligation — was returned
unsatisfied.
So on July 17, 1957 and on various dates thereafter, the lower court, at the instance of
the petitioner, issued several alias writs, which writs the sheriff also returned
unsatisfied. On September 20, 1961, the petitioner obtained a fifth alias writ of
execution. Pursuant to this last writ, the sheriff levied on certain personal properties
belonging to the respondent, and then scheduled them for execution sale.
However, on November 10, 1961, the respondent filed an urgent motion for the
suspension of the execution sale on the ground of payment of the judgment obligation.
The lower court, on November 11, 1961, ordered the suspension of the execution sole
to afford the respondent the opportunity to prove his allegation of payment of the
judgment debt, and set the matter for hearing on November 25, 1961. After hearing,
the lower court, on January 25, 1962, issued an order the dispositive portion of which
reads:
IN VIEW WHEREOF, execution reiterated for P1,700.00 plus costs
of execution.
The lower court ruled that novation had taken place, and that the parties had executed
the chattel mortgage only "to secure or get better security for the judgment.
The respondent duly appealed the aforesaid order to the Court of Appeals, which set
aside the order of execution in a decision rendered on October 17, 1968, holding that
the subsequent agreement of the parties impliedly novated the judgment obligation in
civil case 27116.
The appellate court stated that the following circumstances sufficiently demonstrate
the incompatibility between the judgment debt and the obligation embodied in the
deed of chattel mortgage, warranting a conclusion of implied novation:

1. Whereas the judgment orders the respondent to pay the petitioner the sum of
P1,746.98 with interest at 12% per annum from the filing of the complaint, plus the
amount of P400 and the costs of suit, the deed of chattel mortgage limits the principal
obligation of the respondent to P1,700;
2. Whereas the judgment mentions no specific mode of payment of the amount due to
the petitioner, the deed of chattel mortgage stipulates payment of the sum of P1,700 in
two equal installments;
3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage
obligates the respondent to pay liquidated damages in the amount of P300 in case of
default on his part; and
4. Whereas the judgment debt was unsecured, the chattel mortgage, which may be
foreclosed extrajudicially in case of default, secured the obligation.
On November 26, 1968, the petitioner moved for reconsideration of the appellate
court's decision, which motion the Court of Appeals denied in its resolution of
December 7, 1968. Hence, the present petition for certiorari to review the decision of
the Court of Appeals, seeking reversal of the appellate court's decision and affirmance
of the order of the lower court.
Resolution of the controversy posed by the petition at bar hinges entirely on a
determination of whether or not the subsequent agreement of the parties as embodied
in the deed of chattel mortgage impliedly novated the judgment obligation in civil case
27116. The Court of Appeals, in arriving at the conclusion that implied novation has
taken place, took into account the four circumstances heretofore already adverted to as
indicative of the incompatibility between the judgment debt and the principal
obligation under the deed of chattel mortgage.
1. Anent the first circumstance, the petitioner argues that this does not constitute a
circumstance in implying novation of the judgment debt, stating that in the interim
— from the time of the rendition of the judgment in civil case 27116 to the time of the
execution of the deed of chattel mortgage — the respondent made partial payments,
necessarily resulting in the lesser sum stated in the deed of chattel mortgage. He adds
that on record appears the admission by both parties of the partial payments made
before the execution of the deed of chattel mortgage. The erroneous conclusion arrived
at by the Court of Appeals, the petitioner argues, creates the wrong impression that the
execution of the deed of chattel mortgage provided the consideration or the reason for
the reduced judgment indebtedness.
OBLICON (Novation - Requisites) |4
Where the new obligation merely reiterates or ratifies the old obligation, although the
former effects but minor alterations or slight modifications with respect to the cause or
object or conditions of he latter, such changes do not effectuate any substantial
incompatibility between the two obligations Only those essential and principal changes
introduced by the new obligation producing an alteration or modification of the
essence of the old obligation result in implied novation. In the case at bar, the mere
reduction of the amount due in no sense constitutes a sufficient indictum of
incompatibility, especially in the light of (a) the explanation by the petitioner that the
reduced indebtedness was the result of the partial payments made by the respondent
before the execution of the chattel mortgage agreement and (b) the latter's admissions
bearing thereon.
At best, the deed of chattel mortgage simply specified exactly how much the
respondent still owed the petitioner by virtue of the judgment in civil case 27116. The
parties apparently in their desire to avoid any future confusion as to the amounts
already paid and as to the sum still due, decoded to state with specificity in the deed of
chattel mortgage only the balance of the judgment debt properly collectible from the
respondent. All told, therefore, the first circumstance fails to satisfy the test of
substantial and complete incompatibility between the judgment debt an the pecuniary
liability of the respondent under the chattel mortgage agreement.
2. The petitioner also alleges that the third circumstance, considered by the Court of
Appeals as indicative of incompatibility, is directly contrary to the admissions of the
respondent and is without any factual basis. The appellate court pointed out that while
the judgment made no mention of payment of damages, the deed of chattel mortgage
stipulated the payment of liquidated damages in the amount of P300 in case of default
on the part of the respondent.
However, the petitioner contends that the respondent himself in his brief filed with the
Court of Appeals admitted his obligation, under the deed of chattel mortgage, to pay
the amount of P300 by way of attorney's fees and not as liquidated damages. Similarly,
the judgment makes mention of the payment of the sum of P400 as attorney's fees and
omits any reference to liquidated damages.
The discrepancy between the amount of P400 and tile sum of P300 fixed as attorney's
fees in the judgment and the deed of chattel mortgage, respectively, is explained by the
petitioner, thus: the partial payments made by the respondent before the execution of
the chattel mortgage agreement were applied in satisfaction of part of the judgment
debt and of part of the attorney's fee fixed in the judgment, thereby reducing both
amounts.
 OBLICON (Novation - Requisites) |5

At all events, in the absence of clear and convincing proof showing that the parties, in The defense of implied novation requires clear and convincing proof of complete
stipulating the payment of P300 as attorney's fees in the deed of chattel mortgage, incompatibility between the two obligations. 2 The law requires no specific form for an
intended the same as an obligation for the payment of liquidated damages in case of effective novation by implication. The test is whether the two obligations can stand
default on the part of the respondent, we find it difficult to agree with the conclusion together. If they cannot, incompatibility arises, and the second obligation novates the
reached by the Court of Appeals. first. If they can stand together, no incompatibility results and novation does not take
place.
3. As to the second and fourth circumstances relied upon by the Court of Appeals in
holding that the montage obligation superseded, through implied novation, the We do not see any substantial incompatibility between the two obligations as to
judgment debt, the petitioner points out that the appellate court considered said warrant a finding of an implied novation. Nor do we find satisfactory proof showing
circumstances in a way not in accordance with law or accepted jurisprudence. The that the parties, by explicit terms, intended the full discharge of the respondent's
appellate court stated that while the judgment specified no mode for the payment of liability under the judgment by the obligation assumed under the terms of the deed of
the judgment debt, the deed of chattel mortgage provided for the payment of the chattel mortgage so as to justify a finding of express novation.
amount fixed therein in two equal installments.
ACCORDINGLY, the decision of the Court of Appeals of October 17, 1968 is set
On this point, we see no substantial incompatibility between the mortgage obligation aside, and the order of the Court of First Instance of Manila of January 25, 1962 is
and the judgment liability of the respondent sufficient to justify a conclusion of affirmed, at respondent Antonio Gabriel's cost.
implied novation. The stipulation for the payment of the obligation under the terms of
the deed of chattel mortgage serves only to provide an express and specific method for Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Fernando and
its extinguishment — payment in two equal installments. The chattel mortgage simply Makasiar, JJ., concur.
gave the respondent a method and more time to enable him to fully satisfy the
judgment indebtedness. 1 The chattel mortgage agreement in no manner introduced any Villamor, J., abstains.
substantial modification or alteration of the judgment. Instead of extinguishing the
obligation of the respondent arising from the judgment, the deed of chattel mortgage
expressly ratified and confirmed the existence of the same, amplifying only the mode  
and period for compliance by the respondent.
 
The Court of Appeals also considered the terms of the deed of chattel mortgage
incompatible with the judgment because the chattel mortgage secured the obligation  
under the deed, whereas the obligation under the judgment was unsecured. The
petitioner argues that the deed of chattel agreement clearly shows that the parties Separate Opinions
agreed upon the chattel mortgage solely to secure, not the payment of the reduced
amount as fixed in the aforesaid deed, but the payment of the judgment obligation and  
other incidental expenses in civil case 27116.
BARREDO, J., concurring:
The unmistakable terms of the deed of chattel mortgage reveal that the parties
constituted the chattel mortgage purposely to secure the satisfaction of the then
I concur. I would like to add the following considerations to the rationale of the main
existing liability of the respondent arising from the judgment against him in civil case
opinion:
27116. As a security for the payment of the judgment obligation, the chattel mortgage
agreement effectuated no substantial alteration in the liability of the respondent.
As evidenced by the express terms of the chattel mortgage by repondent Gabriel in
favor of petitioner Millar, it was unmistakably the intent of the parties that the said
 OBLICON (Novation - Requisites) |6

mortgage be merely a "security for the payment to the said Eusebio Millar, mortgagee,
of the judgment and other incidental expenses in Civil Case No. 27116 of the Court of
First Instance of Manila against Antonio P. Gabriel, mortgagor," to be paid in the
amount and manner therein stated. If this can in any sense in which the parties must be
held to have newly bound themselves. In other words, by their explicit covenant, the
parties contemplated the chattel mortgage to be a security for the payment of the
judgment and not the payment itself thereof. Such being the case, and it appearing that
respondent Gabriel has not paid the judgment remains unimpaired in its full existence
and vigor, and the resort to the execution thereof thru the ordinary procedure of a writ
of execution by the petitioner is an election to which every mortgage creditor is
entitled when he decides to abandon his security.

Teehankee, J., concurs.

Separate Opinions

BARREDO, J., concurring:

I concur. I would like to add the following considerations to the rationale of the main
opinion:

As evidenced by the express terms of the chattel mortgage by repondent Gabriel in G.R. No. L-25897 August 21, 1976
favor of petitioner Millar, it was unmistakably the intent of the parties that the said
mortgage be merely a "security for the payment to the said Eusebio Millar, mortgagee,
AGUSTIN DORMITORIO and LEONCIA D. DORMITORIO, petitioner 
of the judgment and other incidental expenses in Civil Case No. 27116 of the Court of
vs.
First Instance of Manila against Antonio P. Gabriel, mortgagor," to be paid in the
HONORABLE JOSE FERNANDEZ, Judge of the Court of First Instance of
amount and manner therein stated. If this can in any sense in which the parties must be
Negros Occidental, Branch Bacolod City, and SERAFIN
held to have newly bound themselves. In other words, by their explicit covenant, the
LAZALITA, respondents.
parties contemplated the chattel mortgage to be a security for the payment of the
judgment and not the payment itself thereof. Such being the case, and it appearing that
respondent Gabriel has not paid the judgment remains unimpaired in its full existence Graciano H. Arinday, Jr. for petitioners.
and vigor, and the resort to the execution thereof thru the ordinary procedure of a writ
of execution by the petitioner is an election to which every mortgage creditor is Antonio L. Balinas for respondent.
entitled when he decides to abandon his security.
 
Teehankee, J., concurs.

FERNANDO, Acting C.J.:
The filing of this suit for certiorari could have been avoided had there full awareness
by petitioners of the legal import and significance of a later decision involving the
parties. If such were the case, they would have realized that no grave abuse of
discretion, no abuse of discretion for that matter, could be imputed to respondent
Judge for issuing the challenged order,  1 setting aside a writ of execution conformably
to a petition for relief by private respondent Serafin Lazalita.  2 Insofar as pertinent, it is
worded thus: "That the above-mentioned order of Execution to be set aside is based on
the decision of the Honorable Court dated September 5, 1961 in the above-entitled
case which is no longer enforceable, and executory by virtue of the "Agreed
Stipulation of Facts" entered into by the Plaintiffs and Defendants in Civil Case No.
6553, and which said "Agreed Stipulation of Facts" was the basis for the judgment of
the Honorable Court dated February 12, 1965. That the parties and subject matter in
Civil Case No. 5111 and Civil Case No. 6553 are the same except that the plaintiffs in
Civil Case No. 5111 were the defendants in Civil Case No. 6553, and vice-versa; ...
That in the "Agreed Stipulation of Facts" in Civil Case No. 6553 which was the basis
of the Honorable Court judgment dated February 12, 1965, it was agreed by the
defendant spouses Dormitorio, who are the plaintiffs in Civil Case No. 5111 that the
defendant Serafin Lazalita should be reimbursed for his expenses in transferring his
house to another Lot to be assigned to him by the Municipality of Victorias, and that
the Decision in Civil Case No. 5111 shall not be enforced and executed anymore; That
by means of fraud, misrepresentation and concealment of the true facts of the case, the
plaintiffs were able to mislead the Honorable Court, thru an Ex-Parte Motion to issue
by mistake an Order for the issuance of a Writ of Execution by making this Honorable
Court believe that the Decision of September 5, 1961 is still enforceable and
executory; ..." 3 Respondent Judge granted the relief prayed for and set aside the writ of
execution, in view of the conclusion reached by him that such later decision, arrived at
as the result of a compromise between the same parties, evidenced by the agreed
stipulation of facts, was clear proof of an animus novandi and thus superseded the
previous judgment which as a result of an ex parte motion was mistakenly ordered
executed. Such a conclusion is borne out by a study of the records of the case.
certiorari does not lie.
The decision in the aforecited Civil Case No. 6553, which as contended by private
respondent, a submission that earned the approval of respondent Judge, sufficed for the
lifting of the writ of execution, pursuant to the decision in Civil Case No. 5111
deemed superseded, started with a stipulation of facts. Thus: "When this case was
called for hearing the parties submitted an Agreed Stipulation of Facts duly signed by
the parties and their respective counsel, as follows: "[Agreed Stipulation of Facts],"
Come now the parties, in the above-entitled case, represented by their respective
OBLICON (Novation - Requisites) |7
counsel and before this Honorable Court, respectfully submit the following agreed
stipulation of facts: 1. That the defendant Municipality of Victorias, is the owner of
several parcels of lands in Victorias, Negros Occidental, known as Lots Nos. 102 and
120 and 138 and 102-New, which [are] consolidated and subdivided into small lots for
sale to the inhabitants thereof; the lots were sold by the Municipality, either in cash or
installment for ten (10) years at [one peso] (P1.00) per square meter; 2. That on
December 7, 1948, the plaintiff Serafin Lazalita, bought from the Municipality of
Victorias, Lot No. 1, Block 16 of the consolidated-subdivision plan PCs-118 having an
area of Two Hundred Thirty (230) Square Meters, payable in installment at [one peso]
(P1.00) per square meter, and in the year 1958, upon full payment by plaintiff Lazalita
of the purchase price of the land, a deed of definite sale was executed in his favor by
the then Municipal Mayor Montinola of Victorias, Negros Occidental, and thereafter a
Certificate of Title No. T-23098 covering the property, was issued him by the Register
of Deeds of Bacolod, Negros Occidental; 3. That from February 7, 1948, until about
eight continuous years thereafter, plaintiff had been in full and peaceful possession of
the said land, and he introduced permanent and valuable improvements thereon,
[namely] fruit trees, like coconuts, avocados, pumelos and oranges, which have long
been fruit bearing, and built a house of strong materials, valued at P5,000.00; 4. That
plaintiff Lazalita, was placed in possession of the said Lot No. 1, Block 16 of the
subdivision plan of Victorias, by the persons designated by the Municipality to take
charge of the sale of said lots to the people, and from the time, he had occupied by
same, up to the present, there has not been a change in the location thereof, as
described in the Certificate of Title covering the property, now registered in plaintiff's
name; 5. That about the year 1955, however, the other co-defendants herein — the
spouses Agustin Dormitorio and Leoncia D. Dormitorio, purchased also, from the
defendant Municipality of Victorias, their lot known as Lot 2, Block 16, of the same
consolidation-subdivision plan PCs-118, having an area of Three Hundred Forty-Three
(343) Square meters, in cash, at [one peso) (P1.00) per square meter. Immediately
thereafter, the Dormitorios, obtained a transfer Certificate of Title known as T-18189
for their property, from the Office of the Register of Deeds, Bacolod, Negros
Occidental. However, the spouses Dormitorio, have not taken actual possession of the
land, they have purchased from the defendant Municipality of Victorias, up to the
present; 6. That on December 12, 1958, the spouses Dormitorio, brought a suit against
the plaintiff Lazalita, for Ejectment and the conflict between them was made known to
the office of the Municipal Mayor and the Council of Victorias, who tried to settle the
matter between the parties — Dormitorio and Lazalita. Later, a private Land Surveyor,
was hired by the Municipality of Victorias, and it was found out, according to said
Surveyor, Mr. Ceballos, that the Lot sold by the Municipality of Victorias, to the
plaintiff, was converted into the new Municipal. Road known as "Jover Street" and
that the lot presently occupied by him, is supposed to be the lot No. 2, bought by the
spouses Dormitorio from the Municipality of Victorias; and so, availing of the said
discovery, the Court of First Instance of Negros Occidental, Branch V, Presided over

by Hon. Jose F. Fernandez, rendered judgment in that case No. 5111, in favor of
Dormitorio, ordering the plaintiff herein Lazalita, to vacate the land and to pay a
monthly rental of P20.00, to said Dormitorio, besides his Attorney's fees; 7. That
Lazalita, having failed to appeal from said judgment in Civil Case No. 5111 of this
Honorable Court, brought this present action, against the Municipality of Victorias,
and joined the Dormitorios, as formal parties, because of the value of his permanent
improvements and building introduced or constructed on Lot No. 2, Block 16,
ascertained to be that, very lot purchased by Dormitorio from the defendant
Municipality of Victorias, which building and improvements, have far exceed then, the
original purchase price of the land; 8. That the present fair market value of residential
lots in the Poblacion of Victorias, ranges between P15.00 to P25.00 per square meter
and the lots in controversy, are saleable at present, at P20.00 per square meter; 9. That
the Municipality of Victorias, under the present administration, is willing to amicably
settle the case, now before this Honorable Court, by giving the plaintiff another lot, if
they could open their newly proposed subdivision, or pay back Lazalita the amount
necessary and just for plaintiff to acquire another lot for his residence, and for the
expenses of transferring his present residential house thereto. ....:"  4 Then, as noted in
the decision, the parties did respectfully pray "that judgment be rendered by this
Honorable Court, on the basis of the foregoing agreed stipulation of facts, and on such
other basis just and equitable, without special pronouncement of costs."  5 So it was
granted in the dispositive portion of such decision: "[Wherefore], judgment is hereby
rendered in accordance with the above-mentioned Agreed Stipulation of Facts." 6
grave abuse of discretion when he set aside the writ of execution is thus clearly
apparent. He had no choice on the matter. That was made even more evident in the
answer to the petition filed by respondents. It must have been the realization by
petitioners that certiorari certainly did not lie that led to their not only failing to make
an attempt at a refutation of what was asserted in the answer but also failing to appear
at the hearing when this case was set for oral argument. As noted at the outset, this
petition must be dismissed.
1. What was done by respondent Judge in setting aside the writ of execution in Civil
Case No. 5111 finds support in the applicable authorities. There is this relevant excerpt
in Barretta v. Lopez, 7 this Court speaking through the then Chief Justice Paras:
"Alleging that the respondent judge of the municipal court had acted in excess of her
jurisdiction and with grave abuse of discretion in issuing the writ of execution of
December 15, 1947, the petitioner has filed the present petition for certiorari and
prohibition for the purpose of having said writ of execution annulled. Said petition is
meritorious. The agreement filed by the parties in the ejectment case created as
between them new rights and obligations which naturally superseded the judgment of
the municipal court." 8 In Santos v. Acuña, 9 it was contended that a lower court
OBLICON (Novation - Requisites) |8
decision was novated by subsequent agreement of the parties. Implicit in this Court's
ruling is that such a plea would merit approval if indeed that was what the parties
intended. Nonetheless, it was not granted, for as explained by the ponente,Justice J. B.
L. Reyes: "Appellants understood and expressly agreed to be bound by this condition,
when they stipulated that "they will voluntarily deliver and surrender possession of the
premises to the plaintiff in such event" ... Hence, it is plain that in no case were the
subsequent arrangements entered into with any unqualified intention to discard or
replace the judgment in favor of the plaintiff-appellee; and without such intent
or animus novandi, no substitution of obligations could possibly take place." 10 Can
there be any doubt that if it could be shown, as it was in this case, that there was such
clear manifestation of will by the parties, the original decision had lost force and
effect? To ask the question is to answer it. The presence of the animus novandi is
undeniable. Nor is there anything novel in such an approach. So it was noted by then
Chief Justice Concepcion in De los Santos v. Rodriguez: 11 "As early as Molina v. De
la Riva the principle has been laid down that, when, after judgment has become final,
facts and circumstances transpire which render its execution impossible or unjust, the
interested party may ask the court to modify or alter the judgment to harmonize the
same with justice and the facts" 12 Molina v. de la Riva 13 was a 1907 decision. Again,
the present case is far stronger, for there is a later decision expressly superseding the
earlier one relied upon on which the writ of execution thereafter set aside was based.
2. Nor can it be denied that as the later decision in Civil Case No. 6553 was the result
of a compromise, it had the effect of res judicata. This was made clear in Salazar v.
Jarabe. 14 There are later decisions to the same effect. 15The parties were, therefore,
bound by it. There was thus an element of bad faith when petitioners did try to evade
its terms. At first, they were quite successful. Respondent Judge, however, upon being
duly informed, set matters right. He set aside the writ of execution. That was to act in
accordance with law. He is to be commended, not condemned.
3. There is no merit likewise to the point raised by petitioners that they were not
informed by respondent Judge of the petition by private respondent to set aside the
writ of execution. The order granting such petition was the subject of a motion for
reconsideration. 16 The motion for reconsideration was thereafter denied.  17 Under the
circumstances, the failure to give notice to petitioners had been cured. That is a well-
settled doctrine. 18 Their complaint was that they were not heard. They were given the
opportunity to file a motion for reconsideration. So they did. That was to free the order
from the alleged infirmity. Petitioners then cannot be heard to claim that they were
denied procedural due process.
WHEREFORE, the petition for certiorari is dismissed. Costs against petitioners.
OBLICON (Novation - Requisites) |9
 O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 10

G.R. No. L-47369

JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners, 

vs.
R & B SURETY AND INSURANCE COMPANY, INC., respondent.

FELICIANO, J.:

This case was certified to us by the Court of Appeals in its resolution dated 11
November 1977 as one involving only questions of law and, therefore, falling within
the exclusive appellate jurisdiction of this Court under Section 17, Republic Act 296,
as amended.

In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and
was granted an increase in its line of credit from P400,000.00 to P800,000.00 (the
"Principal Obligation"), with the Philippine National Bank (PNB). To secure PNB's
approval, PAGRICO had to give a good and sufficient bond in the amount of
P400,000.00, representing the increment in its line of credit, to secure its faithful

compliance with the terms and conditions under which its line of credit was increased.
In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765,
issued by the respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the
specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO
and R & B Surety bound themselves jointly and severally to comply with the "terms
and conditions of the advance line [of credit] established by the [PNB]." PNB had the
right under the Surety Bond to proceed directly against R & B Surety "without the
necessity of first exhausting the assets" of the principal obligor, PAGRICO. The
Surety Bond also provided that R & B Surety's liability was not to be limited to the
principal sum of P400,000.00, but would also include "accrued interest" on the said
amount "plus all expenses, charges or other legal costs incident to collection of the
obligation [of R & B Surety]" under the Surety Bond.
In consideration of R & B Surety's issuance of the Surety Bond, two Identical
indemnity agreements were entered into with R & B Surety: (a) one agreement dated
23 December 1963 was executed by the Catholic Church Mart (CCM) and by
petitioner Joseph Cochingyan, Jr, the latter signed not only as President of CCM but
also in his personal and individual capacity; and (b) another agreement dated 24
December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO),
Jose K. Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of
PAGRICO and in his personal and individual capacity; Mr. Liu signed both as
President of PACOCO and in his individual and personal capacity.
Under both indemnity agreements, the indemnitors bound themselves jointly and
severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful
compliance of the terms and conditions set forth in said SURETY BOND for a period
beginning ... until the same is CANCELLED and/or DISCHARGED." The Indemnity
Agreements further provided:
(b) INDEMNITY: — TO indemnify the SURETY COMPANY for any
damage, prejudice, loss, costs, payments, advances and expenses of whatever
kind and nature, including [of] attorney's fees, which the CORPORATION
may, at any time, become liable for, sustain or incur as consequence of
having executed the above mentioned Bond, its renewals, extensions or
substitutions and said attorney's fees [shall] not be less than twenty [20%] per
cent of the total amount claimed by the CORPORATION in each action, the
same to be due, demandable and payable, irrespective of whether the case is
settled judicially or extrajudicially and whether the amount has been actually
paid or not;
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 11
(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED
HEREWITH: — The said indemnities will be paid to the CORPORATION as
soon as demand is received from the Creditor or upon receipt of Court order
or as soon as it becomes liable to make payment of any sum under the terms
of the above-mentioned Bond, its renewals, extensions, modifications or
substitutions, whether the said sum or sums or part thereof, have been
actually paid or not.
We authorize the SURETY COMPANY, to accept in any case and at its
entire discretion, from any of us, payments on account of the pending
obligations, and to grant extension to any of us, to liquidate said obligations,
without necessity of previous knowledge of [or] consent from the other
obligors.
x x x           x x x          x x x
(e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY.
— Any payment or disbursement made by the SURETY COMPANY on
account of the above-mentioned Bonds, its renewals, extensions or
substitutions, either in the belief that the SURETY COMPANY was
obligate[d] to make such payment or in the belief that said payment was
necessary in order to avoid greater losses or obligations for which the
SURETY COMPANY might be liable by virtue of the terms of the above-
mentioned Bond, its renewals, extensions or substitutions, shall be final and
will not be disputed by the undersigned, who jointly and severally bind
themselves to indemnify the SURETY COMPANY of any and all such
payments as stated in the preceding clauses.
x x x           x x x          x x x
When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB
demanded payment from R & B Surety of the sum of P400,000.00, the full amount of
the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of
that demand totalling P70,000.00 evidenced by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr.
and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and
for a discharge of its liability to the PNB under the Surety Bond. When petitioners
failed to heed its demands, R & B Surety brought suit against Joseph Cochingyan, Jr.,

Jose K. Villanueva and Liu Tua Ben in the Court of First Instance of Manila, praying
principally that judgment be rendered:
b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum
of P20,412.20 representing the unpaid premiums for Surety Bond No. 4765
from 1965 up to 1968, and the additional amount of P5,103.05 yearly until
the Surety Bond No. 4765 is discharged, with interest thereon at the rate of
12% per annum; [and]
c. Ordering the defendants to pay jointly and severally, unto the plaintiff the
sum of P400,000.00 representing the total amount of the Surety Bond No.
4765 with interest thereon at the rate of 12% per annum on the amount of
P70,000.00 which had been paid to the Phil. National Bank already, the
interest to begin from the month of September, 1966;
x x x           x x x          x x x
Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity
Agreement he executed in favor of R & B Surety: (i) did not express the true intent of
the parties thereto in that he had been asked by R & B Surety to execute the Indemnity
Agreement merely in order to make it appear that R & B Surety had complied with the
requirements of the PNB that credit lines be secured; (ii) was executed so that R & B
Surety could show that it was complying with the regulations of the Insurance
Commission concerning bonding companies; (iii) that R & B Surety had assured him
that the execution of the agreement was a mere formality and that he was to be
considered a stranger to the transaction between the PNB and R & B Surety; and (iv)
that R & B Surety was estopped from enforcing the Indemnity Agreement as against
him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the
Indemnity Agreement in favor of R & B Surety only "for accommodation purposes"
and that it did not express their true intention; (ii) that the Principal Obligation of
PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM
by virtue of a Trust Agreement entered into with the PNB, where CCM represented by
Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRICO to the
PNB; (iii) that his obligation under the Indemnity Agreement was thereby
extinguished by novation arising from the change of debtor under the Principal
Obligation; and (iv) that the filing of the complaint was premature, considering that R
& B Surety filed the case against him as indemnitor although the PNB had not yet
proceeded against R & B Surety to enforce the latter's liability under the Surety Bond.
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 12
Petitioner Cochingyan, however, did not present any evidence at all to support his
asserted defenses. Petitioner Villanueva did not submit any evidence either on his
"accommodation" defense. The trial court was therefore constrained to decide the case
on the basis alone of the terms of the Trust Agreement and other documents submitted
in evidence.
In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in
favor of R & B Surety, the dispositive portion of which reads as follows;
Premises considered, judgment is hereby rendered: (a) ordering the
defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and
severally, unto the plaintiff the sum of 400,000,00, representing the total
amount of their liability on Surety Bond No. 4765, and interest at the rate of
6% per annum on the following amounts:
On P14,000.00 from September 27, 1966;
On P4,000.00 from November 28, 1966;
On P4,000.00 from December 14, 1966;
On P4,000.00 from January 19, 1967;
On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 24, 1967;
On P8,000. 00 from September 14, 1967;
On P8,000.00 from November 28, 1967; and
On P8,000. 00 from February 26, 1968
until full payment; (b) ordering said defendants to pay, jointly and severally,
unto the plaintiff the sum of P20,412.00 as the unpaid premiums for Surety
Bond No. 4765, with legal interest thereon from the filing of plaintiff's
complaint on August 1, 1968 until fully paid, and the further sum of

P4,000.00 as and for attorney's fees and expenses of litigation which this
Court deems just and equitable.
There being no showing the summons was duly served upon the defendant
Liu Tua Ben who has filed no answer in this case, plaintiff's complaint is
hereby dismissed as against defendant Liu Tua Ben without prejudice.
Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this appeal to the
Court of Appeals which, as already noted, certified the case to us as one raising only
questions of law.
The issues we must confront in this appeal are:
1. whether or not the Trust Agreement had extinguished, by novation, the obligation of
R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the
obligations of the petitioners under the Indemnity Agreements;
2. whether the Trust Agreement extended the term of the Surety Bond so as to release
petitioners from their obligation as indemnitors thereof as they did not give their
consent to the execution of the Trust Agreement; and
3. whether or not the filing of this complaint was premature since the PNB had not yet
filed a suit against R & B Surety for the forfeiture of its Surety Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by both petitioners in their separate briefs, was
executed on 28 December 1965 (two years after the Surety Bond and the Indemnity
Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing
business under the name and style of the Catholic Church Mart, represented by Joseph
Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the
PNB as beneficiary. The Trust Agreement provided, in pertinent part, as follows:
WHEREAS, the TRUSTOR has guaranteed a bond in the amount of
P400,000.00 issued by the R & B Surety and Insurance Co. (R & B) at the
instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21,
1963, in favor of the BENEFICIARY in connection with the application of
PAGRICO for an advance line of P400,000.00 to P800,000.00;
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 13
WHEREAS, the TRUSTOR has also guaranteed a bond issued by the
Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in the amount
of P900,000.00 in favor of the BENEFICIARY to secure certain credit
facilities extended by the BENEFICIARY to the Pacific Copra Export Co.,
Inc. (PACOCO);
WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment
of their respective obligations in favor of the BENEFICIARY guaranteed by
the bonds issued by the R & B and the CONSOLACION, respectively, and by
reason of said default, the BENEFICIARY has demanded compliance by the
R & B and the CONSOLACION of their respective obligations under the
aforesaid bonds;
WHEREAS, the TRUSTOR is, therefore, bound to comply with his
obligation under the indemnity agreements aforementioned executed by him
in favor of R & B and the CONSOLACION, respectively and in order to
forestall impending suits by the BENEFICIARY against said companies, he is
willing as he hereby agrees to pay the obligations of said companies in favor
of the BENEFICIARY in the total amount of P1,300,000 without interest from
the net profits arising from the procurement of reparations consumer goods
made thru the allocation of WARVETS; . . .
l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as
TRUSTEE for the purpose of paying to the BENEFICIARY Philippine
National Bank in the manner stated hereunder, the obligations of the R & B
under the R & B Bond No. G-4765 for P400,000.00 dated December 23,
1963, and of the CONSOLACION under The Consolacion Bond No. G-5938
of June 3, 1964 for P900,000.00 or the total amount of P1,300,000.00 without
interest from the net profits arising from the procurement of reparations
consumer goods under the Memorandum of Settlement and Deeds of
Assignment of February 2, 1959 through the allocation of WARVETS;
x x x           x x x          x x x
6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its
claims against R & B and CONSOLACION, subject of the bond mentioned
above. In the meantime that this TRUST AGREEMENT is being
implemented, the BENEFICIARY hereby agrees to forthwith reinstate the R
& B and the CONSOLACION as among the companies duly accredited to do
business with the BENEFICIARY and its branches, unless said companies

have been blacklisted for reasons other than those relating to the obligations
subject of the herein TRUST AGREEMENT;
x x x           x x x          x x x
9. This agreement shall not in any manner release the R & B and
CONSOLACION from their respective liabilities under the bonds mentioned
above. (emphasis supplied)
There is no question that the Surety Bond has not been cancelled or fully
discharged 2 by payment of the Principal Obligation. Unless, therefore, the Surety
Bond has been extinguished by another means, it must still subsist. And so must the
supporting Indemnity Agreements. 3
We are unable to sustain petitioners' claim that the Surety Bond and their respective
obligations under the Indemnity Agreements were extinguished by novation brought
about by the subsequent execution of the Trust Agreement.
Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which terminates it, either by changing its object or
principal conditions, or by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. 4 Novation through a change of
the object or principal conditions of an existing obligation is referred to as objective
(or real) novation. Novation by the change of either the person of the debtor or of the
creditor is described as subjective (or personal) novation. Novation may also be both
objective and subjective (mixed) at the same time. In both objective and subjective
novation, a dual purpose is achieved-an obligation is extinguished and a new one is
created in lieu thereof.5
If objective novation is to take place, it is imperative that the new obligation expressly
declare that the old obligation is thereby extinguished, or that the new obligation be on
every point incompatible with the old one. 6Novation is never presumed: it must be
established either by the discharge of the old debt by the express terms of the new
agreement, or by the acts of the parties whose intention to dissolve the old obligation
as a consideration of the emergence of the new one must be clearly discernible. 7
Again, if subjective novation by a change in the person of the debtor is to occur, it is
not enough that the juridical relation between the parties to the original contract is
extended to a third person. It is essential that the old debtor be released from the
obligation, and the third person or new debtor take his place in the new relation. If the
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 14
old debtor is not released, no novation occurs and the third person who has assumed
the obligation of the debtor becomes merely a co-debtor or surety or a co-surety. 8
Applying the above principles to the instant case, it is at once evident that the Trust
Agreement does not expressly terminate the obligation of R & B Surety under the
Surety Bond. On the contrary, the Trust Agreement expressly provides for the
continuing subsistence of that obligation by stipulating that "[the Trust Agreement]
shall not in any manner release" R & B Surety from its obligation under the Surety
Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an
unequivocal declaration of extinguishment of a pre-existing obligation, a showing of
complete incompatibility between the old and the new obligation (and nothing else)
would sustain a finding of novation by implication. 9 But where, as in this case, the
parties to the new obligation expressly recognize the continuing existence and validity
of the old one, where, in other words, the parties expressly negated the lapsing of the
old obligation, there can be no novation. The issue of implied novation is not reached
at all.
What the trust agreement did was, at most, merely to bring in another person or
persons-the Trustor[s]-to assume the same obligation that R & B Surety was bound to
perform under the Surety Bond. It is not unusual in business for a stranger to a contract
to assume obligations thereunder; a contract of suretyship or guarantee is the classical
example. The precise legal effect is the increase of the number of persons liable to the
obligee, and not the extinguishment of the liability of the first debtor. 10 Thus,
in Magdalena Estates vs. Rodriguez, 11 we held that:
[t]he mere fact that the creditor receives a guaranty or accepts payments from
a third person who has agreed to assume the obligation, when there is no
agreement that the first debtor shall be released from responsibility, does not
constitute a novation, and the creditor can still enforce the obligation against
the original debtor.
In the present case, we note that the Trustor under the Trust Agreement, the
CCM, was already previously bound to R & B Surety under its Indemnity Agreement.
Under the Trust Agreement, the Trustor also became directly liable to the PNB. So far
as the PNB was concerned, the effect of the Trust Agreement was that where there had
been only two, there would now be three obligors directly and solidarily bound in
favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the PNB could
proceed against any of the three, in any order or sequence. Clearly, PNB never
intended to release, and never did release, R & B Surety. Thus, R & B Surety, which

was not a party to the Trust Agreement, could not have intended to release any of its
own indemnitors simply because one of those indemnitors, the Trustor under the Trust
Agreement, became also directly liable to the PNB.
2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as
indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was
extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any
action to enforce its claims against R & B Surety .
The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and
severally (in solidum) to the R & B Surety] — to become SURETY upon a SURETY
BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the
faithful compliance of the terms and conditions set forth in said SURETY BOND — ."
This part of the Agreement suggests that the indemnitors (including the petitioners)
would become co-sureties on the Security Bond in favor of PNB. The record, however,
is bereft of any indication that the petitioners-indemnitors ever in fact became co-
sureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes,
remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB
could not have directly demanded payment of the Principal Obligation from the
petitioners. Thus, we do not see how Article 2079 of the Civil Code-which provides in
part that "[a]n extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty" could apply in the instant case.
The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was
concerned and any extension of time granted by PNB to any of the first-tier obligators
(PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier
parties.
There is no other reason why petitioner Villanueva's contention must fail. PNB's
undertaking under the Trust Agreement "to hold in abeyance any action to enforce its
claims" against R & B Surety did not extend the maturity of R & B Surety's obligation
under the Surety Bond. The Principal Obligation had in fact already matured, along
with that of R &B Surety, by the time the Trust Agreement was entered into.
Petitioner's Obligation had in fact already matured, for those obligations were to
amture "as soon as [R & B Surety] became liable to make payment of any sum under
the terms of the [Surety Bond] — whether the said sum or sums or part thereof have
been actually paid or not." Thus, the situation was that precisely envisaged in Article
2079:
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 15
[t]he mere failure on the part of the creditor to demand payment after the
debt has become due does not of itself constitute any extension of the referred
to herein.(emphasis supplied)
The theory behind Article 2079 is that an extension of time given to the principal
debtor by the creditor without the surety of his right to pay the creditor and to be
immediately subrogated to the creditor's remedies against the principal debtor upon the
original maturity date. The surety is said to be entitled to protect himself against the
principal debtor upon the orginal maturity date. The surety is said to be entitled to
protect himself against the contingency of the principal debtor or the indemnitors
becoming insolvent during the extended period. The underlying rationale is not present
in the instant case. As this Court has held,
merely delay or negligence in proceeding against the principal will not
discharge a surety unless there is between the creditor and the principal
debtor a valid and binding agreement therefor, one which tends to prejudice
[the surety] or to deprive it of the power of obtaining indemnity by presenting
a legal objection for the time, to the prosecution of an action on the original
security.12
In the instant case, there was nothing to prevent the petitioners from tendering
payment, if they were so minded, to PNB of the matured obligation on behalf of R &
B Surety and thereupon becoming subrogated to such remedies as R & B Surety may
have against PAGRICO.
3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity
Agreements (quoted above) allow R & B Surety to recover from petitioners even
before R & B Surety shall have paid the PNB. We have previously held similar
indemnity clauses to be enforceable and not violative of any public policy. 13
The petitioners lose sight of the fact that the Indemnity Agreements are contracts of
indemnification not only against actual loss but against liability as well. 14 While in a
contract of indemnity against loss as indemnitor will not be liable until the person to
be indemnified makes payment or sustains loss, in a contract of indemnity against
liability, as in this case, the indemnitor's liability arises as soon as the liability of the
person to be indemnified has arisen without regard to whether or not he has suffered
actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners
not only for the partial payments already made but for the full amount owed by
PAGRICO to the PNB.
 O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 16

Summarizing, we hold that :

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

(2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim"
against R & B Surety did not amount to an "extension granted to the debtor" without
petitioner's consent so as to release petitioner's from their undertaking as indemnitors
of R & B Surety under the INdemnity Agreements; and
G.R. No. 79642 July 5, 1993
(3) Petitioner's are indemnitors of R & B Surety against both payments to and liability
for payments to the PNB. The present suit is therefore not premature despite the fact
that the PNB has not instituted any action against R & B Surety for the collection of its BROADWAY CENTRUM CONDOMINIUM CORPORATION, petitioner, 
matured obligation under the Surety Bond. vs.
TROPICAL HUT FOOD MARKET, INC. and THE HONORABLE COURT OF
APPEALS, respondents.
WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the
decision of the trial court is AFFIRMED in toto. Costs against the petitioners.
Gozon, Berenguer, Fernandez & Defensor Law Offices for petitioner.
SO ORDERED.
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 (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:
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 17
. . . Meantime, we are agreeable to a conditional reduction of your
rental by P20,000.00 per monthfor 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 temporary suspension of the original rate of
rental stipulated in 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 coffee shop outlets and half of the
hallway.
Finally we wish to remind you that the temporary alteration in
rental is conditioned on your good faith implementation 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.
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 18
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.
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 foregoing.  8 (Emphasis
supplied).
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 19
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 increase. 9 (Emphasis supplied).
On the same day, 5 May 1983, Mrs. Orosa wrote to Mr. Mariano Que expressing
shock and dismay at the posture suddenly adopted by the latter. Mrs. Orosa wrote:
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 andthis was
done merely as an assistance. There is, therefore, absolutely no basis
to your claim that we cannot arbitrarily and unilaterally increase the
rentals. We strongly feel that we should have instead been the
recipient 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).
 O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 20

A week later, on 12 May 1983, Tropical filed a Complaint before the Regional Trial 3. The contract of leased dated November 28, 1980 (Exh. "A" or
Court, Quezon City, seeking a restraining order or preliminary injunction to prevent "1") is declared as partially novated or modified by the letter-
Broadway from invoking and implementing Section 5 of their Lease Contract and agreement;
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." 4. The amount of monthly rentals payable by plaintiff for the
A restraining order was issued by the trial court ex parte the next day and a reduced area of the leased promises after plaintiff has achieved its
preliminary injunction was granted on 2 June 1983, upon Tropical's filing of a bond in projected daily sales average is fixed as follows:
the amount of P100,000.00.
February 1, 1981 to February 1,
On 6 January 1984, while trial before the Regional Trial Court was pending, 1984 —
Broadway informed Tropical that the basic rental would be increased to P140,000.00 P39.45 per square meter or
per month during the next three (3) years from 1 February 1984 to 1 February 1987 in P101,609.00;
accordance with paragraph (3) of the Lease Contract dated 28 November 1980.
February 1, 1984 to February 1,
Tropical reacted by filing a supplemental complaint with the trial court raising for the 1987 —
first time the issue of whether or not the letter-agreement dated 20 April 1982 had P46.02 per square meter or
novated the Lease Contract of 28 November 1980. Tropical alleged that the original P118.530.00;
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 February 1, 1987 to February 1,
that the reduced lease rates set out in the letter-agreement are to subsist while 1991 —
Tropical's sales volume "remains low." P54.24 per square mater or
P139,702.00.
Petitioner, upon the other hand, vehemently denied that the original Lease Contract
had been novated by the letter-agreement of 20 April 1982. Correspondingly, defendant's counterclaim is dismissed.

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;
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.
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 21
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 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 LESSOR. 16 (Emphasis supplied).
In the third place, the course of negotiations between Broadway and
Tropical before the execution of their letter-agreement of 20 April 1982, quite clearly
indicated that what they were negotiating was a temporary and provisional reduction
of rentals. Thus, Tropical itself, in its letter to Broadway dated 5 February 1982,
quoted earlier, had proposed reduction of rentals from the stipulated contractual rates

to P50,000.00 per month or 2% of monthly sales, whichever is higher, "up to the end
of the third year after which it shall again subject, to renegotiation."
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
"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).
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 22
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 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
 O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 23

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;

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 annumcomputed 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.
 O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 24

Petitioner assails the respondent court's decision  1 dated May 12, 1995 which sustained
the two resolutions of the respondent Secretary of Justice, namely: 1) the Resolution
dated January 23, 1992 affirming the resolution of the Provincial Prosecutor of Rizal
dismissing the complaints of petitioner against private respondent Eleazar in I.S. Nos.
91-2853, 91-4328 to 29, 91-4585 to 91 and 91-4738 to 39 for violations of B.P. Blg.
22 and estafa under Article 315, par. 4, no. 2 (d) of the Revised Penal Code, and 2) the
Resolution dated January 12, 1993 affirming the resolution of the City Prosecutor of
Quezon City finding a prima facie case in I.S. No. 92-926 for violation of B.P. Blg. 22
and estafa filed by respondent AFP-Mutual Benefit Association, Inc. (AFP-MBAI, for
brevity) against petitioner Reyes.

The facts as summarized by the respondent court are as follows:

Elsa Reyes is the president of Eurotrust Capital Corporation

(EUROTRUST), a domestic corporation engaged in credit financing.
Graciela Eleazar, private respondent, is the president of B.E. Ritz
Mansion International Corporation (BERMIC), a domestic enterprise
engaged in real estate development. The other respondent, Armed
Forces of the Philippines Mutual Benefit Asso., Inc. (AFP-MBAI), is
a corporation duly organized primarily to perform welfare services
for the Armed Forces of the Philippines.

A. Re: Resolution dated January 23, 1992.

In her various affidavits-complaint with the Office of the Provincial

Prosecutor of Rizal, Elsa Reyes alleges that Eurotrust and Bermic
entered into a loan agreement. Pursuant to the said contract,
Eurotrust extended to Bermic P216.053,126.80 to finance the
construction of the latter's Ritz Condominium and Gold Business
Park. The loan was without collateral but with higher interest rates
G.R. No. 120817 November 4, 1996 than those allowed by the banks. In turn, Bermic issued 21 postdated
checks to cover payments of the loan packages. However, when
ELSA B. REYES, petitioner,  those checks were presented for payment, the same were dishonored
vs. by the drawee bank, Rizal Commercial Banking Corporation
COURT OF APPEALS, SECRETARY OF JUSTICE, AFP-MUTUAL BENEFIT (RCBC), due to stop payment order made by Graciela Eleazar.
ASSOCIATION, INC., and GRACIELA ELEAZAR, respondents. Despite Eurotrust's notices and repeated demands to pay, Eleazar
failed to make good the dishonored checks, prompting Reyes to file
against her several criminal complaints for violation of B.P. 22 and
 
estafa under Article 315, 4th paragraph, No. 2 (d) of the Revised
Penal Code.
TORRES, JR., J.:

Graciela Eleazar, in her counter-affidavits, asserts that beginning
December 1989, Eurotrust extended to Bermic several loan packages
amounting to P190,336,388.86. For its part, Bermic issued several
postdated checks to cover payments of the principal and interest of
every a loan packages involved.
Subsequently, Elsa Reyes was investigated by the Senate Blue
Ribbon Committee. She was involved in a large scale scam
amounting to millions of pesos belonging to Instructional Material
Corporation (IMC), an agency under the Department of Education,
Culture and Sports.
Meanwhile, respondent AFP-MBAI which invested its funds with
Eurotrust, by buying from it government securities, conducted its
own investigation and found that after Eurotrust delivered to AFP-
MBAI the securities it purchased, the former borrowed the same
securities but failed to return them to AFP-MBAI; and that the
amounts paid by AFP-MBAI to Eurotrust for those securities were in
turn lent by Elsa Reyes to Bermic and others.
When Eleazar came to know that the funds originally loaned by
Eurotrust to Bermic belonged to AFP-MBAI, she, as President of
Bermic, requested a meeting with Eurotrust representatives. Thus, on
February 15, 1991, the representatives of Eurotrust and Bermic
agreed that Bermic would directly settle its obligations with the real
owners of the fund-AFP-MBAI and DECS-IMC. This agreement
was formalized in two letters dated March 19, 1991. Pursuant to this
understanding, Bermic negotiated with AFP-MBAI and DECS-IMC
and made payments to the latter. In fact, Bermic paid AFP-MBAI
P31,711.11 and a check of P1-million.
However, Graciela Eleazar later learned that Elsa Reyes continued to
collect on the postdated checks issued by her (Eleazar) contrary to
their agreement. So, Bermic wrote to Eurotrust to hold the amounts
"in constructive trust" for the real owners. But Reyes continued to
collect on the other postdated checks dated April 17 to June 28,
1991. Upon her counsel's advise, Eleazar had the payment stopped.
Hence, her checks issued in favor of Eurotrust were dishonored.
After investigation, the Office of the Provincial Prosecutor of Rizal
issued a resolution dismissing the complaints filed by Elsa Reyes
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 25
against Graciela Eleazar on the ground that when the latter assumed
the obligation of Reyes to AFP-MBAI, it constituted novation,
extinguishing any criminal liability on the part of Eleazar.
Reyes filed a petition for review of the said resolution with
respondent Secretary of Justice contending that novation did not take
place.
The Secretary of Justice dismissed the petition holding that "the
novation of the loan agreement prevents the rise of any incipient
criminal liability since the novation had the effect of canceling the
checks and rendering without effect the subsequent dishonor of the
already cancelled checks."
B. Re: Resolution dated January 12, 1993
At the time of the pendency of the cases filed by Elsa Reyes against
Graciela Eleazar, AFP-MBAI lodged a separate complaint for estafa
and a violation of BP 22 against Elsa Reyes with the office of the
city prosecutor of Quezon City docketed as I.S. 92-926. The
affidavit of Gudelia Dinapo a member of the investigating
committee formed by AFP-MBAI to investigate the anomalies
committed by Eurotrust/Reyes, shows that between August 1989 and
September 1990, Eurotrust offered to sell to AFP-MBAI various
marketable securities, including government securities, such as but
not limited to treasury notes, treasury bills, Land Bank of the
Philippines Bonds and Asset Participation Certificates.
Relying on a canvass conducted by one of its employees, Cristina
Cornista, AFP-MBAI decided to purchase several securities
amounting to P120,000,000.00 from Eurotrust. From February 1990
to September 1990, a total of 21 transactions were entered into
between Eurotrust and AFP-MBAI. Eurotrust delivered to AFP-
MBAI treasury notes amounting to P73 million. However, Eurotrust
fraudulently borrowed all those treasury notes from the AFP-MBAI
for purposes of verification with the Central Bank. Despite AFP-
MBAI's repeated demands, Eurotrust failed to return the said
treasury notes. Instead it delivered 21 postdated checks in favor of
AFP-MBAI which were dishonored upon presentment for payment.
Eurotrust nonetheless made partial payment to AFP-MBAI
amounting to P35,151,637.72. However, after deducting this partial

payment, the amounts of P73 million treasury notes with interest and
P35,151,637.72 have remained unpaid. Consequently, AFP-MBAI
filed with the Office of the City Prosecutor of Quezon City a
complaint for violation of BP 22 and estafa against Elsa Reyes.
Reyes interposed the defense of novation and insisted that AFP-
MBAI's claim of unreturned P73 million worth of government
securities has been satisfied upon her payment of P30 million. With
respect to the remaining P43 million, the same was paid when
Eurotrust assigned its Participation Certificates to AFP-MBAI.
Eventually, the Office of the City Prosecutor of Quezon City issued
a resolution recommending the filing of an information against
Reyes for violation of BP 22 and estafa.
Whereupon, Reyes filed a petition for review with respondent
Secretary of Justice. The latter dismissed the petition on the ground
that only resolutions of the prosecutors dismissing criminal
complaints are cognizable for review by the Department of Justice. 2
On February 2, 1994, petitioner seeking the nullification of either of the two
resolutions of the respondent Secretary of Justice filed a petition for certiorari,
prohibition and mandamus  3 with the respondent court which, however, denied and
dismissed her petition. Her motion for reconsideration  4 was likewise denied in a
Resolution 5 dated June 27, 1995. Hence, this present petition.
The first Department of Justice Resolution dated January 23, 1992 which sustained the
Provincial Prosecutor's decision dismissing petitioner's complaints against respondent
Eleazar for violation of B.P. 22 and estafa ruled that the contract of loan between
petitioner and respondent Eleazar had been novated when they agreed that respondent
Eleazar should settle her firm's (BERMIC) loan obligations directly with AFP-MBAI
and DECS-IMC instead of settling it with petitioner Reyes. This finding was affirmed
by the respondent court which pointed out that "the first contract was novated in the
sense that there was a substitution of creditor"  6 when respondent Eleazar, with the
agreement of Reyes, directly paid her obligations to AFP-MBAI.
We cannot see how novation can take place considering the surrounding circumstances
which negate the same. The principle of novation by substitution of creditor was
erroneously applied in the first questioned resolution involving the contract of loan
between petitioner and respondent Eleazar.
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 26
Admittedly, in order that a novation can take place, the concurrence of the following
requisites 7 is indispensable:
1. there must be a previous valid obligation,
2 there must be an agreement of the parties concerned to a new contract,
3. there must be the extinguishment of the old contract, and
4. there must be the validity of the new contract.
Upon the facts shown in the record, there is no doubt that the last three essential
requisites of novation are wanting in the instant case. No new agreement for
substitution of creditor war forged among the parties concerned which would take the
place of the preceding contract. The absence of a new contract extinguishing the old
one destroys any possibility of novation by conventional subrogation, In concluding
that a novation took place, the respondent court relied on the two letters dated March
19, 1991, 8 which, according to it, formalized petitioner's and respondent Eleazar's
agreement that BERMIC would directly settle its obligation with the real owners of the
funds - the AFP MBAI and DECS IMC.  9 Be that as it may, a cursory reading of these
letters, however clearly and unmistakably shows that there was nothing therein that
would evince that respondent AFP-MBAI agreed to substitute for the petitioner as the
new creditor of respondent Eleazar in the contract of loan. It is evident that the two
letters merely gave respondent Eleazar an authority to directly settle the obligation of
petitioner to AFP-MBAI and DECS-IMC. It is essentially an agreement between
petitioner and respondent Eleazar only. There was no mention whatsoever of AFP-
MBAI's consent to the new agreement between petitioner and respondent Eleazar
much less an indication of AFP-MBAI's intention to be the substitute creditor in the
loan contract. Well settled is the rule that novation by substitution of creditor requires
an agreement among the three parties concerned — the original creditor, the debtor
and the new creditor. 10 It is a new contractual relation based on the mutual agreement
among all the necessary parties, Hence, there is no novation if no new contract was
executed by the parties. Article 1301 of the Civil Code is explicit, thus:
Conventional subrogation of a third person requires the consent of
the original parties and of the third person.
The fact that respondent Eleazar made payments to AFP-MBAI and the latter accepted
them does not ipso factoresult in novation. There must be an express intention to
novate — animus novandi. 11 Novation is never

presumed. 12 Article 1300 of the Civil Code provides inter alia that conventional
subrogation must be clearly established in order that it may take effect.
Notwithstanding our disagreement with the decision of the respondent court and the
ruling of the Secretary of Justice that a novation by substitution of creditor has taken
place, we opt not to disturb the Resolution of the respondent Secretary of Justice dated
January 23, 1992 finding a prima facie case against the petitioner in as much as it had
already become final. It appears that petitioner filed two motions for reconsideration to
the said resolution, the first one on February 6, 1992 and the second one in June 2,
1992. These two motions were, however, denied by the respondent Secretary of
Justice, the last denial was contained in a Resolution dated June 25, 1992 which was
received by petitioner on July 9, 1992. Petitioner made no prompt attempt to question
the said resolutions before the proper forum. It took her almost seventeen months
(from July 9, 1992 to February 2, 1994) to challenge the January 23, 1992 Resolution
when she filed the petition for certiorari with the respondent court on February 3,
1994, 13 which resolved to affirm the aforesaid resolution of the Secretary of Justice.
Petitioner who chose her forum but unfortunately lost her claim is bound by such
adverse judgment on account of finality of judgment, otherwise, there would be no end
to litigation. Litigation must end and terminate sometime and somewhere, and it is
essential to an effective administration of justice that once a judgment has become
final, the issue or cause therein should be laid at rest.  14 While the respondent Secretary
of Justice was in error in applying the rule on novation in the January 23, 1992
Resolution, such irregularity, however, does not affect the validity of the proceedings
in the Department of Justice. Erroneous application of a legal principle cannot bring a
judgment that has already attained the status of finality to an absolute nullity under the
well entrenched rule of finality of judgment. The basic rule of finality of judgment is
grounded on the fundamental principle of public policy and sound practice that at the
risk of occasional error, the judgment of court and award of quasi-judicial agencies
must become final at some definite date fixed by law. 15
We find no plausible explanation nor justifiable reason offered by petitioner for the
obvious delay or omission to take a timely action against the questioned resolution.
She is apparently guilty of laches which bars her from seeking relief in a court of law
after she intentionally and unreasonably fails to guard of her rights. Laches is the
failure or neglect for an unreasonable and unexplained length of time to do that which
by exerting due diligence could/should have been done earlier.  16 Petitioner's omission
to assert her right to avail of the remedies in law within a reasonable time warrants a
presumption that she abandoned it or declined to assert it. The law serves those who
are vigilant and diligent and no those who sleep when the law requires to act.  17
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 27
Its bears emphasis that the above pronouncement we laid down applies only pro hac
vice. This Court in affirming the questioned resolution despite the erroneous
application of a legal principle acted according to what the peculiar circumstances of
the instant case demand. Its factual setting led us to consider that to sustain the
resolution is but the proper action to take in this particular case.
Regarding the second Resolution of respondent Secretary of Justice dated January 12,
1993 which affirms the City Prosecutor's finding of a prima facie case against
petitioner for violation of B.P. Blg. 22 and estafa involving the contract of sale of
securities, petitioner avers that she could not be held criminally liable for the crime
charged because the contract of sale of securities between her and respondent AFP-
MBAI was novated by substitution of debtor. According to petitioner, the obligation
assumed by respondent Eleazar pursuant to the authority given by her to respondent
Eleazar in a letter dated March 19, 1991 was precisely her (petitioner's) obligation to
respondent AFP-MBAI under the contract of sale of securities. She claims that private
respondent Eleazar, instead of fulfilling her obligation under the contract of loan to
pay petitioner the amount of debts, assumed petitioner's obligation under the contract
of sale to make payments to respondent AFP-MBAI directly. 18
This contention is bereft of any legal and factual basis. Just like in the first questioned
resolution, no novation took place in this case. A thorough examination of the records
shows that no hard evidence was presented which would expressly and unequivocably
demonstrate the intention of respondent AFP-MBAI to release petitioner from her
obligation to pay under the contract of sale of securities. It is a rule that novation by
substitution of debtor must always be made with the consent of the creditor.  19 Article
1293 of the Civil Code is explicit, thus:
Novation which consists in substituting a new debtor in the place of
the original one, may be made even without or against the will of the
latter, but not without the consent of the creditor. Payment by the
new debtor gives him the rights mentioned in Articles 1236 and
1237.
The consent of the creditor to a novation by change of debtor is as
indispensable as the creditor's consent in conventional subrogation in order
that a novation shall legally take place. The mere circumstance of AFP-MBAI
receiving payments from respondent Eleazar who acquiesced to assume the
obligation of petitioner under the contract of sale of securities, when there is
clearly no agreement to release petitioner from her responsibility, does not
constitute novation, at most, it only creates a juridical relation of co-
debtorship or suretyship on the part of respondent Eleazar to the contractual
 O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 28

obligation of petitioner to AFP-MBAI and the latter can still enforce the
obligation against the petitioner. In Ajax Marketing and Development
Corporation vs. Court of Appeals. 20 which is relevant in the instant case, we
stated that—

In the same vein, to effect a subjective novation by a change in the

person of the debtor, it is necessary that the old debtor be released
expressly from the obligation, and the third person or new debtor
assumes his place in the relation. There is no novation without such
release as the third person who has assumed the debtor's obligation
becomes merely a co-debtor or surety. . . Novation arising from a
purported change in the person of the debtor must be clear and
express. . .

In the civil law setting, novatio is literally construed as to make new. So it is deeply

rooted in the Roman Law jurisprudence, the principle novatio non praesumitur — that
novation is never presumed. At bottom, for novation to be a jural reality, its animus
must be ever present, debitum pro debito — basically extinguishing the old obligation
for the new one.

The foregoing elements are found wanting in the case at bar.

ACCORDINGLY, finding no reversible error in the decision appealed from dated May
12, 1995, the same is hereby AFFIRMED in all respects.

SO ORDERED.
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 29

G.R. No. 99398 & 104625       January 26, 2001
CHESTER BABST, petitioner,  the Company in obtaining credit facilities to enable it to maintain the present
vs.
COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, ELIZALDE
STEEL CONSOLIDATED, INC., and PACIFIC MULTI-COMMERCIAL
CORPORATION, respondents.
x ------------------------------------------------ x
ELIZALDE STEEL CONSOLIDATED, INC., petitioner, 
vs.
COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, PACIFIC
MULTI-COMMERCIAL CORPORATION and CHESTER BABST, respondents.
YNARES-SANTIAGO, J.:
These consolidated petitions seek the review of the Decision dated April 29, 1991 of
the Court of Appeals in CA-G.R. CV No. 17282 1 entitled, "Bank of the Philippine
Islands, Plaintiff-Appellee versus Elizalde Steel Consolidated, Inc., Pacific Multi-
Commercial Corporation, and Chester G. Babst, Defendants-Appellants."
The complaint was commenced principally to enforce payment of a promissory note
and three domestic letters of credit which Elizalde Steel Consolidated, Inc.
(ELISCON) executed and opened with the Commercial Bank and Trust Company
(CBTC).
On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of P
8,015,900.84, with interest at the rate of 14% per annum, evidenced by a promissory
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 30
note.2 ELISCON defaulted in its payments, leaving an outstanding indebtedness in the
amount of P2,795,240.67 as of October 31, 1982.3
The letters of credit, on the other hand, were opened for ELISCON by CBTC using the
credit facilities of Pacific Multi-Commercial Corporation (MULTI) with the said bank,
pursuant to the Resolution of the Board of Directors of MULTI adopted on August 31,
1977 which reads:
WHEREAS, at least 90% of the Company's gross sales is generated by the
sale of tin-plates manufactured by Elizalde Steel Consolidated, Inc.;
WHEREAS, it is to the best interests of the Company to continue handling
said tin-plate line;
WHEREAS, Elizalde Steel Consolidated, Inc. has requested the assistance of
level of its tin-plate manufacturing output and the Company is willing to
extend said requested assistance;
NOW, THEREFORE, for and in consideration of the foregoing premises ---
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT
& GENERAL MANAGER, ANTONIO ROXAS CHUA, be, as he is hereby
empowered to allow and authorize ELIZALDE STEEL CONSOLIDATED,
INC. to avail and make use of the Credit Line of PACIFIC MULTI-
COMMERCIAL CORPORATION with the COMMERCIAL BANK &
TRUST COMPANY OF THE PHILIPPINES, Makati, Metro Manila;
RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation
guarantee, as it does hereby guarantee, solidarily, the payment of the
corresponding Letters of Credit upon maturity of the same;
RESOLVED, FINALLY, That copies of this resolution be furnished the
Commercial Bank & Trust Company of the Philippines, Makati, Metro
Manila, for their information.4
Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst
executed a Continuing Suretyship,5 whereby they bound themselves jointly and
severally liable to pay any existing indebtedness of MULTI to CBTC to the extent of
P8,000,000.00 each.1âwphi1.nêt

Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel
Corporation three (3) domestic letters of credit in the amounts of
P1,946,805.73,6 P1,702,869.327 and P200,307.72,8 respectively, which ELISCON used
to purchase tin black plates from National Steel Corporation. ELISCON defaulted in
its obligation to pay the amounts of the letters of credit, leaving an outstanding
account, as of October 31, 1982, in the total amount of P3,963,372.08.9
On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC entered
into a merger, wherein BPI, as the surviving corporation, acquired all the assets and
assumed all the liabilities of CBTC.10
Meanwhile, ELISCON encountered financial difficulties and became heavily indebted
to the Development Bank of the Philippines (DBP). In order to settle its obligations,
ELISCON proposed to convey to DBP by way of dacion en pago all its fixed assets
mortgaged with DBP, as payment for its total indebtedness in the amount of
P201,181,833.16. On December 28, 1978, ELISCON and DBP executed a Deed of
Cession of Property in Payment of Debt.11
In June 1981, ELISCON called its creditors to a meeting to announce the take-over by
DBP of its assets.
In October 1981, DBP formally took over the assets of ELISCON, including its
indebtedness to BPI. Thereafter, DBP proposed formulas for the settlement of all of
ELISCON's obligations to its creditors, but BPI expressly rejected the formula
submitted to it for not being acceptable.12
Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC, instituted
with the Regional Trial Court of Makati, Branch 147, a complaint 13 for sum of money
against ELISCON, MULTI and Babst, which was docketed as Civil Case No. 49226.
ELISCON, in its Answer,14 argued that the complaint was premature since DBP had
made serious efforts to settle its obligations with BPI.
Babst also filed his Answer alleging that he signed the Continuing Suretyship on the
understanding that it covers only obligations which MULTI incurred solely for its
benefit and not for any third party liability, and he had no knowledge or information of
any transaction between MULTI and ELISCON.15
MULTI, for its part, denied knowledge of the merger between BPI and CBTC, and
averred that the guaranty under its board resolution did not cover purchases made by
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 31
ELISCON in the form of trust receipts. It set up a cross-claim against ELISCON
alleging that the latter should be held liable for any judgment which the court may
render against it in favor of BPI.16
On February 20, 1987, the trial court rendered its Decision, 17 the dispositive portion of
which reads:
WHEREFORE, in view of all the foregoing, the Court hereby renders
judgment in favor of the plaintiff and against all the defendants:
1) Ordering defendant ELISCON to pay the plaintiff the amount of
P2,795,240.67 due on the promissory note, Annex "A" of the Complaint as of
31 October 1982 and the amount of P3,963,372.08 due on the three (3)
domestic letters of credit, also as of 31 October 1982;
2) Ordering defendant ELISCON to pay the plaintiff interests and related
charges on the principal of said promissory note of P2,102,232.02 at the rates
provided in said note from and after 31 October 1982 until full payment
thereof, and on the principal of the three (3) domestic letters of credit of
P3,564,349.25 interests and related charges at the rates provided in said
letters of credit, from and after 31 October 1982 until full payment;
3) Ordering defendant ELISCON to pay interests at the legal rate on all
interests and related charges but unpaid as of the filing of this complaint, until
full payment thereof;
4) Ordering defendant ELISCON to pay attorney's fees equivalent to 10% of
the total amount due under the preceding paragraphs;
5) Ordering defendants Pacific Multi-Commercial Corporation and defendant
Chester Babst to pay, jointly and severally with defendant ELISCON, the
total sum of P3,963,372.08 due on the three (3) domestic letters of credit as of
31 October 1982 with interests and related charges on the principal amount of
P3,963,372.08 at the rates provided in said letters of credit from 30 October
1982 until fully paid, but to the extent of not more than P8,000,000.00 in the
case of defendant Chester Babst;
6) Ordering defendant Pacific Multi-Commercial Corporation and defendant
Chester Babst to pay, jointly and severally plaintiff interests at the legal rate
on all interests and related charges already accrued but unpaid on said three

(3) domestic letters of credit as of the date of the filing of this Complaint until
full payment thereof;
7) Ordering defendant Pacific Multi-Commercial Corporation and defendant
Chester Babst to pay, jointly and severally, attorney's fees of not less than
10% of the total amount due under paragraphs 5 and 6 hereof. With costs.
SO ORDERED.
In due time, ELISCON, MULTI and Babst filed their respective notices of appeal. 18
On April 29, 1991, the Court of Appeals rendered the appealed Decision as follows:
WHEREFORE, the judgment appealed from is MODIFIED, to now read
(with the underlining to show the principal changes from the decision of the
lower court) thus:
1) Ordering appellant ELISCON to pay the appellee BPI the amount
of P2,731,005.60 due on the promissory note, Annex "A" of the Complaint as
of 31 October 1982 and the amount of P3,963,372.08 due on the three (3)
domestic letters of credit, also as of 31 October 1982;
2) Ordering appellant ELISCON to pay the appellee BPI interests and related
charges on the principal of said promissory note of P2,102,232.02 at the rates
provided in said note from and after 31 October 1982 until full payment
thereof, and on the principal of the three (3) domestic letters of credit of
P3,564,349.25 interests and related charges at the rates provided in said
letters of credit, from and after 31 October 1982 until full payment;
3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate
on all interests and related charges but unpaid as of the filing of this
complaint, until full payment thereof;
4) Ordering appellant Pacific Multi-Commercial Corporation and appellant
Chester G. Babst to pay appellee BPI, jointly and severally with appellant
ELISCON, the total sum of P3,963,372.08 due on the three (3) domestic
letters of credit as of 31 October 1982 with interest and .related charges on
the principal amount of P3,963,372.08 at the rates provided in said letters of
credit from 30 October 1982 until fully paid, but to the extent of not more
than P8,000,000.00 in the case of defendant Chester Babst;
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 32
5) Ordering appellant Pacific Multi-Commercial Corporation and defendant
Chester Babst to pay, jointly and severally, appellee BPI interests at the legal
rate on all interests and related charges already accrued but unpaid on said
three (3) domestic letters of credit as of the date of the filing of this
Complaint until full payment thereof and the plaintiff's lawyer's fees in the
nominal amount of P200.000.00;
6) Ordering appellant ELISCON to reimburse appellants Pacific Multi-
Commercial Corporation and Chester Babst whatever amount they shall have
paid in said Eliscon's behalf particularly referring to the three (3) letters of
credit as of 31 October 1982 and other related charges.
No costs.
SO ORDERED.19
ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals
which was, however, denied in a Resolution dated March 9, 1992. 20 Subsequently,
ELISCON filed a petition for review on certiorari, docketed as G.R. No. 104625, on
the following grounds:
A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO
RECOVER FROM PETITIONER ELISCON THE LATTER'S
OBLIGATION WITH COMMERCIAL BANK AND TRUST COMPANY
(CBTC)
B. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN
ELISCON AND BPI THERE BEING A PRIOR CONSENT TO AND
APPROVAL BY BPI OF THE SUBSTITUTION BY DBP AS DEBTOR IN
LIEU OF THE ORIGINAL DEBTOR, ELISCON, THEREBY RELEASING
ELISCON FROM ITS OBLIGATION TO BPI.
C. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER
BABST CANNOT LAWFULLY RECOVER FROM ELISCON
WHATEVER AMOUNT THEY MAY BE REQUIRED TO PAY TO BPI
AS SURETIES OF ELISCON'S OBLIGATION TO BPI; THEIR CAUSE OF
ACTION MUST BE DIRECTED AGAINST DBP AS THE NEWLY
SUBSTITUTED DEBTOR IN PLACE OF ELISCON.

D. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO
AN ACT OF GOVERNMENT WHICH WAS A FORTUITOUS EVENT
EXCULPATING ELISCON FROM FURTHER LIABILITIES TO
RESPONDENT BPI.
E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY
RESPONDENT BPI THE AMOUNTS STATED IN THE DISPOSITIVE
PORTION OF RESPONDENT COURT OF APPEALS' DECISION:21
BPI filed its Comment22 raising the following arguments, to wit:
1. Respondent BPI is legally entitled to recover from ELISCON, MULTI and
Babst the past due obligations with CBTC prior to the merger of BPI with
CBTC.
2. BPI did not give its consent to the DBP take-over of ELISCON. Hence, no
valid novation has been effected.
3. Express consent of creditor to substitution should be recorded in the books.
4. Petitioner Chester G. Babst and respondent MULTI are jointly and
solidarily liable to BPI for the unpaid letters of credit of ELISCON.
5. The question of the liability of ELISCON to BPI has been clearly
established.
6. Since MULTI and Chester G. Babst are guarantors of the debts incurred by
ELISCON, they may recover from the latter what they may have paid for on
account of that guaranty.
Chester Babst filed a Comment with Manifestation, 23 wherein he contends that the
suretyship agreement he executed with Antonio Roxas Chua was in favor of MULTI;
and that there is nothing therein which authorizes MULTI, in turn, to guarantee the
obligations of ELISCON.
In its Comment,24 MULTI maintained that inasmuch as BPI had full knowledge of the
purpose of the meeting in June 1981, wherein the takeover by DBP of ELISCON was
announced, it was incumbent upon the said bank to formally communicate its
objection to the assumption of ELISCON's liabilities by DBP in answer to the call for
the meeting. Moreover, there was no showing that the availment by ELISCON of
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 33
MULTI's credit facilities with CBTC, which was supposedly guaranteed by Antonio
Roxas Chua, was indeed authorized by the latter pursuant to the resolution of the
Board of Directors of MULTI.
In compliance with this Court's Resolution dated March 17, 1993, 25 the parties
submitted their respective memoranda.
Meanwhile, in a petition for review filed with this Court, which was docketed as G.R.
No. 99398, Chester Babst alleged that the Court of Appeals acted without jurisdiction
and/or with grave abuse of discretion when:
1. IT AFFIRMED THE LOWER COURT'S HOLDING THAT THERE WAS
NO NOVATION INASMUCH AS RESPONDENT BANK OF THE
PHILIPPINE ISLANDS (OR BPI) HAD PRIOR CONSENT TO AND
APPROVAL OF THE SUBSTITUTION AS DEBTOR BY THE
DEVELOPMENT BANK OF THE PHILIPPINES (OR DBP) IN THE
PLACE OF ELIZALDE STEEL CONSOLIDATED, INC. (OR ELISCON)
IN THE LATTER 'S OBLIGATION TO BPI.
2. IT CONFIRMED THE LOWER COURT'S CONCLUSION THAT
THERE WAS NO IMPLIED CONSENT OF THE CREDITOR BANK OF
THE PHILIPPINE ISLANDS TO THE SUBSTITUTION BY
DEVELOPMENT BANK OF THE PHILIPPINES OF THE ORIGINAL
DEBTOR ELIZALDE STEEL CONSOLIDATED, INC.
3. IT AFFIRMED THE LOWER COURT'S FINDING OF LACK OF
MERIT OF THE CONTENTION OF ELISCON THAT THE FAILURE OF
THE OFFICER OF BPI, WHO WAS PRESENT DURING THE MEETING
OF ELISCON'S CREDITORS IN JUNE 1981 TO VOICE HIS OBJECTION
TO THE ANNOUNCED TAKEOVER BY THE DBP OF THE ASSETS OF
ELISCON AND ASSUMPTION OF ITS LIABILITIES, CONSTITUTED
AN IMPLIED CONSENT TO THE ASSUMPTION BY DBP OF THE
OBLIGATIONS OF ELISCON TO BPI.
4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER
OF THE ENTIRE ELISCON WAS AN ACT OF GOVERNMENT
CONSTITUTING A FORTUITOUS EVENT EXCULPATING ELISCON
FROM ANY LIABILITY TO BPI.

5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP
AND BPI RELIEVED ELISCON, MULTI AND BABST OF ANY
LIABILITY TO BPI.
6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES
SOLIDARILY WITH ELISCON WITH RESPECT TO THE OBLIGATION
INVOLVED HERE.
7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST
ELISCON ORDERING THE LATTER TO PAY THE AMOUNTS STATED
IN THE DISPOSITIVE PORTION OF THE DECISION; AND ORDERING
PETITIONER AND MULTI TO PAY SAID AMOUNTS JOINTLY AND
SEVERALLY WITH ELISCON.26
Petitioner Babst alleged that DBP sold all of ELISCON's assets to the National
Development Company, for the latter to take over and continue the operation of its
business. On September 11, 1981, the Board of Governors of the DBP adopted
Resolution No. 2817 which states that DBP shall enter into a contractual arrangement
with NDC for the latter to pay ELISCON's creditors, including BPI in the amount of
P4,015,534.54. This was followed by a Memorandum of Agreement executed on May
4,1983 by and between DBP and NDC, wherein they stipulated, inter alia, that NDC
shall pay to ELISCON's creditors, through DBP, the amount of P299,524,700.00.
Among the creditors mentioned in the agreement was BPI, with a listed credit of
P4,015,534.54.
Furthermore, petitioner Babst averred that the assets of ELISCON which were
acquired by the DBP, and later transferred to the NDC, were placed under the Asset
Privatization Trust pursuant to Proclamation No. 50, issued by then President Corazon
C. Aquino on December 8, 1986.
In its Comment,27 BPI countered that by virtue of its merger with CBTC, it acquired all
the latter's rights and interest including all receivables; that in order to effect a valid
novation by substitution of debtors, the consent of the creditor must be express; that in
addition, the consent of BPI must appear in its books, it being a private corporation;
that BPI intentionally did not consent to the assumption by DBP of the obligations of
ELISCON because it wanted to preserve intact its causes of action and legal recourse
against Pacific Multi-Commercial Corporation and Babst as sureties of ELISCON and
not of DBP; that MULTI expressly bound itself solidarily for ELISCON's obligations
to CBTC in its Resolution wherein it allowed the latter to use its credit facilities; and
that the suretyship agreement executed by Babst does not exclude liabilities incurred
by MULTI on behalf of third parties, such as ELISCON.
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 34
ELISCON likewise filed a Comment,28 wherein it manifested that of the seven errors
raised by Babst in his petition, six are arguments which ELISCON itself raised in its
previous pleadings. It is only the sixth assigned error --- that the Court of Appeals
erred in finding that MULTI and Babst bound themselves solidarily with ELISCON ---
that ELISCON takes exception to. More particularly, ELISCON pointed out the
contradictory positions taken by Babst in admitting that he bound himself to pay the
indebtedness of MULTI, while at the same time completely disavowing and denying
any such obligation. It stressed that should MULTI or Babst be finally adjudged liable
under the suretyship agreement, they cannot lawfully recover from ELISCON, but
from the DBP which had been substituted as the new debtor.
MULTI filed its Comrnent,29 admitting the correctness of the petition and adopting the
Comment of ELISCON insofar as it is not inconsistent with the positions of Babst and
MULTI.
At the outset, the preliminary issue of BPI's right of action must first be addressed.
ELISCON and MULTI assail BPI's legal capacity to recover their obligation to CBTC.
However, there is no question that there was a valid merger between BPI and CBTC. It
is settled that in the merger of two existing corporations, one of the corporations
survives and continues the business, while the other is dissolved and all its rights,
properties and liabilities are acquired by the surviving corporation. 30 Hence, BPI has a
right to institute the case a quo.
We now come to the primordial issue in this case — whether or not BPI consented to
the assumption by DBP of the obligations of ELISCON.
Article 1293 of the Civil Code provides:
Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of
the latter, but not without the consent of the creditor. Payment by the new
debtor gives him the rights mentioned in articles 1236 and 1237.
BPI contends that in order to have a valid novation, there must be an express consent
of the creditor. In the case of Testate Estate of Mota, et al. v. Serra,31 this Court held:
It should be noted that in order to give novation its legal effect, the law
requires that the creditor should consent to the substitution of a new debtor.
This consent must be given expressly for the reason that, since novation
extinguishes the personality of the first debtor who is to be substituted by a

new one, it implies on the part of the creditor a waiver of the right that he had
before the novation, which waiver must be express under the principle
of renuntiatio non proesumitur, recognized by the law in declaring that a
waiver of right may not be performed [should read: presumed] unless the
will to waive is indisputably shown by him who holds the right.32
The import of the foregoing ruling, however, was explained and clarified by this Court
in the later case of Asia Banking Corporation v. EIser33 in this wise:
The aforecited article 1205 [now 1293] of the Civil Code does not state
that the creditor's consent to the substitution of the new debtor for the
old be express, or given at the time of the substitution, and the Supreme
Court of Spain, in its judgment of June 16, 1908, construing said article, laid
down the doctrine that "article 1205 of the Civil Code does not mean or
require that the creditor's consent to the change of debtors must be given
simultaneously with the debtor's consent to the substitution, its evident
purpose being to preserve the creditor's full right, it is sufficient that the
latter's consent be given at any time and in any form whatever, while the
agreement of the debtors subsists." The same rule is stated in
the Enciclopedia Juridica Española, volume 23, page 503, which reads:
"'The rule that this kind of novation, like all others, must be express, is not
absolute; for the existence of the consent may well be inferred from the
act of the creditor, since volition may as well be expressed by deeds as by
words." The understanding between Henry W. Elser and the principal
director of Yangco, Rosenstock & Co., Inc., with respect to Luis R. Yangco's
stock in said corporation, and the acts of the board of directors after Henry W.
Elser had acquired said shares, in substituting the latter for Luis R. Yangco,
are a clear and unmistakable expression of its consent. When this court said
in the case of Estate of Mota  vs.  Serra (47 Phil. 464), that the creditor's
express consent is necessary in order that there may be a novation of a
contract by the substitution of debtors, it did not wish to convey the
impression that the word "express" was to be given an unqualified
meaning. as indicated in the authorities or cases. both Spanish and
American, cited in said decision.34
Subsequently, in the case of Vda. e Hijos de Pio Barretto y Cia., Inc. v.
Albo & Sevilla, Inc., et al.,35 this Court reiterated the rule that there can be implied
consent of the creditor to the substitution of debtors.
In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of
BPI to register its objection to the take-over by DBP of ELISCON's assets, at the
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 35
creditors' meeting held in June 1981 and thereafter, it is deemed to have consented to
the substitution of DBP for ELISCON as debtor.
We find merit in the argument. Indeed, there exist clear indications that BPI was aware
of the assumption by DBP of the obligations of ELISCON. In fact, BPI admits that ---
"the Development Bank of the Philippines (DBP), for a time, had .proposed a
formula for the settlement of Eliscon's past obligations to its creditors,
including the plaintiff [BPI], but the formula was expressly rejected by the
plaintiff as not acceptable (long before the filing of the complaint at bar)." 36
The Court of Appeals held that even if the account officer who attended the June 1981
creditors' meeting had expressed consent to the assumption by DBP of ELISCON' s
debts, such consent would not bind BPI for lack of a specific authority therefor. In its
petition, ELISCON counters that the mere presence of the account officer at the
meeting necessarily meant that he was authorized to represent BPI in that creditors'
meeting. Moreover, BPI did not object to the substitution of debtors, although it
objected to the payment formula submitted by DBP.
Indeed, the authority granted by BPI to its account officer to attend the creditors'
meeting was an authority to represent the bank, such that when he failed to object to
the substitution of debtors, he did so on behalf of and for the bank. Even
granting arguendo that the said account officer was not so empowered, BPI could
have subsequently registered its objection to the substitution, especially after it had
already learned that DBP had taken over the assets and assumed the liabilities of
ELISCON. Its failure to do so can only mean an acquiescence in the assumption by
DBP of ELISCON's obligations. As repeatedly pointed out by ELISCON and MULTI,
BPI's objection was to the proposed payment formula, not to the substitution itself.
BPI gives no cogent reason in withholding its consent to the substitution, other than its
desire to preserve its causes of action and legal recourse against the sureties of
ELISCON. It must be remembered, however, that while a surety is solidarily liable
with the principal debtor, his obligation to pay only arises upon the principal debtor's
failure or refusal to pay. A contract of surety is an accessory promise by which a
person binds himself for another already bound, and agrees with the creditor to satisfy
the obligation if the debtor does not.37 A surety is an insurer of the debt; he promises to
pay the principal's debt if the principal will not pay.38
In the case at bar, there was no indication that the principal debtor will default in
payment. In fact, DBP, which had stepped into the shoes of ELISCON, was capable of
 O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 36

payment. Its authorized capital stock was increased by the government. 39 More
importantly, the National Development Company took over the business of ELISCON
and undertook to pay ELISCON's creditors, and earmarked for that purpose the
amount of P4,015,534.54 for payment to BPI.40
Notwithstanding the fact that a reliable institution backed by government funds was
offering to pay ELISCON's debts, not as mere surety but as substitute principal debtor,
BPI, for reasons known only to itself, insisted in going after the sureties. The course of
action chosen taxes the credulity of this Court. At the very least, suffice it to state that
BPI's actuation in this regard runs counter to the good faith covenant in contractual
relations, provided for by the Civil Code, to wit:
ART. 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.1âwphi1.nêt
The original obligation having been extinguished, the contracts of suretyship executed
separately by Babst and MULTI, being accessory obligations, are likewise
extinguished.42
Hence, BPI should enforce its cause of action against DBP. It should be stressed that
notwithstanding the lapse of time within which these cases have remained pending, the
prescriptive period for BPI to file its action was interrupted when it filed Civil Case
No. 49226.43
WHEREFORE, the consolidated petitions are GRANTED. The appealed Decision of
the Court of Appeals, which held ELISCON, MULTI and Babst solidarily liable for
payment to BPI of the promissory note and letters of credit, is REVERSED and SET
ASIDE. BPI's complaint against ELISCON, MULTI and Babst is DISMISSED.
SO ORDERED.

ART. 1159. Obligations arising from contract have the force of law between
the contracting parties and should be complied with in good faith.

BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for
ELISCON as debtor. Hence, there was a valid novation which resulted in the release of
ELISCON from its obligation to BPI, whose cause of action should be directed against
DBP as the new debtor.

Novation, in its broad concept, may either be extinctive or modificatory .It is

extinctive when an old obligation is terminated by the creation of a new
obligation that takes the place of the former; it is merely modificatory when
the old obligation subsists to the extent it remains compatible with the
amendatory agreement. An extinctive novation results either by changing the
object or principal conditions (objective or real), or by substituting the person
of the debtor or subrogating a third person in the rights of the creditor
(subjective or personal). Under this mode, novation would have dual
functions — one to extinguish an existing obligation, the other to substitute a
new one in its place — requiring a conflux of four essential requisites, (1) a
previous valid obligation; (2) an agreement of all parties concerned to a new
contract; (3) the extinguishment of the old obligation; and (4) the birth of a
valid new obligation.41
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 37

G.R. No. 136780            August 16, 2001
JEANETTE D. MOLINO, petitioner,  accordance with Section 11 hereof."
vs.
SECURITY DINERS INTERNATIONAL CORPORATION, respondent.
GONZAGA-REYES, J.:
Assailed by this petition for review on certiorari is the decision of the Court of
Appeals dated September 28, 19981which 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
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 38
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 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
cardholder's privileges shall be automatically terminated in
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, attorney's 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."
Danilo's 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 x x x2
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 Alto's
Regular Diners Club Card, there was no evidence that after the card had been
upgraded to Diamond (Edition) petitioner consented or agreed to act as surety for
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 39
Danilo. Exhibit "C" or Exhibit "1", inter alia, which was a note bearing petitioner's
signature certifying to her approval of Danilo's request to have his card upgraded
should be read simply as a statement of and objection to his request for upgrading, and
not as an assumption of liability for the debts that Danilo may later owe through the
said card.4 The trial court also took note of the testimony of Alfredo Vicente, an officer
of respondent, who opined that the consent to be bound as surety to an upgraded card
should be categorical5 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 Danilo's 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 cardholder's indebtedness, under the clear
terms of the Guarantor's 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 Alto's 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 attorney's 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 Intentional, 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.
SO ORDERED. 9 explicit declaration, or by material incompatibility (implied novation). As we stated
Petitioner's 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.
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 40
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 x x x. 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 Alto's 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
in Fortune Motors vs. Court of Appeals, supra:
x x x The test of incompatibility is whether the two obligations can stand
together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. Novation must be
established either by the express terms of the new agreement or by the acts of
the parties clearly demonstrating the intent to dissolve the old obligation as a
consideration for the emergence of the new one. The will to novate, whether
totally or partially, must appear by express agreement of the parties, or by
their acts which are too clear or unequivocal to be mistaken.
There is no doubt that the upgrading was a novation of the original agreement covering
the first credit card issued to Danilo Alto, basically since it was committed with the
intent of canceling and replacing the said card. However, the novation did not serve to
release petitioner from her surety obligations because in the Surety Undertaking she

expressly waived discharge in case of change or novation in the agreement governing
the use of the first credit card.
The nature and extent of petitioner's 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, attorney's fees,
and costs;
2. She declared that "any change or novation in the Agreement or any extension of
time granted by SECURITY DINERS to pay such obligation, charges, and fees, shall
not release (her) from this Surety Undertaking";
3. "(S)aid undertaking is a continuous one and shall subsist and bind (her) until all
such obligations, charges and fees have been fully paid and satisfied"; and
4. "The indication of a credit limit to the cardholder shall not relieve (her) of liability
for charges and all other amounts voluntarily incurred by the cardholder in excess of
said credit limit."12
We cannot give any additional meaning to the plain language of the subject
undertaking. The extent of a surety's liability is determined by the language of the
suretyship contract or bond itself.13 Article 1370 of the Civil Code provides: "If the
terms of contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control."
This case is no different from Pacific Banking Corporation vs. IAC, supra, correctly
applied by the Court of Appeals, which involved a Guarantor's 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 wife's card but
the Court declared him liable to the full extent of his wife's 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
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 41
Pacificard or renewals thereof issued in (her) favor by Pacific Banking
Corporation. x x x.
xxx           xxx           xxx
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 debtor's (Celia's) 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 "Guarantor's 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 satisfied 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 petitioner's liability is solidary. A
surety is considered in law as being the same party as the debtor in relation to
whatever is adjudged touching the obligation of the latter, and their liabilities are
interwoven as to be inseparable. 14 Although the contract of a surety is in essence
secondary only to a valid principal obligation, his liability to the creditor is direct,
primary and absolute; he becomes liable for the debt and duty of another although he
possesses no direct or personal interest over the obligations nor does he receive any
benefit therefrom.15 There being no question that Danilo Alto incurred debts of
P166,408.31 in credit card advances, an obligation shared solidarily by petitioner,
respondent was certainly within its rights to proceed singly against petitioner, as surety
 O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 42

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 speculations that could lead to onerous effects, like in the present case where
the credit applied for was limitless. At the same time, it bears articulating that although
courts in appropriate cases may equitably reduce the award for penalty as provided
under such suretyship agreements if the same is iniquitous or unconscionable, 16 we are
unable to give relief to petitioner by way of reducing the amount of the principal
liability as surety under the circumstances of this case.

WHEREFORE, the petition is dismissed for lack of merit The decision of the Court of
Appeals is AFFIRMED in all respects.

SO ORDERED.
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 43

G.R. No. 154127               December 8, 2003
ROMEO C. GARCIA, petitioner,  that, on the same day, [they] executed a promissory note wherein they bound
vs.
DIONISIO V. LLAMAS, respondent.
DECISION
PANGANIBAN, J.:
Novation cannot be presumed. It must be clearly shown either by the express assent of
the parties or by the complete incompatibility between the old and the new
agreements. Petitioner herein fails to show either requirement convincingly; hence, the
summary judgment holding him liable as a joint and solidary debtor stands.
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, seeking to
nullify the November 26, 2001 Decision 2 and the June 26, 2002 Resolution 3 of the
Court of Appeals (CA) in CA-GR CV No. 60521. The appellate court disposed as
follows:
"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from,
insofar as it pertains to [Petitioner] Romeo Garcia, must be, as it hereby is,
AFFIRMED, subject to the modification that the award for attorney’s fees and cost of
suit is DELETED. The portion of the judgment that pertains to x x x Eduardo de Jesus
is SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus
is REMANDED to the court of origin for purposes of receiving ex parte [Respondent]
Dionisio Llamas’ evidence against x x x Eduardo de Jesus."4
The challenged Resolution, on the other hand, denied petitioner’s Motion for
Reconsideration.
The Antecedents
The antecedents of the case are narrated by the CA as follows:
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 44
"This case started out as a complaint for sum of money and damages by x x x
[Respondent] Dionisio Llamas against x x x [Petitioner] Romeo Garcia and Eduardo
de Jesus. Docketed as Civil Case No. Q97-32-873, the complaint alleged that on 23
December 1996[,] [petitioner and de Jesus] borrowed P400,000.00 from [respondent];
themselves jointly and severally to pay the loan on or before 23 January 1997 with a
5% interest per month; that the loan has long been overdue and, despite repeated
demands, [petitioner and de Jesus] have failed and refused to pay it; and that, by
reason of the[ir] unjustified refusal, [respondent] was compelled to engage the services
of counsel to whom he agreed to pay 25% of the sum to be recovered from [petitioner
and de Jesus], plus P2,000.00 for every appearance in court. Annexed to the complaint
were the promissory note above-mentioned and a demand letter, dated 02 May 1997,
by [respondent] addressed to [petitioner and de Jesus].
"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed
no liability under the promissory note because he signed it merely as an
accommodation party for x x x de Jesus; and, alternatively, that he is relieved from any
liability arising from the note inasmuch as the loan had been paid by x x x de Jesus by
means of a check dated 17 April 1997; and that, in any event, the issuance of the check
and [respondent’s] acceptance thereof novated or superseded the note.
"[Respondent] tendered a reply to [Petitioner] Garcia’s answer, thereunder asserting
that the loan remained unpaid for the reason that the check issued by x x x de Jesus
bounced, and that [Petitioner] Garcia’s answer was not even accompanied by a
certificate of non-forum shopping. Annexed to the reply were the face of the check and
the reverse side thereof.
"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of
the supposed P400,000.00 loan, he received only P360,000.00, the P40,000.00 having
been advance interest thereon for two months, that is, for January and February 1997;
that[,] in fact[,] he paid the sum of P120,000.00 by way of interests; that this was made
when [respondent’s] daughter, one Nits Llamas-Quijencio, received from the Central
Police District Command at Bicutan, Taguig, Metro Manila (where x x x de Jesus
worked), the sum of P40,000.00, representing the peso equivalent of his accumulated
leave credits, another P40,000.00 as advance interest, and still another P40,000.00 as
interest for the months of March and April 1997; that he had difficulty in paying the
loan and had asked [respondent] for an extension of time; that [respondent] acted in
bad faith in instituting the case, [respondent] having agreed to accept the benefits he
(de Jesus) would receive for his retirement, but [respondent] nonetheless filed the
instant case while his retirement was being processed; and that, in defense of his

rights, he agreed to pay his counsel P20,000.00 [as] attorney’s fees, plus P1,000.00 for
every court appearance.
"During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did
they file any pre-trial brief. Neither did [Petitioner] Garcia file a pre-trial brief, and his
counsel even manifested that he would no [longer] present evidence. Given this
development, the trial court gave [respondent] permission to present his evidence ex
parte against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial court directed
[respondent] to file a motion for judgment on the pleadings, and for [Petitioner] Garcia
to file his comment or opposition thereto.
"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to
allow him to present his evidence ex parte. Meanwhile, [Petitioner] Garcia filed a
[M]anifestation submitting his defense to a judgment on the pleadings. Subsequently,
[respondent] filed a [M]anifestation/[M]otion to submit the case for judgement on the
pleadings, withdrawing in the process his previous motion. Thereunder, he asserted
that [petitioner’s and de Jesus’] solidary liability under the promissory note cannot be
any clearer, and that the check issued by de Jesus did not discharge the loan since the
check bounced."5
On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222)
disposed of the case as follows:
"WHEREFORE, premises considered, judgment on the pleadings is hereby rendered
in favor of [respondent] and against [petitioner and De Jesus], who are hereby ordered
to pay, jointly and severally, the [respondent] the following sums, to wit:
‘1) P400,000.00 representing the principal amount plus 5% interest thereon
per month from January 23, 1997 until the same shall have been fully paid,
less the amount of P120,000.00 representing interests already paid by x x x de
Jesus;
‘2) P100,000.00 as attorney’s fees plus appearance fee of P2,000.00 for each
day of [c]ourt appearance, and;
‘3) Cost of this suit.’"6
Ruling of the Court of Appeals
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 45
The CA ruled that the trial court had erred when it rendered a judgment on the
pleadings against De Jesus. According to the appellate court, his Answer raised
genuinely contentious issues. Moreover, he was still required to present his evidence
ex parte. Thus, respondent was not ipso facto entitled to the RTC judgment, even
though De Jesus had been declared in default. The case against the latter was therefore
remanded by the CA to the trial court for the ex parte reception of the former’s
evidence.
As to petitioner, the CA treated his case as a summary judgment, because his Answer
had failed to raise even a single genuine issue regarding any material fact.
The appellate court ruled that no novation -- express or implied -- had taken place
when respondent accepted the check from De Jesus. According to the CA, the check
was issued precisely to pay for the loan that was covered by the promissory note
jointly and severally undertaken by petitioner and De Jesus. Respondent’s acceptance
of the check did not serve to make De Jesus the sole debtor because, first, the
obligation incurred by him and petitioner was joint and several; and, second, the check
-- which had been intended to extinguish the obligation -- bounced upon its
presentment.
Hence, this Petition.7
Issues
Petitioner submits the following issues for our consideration:
"I
Whether or not the Honorable Court of Appeals gravely erred in not holding that
novation applies in the instant case as x x x Eduardo de Jesus had expressly assumed
sole and exclusive liability for the loan obligation he obtained from x x x Respondent
Dionisio Llamas, as clearly evidenced by:
a) Issuance by x x x de Jesus of a check in payment of the full amount of the
loan of P400,000.00 in favor of Respondent Llamas, although the check
subsequently bounced[;]
b) Acceptance of the check by the x x x respondent x x x which resulted in
[the] substitution by x x x de Jesus or [the superseding of] the promissory
note;

c) x x x de Jesus having paid interests on the loan in the total amount
of P120,000.00;
d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus
that due to financial difficulties, he be given an extension of time to pay his
loan obligation and that his retirement benefits from the Philippine National
Police will answer for said obligation.
"II
Whether or not the Honorable Court of Appeals seriously erred in not holding that the
defense of petitioner that he was merely an accommodation party, despite the fact that
the promissory note provided for a joint and solidary liability, should have been given
weight and credence considering that subsequent events showed that the principal
obligor was in truth and in fact x x x de Jesus, as evidenced by the foregoing
circumstances showing his assumption of sole liability over the loan obligation.
"III
Whether or not judgment on the pleadings or summary judgment was properly availed
of by Respondent Llamas, despite the fact that there are genuine issues of fact, which
the Honorable Court of Appeals itself admitted in its Decision, which call for the
presentation of evidence in a full-blown trial."8
Simply put, the issues are the following: 1) whether there was novation of the
obligation; 2) whether the defense that petitioner was only an accommodation party
had any basis; and 3) whether the judgment against him -- be it a judgment on the
pleadings or a summary judgment -- was proper.
The Court’s Ruling
The Petition has no merit.
First Issue:
Novation
Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by
insisting that novation took place, either through the substitution of De Jesus as sole
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 46
debtor or the replacement of the promissory note by the check. Alternatively, the
former argues that the original obligation was extinguished when the latter, who was
his co-obligor, "paid" the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could
not have extinguished the obligation, because it bounced upon presentment. By
law,9 the delivery of a check produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a
third person to the rights of the creditor. 10 Article 1293 of the Civil Code defines
novation as follows:
"Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter,
but not without the consent of the creditor. Payment by the new debtor gives him
rights mentioned in articles 1236 and 1237."
In general, there are two modes of substituting the person of the debtor: (1)
expromision and (2) delegacion. In expromision, the initiative for the change does not
come from -- and may even be made without the knowledge of -- the debtor, since it
consists of a third person’s assumption of the obligation. As such, it logically requires
the consent of the third person and the creditor. In delegacion, the debtor offers, and
the creditor accepts, a third person who consents to the substitution and assumes the
obligation; thus, the consent of these three persons are necessary. 11 Both modes of
substitution by the debtor require the consent of the creditor.12
Novation may also be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new one that takes the place of the former.
It is merely modificatory when the old obligation subsists to the extent that it remains
compatible with the amendatory agreement. 13 Whether extinctive or modificatory,
novation is made either by changing the object or the principal conditions, referred to
as objective or real novation; or by substituting the person of the debtor or subrogating
a third person to the rights of the creditor, an act known as subjective or personal
novation.14 For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.15
Novation may also be express or implied. It is express when the new obligation
declares in unequivocal terms that the old obligation is extinguished. It is implied
when the new obligation is incompatible with the old one on every point. 16 The test of
incompatibility is whether the two obligations can stand together, each one with its
own independent existence.17
Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been extinguished
by the issuance and the acceptance of the check, or that the check would take the place
of the note. There is no incompatibility between the promissory note and the check. As
the CA correctly observed, the check had been issued precisely to answer for the
obligation. On the one hand, the note evidences the loan obligation; and on the other,
the check answers for it. Verily, the two can stand together.
Neither could the payment of interests -- which, in petitioner’s view, also constitutes
novation18 -- change the terms and conditions of the obligation. Such payment was
already provided for in the promissory note and, like the check, was totally in accord
with the terms thereof.
Also unmeritorious is petitioner’s argument that the obligation was novated by the
substitution of debtors. In order to change the person of the debtor, the old one must be
expressly released from the obligation, and the third person or new debtor must
assume the former’s place in the relation. 19 Well-settled is the rule that novation is
never presumed.20 Consequently, that which arises from a purported change in the
person of the debtor must be clear and express. 21 It is thus incumbent on petitioner to
show clearly and unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly released from the
obligation, that a third person was substituted in his place, or that the joint and solidary
obligation was cancelled and substituted by the solitary undertaking of De Jesus. The
CA aptly held:
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 47
"x x x. Plaintiff’s acceptance of the bum check did not result in substitution by de
Jesus either, the nature of the obligation being solidary due to the fact that the
promissory note expressly declared that the liability of appellants thereunder is joint
and [solidary.] Reason: under the law, a creditor may demand payment or performance
from one of the solidary debtors or some or all of them simultaneously, and payment
made by one of them extinguishes the obligation. It therefore follows that in case the
creditor fails to collect from one of the solidary debtors, he may still proceed against
the other or others. x x x "22
Moreover, it must be noted that for novation to be valid and legal, the law requires that
the creditor expressly consent to the substitution of a new debtor. 23 Since novation
implies a waiver of the right the creditor had before the novation, such waiver must be
express.24 It cannot be supposed, without clear proof, that the present respondent has
done away with his right to exact fulfillment from either of the solidary debtors.25
More important, De Jesus was not a third person to the obligation. From the beginning,
he was a joint and solidary obligor of the P400,000 loan; thus, he can be released from
it only upon its extinguishment. Respondent’s acceptance of his check did not change
the person of the debtor, because a joint and solidary obligor is required to pay the
entirety of the obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the
satisfaction of the whole obligation from any or all of the debtors. 26 It is up to the
former to determine against whom to enforce collection.27 Having made himself jointly
and severally liable with De Jesus, petitioner is therefore liable 28 for the entire
obligation.29
Second Issue:
Accommodation Party
Petitioner avers that he signed the promissory note merely as an accommodation party;
and that, as such, he was released as obligor when respondent agreed to extend the
term of the obligation.
This reasoning is misplaced, because the note herein is not a negotiable instrument.
The note reads:
"PROMISSORY NOTE

"P400,000.00
"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED
THOUSAND PESOS, Philippine Currency payable on or before January 23, 1997 at
No. 144 K-10 St. Kamias, Quezon City, with interest at the rate of 5% per month or
fraction thereof.
"It is understood that our liability under this loan is jointly and severally [sic].
"Done at Quezon City, Metro Manila this 23rd day of December, 1996." 30
By its terms, the note was made payable to a specific person rather than to bearer or to
order31 -- a requisite for negotiability under Act 2031, the Negotiable Instruments Law
(NIL). Hence, petitioner cannot avail himself of the NIL’s provisions on the liabilities
and defenses of an accommodation party. Besides, a non-negotiable note is merely a
simple contract in writing and is evidence of such intangible rights as may have been
created by the assent of the parties.32 The promissory note is thus covered by the
general provisions of the Civil Code, not by the NIL.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable
for the promissory note. Under Article 29 of Act 2031, an accommodation party is
liable for the instrument to a holder for value even if, at the time of its taking, the latter
knew the former to be only an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect, one of principal and
surety -- the accommodation party being the surety. 33 It is a settled rule that a surety is
bound equally and absolutely with the principal and is deemed an original promissor
and debtor from the beginning. The liability is immediate and direct.34
Third Issue:
Propriety of Summary Judgment
or Judgment on the Pleadings
The next issue illustrates the usual confusion between a judgment on the pleadings and
a summary judgment. Under Section 3 of Rule 35 of the Rules of Court, a summary
judgment may be rendered after a summary hearing if the pleadings, supporting
affidavits, depositions and admissions on file show that (1) except as to the amount of
damages, there is no genuine issue regarding any material fact; and (2) the moving
party is entitled to a judgment as a matter of law.
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 48
A summary judgment is a procedural device designed for the prompt disposition of
actions in which the pleadings raise only a legal, not a genuine, issue regarding any
material fact.35 Consequently, facts are asserted in the complaint regarding which there
is yet no admission, disavowal or qualification; or specific denials or affirmative
defenses are set forth in the answer, but the issues are fictitious as shown by the
pleadings, depositions or admissions.36 A summary judgment may be applied for by
either a claimant or a defending party.37
On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the
pleadings is proper when an answer fails to render an issue or otherwise admits the
material allegations of the adverse party’s pleading. The essential question is whether
there are issues generated by the pleadings.38 A judgment on the pleadings may be
sought only by a claimant, who is the party seeking to recover upon a claim,
counterclaim or cross-claim; or to obtain a declaratory relief. 39
Apropos thereto, it must be stressed that the trial court’s judgment against petitioner
was correctly treated by the appellate court as a summary judgment, rather than as a
judgment on the pleadings. His Answer 40 apparently raised several issues -- that he
signed the promissory note allegedly as a mere accommodation party, and that the
obligation was extinguished by either payment or novation. However, these are not
factual issues requiring trial. We quote with approval the CA’s observations:
"Although Garcia’s [A]nswer tendered some issues, by way of affirmative defenses,
the documents submitted by [respondent] nevertheless clearly showed that the issues
so tendered were not valid issues. Firstly, Garcia’s claim that he was merely an
accommodation party is belied by the promissory note that he signed. Nothing in the
note indicates that he was only an accommodation party as he claimed to be. Quite the
contrary, the promissory note bears the statement: ‘It is understood that our liability
under this loan is jointly and severally [sic].’ Secondly, his claim that his co-defendant
de Jesus already paid the loan by means of a check collapses in view of the dishonor
thereof as shown at the dorsal side of said check."41
From the records, it also appears that petitioner himself moved to submit the case for
judgment on the basis of the pleadings and documents.1âwphi1 In a written
Manifestation,42 he stated that "judgment on the pleadings may now be rendered
without further evidence, considering the allegations and admissions of the parties." 43
In view of the foregoing, the CA correctly considered as a summary judgment that
which the trial court had issued against petitioner.
 O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 49

WHEREFORE, this Petition is hereby DENIED and the assailed Decision

AFFIRMED. Costs against petitioner.

SO ORDERED.

G.R. No. 147950               December 11, 2003


CALIFORNIA BUS LINES, INC., petitioner,  When CBLI defaulted on all payments due, it entered into a restructuring agreement
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 Corporation—M.A.N. Division (Delta) applied for
financial assistance from respondent State Investment House, Inc. (hereafter SIHI), a
domestic corporation engaged in the business of quasi-banking. SIHI agreed to extend
a credit line to Delta for P25,000,000.00 in three separate credit agreements dated May
11, June 19, and August 22, 1979.3 On several occasions, Delta availed of the credit
line by discounting with SIHI some of its receivables, which evidence actual sales of
Delta’s vehicles. Delta eventually became indebted to SIHI to the tune
of P24,010,269.32.4
Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc.
(hereafter CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses and
two (2) units of M.A.N. Diesel Conversion Engines from Delta. To secure the payment
of the purchase price of the 35 buses, CBLI and its president, Mr. Dionisio O. Llamas,
executed sixteen (16) promissory notes in favor of Delta on January 23 and April 25,
1980.5 In each promissory note, CBLI promised to pay Delta or order, P2,314,000
payable in 60 monthly installments starting August 31, 1980, with interest at 14% per
annum. CBLI further promised to pay the holder of the said notes 25% of the amount
due on the same as attorney’s 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 Delta’s favor.
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 50
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
CBLI’s past due installments, extending the period to pay, and stipulating daily
remittance instead of the previously agreed monthly remittance of payments. In case of
default, Delta would have the authority to take over the management and operations of
CBLI until CBLI and/or its president, Mr. Dionisio Llamas, remitted and/or updated
CBLI’s 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
Receivables7 in favor of SIHI as security for the payment of its obligations to SIHI per
the credit agreements. In view of Delta’s 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 Delta’s overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This prompted Delta
to threaten CBLI with the enforcement of the management takeover clause. To pre-
empt the take-over, CBLI filed on May 3, 1982, a complaint for injunction 9, docketed
as Civil Case No. 0023-P, with the Court of First Instance of Rizal, Pasay City, (now
Regional Trial Court of Pasay City). In due time, Delta filed its amended answer with
applications for the issuance of a writ of preliminary mandatory injunction to enforce
the management takeover clause and a writ of preliminary attachment over the buses it
sold to CBLI.10 On December 27, 1982,11 the trial court granted Delta’s 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 Sale12 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 Delta’s 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
Delta’s offer, and Delta transferred the ownership of its available buses to SIHI, which
in turn acknowledged full payment of Delta’s remaining obligation. 17 When SIHI was
unable to take possession of the buses, SIHI filed a petition for recovery of possession
with prayer for issuance of a writ of replevin before the RTC of Manila, Branch 6,
docketed as Civil Case No. 84-23019. The Manila RTC issued a writ of replevin and
SIHI was able to take possession of 17 bus units belonging to Delta. SIHI applied the
proceeds from the sale of the said 17 buses amounting to P12,870,526.98 to Delta’s
outstanding obligation. Delta’s 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 Delta’s petition and motion for execution per the judgment of compromise,
the RTC of Manila granted in Civil Case No. 84-28505 SIHI’s 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 CBLI’s 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 SIHI’s petition in CA-GR SP
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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. 26The 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 sheriff’s 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 Manila.29 SIHI’s motion was granted on December 16, 1987.30 On November
29, 1988, however, SIHI filed an urgent ex-parte motion to amend this order claiming
that through inadvertence and excusable negligence of its new counsel, it made a
mistake in the list of buses in the Motion to Sell Attached Properties it had earlier
filed.31 SIHI explained that 14 of the buses listed had already been sold to Delta on
April 2, 1987, by virtue of the January 3, 1985 Order of the RTC of Pasay, and that
two of the buses listed had been released to third party, claimant Pilipinas Bank, by
Order dated September 16, 198732 of Branch 13 of the RTC of Manila.
CBLI opposed SIHI’s motion to allow the sale of the 16 buses. On May 3,
1989,33 Branch 13 of the RTC of Manila denied SIHI’s 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 CBLI’s 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 attorney’s 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
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restructuring agreement did not totally extinguish the obligations under the sixteen
(16) promissory notes, the July 24, 1984, compromise agreement executed in Civil
Case No. 0023-P did.38 CBLI cites paragraph 5 of the compromise agreement which
states that the agreement between it and CBLI was in "full and final settlement,
adjudication and termination of all their rights and obligations as of the date of (the)
agreement, and of the issues in (the) case." According to CBLI, inasmuch as the five
promissory notes were subject matters of the Civil Case No. 0023-P, the decision
approving the compromise agreement operated as res judicata in the present case. 39
Novation has been defined as the extinguishment of an obligation by the substitution
or change of the obligation by a subsequent one which terminates the first, either by
changing the object or principal conditions, or by substituting the person of the debtor,
or subrogating a third person in the rights of the creditor.40
Novation, in its broad concept, may either be extinctive or modificatory. 41 It is
extinctive when an old obligation is terminated by the creation of a new obligation that
takes the place of the former; it is merely modificatory when the old obligation
subsists to the extent it remains compatible with the amendatory agreement. 42 An
extinctive novation results either by changing the object or principal conditions
(objective or real), or by substituting the person of the debtor or subrogating a third
person in the rights of the creditor (subjective or personal). 43 Novation has two
functions: one to extinguish an existing obligation, the other to substitute a new one in
its place.44 For novation to take place, four essential requisites have to be met, namely,
(1) a previous valid obligation; (2) an agreement of all parties concerned to a new
contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new
obligation.45
Novation is never presumed, 46 and the animus novandi, whether totally or partially,
must appear by express agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken.47
The extinguishment of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. 48 The term "expressly"
means that the contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. 49 Upon the other hand, no
specific form is required for an implied novation, and all that is prescribed by law
would be an incompatibility between the two contracts. 50 While there is really no hard
and fast rule to determine what might constitute to be a sufficient change that can
bring about novation, the touchstone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations.
 O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 53

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. 52Corollarily, 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
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 attorney’s
fees and expenses of 25% of the amount due in addition to the costs of suit.

The necessity to prove the foregoing by clear and convincing evidence is accentuated The restructuring agreement, for its part, had the following provisions:
where the obligation of the debtor invoking the defense of novation has already
matured.54 WHEREAS, CBL and LLAMAS admit their past due installment on the following
promissory notes:
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 a. PN Nos. 16 to 26 (11 units)
recognizes the old, changes only the terms of payment, and adds other obligations not Past Due as of September 30, 1981 – P1,411,434.00
incompatible with the old ones, or where the new contract merely supplements the old
one.55 b. PN Nos. 52 to 57 (24 units)
Past Due as of September 30, 1981 – P1,105,353.00
In Inchausti & Co. v. Yulo 56 this Court held that an obligation to pay a sum of money
is not novated in a new instrument wherein the old is ratified, by changing only the WHEREAS, the parties agreed to restructure the above-mentioned past due
term of payment and adding other obligations not incompatible with the old one. In installments under the following terms and conditions:
Tible v. Aquino57 and Pascual v. Lacsamana58 this Court declared that it is well settled
that a mere extension of payment and the addition of another obligation not a. PN Nos. 16 to 26 (11 units) – 37 months
incompatible with the old one is not a novation thereof. PN Nos. 52 to 57 (24 units) – 46 months

In this case, the attendant facts do not make out a case of novation. The restructuring b. Interest Rate: 16% per annum
agreement between Delta and CBLI executed on October 7, 1981, shows that the
parties did not expressly stipulate that the restructuring agreement novated the
c. Documentation Fee: 2% per annum
promissory notes. Absent an unequivocal declaration of extinguishment of the pre-
existing obligation, only a showing of complete incompatibility between the old and
the new obligation would sustain a finding of novation by implication. 59 However, our d. Penalty previously incurred and Restructuring fee: 4% p.a.
review of its terms yields no incompatibility between the promissory notes and the
restructuring agreement. e. Mode of Payment: Daily Remittance

The five promissory notes, which Delta assigned to SIHI on September 13, 1983, NOW, THEREFORE, for and in consideration of the foregoing premises, the parties
contained the following common stipulations: 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<>January 1, 1982 to March 31,
1982
Daily payments of P13,000.00 from<>April 1, 1982 to June 30,
1982
Daily payments of P14,000.00 from<>July 1, 1982 to September 30,
1982
Daily payments of P15,000.00 from<>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 collector to receive the amount due at CBL’s 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.
O B L I C O N ( N o v a t i o n - R e q u i s i t e s ) | 54
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
attorney’s 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 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. CA63, 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 CBLI’s 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. Delta’s limited authority to collect for SIHI stipulated in the
September 13, 1985, Deed of Sale cannot be construed to include the power to
compromise CBLI’s 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, Delta’s
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.
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As regards CBLI, SIHI’s demand letter dated December 13, 1983, requiring CBLI to
remit the payments directly to SIHI effectively revoked Delta’s limited right to collect
in behalf of SIHI. This should have dispelled CBLI’s 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
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 CBLI’s management and operations and the
resultant impossibility for CBLI to comply with its obligations in the subject
promissory notes. CBLI also adds that SIHI’s failure to intervene in Civil Case No.
0023-P is proof that Delta continued to act in SIHI’s 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, CBLI’s obligations to SIHI embodied in the five
promissory notes became separate and distinct from CBLI’s 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 Delta’s 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, SIHI’s 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 SIHI’s
rights.74 Indeed, SIHI’s 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 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.
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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 SIHI’s 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 CBLI’s obligations
to Delta. And since there was a previous revocation of Delta’s authority to collect for
SIHI, Delta was no longer SIHI’s collecting agent. CBLI, in turn, knew of the
assignment and Delta’s lack of authority to compromise the subject notes, yet it readily
agreed to the foreclosure. To sanction CBLI’s 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.1âwphi1 Under the circumstances, we cannot see how SIHI’s
belated acquisition of the foreclosed buses operates to hold the compromise agreement
—and consequently Article 1484(3)—applicable to SIHI as CBLI contends. CBLI’s
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
SIHI’s 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
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SIHI’s bare allegations on this matter were insufficient for the preliminary attachment
of CBLI’s properties.80

The question whether the attachment of the sixteen (16) buses was valid and in
accordance with law, however, has already been resolved with finality by the Court of
Appeals in CA-G.R. SP No. 08376. In its July 31, 1987, decision, the Court of Appeals
upheld the legality of the writ of preliminary attachment SIHI obtained and ruled that
the trial court judge acted with grave abuse of discretion in discharging the writ of
attachment despite the clear presence of a determined scheme on the part of CBLI to
dispose of its property. Considering that the said Court of Appeals decision has already
attained finality on August 22, 1987, there exists no reason to resolve this question
anew. Reasons of public policy, judicial orderliness, economy and judicial time and
the interests of litigants as well as the peace and order of society, all require that
stability be accorded the solemn and final judgments of courts or tribunals of
competent jurisdiction.81

Finally, in the light of the justness of SIHI’s claim against CBLI, we cannot sustain
CBLI’s 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.