Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-18411      December 17, 1966

MAGDALENA ESTATES, INC., plaintiff-appellee, 

vs.
ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, defendants-appellants.

Roxas and Sarmiento for plaintiff-appelle.

Somero, Baclig and Savello for defendants-appellants.

REGALA, J.:

Appeal from the decision of the Court of First Instance of Manila ordering the defendants-appellants
to pay jointly and severally to the plaintiff-appellee the sum of P655.89, plus legal interest thereon
from date of the judicial demand, the sum of P100.00 as attorney's fees, and to pay the costs.

The appellants bought from the appellee a parcel of land in Quezon City known as Lot 7-K-2-G, Psd-
26193. In view of an unpaid balance of P5,000.00 on account of the purchase price of the lot, the
appellants executed on January 4, 1957, the following promissory note representing the said
account:

PROMISSORY NOTE

P5,000.00

Manila, January 4, 1957

We, the Spouses ANTONIO A. RODRIGUEZ and HERMINIA C. RODRIGUEZ, jointly and severally
promise to pay the Magdalena Estates, Inc., or order, at its offices in the City of Manila, without any
demand the sum of FIVE THOUSAND PESOS (P5,000.00), Philippine currency, with interest at the rate
of Nine Per Cent 9% per annum, within sixty (60) days from January 7, 1957. The sum of P5,000.00
represents the balance of the purchase price of the parcel of land known as Lot 7-K-2-G, Psd. 26193,
containing an area of 2,191 square meters, Quezon City.

(Sgd.) Antonio A.
Rodriguez
( T ) ANTONIO A.
RODRIGUEZ

(Sgd.) Herminia C.
Rodriguez
( T ) HERMINIA C.
RODRIGUEZ

Signed in the Presence of:

(Sgd.) ILLEGIBLE

(Sgd.) ILLEGIBLE

On the same date, the appellants and the Luzon Surety Co., Inc. executed a bond in favor of the
appellee, the undertaking thereof being embodied therein as follows:

. . . comply with the obligation to pay the amount of P5,000.00 representing balance of the
purchase price of a parcel of land known as Lot 7-K-2-G, Psd-26193, with an area of 2191
square meters, Quezon City, covered by Transfer Certificate of Title No. 13 (6947), Quezon
City, within a period of sixty (60) days from January 7, 1957; That the Surety shall be notified
in writing within Ten (10) days from moment of default otherwise, this undertaking is
automatically null and void.

On June 20, 1958, when the obligation of the appellants became due and demandable, the Luzon
Surety Co., Inc. paid to the appellee the sum of P5,000.00. Subsequently, the appellee demanded
from the appellants the payment of P655.89 corresponding to the alleged accumulated interests on
the principal of P5,000.00. Due to the refusal of the appellants to pay the said interest, the appellee
started this suit in the Municipal Court of Manila to enforce the collection thereof. The said court, on
February 5, 1959, rendered judgment in favor of the appellee and against the appellants, ordering
the latter to pay jointly and severally the appellee the sum of P655.89 with interest thereon at the
legal rate from November 10, 1958, the date of the filing of the complaint, until the whole amount is
fully paid. Not satisfied with that judgment, appellants appealed to the Court of First Instance of
Manila, where the case was submitted for decision on the pleadings. The Court of First Instance of
Manila rendered the judgment stated at the outset of this decision.

On appeal directly to this Court, the following errors are assigned:

I. The lower court erred in concluding as a fact from the pleadings that the plaintiff-appellee
demanded, and the Luzon Surety Co., Inc. refused, the payment of interest in the amount of
P655.89, and in not finding and declaring that said plaintiff-appellee waived or condoned the
said interests.

II. The lower court erred in not finding and declaring that the obligation of the defendants-
appellants in favor of the plaintiff-appellee was totally extinguished by payment and/or
condonation.

III. The lower court erred in not finding and declaring that the promissory note executed by
the defendants-appellants in favor of the plaintiff-appellee was, insofar as the said document
provided for the payment of interests, novated when the plaintiff-appellee unqualifiedly
accepted the surety bond which merely guaranteed payment of the principal in the sum of
P5,000.00.

Appellants claim that the pleadings do not show that there was demand made by the appellee for the
payment of accrued interest and what could be deduced therefrom was merely that the appellee
demanded from the Luzon Surety Co., Inc., in the capacity of the latter as surety, the payment of the
obligation of the appellants, and said appellee accepted unqualifiedly the amount of P5,000.00 as
performance by the obligor and/or obligors of the obligation in its favor. It is further claimed that the
unqualified acceptance of payment made by the Luzon Surety Co., Inc. of P5,000.00 or only the
amount of the principal obligation and without exercising its (appellee's) right to apply a portion of
P655.89 thereof to the payment of the alleged interest due despite its presumed knowledge of its
right to do so, the appellee showed that it waived or condoned the interests due, because Articles
1235 and 1253 of the Civil Code provide:

ART. 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.

ART. 1253. If the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been recovered.

We do not agree with the contention of the appellants. It is very clear in the promissory note that the
principal obligation is the balance of the purchase price of the parcel of land known as Lot 7-K-2-G,
Psd-26193, which is the sum of P5,000.00, and in the surety bond, the Luzon Surety Co., Inc.
undertook "to pay the amount of P5,000.00 representing balance of the purchase price of a parcel of
land known as Lot 7-K-2-G, Psd-26193, . . . ." The appellee did not protest nor object when it
accepted the payment of P5,000.00 because it knew that that was the complete amount undertaken
by the surety as appearing in the contract. The liability of a surety is not extended, by implication,
beyond the terms of his contract.1 It is for the same reason that the appellee cannot apply a part of
the P5,000.00 as payment for the accrued interest. Appellants are relying on Article 1253 of the Civil
Code, but the rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing
several debts of the same kind of a single creditor. They cannot be made applicable to a person
whose obligation as a mere surety is both contingent and singular; his liability is confined to such
obligation, and he is entitled to have all payments made applied exclusively to said application and
to no other.2 Besides, Article 1253 of the Civil Code is merely directory, and not
mandatory.3 Inasmuch as the appellee cannot protest for non-payment of the interest when it
accepted the amount of P5,000.00 from the Luzon Surety Co., Inc., nor apply a part of that amount
as payment for the interest, we cannot now say that there was a waiver or condonation on the
interest due.

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

EN BANC
[G.R. No. L-10060.  November 27, 1956.]
MARIA S. PASCUAL, Plaintiff-Appellee, vs. JOSE LACSAMANA, Defendant-Appellant.
 
DECISION
LABRADOR, J.:
On July 23, 1951, the Defendant executed a document in Tagalog, presented at the trial as Exhibit A,
which reads: chanroblesvirtua llawlibrary

“ALAMIN NG LAHAT NG MAKABABASA NITO: chanroblesvirtuallawlibrary

“Na ako, si Jose Lacsamana, may sapat na gulang, may asawa, at kasalukuyan naninirahan sa 1039
Trabajo, Sampaloc, Manila ay nagpapatunay ng sumusunod: chanroblesvirtua llawlibrary

“Una. — Na ako ay umutang ng halagang anim na libo apat na daan at limang piso at limang pu at
tatlong sentimos lamang (P6,405.53) kualtang pilipino, kay Gng. Maria S. Pascual ng Malabon, Rizal
ngayong araw na ito.
“Ikalawa. — Na ang nasabing utang ay ipinangangako kong bahayaran sa nasabing Ginang sa Deciembre
31, 1951.
“Ikatlo. — Na ang lahat ng isdang huhulihin sa aming palaisdaang “MAGPITO” at “PULO” na nasa
Pampanga, sa punduhan ng isda sa Hulong Duat, Malabon, Rizal, upang ipagbili at sa lahat ng
pagbibilhan ay aawasin ang kangyang komissiong 5 porciento.
“Ikaapat. — Na ang nasabing halaga ay aking bibigyan ng tubo o interest ng 12 porciento isang taon sa
nasabing Ginang mula ngayon araw na ito hanggang sa Deciembre 31, 1951.
“Ikalima. — Na kung sakali’t hindi ako makabayad sa aking utang sa nasabing Ginang sa taning na
nakalagay dito, at ang pagsiñgil sa akin ay umabot sa “jusgado” ako ay nangangako na magbabayad ng
aking pagkakautang at bukod sa doon ay magbabayad ako ng 25 porciento ng aking pagkakautang bilang
daños y perjuicios o costas ng abogado.
“SA KATUNAYAN NG LAHAT NG ITO, ako ay lumagda sa ibaba nito, dito sa Malabon, Rizal ngayong ika 23
ng Julio, 1951.
“Jose Lacsamana”
On February 27, 1953, he again executed another document, presented at the trial as Exhibit “D”, which
read:chanroblesvirtua llawlibrary

“SA LAHAT AY AKING PINATUTUNAYAN: chanroblesvirtuallawlibrary

“Ako, si JOSE LACSAMANA, matapos na makapanumpa, ay nagsasalaysay ng mga sumusunod: chanroblesvirtua llawlibrary

“1.  Na ako ay may nakuhang cualta sa Gng. Maria Pascual, sa halagang Anim na libong piso at apat na
daan at lima at limanpu’t tatlong centimos (P6,405.53) noong 23 ng Julio ng 1951.
“2.  Na bilang katunayan na ako ay handang magbayad ng nasabing utang ako ay nangakong
maghuhulog ng isda kay Gng. Maria Pascual, at bukod dito’y ako’y nangakong magpapatong ng nuukol
na interes sa halagang aking nautang hanggang sa mabayaran ang halagang aking nakuha.
“3.  Na ako’y nangakong magbayad ng nasabing utang, kasama and nauukol na interes, sangayon sa
kasulatang aking nilagdaan, noong ika a 31 ng Deciembre, 1951.
“4.  Na hangga sa ngayon ay hindi pa ako nagbabayad ng nasabing utang kay Gng. Maria Pascual.
“5.  Na noong Deciembre, 1952, ako ay nakipagusap kay Gng. Maria Pascual at ulit ay nangakong
magbabayad ng nasabing utang nitong katapusan ng Febrero, 1953, nguni’t hindi pa rin ako nagbayad ng
nasabing utang.
“6.  Na ngayong ika 27 ng Febrero, ako’y muling nakipagusap sa kay Gng. Maria Pascual at sa kay Atty.
Arsenio Roldan, Jr., at sa harap nitong huli, ako ay nangakong muli na magbabayad ng nasabing utang sa
fecha 20 ng Marzo, 1953.
“SA KATUNAYAN NG LAHAT NG ITO, ako ay lumagda sa kasulatang ito, ngayong ika 27 ng Febroro, 1953.
“Manila, Philippines
“JOSE LACSAMANA”
Plaintiff brought this action alleging that Defendant has not paid the indebtedness that he had agreed
and promised to pay in accordance with his promisory note of July 23, 1951 (Exhibit A);  chan

that Defendant also promised therein to sell all the fish that would be harvested from his two
roblesvirtualawlibra ry

fishponds, through the Plaintiff, who will receive 5 per cent commission, but failed to comply with this
obligation, depriving Plaintiff of an unrealized commission estimated at P700. She, therefore, prays
that Defendant be sentenced to pay the sum of P6,405.53, the amount of the debt, plus interest thereon
at the rate of 12% per annum from the date of the execution of the instrument until the debt is fully
paid, and that she also be ordered to pay Plaintiff P700, representing the 5 per cent commission which
the Plaintiff failed to realize. She also prays that Defendant be sentenced to pay P1,601.38, representing
25 per cent of the debt, as liquidated damages.
The Defendant claims that the facts are not presented clearly by Plaintiff. He alleges that on February
27, 1953, he and Plaintiff settled and liquidated all their outstanding accounts, and in consideration of
said cancellation and renovation, Defendant executed the contract, Exhibit “D “. By way of counterclaim,
he alleges that he had delivered fish valued at P1,198.15, and that after deducting Plaintiff’s commission
thereon, Plaintiff still owed him a balance of P1,004.25. He, therefore, asks that Plaintiff’s complaint be
dismissed, and that Plaintiff be sentenced to pay the sum stated in his counterclaim.
After the trial and on January 4, 1954, the court rendered judgment sentencing Defendant to pay the
sum of P6,405.53, plus interest thereon at 12% per annum from July 23, 1951 until the whole amount is
fully paid, and the further sum of P1,601.38, representing 25 per cent of the aforementioned amount, as
liquidated damages and attorney’s fees, plus the costs. Defendant’s counterclaim was dismissed.
Against the above judgment, Defendant appealed to the Court of Appeals, which in due time, certified
the case to Us, on the ground that only questions of law are involved. The only error assigned in the
appeal is that the lower court erred in holding that Exhibit D did not novate Exhibit A.
A comparison between the two instruments will readily show that the second one, Exhibit D, is
absolutely silent on Defendant’s obligation to deliver all the fish produced from his two fishponds to
the Plaintiff, as well as on the payment of liquidated damages of 25 per cent. It contains nothing but a
recital of past unfulfilled promises to pay made by Defendant, and a final promise to pay the obligation
on March 20, 1953. Whether or not Plaintiff agreed to this date of payment does not appear, but even if
she did, the change would be limited to the date of payment and it cannot be held to extend to all other
particulars of the contract. For a novation to exist, there must be a change, substitution, or renewal of
an obligation or obligatory relation, with the intention of extinguishing or modifying essentially the
former, debitum pro debito. (4 S. R. 424.) If the second instrument was accepted by Plaintiff so that the
period for the payment was intended to be postponed, there would still be no novation because mere
extension of payment and the addition of another obligation not incompatible with the old one is not a
novation thereof (Inchausti & Co. vs. Yulo, 34 Phil. 978). Furthermore, novation is never presumed;  chan

there must be a declaration to that effect in unequivocal terms, or that the old and the new
roblesvirtualawlibra ry

obligations must be incompatible (Article 1292, Civil Code).

Finding no error in the judgment of the court a quo, the same is hereby affirmed in toto, and it
appearing that the appeal is frivolous, Defendant is hereby sentenced to pay double costs.
Paras, C.J., Bengzon, Padilla, Montemayor, Bautista Angelo, Concepcion, Reyes, J. B. L., Endencia and
Felix, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-10132             July 18, 1957

LA TONDEÑA, INC., plaintiff-appellant, 
vs.
ALTO SURETY & INSURANCE CO., INC., ET AL., defendants-appellees.

Manuel V. San Jose and Arturo B. Christi for appellant.

Sinai C. Hamada and Guillermo F. de Guzman for appellees.

REYES, J.B.L., J.:

This appeal involves a question of priority between creditors that the Court of First Instance of
Manila resolved in favor of the appellee Alto Surety and Insurance Co., Inc.

It appears that on April 21, 1949, one Primitivo P. Ferrer executed in favor of La Tondeña, Inc., a
second chattel mortgage upon certain properties described in the complaint, to guarantee payment
of certain amounts. Some of these properties were already subject to a first mortgage in favor of one
Pedro Ruiz. All mortgages were duly registered.

On August 18, 1949, Pedro Ruiz sought foreclosure of the first mortgage in his favor, alleging default
by the mortgagor Ferrer; and in view of the latter's refusal to surrender the properties mortgaged,
Ruiz started action in court (Case No. 10880 of the Court of First Instance of Pangasinan) and asked
for their replevin. However, Ferrer secured their release by means of a redelivery bond for P20,000,
guaranteed by the Alto Surety and Insurance Co. The case having been tried, the court rendered
judgment on December 1, 1950, sentencing Ferrer to pay Ruiz P6,590.00 plus interest and
attorney's fees. As Ferrer defaulted, the Alto Surety paid for him on June 19, 1952.
While this first case was still pending, La Tondeña, Inc. instituted court proceedings against Ferrer
on November 15, 1949 (No. 9658 of the Court, of First Instance of Manila to foreclose its second
mortgage and to recover various other sums; and on June 7, 1950, judgment was rendered
sentencing Ferrer to pay P7,122.49 plus interest and costs on account of the mortgage debt, with a
decree for its for closure if not paid within ninety days. Ferrer was also sentenced to pay on the other
cause of action. In view of the foreclosure decree the Provincial Sheriff of Pangasinan levied on the
mortgaged properties and advertised them for sale. The sale was postponed from time to time, until
on December 13, 1950, upon request of Ferrer and to save him the custody fees, plaintiff directed
the sheriff to release the properties from levy, on condition that Ferrer would satisfy, the judgment by
March 31, 1951, and should he fail to do so, La Tondeña would be at liberty to proceed with the
foreclosure.

On March 13, 1951, the Alto Surety filed complaints (Civil Cases Nos. 241 and 242 of the Court of
First Instance of Baguio) against Ferrer to recover bond premiums and indemnities paid for his
account, and secured writs of preliminary attachment. Then on April 23, 1951 the Provincal Sheriff,
at the behest of Alto Surety, attached the very properties mortgaged by Ferrer to La Tondeña, Inc.,
and which had been the object of the writ of execution released as heretofore narrated.

Ferrer not having paid his debt to La Tondeña at the end of March 1951, as stipulated, the
mortgagee obtained an alias writ of execution of the judgment in its favor on May 26. But as the
properties had been in the meantime attached by Alto Surety, and Alto Surety refused to lift its
attachment, the foreclosure sale could not proceed. La Tondeña then filed with the Sheriff a third
party claim to the property; the Alto Surety in turn issued an indemnity bond in favor of the Sheriff,
guaranteed by the Associated Insurance Company, to maintain its levy; and on May 19, 1952, the
goods were sold at auction at the instance of Alto Surety and purchased by the same for P3,507.50.

Thereupon La Tondeña, Inc. filed the present complaint for damages against Alto Surety, the
Associated Insurance Co., and the Provincial Sheriff of Pangasinan. After due trial, the Court of First
Instance dismissed the complaint on the ground that (1) the release of the levy originally made by
the Sheriff in the foreclosure proceedings of La Tondeña's mortgage, extinguished its lien on the
goods, and deprived it of preference; (2) that the judgment of foreclosure was novated and
extinguished by extension of time and release of execution levy granted by La Tondeña to Ferrer;
and (3) that since Alto Surety had paid off the claims of the first mortgagee, Pedro Ruiz, the surety
company became subrogated to the rights of the first mortgagee, and therefore Alto Surety's rights
became superior to those of the second mortgagee La Tondeña, Inc. The latter appealed the
judgment to this Court on points of law exclusively.

1. As to the alleged extinction of the lien of La Tondeña because of its release of the execution levy,
the court below appears to have missed the fact that Latondeña held a mortgage lien, independent
of that arising from the levy. It is true that if the creditor, instead of foreclosing the mortgage, files an
ordinary action against the mortgagor, the creditor is deemed to have abandoned the mortgage
(Bachrach Motor Co. vs. Icarañgal, 68 Phil. 287; Manila Trading and Supply Co. vs. Co Kim, 71 Phil.
448 and cases cited). But that is not the case now, for La Tondeña here precisely sued for the
foreclosure of the mortgage in its favor, and can not have intended to abandon its mortgage.

It is apparent that, not having been waived actually or constructively, the mortgage lien held by La
Todeña could not be deemed released merely because the execution levy was discharged without
the credit being satisfied. Had La Tondeña not secured a writ of execution on its foreclosure
judgment, undeniably the attachment levied at the behest of Alto Surety would have been
subordinate to the registered mortgage in favor of La Tondeña and would not supersede it. We see
no reason why Alto Surety should be in a better position when an execution levy is made and later
lifted than in the case where no such levy at all is had.
The theory that the judgment lien merged or absorbed (and thereby extinguished) the mortgage lien
ignores the fact that the judgment lien depends upon the levy but that of the mortgage is based upon
its registration; and that the very purpose of the mortgage lien is precisely to assure that a judgment
for the amount of the debt will remain collectible and will be satisfied from the proceeds of the
mortgaged property; hence, the purpose of the mortgage lien would be defeated unless it is allowed
to stand as long as the foreclosure judgment is in force and is not satisfied. Until then it can not be
contended as appellees do, that the mortgage has become functus oficio. Wherefore, as stated in
American Jurisprudence, Vol. 37, p. 79, section 596, —

Altho there, is some conflict on the question, the weight of authority favors the doctrine that a
decree of foreclosure does not merge the lien of the mortgage until it has been
consummated by sale and satisfaction. The decree does not, it has been said, destroy the
lien of the mortgage but, rather, judicially determines the amount thereof.

2. The ruling of the court below, that the act of La Tondeña, Inc. in dissolving the execution levy and
giving its debtor until March 31, 1951, wherein to pay, constitutes a novation that extinguished the
original judgment, is contrary to the rulings of this Court in Zapanta vs. De Rotaeche, 21 Phil. 154
and Inchausti vs. Yulo, 34 Phil. 978. In both cases, this Court ruled that in order to extinguish or
discharge an obligation by novation the intent of the parties to do so (animus novandi) must be either
expressed or else clearly apparent from the incompatibility "on all points" of the old and the new
obligations (Art. 1204, Civil Code of 1889; Article 1292, new Civil Code) ; and that the act of giving a
debtor more time to pay an obligation is not a novation that will extinguish the original debt. As in the
De Rotaeche case, the subsequent arrangement between La Tondeña and the judgment debtor
Ferrer clearly recognized that the judgment of foreclosure continued to be in force, because the
arrangement was that if Ferrer did not pay until March 31st, 1951, La Tondeña Inc. would ask for the
execution of the judgment.

In the present case, the contract referred to does not expressly extinguish the obligation
existing in said judgment. Upon the contrary it expressly recognizes the obligations existing
between the parties in said judgment and expressly provides a method by which the same
shall be extinguished, which method is, as expressly indicated in said contract, by monthly
payments. The contract, instead of containing provisions "absolutely incompatible" with the
obligations of the judgment, expressly ratifies such obligations contains provisions for
satisfying them. The said agreement simply gave the plaintiff a method and more time for the
satisfaction of said judgment. It did not extinguish the obligations contained in the judgment,
until the terms of said contract had been fully complied with. Had the plaintiff continued to
comply with the conditions of said contract, he might have successfully invoked its provisions
against the issuance of an execution upon the said judgment. The judgment was not
satisfied and the obligations existing thereunder still subsisted until the terms of agreement
had been fully complied with. The plaintiff was bound to perform the conditions mentioned in
said contract punctually and fully, in default of which the defendant was remitted to the
original rights under his judgment. (Zapanta vs. De Rotaeche, supra.)

That an extension of the time does not constitute extinctive novation is evident from the fact that
extension had to be made a special ground for the extinguishment of the contract of guaranty in
Article 1851 of the old Code (Article 2079 new Civil code) notwithstanding that Article 1847 (now
2076) applies or guaranty the same grounds that extinguish all other obligations, naturally including
novation. If the extension of the period for payment were included in novation, Article 1851 (now
2079), making it a separate ground of discharge would be necessary.

3. The last argument for the appellees is that, by paying off the first mortgage of Pedro Ruiz, Alto
Surety became legally subrogated to the rights of the first mortgagee. This stand fails to take into
account that such subrogation only occurs upon payment of the first mortgage (Civil Code of 1889,
Article 1210; new Civil Code, Article 1302), and that Alto Surety did not begin paying off the first
mortgage until March 1952, nor complete its payment until June 19, 1952, while its attachment was
levied one year before, in April of 1951. The complaint upon which Alto Surety obtained the
attachment in question was not for the foreclosure of first mortgage, and in fact, did not even allege
that the first mortgage had been paid by Alto Surety. Hence, the subrogation in its favor did not
exist when the attachment was levied, nor make the latter superior to the lien of the second
mortgagee, La Tondeña, Inc., as of the time of the attachment; nor would it justify the refusal of the
appellees to allow the foreclosure sale to proceed, or their rejection of the third party claim filed by
the second mortgagee on September 5, 1951. As of the latter date, La Tondeña, Inc. was already
entitled to seize and sell the security (of course, subject to the first mortgage), and the attaching
creditor, Alto Surety, had only a lien subordinate to that of its opponent. The refusal to surrender the
mortgaged property being evidently wrongful, the appellees are liable for damages.

As to the extent of such damages, there is no evidence on record other than the third party claim of
La Tondeña, asserting that the goods attached by Alto Surety were worth not less than P7,500; the
indemnity bond subscribed by both Alto Surety and Associated Insurance and Surety Co., in the sum
of P7,500; and that the attached goods were sold at the instance of Alto Surety, and purchased by it
at P3,507 (Exhibit 14-Alto). Since the appellant did not petition for an increase of the indemnity bond,
it is inferable that it was agreeable that the goods attached were not worth more. Considering that La
Tondeña was not entitled to the ownership of the disputed goods, but only claimed the right to seize
and sell them at public auction subject to the first mortgage, and there being no other pertinent
evidence, we believe that there is no basis at present for assessing the appellant's damages. As this
failure appears due to the concentration of the parties on the main legal question of preference,
equity justifies a reopening of the case to admit evidence on the particular issue of damages.

In view of the foregoing, the decision appealed from is reversed, and the attachment levied on the
goods in question by the appellee Alto Surety and Insurance Co. is declared illegal and void. The
records are ordered remanded to the court of origin with instructions to reopen the case and receive
evidence on the question of damages caused by illegal attachment. Costs in this instance shall be
taxed against the appellees, Alto Surety and Insurance Co. and Associated Insurance Co. So
ordered.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-18377           December 29, 1962

ANASTACIO G. DUÑGO, petitioner, 
vs.
ADRIANO LOPENA, ROSA RAMOS and HON. ANDRES REYES, Judge of the Court of First
Instance of Rizal, respondents.

Gatchalian, Padilla & Sison for petitioner.

Santiago F. Alidio for respondents.

REGALA, J.:
On September 10, 1959, herein petitioner Anastacio Duñgo and one Rodrigo S. Gonzales
purchased 3 parcel of land from the respondents Adriano Lopena and Rosa Ramos for the total
price of P269,804.00. Of this amount P28.000.00 was given as down payment with the agreement
that the balance of P241,804.00 would be paid in 6 monthly installments.

To secure the payment of the balance Anastacio Duñgo and Rodrigo S. Gonzales, the vendees, on
September 11, 1958, executed over the same 3 parcels of land Deed of Real Estate Mortgage in
favor of the respondent Adriano Lopena and Rosa Ramos. This deed was duly registered with the
Office of the Register of Deeds Rizal, with the condition that failure of the vendees to pay any of the
installments on their maturity dates shall automatically cause the entire unpaid balance to become
due and demandable.

The vendees defaulted on the first installment. It resulted then that on November 7, 1959, the
vendors, herein respondents Adriano Lopena and Rosa Ramos, filed a complaint for the foreclosure
of the aforementioned real estate mortgage with the Court of First Instance of Rizal the Hon. Judge
Andres Reyes, presiding. This complaint was answered by the herein petitioner and the other
vendee, Rodrigo S. Gonzales, on December 7, 1959.

Meanwhile, there were 2 other civil cases filed in the same lower court against the same defendants
Anastacio Duñgo and Rodrigo S. Gonzales. The plaintiff in one was a certain Dionisio Lopena, and
in the other case, the complainants were Bernardo Lopena and Maria de la Cruz.

Both complaints involved the same cause of action as that of herein respondents Adriano Lopena
and Rosa Ramos. As a matter of fact all three cases arose out of one transaction. In view of the
identical nature of the above three cases, they were consolidated by the lower court into just one
proceeding.

It must be made clear, however, that this present decision refers solely to the interests and claim of
Adriano Lopena against Anastacio Duñgo alone.

Before the cases could be tried, a compromise agreement dated January 15, 1960 was submitted to
the lower court for approval. It was signed by herein respondents Adriano Lopena and Rosa Ramos
on one hand, and Rodrigo S. Gonzales, on the other. It was not signed by the herein petitioner.
However, Rodrigo S. Gonzales represented that his signature was for both himself and the herein
petitioner. Moreover, Anastacio Duñgo's counsel of record, Atty. Manuel O. Chan, the same lawyer
who signed and submitted for him the answer to the complaint, was present at the preparation of the
compromise agreement and this counsel affixed his signature thereto.

The text of this agreement is hereunder quoted:

COMPROMISE AGREEMENT

COME NOW the parties in the above entitled cases and unto this Hon. Court respectfully set
forth:

That, the plaintiffs, have agreed to give the defendants up to June 30, 1960 to pay the
mortgage indebtedness in each of the said cases;

That, should the defendants fail to pay the said mortgage indebtedness, judgments of
foreclosure shall thereafter be entered against the said defendants;
 That, the defendants hereby waive the period of redemption provided by law after entry of
judgments;

That, in the event of sale of the properties involved in these three cases, the defendants
agree that the said properties shall be sold at one time at public auction, that is, one piece of
property cannot be sold without the others.

This compromise agreement was approved by the lower court on the same day it was
submitted, January 15, 1960.

Subsequently, on May 3, 1960, a so-called Tri-Party Agreement was drawn. The signatories to it
were Anastacio Duñgo (herein petitioner) and Rodrigo S. Gonzales as debtors, Adriano Lopena and
Rosa Ramos (herein respondents) as creditors, and, one Emma R. Santos as pay or. The
stipulations of the Tri-Party Agreement were as follows: .

A TRI-PARTY AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This contract entered into by and between —

(1) MMA R. SANTOS, Filipino, of legal age, single, with residence and postal address
at ..........., Rizal Avenue, Manila, hereinafter referred to as the PAYOR,

(2) ANASTACIO C. DUÑGO Filipino, of legal age, single, with residence and postal address
at 137 N. Domingo, Quezon City, and RODRIGO S. GONZALES, Filipino, of legal age,
married to Magdalena Balatbat, with residence and postal address at 73 Maryland, Quezon
City, hereinafter referred to as the DEBTOR,

and

(3) DIONISIO LOPENA, married to Teofila Nofuente, LIBRADA LOPENA, married to

Arellano Cawagas, BERNARDO LOPENA, married to Maria de la Cruz, and ADRIANO
LOPENA, married to Rosa Ramos, all of whom are Filipinos, of legal ages, with residence
and postal address at Sucat, Muntinlupa, Rizal, hereinafter represented by their attorney of
record, ANTONIO LOPENA, hereinafter referred to as the CREDITOR,

W I T N E S S E T H:

WHEREAS, the DEBTOR is indebted to the CREDITOR as of this date in the aggregate
amount of P503,000.00 for the collection of which, the latter as party plaintiffs have institute
foreclosure proceedings against the former as party defendant in Civil Cases Nos. 5872,
5873 and 5874 now pending in the Court of First Instance, Pasig, Rizal;

WHEREAS, the PAYOR, hereby submits and binds herself to the force and effect of the
Order dated January 15, 1960, of the Court of First Instance of Pasig, Rizal, Branch VI,
which order is hereby made an integral part of this agreement as ANNEX "A";

WHEREAS, the PAYOR with due knowledge and consent of the DEBTOR, hereby proposes
to pay the aforesaid indebtedness in the sum of P503,000.00 to the CREDITOR for and in
behalf of the DEBTOR under the following terms and condition petitions:
 (a) To pay the said P503,000.00 in installments in the following schedule of amounts and
time: P50,000.00 on or before May 31, 1960 70,000.00 on or before June 30, 1960
70,000.00 on or before July 31, 1960 313,000.00 on or before Aug. 31, 1960.

(b) That the DEBTOR and the PAYOR hereby waive any right to object and oblige
themselves not to oppose the motion that the CREDITOR may file during the first week of
July 1960, or subsequently thereafter, informing the Court of the exact money obligation of
the DEBTOR which shall be P503,000.00 minus whatever payments, if any, made before
June 30, 1960 by the PAYOR and praying for the issuance of an order to sell the property
covered by the mortgage.

(c) That the CREDITOR, once he has the order referred to, should not execute the same by
giving it to the sheriff if the PAYOR is regular and punctual in the payment of all of the
installments stated above. PROVIDED, however, if the PAYOR defaults or fails to pay
anyone of the installments in the manner stated above, the PAYOR and the DEBTOR hereby
permit the CREDITOR to execute the order of sale referred to above, and they (PAYOR and
DEBTOR) hereby waive any and all objection's or oppositions to the propriety of the public
auction sale and to the confirmation of the sale to be made by the court.

(d) That the CREDITOR, at his option, may execute the August installment stated in letter (a)
of this paragraph if the PAYOR has paid regularly the May, June, and July installments, and
provided further that one half (½) of the August installment in the amount of P156,500.00 is
paid on the said date of August 31, 1960.

NOW, THEREFORE, for and in consideration of the foregoing stipulations, the DEBTOR and
CREDITOR hereby accept, approve and ratify the above-mentioned propositions of the
PAYOR and all the parties herein bind and oblige themselves to comply to the covenants
and stipulations aforestated;

That by mutual agreements of all the parties herein, this TRI-PARTY AGREEMENT may be
submitted to Court to form integral parts of the records of the Civil Cases mentioned above;

IN WITNESS WHEREOF, the parties hereunto affix their signature on this 3rd day of May,
1960 in the City of Manila, Philippines.

When Anastacio Duñgo (herein petitioner) and Rodrigo S. Gonzales failed to pay the balance of their
indebtedness on June 30, 1960, herein respondents Lopena and Ramos filed on July 5, 1960, a
Motion for the Sale of Mortgaged Property. Although this last motion was filed ex parte, Anastacio
Duñgo and Rodrigo S. Gonzales were notified of it by the lower court. Neither of them, however,
despite the notice, filed any opposition thereto. As a result, the lower court granted the above motion
on July 19, 1960, and ordered the sale of the mortgaged property.

On August 25, 1960, the 3 parcels of land above-mentioned were sold by the Sheriff at a public
auction where at herein petitioners, together with the plaintiffs of the other two cases won as the
highest bidders. The said sheriff's sale was later confirmed by the lower court on August 30, 1960. In
this connection, it should also made of record that before confirming the sale, the lower court gave
due notice of the motion for the confirmation to the herein petitioner who filed no opposition
therefore.

On August 31, 1960, Anastacio Duñgo filed a motion to set aside all the proceedings on the ground
that the compromise agreement dated January 15, 1960 was void ab initio with respect to him
because he did not sign the same. Consequently, he argued, all subsequent proceedings under and
by virtue of the compromise agreement, including the foreclosure sale of August 25, 1960, were void
and null as regards him. This motion to set aside, however, was denied by the lower court in its
order of December 14, 1960.

Upon denial of the said motion to set aside, Anastacio Duñgo filed a Notice of Appeal from the order
of August 31, 1960 approving the foreclosure sale of August 25, 1960, as well as the order of
December 14, 1960, denying his motion to set aside. The approval of the record on appeal however,
was opposed by the herein respondent spouses who claimed that the judgment was not appealable
having been rendered by virtue of the compromise agreement. The opposition was contained in a
motion to dismiss the appeal. Anastacio Duñgo filed a reply to the above motion. Soon thereafter,
the lower court dismissed the appeal.

Two issues were raised to this Court for review, to wit:

(1) Was the compromise agreement of January 15, 1960, the Order of the same date approving the
same, and, all the proceedings subsequent thereto, valid or void insofar as the petitioner herein is
concerned?

(2) Did the lower court abuse its discretion when it dismissed the appeal of the herein petitioner?

Petitioner Anastacio Duñgo insists that the Compromise Agreement was void ab initio and could
have no effect whatsoever against him because he did not sign the same. Furthermore, as it was
void, all the proceedings subsequent to its execution, including the Order approving it, were similarly
void and could not result to anything adverse to his interest.

The argument was not well taken. It is true that a compromise is, in itself, a contract. It is as such
that the Civil Code speaks of it.

ART. 2028. A compromise is a contract whereby the parties, by making reciprocal

concessions, avoid a litigation or put an end to one already commenced.

Moreover, under Art. 1878 of the Civil Code, a third person cannot bind another to a
compromise agreement unless he, the third person, has obtained a special power of attorney
for that purpose from the party intended to be bound.

ART. 1878. Special powers of attorney are necessary in the following cases:

x x x           x x x          x x x

x x x           x x x          x x x

(3) To compromise, to submit questions to arbitration, to renounce the right to appeal from a
judgment, to waive objections to the venue of an action or to abandon a prescription already
acquired;

However, although the Civil Code expressly requires a special power of attorney in order that one
may compromise an interest of another, it is neither accurate nor correct to conclude that its
absence renders the compromise agreement void. In such a case, the compromise is merely
unenforceable. This results from its nature is a contract. It must be governed by the rules and the
law on contracts.
 ART. 1403. The following contracts are unenforceable, unless they are ratified:

(1) Those entered into in the name of another person by one who has been given no
authority or legal representation, or who has acted beyond his powers;

Logically, then, the next inquiry in this case should be whether the herein petitioner, Anastacio
Duñgo had or had not ratified the compromise agreement. If he had, then the compromise
agreement was legally enforced against him; otherwise, he should be sustained in his contention
that it never bound him, nor ever could it be made to bind him.

The ratification of the compromise agreement was conclusively established by the Tri-Party
Agreement of May 1960. It is to be noted that the compromise agreement was submitted to and
approved by the lower court January 15, 1960. Now, the Tri-Party Agreement referred itself to that
order when it stipulated thus:

WHEREAS, the MAYOR, hereby submits and binds herself to the force and effect of the
order dated January 15, 1960, of the Court of First Instance of Pasig, Rizal, Branch which
order is hereby made an integral part of this agreement as Annex "A". lawphil.net

Having so consented to making that court order approving the compromise agreement an
integral part of the Tri-Party Agreement, how can the petitioner herein now repudiate the
compromise agreement and claim he has not authorized it?

When it appears that the client, on becoming aware the compromise and the judgment thereon, fails
to repudiate promptly the action of his attorney, he will not afterwards be heard to contest its validity
(Rivero vs. Rivero, 59 Phil. 15).

Besides, this Court has not overlooked the fact that which indeed Anastacio Duñgo was not a
signatory to the compromise agreement, the principal provision of the said instrument was for his
benefit. Originally, Anastacio Duñgo's obligation matured and became demandable on October 10,
1959. However, the compromise agreement extended the date of maturity to June 30, 1960. More
than anything, therefore, the compromise agreement operated to benefit the herein petitioner
because it afforded him more time and opportunity to fulfill his monetary obligations under the
contract. If only for this reason, this Court believes that the herein petitioner should not be heard to
repudiate the said agreement.

Lastly, the compromise agreement stated "that, should the defendants fail to pay the said mortgage
indebtedness, judgment of foreclosure shall thereafter be entered against the said defendants:"
Beyond doubt, this was ratified by the Tri-Party Agreement when it covenanted that —

If the MAYOR defaults or fails to pay anyone of the installments in the manner stated above,
the MAYOR and the DEBTOR hereby permit the CREDITOR to execute the order of sale
referred to above (the Judgment of Foreclosure), and they (PAYOR and DEBTOR) hereby
waive any and all objections or oppositions to the propriety of the public auction sale and to
the confirmation of the sale to be made by the Court.

Petitioner Duñgo finally argued that even assuming that the compromise agreement was valid, it
nevertheless could not be enforced against him because it has been novated by the Tri-Party
Agreement which brought in a third party, namely, Emma R. Santos, who assumed the mortgaged
obligation of the herein petitioner.
This Court cannot accept the argument. Novation by presumption has never been favored. To be
sustained, it need 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. (Martinez
v. Cavives, 25 Phil. 581; Tiy Sinco vs. Havana, 45 Phil. 707; Asia Banking Corp. vs. Lacson Co.. 48
Phil. 482; Pascual vs. Lacsamana, 53 O.G. 2467, April 1957).

An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified,
by changing only the term of payment and adding other obligations not incompatible with the old one
(Inchausti vs. Yulo, 34 Phil. 978; Pablo vs. Sapungan, 71 Phil. 145) or wherein the old contract is
merely supplemented by the new one Ramos vs. Gibbon, 67 Phil. 371).

Herein petitioner claims that when a third party Emma R. Santos, came in and assumed the
mortgaged obligation, novation resulted thereby inasmuch as a new debtor was substituted in place
of the original one. In this kind of novation, however, it is not enough that the juridical relation of the
parties to the original contract is extended to a third person; it is necessary that the old debtor be
released from the obligation, and the third person or new debtor take his place in the new relation.
Without such release, there is no novation; the third person who has assumed the obligation of the
debtor merely becomes a co-debtor or surety. If there is no agreement as to solidarity, the first and
the new debtors are considered obligation jointly. (IV Tolentino, Civil Code, p. 360, citing Manresa.
There was no such release of the original debtor in the Tri-Party Agreement.

It is a very common thing in the business affairs for a stranger to a contract to assume its
obligations; an while this may have the effect of adding to the number of persons liable, it does not
necessarily imply the extinguishment of the liability of the first debtor (Rios v Jacinto, etc., 49 Phil. 7;
Garcia vs. Khu Yek Ching, 65 Phil. 466). 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, do not constitute a novation,
and the creditor can still enforce the obligation against the original debtor (Straight vs. Haskell, 49
Phil. 614; Pacific Commercial Co. vs. Sotto, 34 Phil. 237; Estate of Mota vs. Serra, 47 Phil. 446).

In view of all the foregoing, We hold that the Tri-Party Agreement was an instrument intended to
render effective the compromise agreement. It merely complemented an ratified the same. That a
third person was involved in it is inconsequential. Nowhere in the new agreement may the release of
the herein petitioner be even inferred.

Having held that the compromise agreement was validity and enforceable against the herein
petitioner, it follows that the lower court committed no abuse of discretion when it dismissed the
appeal of the herein petitioner.

WHEREFORE, the petition for certiorari and mandamus filed by the herein petitioner is hereby
dismissed. The order of the lower court dismissing the appeal is her by affirmed, with costs.

Labrador, Concepcion, Reyes, J.B.L., Barrera and Makalintal, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-33654 December 29, 1930

KABANKALAN SUGAR CO., INC., plaintiff-appellant, 
vs.
JOSEFA PACHECO, defendant-appellee.

Hilado and Hilado and Vicente Hilado for appellant.

Nolan and Hernaez for appellee.

VILLA-REAL, J.:

This is an appeal taken by the plaintiff, the Kabankalan Sugar Co., Inc., from the decision of the
Court of First Instance of Occidental Negros, the dispositive part of which is as follows:

In view of the facts established, the court hereby absolves the defendant from the complaint
herein, declaring that the contract executed on September 29, 1911, novated the contract of
November 1, 1920, both executed by the Kabankalan Sugar Co., Inc., and Da. Josefa
Pacheco; with costs against the plaintiff. So ordered.

In support of its appeal, the appellant assigned the following alleged errors as committed by the trial
court in its decision, to wit:

1. The trial court erred in upholding the defense of novation, and in absolving the defendant
from the complaint

2. The trial court erred in denying the appellant's motion for a new trial

The instant case originated from a complaint filed by the corporate entity, the Kabankalan Sugar Co.,
against Josefa Pacheco to compel her to execute and acknowledge before a notary public an
instrument in proper form containing all the conditions stipulated in the contract entered into by and
between the parties on November 1, 1920, for inscription in the registry of deeds, with costs against
said defendant.

In answer to said complaint, the defendant after entering a general denial of each and every
allegation contained therein, with the exception of those expressly admitted, set up a special
defense to the effect that the contract referred to as signed on November 1, 1920, had been
substituted, modified and novated by another public instrument executed on September 29, 1922,
and prayed that she be absolved from said complaint, with costs against the plaintiff.

The relevant facts necessary to decide the questions raised by this appeal, either admitted without
contradiction or established by a preponderance of the evidence, are those found by the court
below, as follows:

On November 1, 1920, the Kabankalan Sugar Co., Inc., a domestic corporation, organized
and existing under the laws in force in these Islands, represented by its manager, Guillermo
Lizarraga, on the one hand, and Josefa Pacheco on the other, freely and voluntarily
executed the contract quoted in the complaint.

That contract was drafted by the plaintiff, and one original and one copy were made, which
were forwarded by the plaintiff to the defendant at her home for her signature, and after
 singing them, the plaintiff's messenger took them with him saying that they had to be signed
by the manager of the plaintiff company, the latter retaining both copies of the contract.

During the year 1922, the defendant had to pay the firm Ledesma Hermanos and the
Philippine National Bank of installment on her indebtedness to them, and she went to the
plaintiff suggesting that it assume the obligation of making those annual payments, as well
as the land tax upon the Hilabañgan estate, which belonged to her, in return for which she
would bind herself to deliver to the plaintiff every year fifteen per centum (15%) of all the
sugar obtained from the Hilabañgan estate. lawphi1>net

Guillermo Lizarraga, manager of the plaintiff company, told the defendant that the company
would accept her proposition provided she made out a new contract in a public instrument
granting the plaintiff a right of way in and through the Hilabañgan estate for a railway, for a
period of twenty years (20) from November 1, 1920, that is, from the date of the execution of
the contract quoted in the complaint, and would, in addition, bind herself for a like period to
deliver all the sugar can produced in the Hilabañgan estate to the plaintiff's sugar mill known
as Bearin, for milling into centrifugal sugar; the defendant insisted that the new contract, both
with regard to the easement and to the milling of the sugar cane, should not be for the same
period as that stipulate between the parties in the contract of November 1, 1920, that is
twenty (20) years from 1920, but only seven (7) years or crop of sugar can, beginning with
the harvest of 1922-1923; and finally, the parties agreed to these last-mentioned conditions,
that is, that the new contract should be for seven (7) years or crops beginning with the 1922-
1923 crop, both with regard to the easement and with regard to the milling of the sugar cane,
and to that end they executed the deed Exhibit 4 on September 29, 1922.

In the execution of the deed Exhibit 4, the plaintiff was represented by another manager
named Benito Belzunce, successor to Guillermo Lizarraga, and after Exhibit 4 had been
signed and ratified, he gave the defendant the original copy of the contract entered into on
November 1, 1920 (Exhibit 6), the same contract directly referred to in the interview had
between Guillermo Lizarraga, then manager of the plaintiff, and the defendant, before they
agreed to the conditions of the contract Exhibit 4, which is one of the two copies retained, as
above stated, by the plaintiff after the defendant had signed it.

In or about the month of October, 1924, when Ignacio B. Huarte was manager of the plaintiff
company, he had the company's notary, Jose Peralta, draw up a document (Exhibits 17 and
17-A) in order to convert the contract of November 1, 1920, into a public instrument, and
when it was prepared, the notary took it to the defendant's house, asking her to sign and
ratify it; she declined to do so, saying that the document executed on November 1, 1920,
had been superseded by the public instrument executed between the company and herself
on September 29, 1922. (Exhibit 4)

The relevant portions of the contract privately entered into on November 1, 1920 (Exhibits 1 and 6)
by and between Josefa Pacheco and Kabankalan Sugar Co., Inc., represented by its manager
Guillermo Lizarraga, which the contracting parties bound themselves to convert into a public
instrument later on, are as follows:

x x x           x x x          x x x

Josefa Pacheco permits the Kabankalan Sugar Co., Inc., to construct a railway which,
starting from the company's lands bounded by the aforesaid Hilabañgan estate and passing
through the part called Sasa, will cross the said estate at places to be designated by both
parties.
 This permission is for the term of twenty years from the date of the execution of this contract.

x x x           x x x          x x x

The Kabankalan Sugar Co, Inc., shall pay Josefa Pacheco for the lease of the ground to be
occupied by the railroad at the rare of seven centavos per square meter, the strip of land to
be used being four meters wide, and payment being per annum.

x x x           x x x          x x x

Josefa Pacheco shall be entitled, whenever she should require it, to have the whole or a
portion of her sugar-cane crop from the Hilabañgan estate milled by the Central Bearin
belonging to the Kabankalan Sugar Co., Inc., in which case the latter shall deliver to her fifty-
five per cent of the sugar produced, and fifty-five per cent of the molasses with respect to the
other conditions of the milling, they shall be the same as those existing between said central
and other plantations adjacent thereto and not belonging to the Kabankalan Sugar Co., Inc.,
but Josefa Pacheco shall give reasonable notice to said central as to when she desires
some milling done, in order that it may augment its capacity if need be.

It is further stipulated that should the Kabankalan Sugar Co., Inc., mill in any one year over
one-half of the crop produced on the Hilabañgan estate, said Central Bearin shall be exempt
from the payment of the lease on the land occupied by the railroad.

The relevant portions of the public document executed on September 29, 1922, by the defendant
Josefa Pacheco and the plaintiff kabankalan Sugar Co., Inc., through its manager, Benito Belzunce,
are as follows:

x x x           x x x          x x x

II. That in consideration of said loan and the mutual agreements and stipulations in this
contract, the party of the first part binds herself to mill in the central known as "Bearin"
belonging to the party of the second part, all the sugar cane produced on the Hilabañgan
estate, belonging to the party of the first part which is evidenced by certificate of title No. 452,
for the period of seven consecutive crops of sugar cane counted from the 1922-1923 crop.

x x x           x x x          x x x

VIII. That the party of the first part binds herself, her heirs, executors, administrators, and
assigns to acknowledge in favor of the party; of the second part the rights of way which may
be deemed necessary and desirable upon the Hilabañgan estate for the construction of
railways during the term of this contract; and to sign, upon demand of the party of the second
part, the necessary documents for registration in the registry of deeds of said easement of
rights of way and other rights and privileges belonging to the party of the second part.

IX. The party of the first part shall also cede and grant to the party of the second part, upon
demand, all the necessary easements of right of way for telephone lines, poles, tubes, water
pipers, aqueducts, and other conduits for conducting the water to the mill, with ground for the
necessary cisterns; and she shall likewise, upon demand, grant the right of way needed for
the railroad, for the period set forth in this contract, upon an adequate piece of land for the
operation of the railway, on and through the land of the party of the first part.
 X. The party of the first part also binds herself to plant the Hilabañgan estate with sugar cane
during the period of this contract, delivering the sugar cane so produced to the Bearin
Central owned by the party of the second part, in accordance with the conditions specified in
the contract; the aforesaid easement and this obligations contracted by the party of the first
part in this instrument are enforcible upon and directly affect said land as voluntary
easement, and any subsequent possessor thereof shall be subject to all the obligations and
rights of the party of the first part especially the voluntary easement herein mentioned; and
said party of the first part further binds herself to cause her successors, vendees or assigns
to abide by each and every one of the obligations contracted by her: Provided that failure to
comply with this requirement shall cause the annulment or rescission of any contract that
may be entered into by said party of the first part or her heirs or assigns, said contract being
considered as having been made in fraud of the party of the second part, which shall then be
entitled to indemnity for damages.

XI. That the period of this contract, as aforesaid, shall be seven consecutive sugar-cane
crops beginning with the harvest of 1922-1923.

x x x           x x x          x x x

Placing the two contracts side, it will be seen that in both, the defendant, Josefa Pacheco, binds
herself to acknowledge in favor of the Kabankalan Sugar Co., Inc., all the easements which the latter
may consider convenient and necessary for its railroad on the Hilabañgan estate belonging to the
former; the only differences being that the term of the contract of November 1, 1920, is twenty years,
while that of the contract entered into on September 29, 1922, is seven crops; that under the first
contract the plaintiff binds itself to pay the defendant an annual rental of 7 centavos a square meter
of the land subject to the easement, with 4 meters in width, while in the second contract no
stipulation is made as to the payment of rent for said right of way; that under the first contract it is
within the defendant Josefa Pacheco's discretion to mill or not to mill all or any part of the sugar cane
produced on the Hilabañgan estate, in the Bearin Central belonging to the plaintiff Kabankalan
Sugar Co., Inc., while under the second, she binds herself to mill in said central all the sugar cane
produced on her aforesaid estate for seven consecutive harvests; that according to the contract of
November 1, 1920, the defendant is not bound to grant the plaintiff any right of way for telephone
lines, poles, tubes, water pipes, aqueduct and other conduits for conducting water to the mill, with
ground for the cisterns and for the railway, while in the contract of September 29, 1922, this
obligation is imposed upon her: in the second contract the plaintiff granted the defendant a loan of
P17,247.30 secured by a mortgage, while said defendant was not granted such a loan in the first
contract.

The question to decide in this appeal is whether the contract of September 29, 1922, has
extinguished the contract of November 1, 1920, by novation.

The pertinent provision of article 1156 of the Civil Code is the following:

ART. 1156. Obligations are extinguished:

x x x           x x x          x x x

By novation

Article 1203 of said Code provides:

 ART. 1203. Obligations may be modified —

1. By the change of their object or principal conditions;

2. By substituting another in place of the debtor;

3. By subrogating a third person in the rights of the creditor

And article 1204 of the same Code reads:

ART. 1204. In order that an obligation may be extinguished by another which substitutes it, it
shall be necessary that it be so declared expressly, or that the old new obligations be
incompatible in every respect.

Let us now see if the contract of November 1, 1920, was novated by that of September 29, 1922,
and the obligations contracted therein were extinguished.

Of course, the debtor has not been substituted nor has a third party been subrogated to the
creditor's rights. Therefore we need only concern ourselves with the first ground of novation, that is,
if the principal conditions of the first contract have been altered in such a way and to such an extent
that the two contracts are incompatible with each other.

As stated above, in the contract of November 1, 1920, the duration of the right of way which the
defendant bound herself to impose upon her estate in favor of the plaintiff was twenty years, while in
the contract of September 29, 1922, that period was reduced to seven crops which is equivalent to
seven years. There can be no doubt that these two contracts, in so far as the duration of the right of
way is concerned, are incompatible with each other, for the second contract reduces the period
agreed upon in the first contract, and so both contracts cannot subsist at the same time. The term
stipulated in the second contract cannot be added to that of the first, because, the period would then
be twenty-seven instead of twenty years, which is greater than the period specified in the first
contract. The duration of the right of way is one of the principal conditions of the first as well as of the
second contract, and inasmuch as said principal condition has been modified, the contract has been
novated, in accordance with the provision quoted above.

The plaintiff-appellant contends that the parties did not intend to novate the first contract when the
second was executed, there being no reason for doing so, nor was the second any advantage to it,
but, on the contrary, imposed an obligation not contained in the first contract.

While it is true that the Kabankalan Sugar Co., Inc., assumed the responsibility of guarantor of the
defendant for certain obligations contracted by the latter with Ledesma Hermanos, and that in
consideration of said assumption the defendant granted the plaintiff the right way through her land, it
is likewise true that Josefa Pacheco bound herself to mill her sugar cane in the Bearin Central,
belonging to the plaintiff corporation, which obligation had not been imposed in the first contract, and
said corporation was benefited thereby, for it is well known that the life of a central depends upon a
constant supply of sugar cane during the milling season; besides which, under the second contract,
the plaintiff is not required to pay for the easement, and is granted an additional easement for its
telephone lines and posts, and other things. The reduction of the period for the right way, and the
plaintiff's guarantee to Ledesma Hermanos of the defendant's debt are counterbalanced by the
latter's assumed obligation to mill her sugar cane in the Bearin Central, to grant the plaintiff
additional easements, and tacitly to relieve it from the payment of rent for the easements.
For the foregoing considerations, we are of opinion and so hold that when an easement of right way
is one of the principal conditions of a contract, and the duration of said easement is specified, the
reduction of said period in a subsequent contract, wherein the same obligation is one of the principal
conditions, constitutes a novation and to that extent extinguishes the former contractual obligation.

Wherefore, finding no error in the judgment appealed from, the same is affirmed in its entirety, with
costs against the appellant. So ordered.

Avanceña, C.J., Johnson, Street, Malcolm, Villamor, Ostrand and Romualdez, JJ., concur. 
Johns, J., dissents.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-40824 February 23, 1989

GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner, 

vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.

The Government Corporate Counsel for petitioner.

Lorenzo A. Sales for private respondents.

REGALADO , J.:

Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs
Flaviano Lagasca, executed a deed of mortgage, dated November 13, 1957, in favor of petitioner
Government Service Insurance System (hereinafter referred to as GSIS) and subsequently, another
deed of mortgage, dated April 14, 1958, in connection with two loans granted by the latter in the
sums of P 11,500.00 and P 3,000.00, respectively. 1 A parcel of land covered by Transfer Certificate of
Title No. 38989 of the Register of Deed of Quezon City, co-owned by said mortgagor spouses, was given
as security under the aforesaid two deeds. 2 They also executed a 'promissory note" which states in part:

... for value received, we the undersigned ... JOINTLY, SEVERALLY and
SOLIDARILY, promise to pay the GOVERNMENT SERVICE INSURANCE SYSTEM
the sum of . . . (P 11,500.00) Philippine Currency, with interest at the rate of six (6%)
per centum compounded monthly payable in . . . (120)equal monthly installments
of . . . (P 127.65) each. 3

On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of
Mortgage" under which they obligated themselves to assume the aforesaid obligation to the GSIS
and to secure the release of the mortgage covering that portion of the land belonging to herein
private respondents and which was mortgaged to the GSIS. 4 This undertaking was not fulfilled. 5
Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the
payment of the amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the
mortgaged property to be sold at public auction on December 3, 1962. 6

More than two years thereafter, or on August 23, 1965, herein private respondents filed a complaint
against the petitioner and the Lagasca spouses in the former Court of

First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their property and all
other documents executed in relation thereto in favor of the Government Service Insurance System" be
declared null and void. It was further prayed that they be allowed to recover said property, and/or the
GSIS be ordered to pay them the value thereof, and/or they be allowed to repurchase the land.
Additionally, they asked for actual and moral damages and attorney's fees.

In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts not
as sureties or guarantors for the Lagasca spouses but they merely gave their common property to
the said co-owners who were solely benefited by the loans from the GSIS.

The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to
establish a cause of action. 8

Said decision was reversed by the respondent Court of Appeals 9 which held that:

... although formally they are co-mortgagors, they are so only for accomodation (sic)
in that the GSIS required their consent to the mortgage of the entire parcel of land
which was covered with only one certificate of title, with full knowledge that the loans
secured thereby were solely for the benefit of the appellant (sic) spouses who alone
applied for the loan.

xxxx

'It is, therefore, clear that as against the GSIS, appellants have a valid cause for
having foreclosed the mortgage without having given sufficient notice to them as
required either as to their delinquency in the payment of amortization or as to the
subsequent foreclosure of the mortgage by reason of any default in such payment.
The notice published in the newspaper, 'Daily Record (Exh. 12) and posted pursuant
to Sec 3 of Act 3135 is not the notice to which the mortgagor is entitled upon the
application being made for an extrajudicial foreclosure. ... 10

On the foregoing findings, the respondent court consequently decreed that-

In view of all the foregoing, the judgment appealed from is hereby reversed, and
another one entered (1) declaring the foreclosure of the mortgage void insofar as it
affects the share of the appellants; (2) directing the GSIS to reconvey to appellants
their share of the mortgaged property, or the value thereof if already sold to third
party, in the sum of P 35,000.00, and (3) ordering the appellees Flaviano Lagasca
and Esther Lagasca to pay the appellants the sum of P 10,00.00 as moral damages,
P 5,000.00 as attorney's fees, and costs. 11

The case is now before us in this petition for review.

In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No.
2031, otherwise known as the Negotiable Instruments Law, which provide that an accommodation
party is one who has signed an instrument as maker, drawer, acceptor of indorser without receiving
value therefor, but is held liable on the instrument to a holder for value although the latter knew him
to be only an accommodation party.

This approach of both parties appears to be misdirected and their reliance misplaced. The
promissory note hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly
not negotiable instruments. These documents do not comply with the fourth requisite to be
considered as such under Section 1 of Act No. 2031 because they are neither payable to order nor
to bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid requisite, the
provisions of Act No. 2031 would not apply; governance shall be afforded, instead, by the provisions
of the Civil Code and special laws on mortgages.

As earlier indicated, the factual findings of respondent court are that private respondents signed the
documents "only to give their consent to the mortgage as required by GSIS", with the latter having
full knowledge that the loans secured thereby were solely for the benefit of the Lagasca
spouses. 12 This appears to be duly supported by sufficient evidence on record. Indeed, it would be
unusual for the GSIS to arrange for and deduct the monthly amortizations on the loans from the salary as
an army officer of Flaviano Lagasca without likewise affecting deductions from the salary of Isabelo
Racho who was also an army sergeant. Then there is also the undisputed fact, as already stated, that the
Lagasca spouses executed a so-called "Assumption of Mortgage" promising to exclude private
respondents and their share of the mortgaged property from liability to the mortgagee. There is no
intimation that the former executed such instrument for a consideration, thus confirming that they did so
pursuant to their original agreement.

The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is clear that there
was no objection in the court below regarding the admissibility of the testimony and documents that were
presented to prove that the private respondents signed the mortgage papers just to accommodate their
co-owners, the Lagasca spouses. Besides, the introduction of such evidence falls under the exception to
said rule, there being allegations in the complaint of private respondents in the court below regarding the
failure of the mortgage contracts to express the true agreement of the parties. 14

However, contrary to the holding of the respondent court, it cannot be said that private respondents
are without liability under the aforesaid mortgage contracts. The factual context of this case is
precisely what is contemplated in the last paragraph of Article 2085 of the Civil Code to the effect
that third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property

So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca
spouses would not invalidate the mortgage with respect to private respondents' share in the
property. In consenting thereto, even assuming that private respondents may not be assuming
personal liability for the debt, their share in the property shall nevertheless secure and respond for
the performance of the principal obligation. The parties to the mortgage could not have intended that
the same would apply only to the aliquot portion of the Lagasca spouses in the property, otherwise
the consent of the private respondents would not have been required.

The supposed requirement of prior demand on the private respondents would not be in point here
since the mortgage contracts created obligations with specific terms for the compliance thereof. The
facts further show that the private respondents expressly bound themselves as solidary debtors in
the promissory note hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling of
respondent court that lack of notice to the private respondents of the extrajudicial foreclosure sale
impairs the validity thereof. In Bonnevie, et al. vs. Court of appeals, et al.,  15 the Court ruled that Act
No. 3135, as amended, does not require personal notice on the mortgagor, quoting the requirement on
notice in such cases as follows:

Section 3. Notice shall be given by posting notices of sale for not less than twenty
days in at least three public places of the municipality where the property is situated,
and if such property is worth more than four hundred pesos, such notice shall also be
published once a week for at least three consecutive weeks in a newspaper of
general circulation in the municipality or city.

There is no showing that the foregoing requirement on notice was not complied with in the
foreclosure sale complained of .

The respondent court, therefore, erred in annulling the mortgage insofar as it affected the share of
private respondents or in directing reconveyance of their property or the payment of the value
thereof Indubitably, whether or not private respondents herein benefited from the loan, the mortgage
and the extrajudicial foreclosure proceedings were valid.

WHEREFORE, judgment is hereby rendered REVERSING the decision of the respondent Court of
Appeals and REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof.

SO ORDERED.

FIRST DIVISION

June 30, 1987

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;

(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.

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   rendered a decision in favor of R & B
1

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;

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   by payment of
2

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.   Novation through a change of the object or principal conditions of an existing obligation is
4

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.  Novation is never presumed: it must be established either by the discharge of the
6

old debt by the express terms of the new agreement, or by the acts of the parties whose intention to
dissolve the old obligation as a consideration of the emergence of the new one must be clearly
discernible.  7

Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that
the juridical relation between the parties to the original contract is extended to a third person. It is
essential that the old debtor be released from the obligation, and the third person or new debtor take
his place in the new relation. If the old debtor is not released, no novation occurs and the third
person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a co-
surety. 
8

Applying the above principles to the instant case, it is at once evident that the Trust Agreement does
not expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the
Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating
that "[the Trust Agreement] shall not in any manner release" R & B Surety from its obligation under
the Surety Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal
declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility
between the old and the new obligation (and nothing else) would sustain a finding of novation by
implication.   But where, as in this case, the parties to the new obligation expressly recognize the
9

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.   Thus, in Magdalena Estates vs. Rodriguez,   we held that:
10 11

[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:

[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.   While in a contract of indemnity against loss
14

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.   Accordingly, R & B Surety was entitled to proceed against petitioners not only for the
15

partial payments already made but for the full amount owed by PAGRICO to the PNB.

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

(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 matured obligation under the Surety
Bond.

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.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 99398 & 104625       January 26, 2001

CHESTER BABST, petitioner, 
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. 172821 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 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 the Company
in obtaining credit facilities to enable it to maintain the present level of its tin-plate
manufacturing output and the Company is willing to extend said requested assistance;

NOW, THEREFORE, for and in consideration of the foregoing premises ---

BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT & GENERAL

MANAGER, ANTONIO ROXAS CHUA, be, as he is hereby empowered to allow and
authorize ELIZALDE STEEL CONSOLIDATED, INC. to avail and make use of the Credit
Line of PACIFIC MULTI-COMMERCIAL CORPORATION with the COMMERCIAL BANK &
TRUST COMPANY OF THE PHILIPPINES, Makati, Metro Manila;

RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation guarantee, as it

does hereby guarantee, solidarily, the payment of the corresponding Letters of Credit upon
maturity of the same;

RESOLVED, FINALLY, That copies of this resolution be furnished the Commercial Bank &
Trust Company of the Philippines, Makati, Metro Manila, for their information. 4

Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst executed a
Continuing Suretyship,5 whereby they bound themselves jointly and severally liable to pay any
existing indebtedness of MULTI to CBTC to the extent of P8,000,000.00 each. 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 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;

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 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.

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 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 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

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

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.

EN BANC

G.R. No. L-15154           December 29, 1960

GIL VILLANUEVA, Plaintiff-Appellant, vs. FILOMENO GIRGED

and LUCIO S. LEGASPI,Defendants-Appellees.

Montilla, Sanchez, Galicia and Alvizo for appellant.

F.Q. Almazan and T. del Rosario for appellee Legaspi.
Tranquilino O. Calo, Jr. for appellee Girged.

CONCEPCION, J.:

Appeal by plaintiff Gil Villanueva from an order of the Court of First

Instance of Agusan, dismissing the complaint, insofar as defendant
Lucio S. Legaspi is concerned, for lack of cause of action, with costs
against plaintiff.   chanroblesvirtualawlibrary chanrobles virtual law library

The complaint purports to set up three (3) causes of action, for the
recovery of the sums of P7,350.00, P2,500.00 and P6,000.00,
respectively.   chanroblesvirtualawlibrary chanrobles virtual law library

It is alleged therein that the first sum represents the amount of the
Philippine National Bank check, issued by defendant Girged in favor
of the plaintiff, on February 27, 1956, in exchange for the same
amount, in cash delivered by the latter to the former; that upon
presentation, the check was dishonored by the bank, for "Girged
had no deposits therein"; that in a letter dated April 28, 1956,
defendant Lucio S. Legaspi had "expressly acknowledged and
assumed the obligations" of Girged, who was his "business partner";
and that, despite repeated demands, said sum of P7,350.00 is still
unpaid.  
chanroblesvirtualawlibrary chanrobles virtual law library

By the way of second cause of action, plaintiff alleged in the

complaint that in February and April, 1956, defendants had hired his
services as stevedore for the loading of round logs for exportation
to Japan, with a total volume of 2,500 cubic meters, at the rate of
P1.00 per cubic meter, making a total of P2,500.00; that the
obligation to pay the same was, also, acknowledged and assumed
by Legaspi in said letter Annex B; and that said obligation has not
been paid despite repeated demands.   chanroblesvirtualawlibrary chanrobles virtual law library

By way of third cause of action, plaintiff claims P2,500.00 for moral

damages and P3,500.00 for attorney's fees. The complaint contains,
also some allegations in support of the prayer therein that a writ of
preliminary injunction be issued.   chanroblesvirtualawlibrary chanrobles virtual law library

In due course, defendant Legaspi filed an answer, denying most of

the allegations of the complaint, except the execution of the letter
Annex B, and alleged, as "affirmative and special defenses", that
plaintiff has no cause of action against him; that he is merely
Girged's attorney-in-fact; and that, in said letter, Annex B, he
(Legaspi) merely tried to help plaintiff in the collection of his credit
against Girged, upon completion of a given shipment of logs to
Japan by Girged, which shipment has not been completed.   chanroblesvirtualawlibrary chanrobles virtual law library

The lower court dealt special defense as if it were a motion to

dismiss and, after due hearing, concluded that it was well-taken.
Hence, the order of dismissal appealed from. chanroblesvirtualawlibrary chanrobles virtual law library

The only question before us is whether or not the allegations of the

complaint are sufficient to state a cause of action against Legaspi.
This issue hinges on the nature and effect of the aforementioned
letter Annex B, from which we quote:

I wish to assure you that any amount that Mr. Girged owes you will
be taken care of  in his 3rd shipment of logs to Japan.   chanroblesvirtualawlibrary chanrobles virtual law library
The 2nd shipment was a losing proposition on account of the fact
that it was an attached shipment of Poblete and Nasipit Lumber.  
library
chanroblesvirtualawlibrary chanrobles virtual law

So please feel assure that I, myself, will be the one to take care of
his account with you as soon as Mr. Girged has made his 3rd
shipment. chanroblesvirtualawlibrary chanrobles virtual law library

I wish to know also by return mail how much really Mr. Girged is
indebted to you so that I may have full amount of Mr. Girged's
obligation.

I thank you.   chanroblesvirtualawlibrary chanrobles virtual law library

Very truly yours,

PHILIPPINE EXPERIMENTERS' SUPPLY CO. 

(Sgd.) LUCIO S. LEGASPI

As contended by Legaspi and sustained by the lower court, Legaspi

did not thereby assume the obligation of Girged. Legaspi merely
assured the plaintiff that any amount due to him by Girged would
"be taken care of in his third shipment of logs to Japan" and that he
(Legaspi) would "be the one to take care" of Gridge's account with
plaintiff, "as soon as Mr. Girged has made his third shipment."
Moreover, there is no allegation in the complaint to the effect that
this shipment has been made, so that, even if said letter Annex B
entitled an assumption of obligation, the condition imposed therefor
had not been fulfilled as yet, and, hence, said obligation is not due,
insofar as Legaspi is concerned. Although plaintiff claims that Girged
and Legaspi are business partners - which is denied by both - there
is no allegation in the complaint to the effect that the first two (2)
causes of action have arisen from transactions with the partnership.
Indeed, the contrary is inferable from the fact that plaintiff's causes
of action against Legaspi are based upon the alleged assumption of
obligation in consequence of Legaspi's letter Annex B, thus
indicating that Legaspi was not  deemed bound prior to said alleged
assumption and that his obligation, if any, did not spring, therefore,
from his status as alleged partner of Girged.   chanroblesvirtualawlibrary chanrobles virtual law library
Wherefore, the order appealed from is hereby affirmed, with the
costs of this instance against plaintiff Gil Villanueva. It is so
ordered.   chanroblesvirtualawlibrary chanrobles virtual law library

Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes,

J.B.L., Barrera, Gutierrez David, Paredes, and Dizon, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-12554             February 28, 1961

C. N. HODGES, plaintiff-appellant, 
vs.
MATIAS C. REY, ET AL., defendants.
PHILIPPINE NATIONAL BANK, defendant-appellee.

Gellado, Mirasol and Vallar for plaintiff-appellant.

Nemesio C. Vargas for defendant-appellee.

DIZON, J.:

On September 21, 1938 Matias C. Rey obtained a loan from appellant C.N. Hodges in the sum of
P3,000.00 payable on or before February 21, 1939, as evidenced by the promissory note Exhibit "A".
Three days thereafter Rey, by means of the letter Exhibit "B", authorized the PhilippineNational Bank
(Iloilo Branch), hereinafter referred to as appellee, to pay his indebtedness to appellant out of
whatever crop loan might be granted to him by said bank for the agricultural year 1939-40. On the
same date appellee's acting manager sent the letter Exhibit "C" to appellant to "confirm (to) the
arrangement mentioned" in the letter Exhibit "B".

The evidence discloses that on January 18, 1939 appellee granted Rey an agricultural line of
P39,000.00 subject to several conditions, among them that the amount of P10,000.00 would be
retained by the bank to meet milling expenses and that "whatever balance unpaid of his 1938-39
agricultural line after liquidating all the sugar assigned to the bank, shall be charged against this
1939-40 agricultural line" (Exhibits 5, 5-A 5-D). According to the evidence in this connection Rey's
agricultural line for the agricultural year 1938-39 had an unpaid balance of more than
P55,000.00(Exhibit 6), but this notwithstanding, on March 2, 1939, the acting manager of appellee
authorized the payment to appellant Hodges of the sum of P2,000.00 on account of Rey's
indebtedness, thus leaving an unpaid balance of P1,000.00. In 1952, in view of his unsuccessful
attempts to collect this amount from Rey and appellee, he commenced the present action in the
Municipal Court of Iloilo to collect the total sum of P1,161.00, with interest at the rate of 1% per
month from March 2, 1939 until full payment, plus attorney's fees and costs of suit. After due trial
said court rendered judgment dismissing the complaint against appellee, but sentencing Rey to pay
appellant the sums prayed for in the latter's complaint. Rey did not appeal, but appellant did to the
Court of First Instance of Iloilo where, after due trial, the decision appealed from dismissing the
complaint, with costs, was rendered.
Upon the facts of the case and the law thereto applicable, we find this appeal to be without merits.

According to the evidence, appellee did not assume the obligation to pay Rey's indebtedness to
appellant, neither as co-principal, nor as a surety or guarantor. Rey simply authorized appellee to
pay the amount he owed appellant out of whatever crop loan or agricultural line appellee might grant
him for the agricultural year 1939-40, and all that appellee did was to confirm or accept said
"arrangement". It is true that the agricultural line that Rey expected was granted by appellee, but it
was subject to several conditions, amongst them, that whatever Rey owed appellee in connection
with the agricultural line granted him for the previous agricultural year would be charged against
whatever agricultural line or crop loan would be granted to him for the agricultural year 1930-40.
Inasmuch as, according to the evidence, he owed appellee more than P55,000.00 in that
connection, it seems clear that, in reality, there were no funds to the credit of Rey and in the
possession of appellee that could be legitimately applied to the payment of Rey's obligation to
appellant. Therefore, the action taken by appellee's acting manager in ordering the payment of the
sum of P2,000.00 to appellant was not in accordance with the agricultural line agreement for the
agricultural year 1939-40 — for which mistake said acting manager was precisely reprimanded by
his employer. That the error thus committed — to the advantage of appellant — cannot be construed
as binding his principal to pay the remainder of Rey's obligation is too obvious to require argument.

In view of the foregoing, the decision appealed from is affirmed, with costs.

Bengzon, Actg. C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera and
Paredes, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 135462            December 7, 2001

SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.), PALAWAN LUMBER

MANUFACTURING CORPORATION, petitioners, 
vs.
BA FINANCE CORPORATION, respondent.

PARDO, J.:

The Case

The case is a petition to set aside the decision 1 of the Court of Appeals, the dispositive portion of
which reads:

"WHEREFORE, premises considered, the appealed Decision (as amended by that Order of
July 22, 1992) of the lower court in Civil Case No. 21944 is hereby AFFIRMED with the
MODIFICATION that defendant-appellee South City Homes, Inc. is hereby ordered to pay,
jointly and severally, with Fortune Motors Corporation, Palawan Lumber Manufacturing
Corporation and Joseph L. G. Chua, the outstanding amounts due under the six (6) drafts
and trust receipts, with interest thereon at the legal rate from the date of filing of this case
until said amounts shall have been fully paid, as follows:
 Date of Draft Amount Due
Balance
July 26, 1983 P244,269.00 P198,659.52
July 27, 1983 967,765.50 324,767.41
July 28, 1983 1,138,941.00 1,138,941.00
August 2, 1983 244,269.00 244,269.00
August 5, 1983 275,079.00 275,079.60
August 8, 1983 475,046.10 475,046.10

and the attorney's fees and costs of suit.

"SO ORDERED."2

The Facts

The facts, as found by the Court of Appeals, are as follows:

"The present controversy relates to the rights of an assignee (financing company) of drafts
and trust receipts backed up by sureties, in the event of default by the debtor (car dealer) to
whom the assignor creditor (car manufacturer) sold and delivered motor vehicles for resale.
A consistent ruling on these cases is hereby reiterated: that a surety may secure obligations
incurred subsequent to the execution of the surety contract.

"Prior to the transactions covered by the subject drafts and trust receipts, defendant-
appellant Fortune Motors Corporation (Phils.) has been availing of the credit facilities of
plaintiff-appellant BA Finance Corporation. On January 17, 1983, Joseph L. G. Chua,
President of Fortune Motors Corporation, executed in favor of plaintiff-appellant a Continuing
Suretyship Agreement, in which he "jointly and severally unconditionally" guaranteed the
"full, faithful and prompt payment and discharge of any and all indebtedness" of Fortune
Motors Corporation to BA Finance Corporation (Folder of Exhibits, pp. 21-22).

"On February 3, 1983, Palawan Lumber Manufacturing Corporation represented by Joseph

L.G. Chua, George D. Tan, Edgar C. Rodrigueza and Joselito C. Baltazar, executed in favor
of plaintiff-appellant a Continuing Suretyship Agreement in which, said corporation "jointly
and severally unconditionally" guaranteed the "full, faithful and prompt payment and
discharge of any and all indebtedness of Fortune Motors Corporation to BA Finance
Corporation (Folder of Exhibits, pp. 19-20). On the same date, South City Homes, Inc.
represented by Edgar C. Rodrigueza and Aurelio F. Tablante, likewise executed a
Continuing Suretyship Agreement in which said corporation "jointly and severally
unconditionally" guaranteed the "full, faithful and prompt payment and discharge of any and
all indebtedness" of Fortune Motors Corporation to BA Finance Corporation (Folder of
Exhibits, pp. 17-18).

"Subsequently, Canlubang Automotive Resources Corporation (CARCO) drew six (6) Drafts
in its own favor, payable thirty (30) days after sight, charged to the account of Fortune
Motors Corporation, as follows:

Date of Draft Amount

 July 26, 1983 P244,269.00
July 27, 1983 967,765.50
July 28, 1983 1,138,941.00
August 2, 1983 244,269.00
August 5, 1983 275,079.00
August 8, 1983 475,046.10

"(Folder of Exhibits, pp. 1, 4, 7, 8, 11 and 14).

"Fortune Motors Corporation thereafter executed trust receipts covering the motor vehicles
delivered to it by CARCO under which it agreed to remit to the Entruster (CARCO) the
proceeds of any sale and immediately surrender the remaining unsold vehicles (Folder of
Exhibits, pp. 2, 5, 7-A, 9, 12 and 15). The drafts and trust receipts were assigned to plaintiff-
appellant, under Deeds of Assignment executed by CARCO (Folder of Exhibits, pp. 3, 6, 7-B,
10, 13 and 16).

"Upon failure of the defendant-appellant Fortune Motors Corporation to pay the amounts due
under the drafts and to remit the proceeds of motor vehicles sold or to return those
remaining unsold in accordance with the terms of the trust receipt agreements, BA Finance
Corporation sent demand letter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio
Tablante, Palawan Lumber Manufacturing Corporation, Joseph L. G. Chua, George D. Tan
and Joselito C. Baltazar (Folder of Exhibits, pp. 29-37). Since the defendants-appellants
failed to settle their outstanding account with plaintiff-appellant, the latter filed on December
22, 1983 a complaint for a sum of money with prayer for preliminary attachment, with the
Regional Trial Court of Manila, Branch 1, which was docketed as Civil Case No. 83-21944
(Record, pp. 1-12). Plaintiff-appellant filed a surety bond in the amount of P3,391,546.56 and
accordingly, Judge Rosalio C. Segundo ordered the issuance of a writ of preliminary
attachment on January 3, 1984 (Record, pp. 37-47). Defendants Fortune Motors
Corporation, South City Homes, Inc., Edgar C. Rodrigueza, Aurelio F. Tablante, Palawan
Lumber Manufacturing Corporation, Joseph L. G. Chua, George D. Tan and Joselito C.
Baltazar filed a Motion to Discharge Attachment, which was opposed by plaintiff-appellant
(Record, pp. 49-56). In an Order dated January 11, 1984, Judge Segundo dissolved the writ
of attachment except as against defendant Fortune Motors Corporation and set the said
incident for hearing (Record, p. 57). On January 19, 1984, the defendants filed a Motion to
Dismiss. Therein, they alleged that conventional subrogation effected a novation without the
consent of the debtor (Fortune Motors Corporation) and thereby extinguished the latter's
liability; that pursuant to the trust receipt transaction, it was premature under P. D. No. 115 to
immediately file a complaint for a sum of money as the remedy of the entruster is an action
for specific performance; that the suretyship agreements are null and void for having been
entered into without an existing principal obligation; and that being such sureties does not
make them solidary debtors (Record, pp. 58-64).

"After due hearing, the court denied the motion to discharge attachment with respect to
defendant Fortune Motors Corporation as well as the motion to dismiss by the defendants
(Record, pp. 68 and 87). In their Answer, defendants stressed that their obligations to the
creditor (CARCO) was extinguished by the assignment of the drafts and trust receipts to
plaintiff-appellant without their knowledge and consent, and pursuant to legal provision on
conventional subrogation a novation was effected, thereby extinguishing the liability of the
sureties; that plaintiff-appellant failed to immediately demand the return of the goods under
the trust receipt agreements or exercise the courses of action by the entruster as provided
for under P. D. No. 115; and that at the time the suretyship agreements were entered into,
there were no principal obligations, thus rendering them null and void. A counterclaim for the
award of actual, moral and exemplary damages was prayed for by defendants (Record, pp.
91-110).

"During the pre-trial, efforts to reach a compromise was not successful, and in view of the
retirement of Judge Rosalio C. Segundo of RTC Manila, Branch 1, the case was-re-raffled off
to Branch XXXIII, presided over by Judge Felix V. Barbers (Record, pp. 155-160).

"Fortune Motors Corporation filed a motion to lift the writ of attachment covering three (3)
vehicles described in the Third-Party Claim filed with the Office of Deputy Sheriff Jorge C.
Victorino (RTC, Branch 1) by Fortune Equipment, Inc. which was opposed by plaintiff-
appellant (Record, pp. 173-181). On June 15, 1984, Deputy Sheriff Jorge C. Victorino issued
a "Notice of Levy Upon Personal Properties Pursuant to Order of Attachment" which was
duly served on defendant Fortune Motors Corporation (Record, pp. 191-199). In an Order
dated April 28, 1986, the court a quo denied the motion to lift the writ of attachment on three
(3) vehicles described in the Third-Party Claim filed by Fortune Equipment Inc. (Record, p.
207). On motion of their respective counsel, the trial court granted the parties time to sit
down and appraise the machineries and spare parts owned by defendant Fortune Motors
Corporation which are now in the possession of plaintiff corporation by virtue of the
attachment. A series of conferences was allowed by the court, as means toward possible
compromise agreement. In an Order dated June 2, 1987, the case was returned to Branch I,
now presided over by Judge Rebecca G. Salvador (Record, p. 237). The pre-trial period was
terminated and the case was set for trial on the merits (Record, p. 259).

"Acting on the motion to sell levied properties filed by defendant George D. Tan, the trial
court ordered the public sale of the attached properties (Record, p. 406). The court likewise
allowed the complaint-in-intervention filed by Fortune Equipment Inc. and South Fortune
Motors Corporation who claimed ownership of four (4) vehicles earlier seized and attached
(Record, p. 471-475). Plaintiff corporation admitted the allegations contained in the
complaint-in-intervention only with respect to one truck so attached but denied the rest of
intervenors' allegations (Record, pp. 479-482). Thereafter, the parties submitted their
respective pre-trial briefs on the complaint-in-intervention, and after the submission of
evidence thereon, the case was submitted for decision (Record, pp. 573-577).

"On November 25, 1991, the lower court rendered its judgment, the dispositive portion of
which reads as follows:

"WHEREFORE, judgment is hereby rendered:

"1. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing Corporation and
Joseph Chua, jointly and severally to pay the plaintiff on the July 27, 1983 Draft, the sum of
P324,767.41 with the interest thereon at the legal rate from the date of filing of this case,
December 21, 1983 until the amount shall have been fully paid;

"2. Ordering defendants Fortune Motors, Palawan Manufacturing Corporation and Joseph
Chua jointly and severally to pay to the plaintiff on the July 26, 1983 Draft, the sum of
P198,659.52 with interest thereon at the legal rate from the date of filing of this case, until
the amount shall have been fully paid;

"3. Ordering defendant Fortune Motors, Palawan Manufacturing Corporation and Joseph
Chua jointly and severally to pay to the plaintiff on the July 28, 1983 Draft the sum of
P1,138,941.00 with interest thereon at the legal rate from the date of filing of this case, until
the amount shall have been fully paid;

"4. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing Corporation and
Joseph Chua jointly and severally to pay to the plaintiff on the August 2, 1983 Draft, the sum
of P244,269.00 with interest thereon at the legal rate from the date of filing of this case, until
the amount shall have been fully paid;

"5. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing Corporation and
Joseph Chua jointly and severally to pay to the plaintiff on the August 5, 1983 Draft the sum
of P275,079.60 with interest thereon at the legal rate from the date of the filing of this case,
until the amount shall have been fully paid;

"6. Ordering defendants Fortune Motors, Palawan Lumber Manufacturing Corporation and
Joseph Chua jointly and severally to pay to the plaintiff on the August 8, 1983 Draft the sum
of P475,046.10 with interest thereon at legal rate from the date of the filing of this case, until
the amount shall been fully paid;

"7. Ordering defendant Fortune Motors, Palawan Lumber Manufacturing Corporation and
Joseph Chua jointly and severally to pay the sum of P300,000.00 as attorney's fees and the
costs of this suit;

"8. Dismissing plaintiff's complaint against South City Homes, Aurelio Tablante, Joselito
Baltazar, George Tan and Edgar Rodrigueza and the latter's counterclaim for lack of basis;

"9. Ordering Deputy Sheriff Jorge Victorino to return to Intervenor Fortune Equipment the
Mitsubishi Truck Canter with Motor No. 310913 and Chassis No. 513234;

"10. Dismissing the complaint-in-intervention in so far as the three other vehicles mentioned
in the complaint-in-intervention are concerned for lack of cause of action;

"11. Dismissing the complaint-in-intervention against Fortune Motor for lack of basis; and

"12. Ordering the parties-in-intervention to bear their respective damages, attorneys fees and
the costs of the suit.

"Upon execution, the sheriff may cause the judgment to be satisfied out of the properties
attached with the exception of one (1) unit Mitsubishi Truck Canter with Motor No. 310913
and Chassis No. 513234, if they be sufficient for that purpose. The officer shall make a return
in writing to the court of his proceedings. Whenever the judgment shall have been paid, the
officer, upon reasonable demand must return to the judgment debtor the attached properties
remaining in his hand, and any of the proceeds of the properties not applied to the judgment.

"SO ORDERED.

"On two (2) separate motions for reconsideration, one filed by plaintiffs-intervenors dated
December 18, 1991 and the other by plaintiff dated December 26, 1991, the trial court issued
an Order dated July 22, 1992 amending its Decision dated November 25, 1991. Specifically,
said Order amended paragraphs 9 and 10 thereof and deleted the last paragraph of the said
Decision.
 "Paragraphs 9 and 10 now read:

"9. Ordering Deputy Sheriff Jorge C. Victorino to return to Intervenor Fortune

Equipment, Inc. the Mitsubishi Truck Canter with Motor No. 310913 and Chassis No.
513234; Mitsubishi Truck Canter with Motor No. 4D30-313012 and Chassis No.
513696, and Fuso Truck with Motor No. 006769 and Chassis No. 20756, and to
Intervenor South Fortune Motors Corporation the Cimaron Jeepney with Plate No.
NET-849;

"10. Ordering the plaintiff, in the event the motor vehicles could no longer be
returned to pay the estimated value thereof i.e., P750,000.00 for the three trucks,
and P5,000.00 for the Cimaron Jeepney, to the plaintiffs-intervenors.

"x x x" (Records, pp. 664-665)

"Plaintiffs BA Finance Corporation, defendants Fortune Motors Corp. (Phils.) and Palawan
Lumber Manufacturing Corporation, and intervenors Fortune Equipment and South Fortune
Motors, interposed the present appeal and filed their respective Briefs." 3

On September 8, 1998, the Court of Appeals promulgated a decision, the dispositive portion of
which is quoted in the opening paragraph of this decision.

Hence, this appeal.4

The Issues

The issues presented are: (1) whether the suretyship agreement is valid; (2) whether there was a
novation of the obligation so as to extinguish the liability of the sureties; and (3) whether respondent
BAFC has a valid cause of action for a sum of money following the drafts and trust receipts
transactions.5

The Court's Ruling

On the first issue, petitioners assert that the suretyship agreement they signed is void because there
was no principal obligation at the time of signing as the principal obligation was signed six (6)
months later. The Civil Code, however, allows a suretyship agreement to secure future loans even if
the amount is not yet known.

Article 2053 of the Civil Code provides that:

"Art. 2053. A guaranty may also be given as security for future debts, the amount of which is
not yet known. x x x"

In Fortune Motors (Phils.) Corporation v. Court of Appeals,6 we held:

"To fund their acquisition of new vehicles (which are later retailed or resold to the general
public), car dealers normally enter into wholesale automotive financing schemes whereby
vehicles are delivered by the manufacturer or assembler on the strength of trust receipts or
drafts executed by the car dealers, which are backed up by sureties. These trust receipts or
drafts are then assigned and/or discounted by the manufacturer to/with financing companies,
which assume payment of the vehicles but with the corresponding right to collect such
 payment from the car dealers and/or the sureties. In this manner, car dealers are able to
secure delivery of their stock-in-trade without having to pay cash therefor; manufacturers get
paid without any receivables/collection problems; and financing companies earn their
margins with the assurance of payment not only from the dealers but also from the sureties.
When the vehicles are eventually resold, the car dealers are supposed to pay the financing
companies — and the business goes merrily on. However, in the event the car dealer
defaults in paying the financing company, may the surety escape liability on the legal ground
that the obligations were incurred subsequent to the execution of the surety contract?

"x x x Of course, a surety is not bound under any particular principal obligation until that
principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying
that the suretyship agreement itself is valid and binding even before the principal obligation
intended to be secured thereby is born, any more than there would be in saying that
obligations which are subject to a condition precedent are valid and binding before the
occurrence of the condition precedent.

"Comprehensive or continuing surety agreements are in fact quite commonplace in present

day financial and commercial practice. A bank or financing company which anticipates
entering into a series of credit transactions with a particular company, commonly requires the
projected principal debtor to execute a continuing surety agreement along with its sureties.
By executing such an agreement, the principal places itself in a position to enter into the
projected series of transactions with its creditor; with such suretyship agreement, there would
be no need to execute a separate surety contract or bond for each financing or credit
accommodation extended to the principal debtor."

Petitioners next posit (second issue) that a novation, as a result of the assignment of the drafts and
trust receipts by the creditor (CARCO) in favor of respondent BAFC without the consent of the
principal debtor (Fortune Motors), extinguished their liabilities.

An assignment of credit is an agreement by virtue of which the owner of a credit, known as

the assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and
without the consent of the debtor, transfers his credit and accessory rights to another, known
as the assignee, who acquires the power to enforce it to the same extent as the assignor
could enforce it against the debtor. 7 As a consequence, the third party steps into the shoes of
the original creditor as subrogee of the latter. Petitioners' obligations were not extinguished.
Thus:

"x x x Moreover, in assignment, the debtor's consent is not essential for the validity of the
assignment (Art. 1624 in relation to Art. 1475, Civil Code), his knowledge thereof affecting
only the validity of the payment he might make (Article 1626, Civil Code).

"Article 1626 also shows that payment of an obligation which is already existing does not
depend on the consent of the debtor. It, in effect, mandates that such payment of the existing
obligation shall already be made to the new creditor from the time the debtor acquires
knowledge of the assignment of the obligation.

"The law is clear that the debtor had the obligation to pay and should have paid from the
date of notice whether or not he consented.

"We have ruled in Sison & Sison vs. Yap Tico and Avanceña, 37 Phil. 587 [1918] that
definitely, consent is not necessary in order that assignment may fully produce legal effects.
Hence, the duty to pay does not depend on the consent of the debtor. Otherwise, all
 creditors would be prevented from assigning their credits because of the possibility of the
debtor's refusal to give consent.

"What the law requires in an assignment of credit is not the consent of the debtor but merely
notice to him. A creditor may, therefore, validly assign his credit and its accessories without
the debtor's consent (National Investment and Development Co. v. De Los Angeles, 40
SCRA 489 [1971]. The purpose of the notice is only to inform that debtor from the date of the
assignment, payment should be made to the assignee and not to the original creditor." 8

Petitioners finally posit (third issue) that as an entruster, respondent BAFC must first demand the
return of the unsold vehicles from Fortune Motors Corporation, pursuant to the terms of the trust
receipts. Having failed to do so, petitioners had no cause of action whatsoever against Fortune
Motors Corporation and the action for collection of sum of money was, therefore, premature. A trust
receipt is a security transaction intended to aid in financing importers and retail dealers who do not
have sufficient funds or resources to finance the importation or purchase of merchandise, and who
may not be able to acquire credit except through utilization, as collateral, of the merchandise
imported or purchased.9 In the event of default by the entrustee on his obligations under the trust
receipt agreement, it is not absolutely necessary that the entruster cancel the trust and take
possession of the goods to be able to enforce his rights thereunder. We ruled:

"x x x Significantly, the law uses the word "may" in granting to the entruster the right to
cancel the trust and take possession of the goods. Consequently, petitioner has the
discretion to avail of such right or seek any alternative action, such as a third party claim or a
separate civil action which it deems best to protect its right, at any time upon default or
failure of the entrustee to comply with any of the terms and conditions of the trust
agreement."10

The Judgment

Davide, Jr., C .J ., Puno, Kapunan and Ynares-Santiago, JJ ., concur.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 84220 March 25, 1992

BENJAMIN RODRIGUEZ, petitioner, 
vs.
COURT OF APPEALS, and HADJI ESMAYATEN LUCMAN, respondents.

GUTIERREZ, JR., J.:
This is a petition for review on certiorari of the decision of the Court of Appeals affirming a decision
of the trial court which allowed Hadji Esmayaten Lucman as assignee to collect from Benjamin Uy
Rodriguez, an indebtedness owed to the assignor, a Hongkong corporation.

The antecedent facts of the case are as follows:

Petitioner Rodriguez alias Uy Tian Kiu is a businessman from Cebu City whose business, includes
the importation of various commodities from Hongkong which he occasionally ordered from Allied
Overseas Commercial Co., Ltd., a Hongkong corporation. The Managing Director of Allied Overseas
Commercial Co., Ltd. is Lin Ping Huang, a close friend of private respondent Lucman.

Petitioner Rodriguez, as a result of business transactions with the Hongkong Corporation,

accumulated an indebtedness owed to Allied Overseas in the amount of HK $418,729.60 which had
at that time in 1968 an exchange value of P540,553.00.

Upon demand for payment by the Hongkong Corporation, the petitioner issued a pay-to-cash check
dated September 11, 1970 covering the indebtedness. The check was, however, dishonored for lack
of funds, the account having been closed two months earlier.

Subsequently, the Allied Overseas Commercial Co., Ltd., through its Managing Director, Lin Ping
Huang, assigned its credit to the private respondent. The contract was evidenced by a Deed of
Assignment (Exhs. "B-2" and "B-3") duly executed before Philippine Consular officials in Hongkong.
It reads:

That WE, the ALLIED OVERSEAS COMMERCIAL CO., LTD., a commercial

association duly organized and registered in the company's registry of the Crown
Colony of Hongkong with offices at No. 5-7 Des Voeux Road, West, 1st Floor,
Hongkong, represented in this instance by its Managing Director duly authorized by a
Board resolution, for and in consideration of HK$ 1 and other valuable
considerations, have on this date assigned, ceded, transferred and conveyed by way
of irrevocable assignment and transferred to Hadji Esmayaten Lucman, Esq., of legal
age, Filipino citizen, and a resident of No. 95-I, A. Lake St., San Juan, Province of
Rizal, Republic of the Philippines, our outstanding and collectible credit due and
owing us by and from Benjamin Uy Rodriguez alias Uy Tian Kiu of Cebu City,
Republic of the Philippines, in the total amount of HK$ 418,729.60 or its equivalent in
the Philippine Currency, for said Hadji Esmayaten Lucman to collect and secure from
the aforesaid debtor, Benjamin Uy Rodriguez alias Uy Tian Kiu the aforesaid amount
in any manner, including court proceedings if necessary, in accordance with the
provisions of existing laws in the jurisdiction of the Republic of the Philippines.

We, as creditors assignors of the aforesaid debt, have on this date notified formally
the debtor named herein of this full assignment of the aforesaid credit. (Orig. record,
p. 11)

The assignee filed an action to collect the indebtedness. On March 4, 1985, the trial court rendered
a decision in favor of the private respondent. The dispositive portion of the Decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against

defendant, sentencing the latter to pay the former the following sums:
 (a) P450,553.00 representing defendant's outstanding account to plaintiff's assignor,
with interest thereon at twelve per cent (12%) per annum from the time of the filing of
the complaint on February 4, 1971 until fully paid:

(b) P500,000.00 as actual damages;

(c) P100,000.00 as moral damages;

(d) The further sum equivalent to ten (10%) per cent of all the foregoing sums as
attorney's fees and costs of litigation.

Costs against the defendant.

SO ORDERED. (pp. 142-143, Orig. Rec.)

Benjamin Rodriguez appealed the decision to the Court of Appeals and assigned the following as
errors committed by the trial court:

1 Plaintiff is not the real party-in-interest and is therefore, without legal capacity to sue;

2 The obligation does not exist or has not been sufficiently proven to exist;

3 Venue is improperly laid.

After carefully evaluating the evidence presented by the parties, the Court of Appeals rendered the
questioned decision dismissing the appeal for lack of merit. Benjamin Rodriguez filed a motion for
reconsideration which was denied by the appellate court which stated that the arguments submitted
in support of the motion were a mere rehash of the arguments in the Appellant's Brief.

The petitioner is now before us questioning the decision of the Court of Appeals. He specifically
relies on the following as bases for his petition:

I. That the judgment in the criminal case cannot be given in evidence in the civil action.

II. That the decision of the Court of Appeals is not in accord with Article 1301 of the New Civil Code
which requires consent to subrogation; and

III. That the award of damages is excessive.

We find the petition devoid of merit.

The petitioner alleges that the only evidence presented by private respondent was the decision of
the Court of Appeals in the case of People v. Lucman (CA G.R. No. 21365-CR) for falsification of
commercial document. The case was filed by the petitioner before the Regional Trial Court of Cebu
while the civil case filed by Lucman in the Regional Trial Court of Pasig was in progress.

The Regional Trial Court of Cebu convicted Lucman but on appeal, the Court of Appeals acquitted
him on the basis of its finding that complainant Rodriguez had indeed an unpaid balance which was
sufficiently established by evidence.
The decision in the criminal case was only one of the pieces of evidence relied upon by the
respondent court. The petitioner is giving undue weight to this particular item.

It is clear from the records, both testimonial and documentary that the obligation exists. The
documents, all testified to by private respondent Lucman as well as other witnesses had sufficiently
proven that Rodriguez had an unpaid balance from previous transaction with Allied Overseas
Commercial Co., Ltd. which arose from the importation of the 800 bales of Hessian sacks.

The unpaid balance was evidenced by a record of transactions between Allied Overseas Co., Ltd.
and Ben Rodriguez. The statement of account was sent to the petitioner on September 30, 1968 and
the receipt portion was duly signed by him and returned. (Exh. "E-3" and "E-3A")

If the importation was made in the name of Madipo Mercantile this was pursuant to the petitioner's
request that his importations be carried out in the names of different companies. This explains the
shipment made to Madipo, a business firm owned by Wilfredo Tiu, a brother-in-law of Rodriguez.
However, the exchange of cables regarding the importation clearly indicates that Rodriguez was the
real importer (Exh. "L", "M", "M-1", "M-2", and "M-3")

The authenticity of the above cable communications has not been impugned by the petitioner.

Lucman also took the witness stand and identified numerous documents consisting of Purchase
Orders, Bills of Lading, Delivery Receipts, and other evidences of the purchase of a barge and other
goods by the petitioner from Allied Overseas Commercial Co., Ltd. Hueng Huan Yuen Sabio,
Assistant to the General Manager and in-charge of shipping of Allied Overseas Commercial Co.,
Ltd., further testified to the same transactions.

We have no doubt from the records that the obligation actually existed.

Anent petitioner's second point, we find no merit in his contention that there was subrogation instead
of an assignment of credit.

The basis of the complaint is not a deed of subrogation but an assignment of credit whereby the
private respondent became the owner, not the subrogee of the credit since the assignment was
supported by HK$ 1.00 and other valuable considerations.

The case is one of the assignment of credit and not subrogation. In subrogation, the third party pays
the obligation of the debtor to the creditor with the latter's consent. As a consequence, the paying
third party steps into the shoes of the original creditor as subrogee of the latter.

An assignment of credit, on the other hand, is the process of transferring the right of the assignor to
the assignee who would then have the right to proceed against the debtor. The assignment may be
done either gratuitously or onerously, in which case, the assignment has an effect similar to that of a
sale (p. 235, Civil Code of the Philippines, Annotated, Vol. V, Paras, 1982 ed.; Nyco Sales Corp. vs.
BA Finance Corp., G.R. No. 71694, August 16, 1991).

The petitioner further contends that the consent of the debtor is essential to the subrogation. Since
there was no consent on his part, then he allegedly is not bound.

Again, we find for the respondent. The questioned deed of assignment is neither one of the
subrogation nor a power of attorney as the petitioner alleges. The deed of assignment clearly states
that the private respondent became an assignee and, therefore, he became the only party entitled to
collect the indebtedness. As a result of the Deed of Assignment, the plaintiff acquired all rights of the
assignor including the right to sue in his own name as the legal assignee. Moreover, in assignment,
the debtor's consent is not essential for the validity of the assignment (Art. 1624 in relation to Art.
1475, Civil Code), his knowledge thereof affecting only the validity of the payment he might make
(Article 1626, Civil Code).

Article 1626 also shows that payment of an obligation which is already existing does not depend on
the consent of the debtor. It, in effect, mandates that such payment of the existing obligation shall
already be made to the new creditor from the time the debtor acquires knowledge of the assignment
of the obligation.

The law is clear that the debtor had the obligation to pay and should have paid from the date of
notice whether or not he consented.

We have ruled in Sison & Sison v. Yap Tico and Avanceña, 37 Phil. 587 [1918] that definitely,
consent is not necessary in order that assignment may fully produce legal effects. Hence, the duty to
pay does not depend on the consent of the debtor. Otherwise, all creditors would be prevented from
assigning their credits because of the possibility of the debtors' refusal to give consent.

What the law requires in an assignment of credit is not the consent of the debtor but merely notice to
him. A creditor may, therefore, validly assign his credit and its accessories without the debtor's
consent (National Investment and Development Co. v. De los Angeles, 40 SCRA 489 [1971]). The
purpose of the notice is only to inform the debtor that from the date of the assignment, payment
should be made to the assignee and not to the original creditor.

The fact that the deed of assignment empowered the assignee to collect the credit originally owing to
the foreign corporation does not make the assignee a mere attorney-in-fact.

The case of Ngo Tian Tian Tek and Ngo Hay v. Philippine Education Co., 78 Phil. 271 [1947] is in
point:

When a chose, capable of legal assignment is assigned absolutely to one, but the
assignment is made for purpose of collection, the legal title thereto vests, in the
assignee, and it is no concern of the debtor that the equitable title is in another and
payment to the assignee discharges the debtor.

The petitioner further assails the consideration given for the deed of assignment which is stated as
"HK$ 1.00 and other valuable considerations."

A valuable considerations, however small or nominal if given or stipulated in good faith is, in the
absence of fraud, sufficient. A stipulation in consideration of $1 is just as effectual and valuable a
consideration as a larger sum stipulated for or paid (Penaco v. Ruaya, 110 SCRA 46 [1981]; Ascalon
vs. Court of Appeals, 158 SCRA 542, [1988]). It is not clear what considerations led to the
assignment but they must have been sufficiently valuable to the assignor in view of the amount
involved.

Hence, by virtue of the deed of assignment whose existence and legality remains unrebutted, the
respondent acquired all the rights of the assignor including the right to sue in his own name as the
legal assignee. The contract was not executed merely to enable the foreign corporation to sue in the
Philippines because even without the assignment, the foreign corporation can also sue in the
Philippines for isolated transactions even if not licensed to engage in business in this country.
Lastly, the petitioner asserts that the award of damages was excessive there being no finding to
justify the amounts.

We find the amounts equitable except for the award of P500,000.00 as actual damages in addition to
the P450,553.00 indebtedness. The records do not contain the factual basis for such an award.
Thus, we agree with the petitioner that it is not justifiable to award that amount.

All premises considered, we find for the private respondent. We should also add that the case has
dragged on 21 years since its filing with the then Court of First Instance of Pasig, Rizal on February
4, 1971, due to the numerous dilatory tactics of the petitioner. The delay has obviously created an
injustice on the part of private respondent not fully compensated by the payment of interests.

Furthermore, it is well-settled that the jurisdiction of the Supreme Court is confined to a review of
questions of law, except where the findings of facts of the appellate court are not supported by the
record or are so glaringly erroneous as to constitute a serious abuse of discretion. (Cañete v. Court
of Appeals, 171 SCRA 13 [1989]).

The findings of the fact of the trial court being adequately supported by documentary as well as
testimonial evidence and affirmed by the Court of Appeals, are conclusive on the Supreme Court
unless they fall within a few well-defined exceptions. No such exception is shown in this case.

ACCORDINGLY, the petition is hereby DISMISSED. The decision of the Court of Appeals dated
October 22, 1987 and its resolution dated June 16, 1988 are AFFIRMED with the modification that
the award of additional actual damages in the amount of P500,000.00 is deleted.

SO ORDERED.

Republic of the Philippines

SUPREME COURT

FIRST DIVISION

G.R. No. 145441. April 26, 2005

PHILIPPINE SAVINGS BANK, Petitioners, 

vs.
SPS. RODOLFO C. MAÑALAC, JR. and ROSITA P. MAÑALAC, Respondents.

DECISION

YNARES-SANTIAGO, J.:

This appeal by certiorari1 assails the decision of the Court of Appeals dated October 12, 2000 in CA-
G.R. CV No. 502922 which affirmed with modifications the decision of the Regional Trial Court of
Pasig, Branch 1613 dated April 27, 1993 in Civil Case No. 53967 which ordered the annulment of the
Certificate of Sale involving TCT Nos. N-1347, N-1348 and N-3267 issued in favor of petitioner
Philippine Savings Bank (PSBank) and dismissing Land Registration Case No. R-3951.

The facts as culled from the records are as follows:

On October 8, 1976, respondent-spouses Rodolfo and Rosita Mañalac (Mañalac) obtained a
P1,300,000.00 loan from PSBank covered by promissory note L.C. No. 76-269. As security for the
loan, Mañalac executed a Real Estate Mortgage in favor of the bank over 8 parcels of land covered
by TCT Nos. 417012, N-1348, N-1347, N-3267, N-8552, N-6162, 469843 and 343593.

In view of Mañalac’s inability to pay the loan installments as they fell due, their loan obligation was
restructured on October 13, 1977. Accordingly, Mañalac signed another promissory note
denominated as LC No. 77-232 for P1,550,000.00 payable to the order of PSBank with interest rate
of 19% annum.4 To secure the payment of the restructured loan, Mañalac executed a Real Estate
Mortgage dated October 13, 1977 in favor of PSBank over the same aforementioned 8 real
properties.

On March 5, 1979, Mañalac and spouses Igmidio and Dolores Galicia, with the prior consent of
PSBank,5 entered into a Deed of Sale with Assumption of Mortgage involving 3 of the mortgaged
properties covered by TCT Nos. N-6162 (now N-36192), N-8552 (now TCT No. N-36193), and
469843 (now TCT No. N-36194). The Deed of Sale with Assumption of Mortgage contained the
following stipulations:

1. The VENDEES shall assume as they hereby assume as part of the purchase price, the amount of
P550,000.00, representing the portion of the mortgaged obligation of the VENDORS in favor of the
Philippine Savings Bank, which is secured by that Real Estate Mortgage contract mentioned in the
Second Whereas Clause hereof covering among others the above-described parcels of land under
the same terms and conditions as originally constituted.

2. The VENDORS hereby warrant valid title to, and peaceful possession of the property herein sold
subject to the encumbrance hereinbefore mentioned.

3. This instrument shall be subject to the Consent of the Philippine Savings Bank.

4. All expenses relative to this instrument including documentary stamps, registration fees, transfer
taxes and other charges shall be for the account of the VENDEES.6

Thereafter, the 3 parcels of land purchased by the Galicias, together with another property, were in
turn mortgaged by them to secure a P2,600,000.00 loan which they obtained from PSBank.
Specifically, the mortgaged properties include TCT Nos. N-36192, N-36193, N-36194, (formerly TCT
Nos. N-6162, N-8552 and 469843, respectively) and 75584. 7 This loan is evidenced by Promissory
Note LC-79-36.8

On March 12, 1979, Mañalac paid PSBank P919,698.11 which corresponds to the value of the
parcels of land covered by TCT Nos. N-36192, N-36193, and N-36194, now registered in the name
of the spouses Galicia. Accordingly, PSBank executed a partial release of the real estate mortgage
covered by the aforesaid properties.9

On August 25, 1981, the spouses Galicia obtained a second loan from PSBank in the amount of
P3,250,000.00 for which they executed Promissory Note LC No. 81-108. They also executed a Real
Estate Mortgage in favor of the bank covering TCT Nos. N-36192, N-36193, N-36194, 75584 and
87690.10

Since Mañalac defaulted again in the payment of their loan installments and despite repeated
demands still failed to pay their past due obligation which now amounted to P1,804,241.76, PSBank
filed with the Office of the Provincial Sheriff of Rizal a petition for extrajudicial foreclosure of their 5
remaining mortgaged properties, specifically those covered by TCT Nos. 417012, N-1347, N-1348,
N-3267, and 343593.

Despite several postponements of the public auction sale, Mañalac still failed to pay their mortgage
obligation. Thus, on May 3, 1982, the foreclosure sale of the subject real properties proceeded with
PSBank as the highest bidder in the amount of P2,185,225.76. 11 On the same date, the Certificate of
Sale was issued by the Acting Ex-Oficio Provincial Sheriff for Rizal province.12

Mañalac failed to redeem the properties hence titles thereto were consolidated in the name of
PSBank and new certificates of title were issued in favor of the bank, namely, TCT No. N-79995 in
lieu of TCT No. 343593; TCT No. 79996 in lieu of TCT No. 417012; TCT No. 79997 in lieu of TCT
No. N-3267; TCT No. N-79998 in lieu of TCT No. N-1347; and TCT No. N-79999 in lieu of TCT No.
N-1348.

On December 16, 1983, Mañalac wrote the Chairman of the Board of PSBank asking information on
their request for the partial release of the mortgage covered by TCT Nos. N-36192, N-36193, N-
36194, and 417012 (now TCT No. 79996). TCT Nos. 36192, 36193, and 36194 were registered in
the name of the Galicias, and mortgaged to partially secure their outstanding loan from the bank.
Enclosed in the same letter is a Cashier’s Check for P1,200,000.00 with a notation which reads:

Re: Payment to effect release of TCT Nos. N-36192, 36193, and 36194 under loan account of
Spouses Igmedio and Dolores Galicia; and TCT No. 417012 under Loan Account of Spouses
Rodolfo and Rosita Mañalac.

Upon receipt of the check, PSBank’s Acting Manager Lino L. Macasaet issued a typewritten receipt
with the inscription:13

Received from Sps. Rodolfo and Rosita Mañalac and Sps. Igmidio and Dolores Galicia PCIB Check
No. 002133 in the amount of One Million Two Hundred Thousand Pesos Only (P1,200,000.00).

It is understood however, that receipt of said check is not a commitment on the part of the Bank to
release the Four (4) TCTs requested to be released on your letter dated 19 December 1983.

On December 19, 1983, the bank applied P1,000,000.00 of the P1,200,000.00 to the loan account of
the Galicias as payment for the arrearages in interest and the remaining P200,000.00 thereof was
applied to the expenses relative to the account of Mañalac. 14

On May 23, 1985, the bank sold the property covered by TCT No. 79996 (previously TCT No.
343593) to Ester Villanueva who thereafter sold it to Mañalac. On October 30, 1985, the land
covered by TCT No. 79995 was sold by the bank to Teresita Jalbuena.

Thereafter, or on October 20, 1986, Mañalac instituted an action for damages, docketed as Civil
Case No. 53967, before the Regional Trial Court of Pasig, Branch 161, against PSBank and its
officers namely Cezar Valenzuela, Alfredo Barretto and Antonio Viray, and spouses Alejandro and
Teresita Jalbuena.

The bank also filed a petition, docketed as LRC Case No. R-3951, before the Regional Trial Court of
Pasig, Branch 159, for the issuance of a writ of possession against the properties covered by TCT
Nos. N-79997, N-79998, and N-79999 (formerly TCT Nos. N-3267, N-1347, and N-1348) and the
ejectment of the respondents.
In an order dated January 2, 1989, the trial court consolidated LRC Case No. R-3951 with Civil Case
No. 53967. On April 27, 1993, a judgment was rendered the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered ordering:

For Civil Case No. 53967

1. The annulment of the Certificate of Sale issued by the acting Ex-Oficio Provincial Sheriff of Rizal
on May 3, 1982 involving Transfer Certificate of Title Nos. N-1347-Rizal, N-1348-Rizal and N-3267-
Rizal and the Contract to Sell executed by defendant PSB in favor of defendants spouses Alejandro
Jalbuena and Teresita Jalbuena involving the real property covered by Transfer Certificate of Title
No. N-79995; and,

2. The dismissal of counterclaims for lack of merit.

For Land Registration Case No. R-3951

3. The dismissal of the petition for lack of merit.

No costs.

SO ORDERED.15

The Court of Appeals affirmed with modification the decision of the trial court, the decretal portion of
which reads:

WHEREFORE, the decision appealed from is AFFIRMED with the modification that the defendant-
appellant Philippine Savings Bank is directed to indemnify the plaintiffs-appellants in the amount of
Two Hundred Thousand Pesos (200,000.00) each as moral damages. Costs against the defendant-
appellant bank.

SO ORDERED.16

Hence the instant petition which raises the following issues:

THE APPELLATE COURT HAS DECIDED QUESTIONS OF SUBSTANCE IN A WAY PROBABLY

NOT IN ACCORD WITH LAW AND WITH APPLICABLE DECISIONS OF THIS HONORABLE
COURT WHEN IT:

a.] HELD THAT THE GENERAL RULE WITH RESPECT TO THE ISSUANCE OF WRITS OF
POSSESSION SHOULD NOT BE APPLIED IN THIS CASE, AND WHAT SHOULD INSTEAD BE
APPLIED IS THE EXCEPTION ENUNCIATED IN VACA VS. COURT OF APPEALS, 234 SCRA 146;

b.] UPHELD THE CONSOLIDATION OF CIVIL CASE NO. 53967 WITH LRC CASE NO. 3951
WHEN PROCEDURALLY THOSE TWO PROCEEDINGS COULD SCARCELY BE
CONSOLIDATED;

c.] HELD THAT SUPPOSEDLY THERE WAS A NOVATION "OF THE PREVIOUS MORTGAGE OF
THE PROPERTIES" WHEN IN TRUTH AND IN FACT THE MORTGAGE HAD ALREADY CEASED
TO EXIST, THAT IS, THE MORTGAGE HAD BECOME NULL AND VOID AS THE SAME HAD
BEEN FORECLOSED BY PETITIONER;
d.] AWARDED MORAL DAMAGES IN FAVOR OF RESPONDENTS.17

Petitioner claims that the Court of Appeals erred in sustaining the trial court’s order consolidating
Civil Case No. 53967 with LRC Case No. R-3951, arguing that consolidation is proper only when it
involves actions, which means an ordinary suit in a court of justice by which one party prosecutes
another for the enforcement or protection of a right, or a prevention of a wrong. Citing A.G.
Development Corp. v. Court of Appeals,18 petitioner posits that LRC Case No. R-3951, being
summary in nature and not being an action within the contemplation of the Rules of Court, should
not have been consolidated with Civil Case No. 53967.

We do not agree. In Active Wood Products Co., Inc. v. Court of Appeals,19 this Court also deemed it
proper to consolidate Civil Case No. 6518-M, which was an ordinary civil action, with LRC Case No.
P-39-84, which was a petition for the issuance of a writ of possession. The Court held that while a
petition for a writ of possession is an ex parte proceeding, being made on a presumed right of
ownership, when such presumed right of ownership is contested and is made the basis of another
action, then the proceedings for writ of possession would also become groundless. The entire case
must be litigated and if need be must be consolidated with a related case so as to thresh out
thoroughly all related issues.

In the same case, the Court likewise rejected the contention that under the Rules of Court only
actions can be consolidated. The Court held that the technical difference between an action and a
proceeding, which involve the same parties and subject matter, becomes insignificant and
consolidation becomes a logical conclusion in order to avoid confusion and unnecessary expenses
with the multiplicity of suits.

In the instant case, the consolidation of Civil Case No. 53967 with LRC Case No. R-3951 is more in
consonance with the rationale behind the consolidation of cases which is to promote a more
expeditious and less expensive resolution of the controversy than if they were heard independently
by separate branches of the trial court. Hence, the technical difference between Civil Case No.
53967 and LRC Case No. R-3951 must be disregarded in order to promote the ends of justice.

Petitioner also contends that the Court of Appeals committed reversible error in applying the doctrine
laid down in Barican v. Intermediate Appellate Court.20 It insists on the application of the general rule
that it is ministerial upon the court to issue a writ of possession on the part of the purchaser in a
foreclosure sale. It argues that the Barican doctrine is inapplicable because the sale with assumption
of mortgage in the present case involves properties different from those which are the subject of the
writ of possession while in Barican, the assumption of mortgage refers to the same property subject
of the writ of possession. We recall that the Court of Appeals applied the Barican doctrine based on
the following factual similarities between the two cases, thus: 21

"In Civil Case No. C-11232, the petitioner-spouses claim ownership of the foreclosed property
against the respondent bank and Nicanor Reyes to whom the former sold the property by negotiated
sale; the complaint alleged that the DBP knew the assumption of mortgage between the mortgagors
and the petitioner-spouses and the latter have paid to the respondent bank certain amounts to
update the loan balances of the mortgagors and transfer and restructuring fees which payments are
duly receipted; the petitioner-spouses were already in possession of the property since September
28, 1979 and long before the respondent bank sold the same property to respondent Nicanor Reyes
on October 28, 1984; and the respondent bank never took physical possession of the property." In a
similar manner, the following facts were duly established in the case at bench: 1. The petition for
issuance of the writ of possession was only filed sometime in May 1988 although the right of
redemption lapsed as early as May 7, 1983; 2. Appellant bank neither obtained physical possession
of the properties nor did they file any action for ejectment against the plaintiffs-appellants; 3. On
December 16, 1983, the plaintiffs-appellants issued a check in favor of the appellant bank to effect
the release of TCT Nos. 36192, 36193, 36194 and 417012 which was applied by appellant bank to
the plaintiffs-appellants’ account and that of the Galicias and; 4. Appellant bank executed a Deed of
Absolute Sale over TCT No. 79996 (formerly TCT No. 417012) on May 23, 1985 in favor of a certain
Elsa Calusa Villanueva who thereafter sold it back to the plaintiffs-appellants. Hence, the same
ruling in the Barican case should be applied, that is, "the obligation of a court to issue a writ of
possession in favor of the purchaser in a foreclosure of mortgage case ceases to be ministerial.

We agree with the petitioner. While indeed the two cases demonstrate palpable similarities, the
Court of Appeals overlooked essential differences that would render the Barican doctrine
inapplicable to the instant case. In Barican, the issuance of the writ of possession was deferred
because a pending action for the declaration of ownership over the foreclosed property was made by
an adverse claimant who was in possession of the subject property. Clearly, the rights of the third
parties, who are plaintiffs in the pending civil case, would be adversely affected with the
implementation of the writ.

In the instant case, the petitioner bank became the absolute owner of the properties subject of the
writ of possession, after they were foreclosed, and titles thereto were consolidated in the name of
the bank. It sufficiently established its ownership over the parcels of land subject of the writ of
possession, by presenting in evidence the Certificate of Sale, 22 Affidavit of Consolidation of
Ownership,23 and copies of new TCTs of the foreclosed properties in the name of the
petitioner.24 Unlike in Barican, the ownership of the foreclosed properties are not open to question
the ownership thereof being established by competent evidence.

Moreover, as earlier pointed out by the petitioner, the parcels of land subject of the writ of
possession are different from those sold by the petitioner bank to Jalbuena and Villanueva. Hence,
unlike in the Barican case, the implementation of the writ will not affect the rights of innocent third
persons.

On the issue of novation, the Court of Appeals held that novation occurred when PSBank applied
P1,000,000.00 of the P1,200,000.00 PCIB Check No. 002133 tendered by Mañalac to the loan
account of the Galicias and the remaining P200,000.00 thereof to Mañalac’s account. It held that
when the bank applied the amount of the check in accordance with the instructions contained
therein, there was novation of the previous mortgage of the properties. It further observed that the
bank was fully aware that the issuance of the check was conditional hence, when it made the
application thereof, it agreed to be bound by the conditions imposed by Mañalac. 25

Novation is the extinguishment of an obligation by the substitution or change of the obligation by a

subsequent one which extinguishes or modifies the first, either by changing the object or principal
conditions, or, by substituting another in place of the debtor, or by subrogating a third person in the
rights of the creditor. In order for novation to take place, the concurrence of the following requisites 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.26

The elements of novation are patently lacking in the instant case. Mañalac tendered a check for
P1,200,000.00 to PSBank for the release of 4 parcels of land covered by TCT Nos. N-36192, 36193,
and 36194, under the loan account of the Galicias and 417012 (now TCT No. 79996) under the loan
account of Mañalac. However, while the bank applied the tendered amount to the accounts as
specified by Mañalac, it nevertheless refused to release the subject properties. Instead, it issued a
receipt with a notation that the acceptance of the check is not a commitment on the part of the bank
to release the 4 TCTs as requested by Mañalac.

From the foregoing, it is obvious that there was no agreement to form a new contract by novating the
mortgage contracts of the Mañalacs and the Galicias. In accepting the check, the bank only acceded
to Mañalac’s instruction on whose loan accounts the proceeds shall be applied but rejected the other
condition that the 4 parcels of land be released from mortgage. Clearly, there is no mutual consent
to replace the old mortgage contract with a new obligation. The conflicting intention and acts of the
parties underscore the absence of any express disclosure or circumstances with which to deduce a
clear and unequivocal intent by the parties to novate the old agreement.

Novation is never presumed, 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 unmistakable. The
extinguishment of the old obligation by the new one is a necessary element of novation, which may
be effected either expressly or impliedly. The term "expressly" means that the contracting parties
incontrovertibly disclose that their object in executing the new contract is to extinguish the old one.
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. 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.27

A fortiori, 3 of the 4 properties sought to be released from mortgage, namely, TCT Nos. N-36192, N-
36193, and N-36194, have already been sold by Mañalac to Galicia and are now registered in the
name of the latter who thereafter mortgaged the same as security to a separate loan they obtained
from the bank. Thus, without the consent of PSBank as the mortgagee bank, Mañalac, not being a
party to the mortgage contract between the Galicias and the bank, cannot demand much less
impose upon the bank the release of the subject properties. Unless there is a stipulation to the
contrary, the release of the mortgaged property can only be made upon the full satisfaction of the
loan obligation upon which the mortgage attaches. Unfortunately, Mañalac has not shown that the
P1,000,000.00 was sufficient to cover not only the accrued interests but also the entire indebtedness
of the Galicias to the bank.

Neither can Mañalac be deemed substitute debtor within the contemplation of Article 1293 of the
Civil Code, which states that:

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may
be made 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. 28

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.
Novation is never presumed. Consequently, that which arises from a purported change in the person
of the debtor must be clear and express. It is thus incumbent on Mañalac to show clearly and
unequivocally that novation has indeed taken place. 29 In Magdalena Estates Inc. v. Rodriguez,30 we
held that "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."

Mañalac has not shown by competent evidence that they were expressly taking the place of Galicia
as debtor, or that the latter were being released from their solidary obligation. Nor was it shown that
the obligation of the Galicias was being extinguished and replaced by a new one. The existence of
novation must be shown in clear and unmistakable terms.

Likewise, we hold that Mañalac cannot demand to repurchase the foreclosed piece of land covered
by TCT No. 417012 (now TCT No. 79996) from the bank. Its foreclosure and the consolidation of
ownership in favor of the bank and the resultant cancellation of mortgage effectively cancelled the
mortgage contract between Mañalac and the bank. Insofar as TCT No. 417012 is concerned, there
is no more existing mortgage to speak of. As the absolute owner of the foreclosed property, the
petitioner has the discretion to reject or accept any offer to repurchase.

Granting arguendo that a new obligation was established with the acceptance by the bank of the
PCIB Check and its application to the loan account of Mañalac on the condition that TCT No.
417012 would be released, this new obligation however could not supplant the October 13, 1977
real estate mortgage executed by Mañalac, which, by all intents and purposes, is now a defunct and
non-existent contract. As mentioned earlier, novation cannot be presumed.

We however sustain the award of moral damages. While the bank had the legal basis to withhold the
release of the mortgaged properties, nevertheless, it was not forthright and was lacking in candor in
dealing with Mañalac. In accepting the PCIB Check, the bank knew fully well that the payment was
conditioned on its commitment to release the specified properties. At the first instance, the bank
should not have accepted the check or returned the same had it intended beforehand not to honor
the request of Mañalac. In accepting the check and applying the proceeds thereof to the loan
accounts of Mañalac and Galicia, the former were led to believe that the bank was favorably acting
on their request. In justifying the award of moral damages, the Court of Appeals correctly observed
that "there is the unjustified refusal of the appellant bank to make a definite commitment while
profiting from the proceeds of the check by applying it to the principal and the interest of the Galicias
and plaintiff-appellants."31

Moral damages are meant to compensate the claimant for any physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation and
similar injuries unjustly caused. Although incapable of pecuniary estimation, the amount must
somehow be proportional to and in approximation of the suffering inflicted. Moral damages are not
punitive in nature and were never intended to enrich the claimant at the expense of the defendant.
There is no hard-and-fast rule in determining what would be a fair and reasonable amount of moral
damages, since each case must be governed by its own peculiar facts. Trial courts are given
discretion in determining the amount, with the limitation that it "should not be palpably and
scandalously excessive." Indeed, it must be commensurate to the loss or injury suffered. 32

Respondent Rosita Mañalac has adequately established the factual basis for the award of moral
damages when she testified that she suffered mental anguish and social humiliation as a result of
the failure of the bank to release the subject properties or its failure to return the check despite its
refusal to make a definite commitment to comply with the clearly-stated object of the payment.

Respondent Rodolfo Mañalac however is not similarly entitled to moral damages. The award of
moral damages must be anchored on a clear showing that he actually experienced mental anguish,
besmirched reputation, sleepless nights, wounded feelings or similar injury. There was no better
witness to this experience than respondent himself. Since respondent Rodolfo Mañalac failed to
testify on the witness stand, the trial court did not have any factual basis to award moral damages to
him.33 Indeed, respondent Rodolfo Mañalac should have taken the witness stand and should have
testified on the mental anguish, serious anxiety, wounded feelings and other emotional and mental
suffering he purportedly suffered to sustain his claim for moral damages. Mere allegations do not
suffice; they must be substantiated by clear and convincing proof.

Nevertheless, we find the award of P200,000.00 excessive and unconscionable. As we said, moral
damages are not intended to enrich the complainant at the expense of the defendant. Rather, these
are awarded only to enable the injured party to obtain "means, diversions or amusements" that will
serve to alleviate the moral suffering that resulted by reason of the defendant’s culpable action. The
purpose of such damages is essentially indemnity or reparation, not punishment or correction. In
other words, the award thereof is aimed at a restoration within the limits of the possible, of the
spiritual status quo ante; therefore, it must always reasonably approximate the extent of injury and
be proportional to the wrong committed. 34 The award of P50,000.00 as moral damages is reasonable
under the circumstances.35

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October 12,
2000 in CA-G.R. CV No. 50292 is REVERSED and SET ASIDE. The petitioner Philippine Savings
Bank is DIRECTED to indemnify respondent Rosita P. Mañalac in the amount of P50,000.00 as
moral damages. The Regional Trial Court of the City of Pasig, Branch 161 is ORDERED to issue a
writ of possession in favor of Philippine Savings Bank. No costs.

SO ORDERED. Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 200602               December 11, 2013

ACE FOODS, INC., Petitioner, 

vs.
MICRO PACIFIC TECHNOLOGIES CO., LTD. , Respondent.1

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari are the Decision  dated October 21, 2011 and
2 3

Resolution  dated February 8, 2012 of the Court of Appeals (CA) in CA-G.R. CV No. 89426 which
4

reversed and set aside the Decision  dated February 28, 2007 of the Regional Trial Court of Makati,
5

Branch 148 (RTC) in Civil Case No. 02-1248, holding petitioner ACE Foods, Inc. (ACE Foods) liable
to respondent Micro Pacific Technologies Co., Ltd. (MTCL) for the payment of Cisco Routers and
Frame Relay Products (subject products) amounting to P646,464.00 pursuant to a perfected
contract of sale.

The Facts

ACE Foods is a domestic corporation engaged in the trading and distribution of consumer goods in
wholesale and retail bases,  while MTCL is one engaged in the supply of computer hardware and
6

equipment. 7
On September 26, 2001, MTCL sent a letter-proposal  for the delivery and sale of the subject
8

products to be installed at various offices of ACE Foods. Aside from the itemization of the products
offered for sale, the said proposal further provides for the following terms, viz.: 9

TERMS : Thirty (30) days upon delivery

VALIDITY : Prices are based on current dollar rate and subject to changes without prior notice.

DELIVERY : Immediate delivery for items on stock, otherwise thirty (30) to forty-five days upon
receipt of [Purchase Order]

WARRANTY : One (1) year on parts and services. Accessories not included in warranty.

On October 29, 2001, ACE Foods accepted MTCL’s proposal and accordingly issued Purchase
Order No. 100023  (Purchase Order) for the subject products amounting to P646,464.00 (purchase
10

price). Thereafter, or on March 4, 2002, MTCL delivered the said products to ACE Foods as
reflected in Invoice No. 7733   (Invoice Receipt). The fine print of the invoice states, inter alia, that
11

"[t]itle to sold property is reserved in MICROPACIFIC TECHNOLOGIES CO., LTD. until full
compliance of the terms and conditions of above and payment of the price" (title reservation
12

stipulation). After delivery, the subject products were then installed and configured in ACE Foods’s
premises. MTCL’s demands against ACE Foods to pay the purchase price, however, remained
unheeded.  Instead of paying the purchase price, ACE Foods sent MTCL a Letter  dated September
13 14

19, 2002, stating that it "ha[s] been returning the [subject products] to [MTCL] thru [its] sales
representative Mr. Mark Anteola who has agreed to pull out the said [products] but had failed to do
so up to now."

Eventually, or on October 16, 2002, ACE Foods lodged a Complaint  against MTCL before the RTC,
15

praying that the latter pull out from its premises the subject products since MTCL breached its "after
delivery services" obligations to it, particularly, to: (a) install and configure the subject products; (b)
submit a cost benefit study to justify the purchase of the subject products; and (c) train ACE Foods’s
technicians on how to use and maintain the subject products.   ACE Foods likewise claimed that the
16

subject products MTCL delivered are defective and not working. 17

For its part, MTCL, in its Answer with Counterclaim,  maintained that it had duly complied with its
18

obligations to ACE Foods and that the subject products were in good working condition when they
were delivered, installed and configured in ACE Foods’s premises. Thereafter, MTCL even
conducted a training course for ACE Foods’s representatives/employees; MTCL, however, alleged
that there was actually no agreement as to the purported "after delivery services." Further, MTCL
posited that ACE Foods refused and failed to pay the purchase price for the subject products despite
the latter’s use of the same for a period of nine (9) months. As such, MTCL prayed that ACE Foods
be compelled to pay the purchase price, as well as damages related to the transaction. 19

The RTC Ruling

On February 28, 2007, the RTC rendered a Decision,   directing MTCL to remove the subject
20

products from ACE Foods’s premises and pay actual damages and attorney fees in the amounts
of P200,000.00 and P100,000.00, respectively. 21

At the outset, it observed that the agreement between ACE Foods and MTCL is in the nature of a
contract to sell. Its conclusion was based on the fine print of the Invoice Receipt which expressly
indicated that "title to sold property is reserved in MICROPACIFIC TECHNOLOGIES CO., LTD. until
full compliance of the terms and conditions of above and payment of the price," noting further that in
a contract to sell, the prospective seller explicitly reserves the transfer of title to the prospective
buyer, and said transfer is conditioned upon the full payment of the purchase price.  Thus, 22

notwithstanding the execution of the Purchase Order and the delivery and installation of the subject
products at the offices of ACE Foods, by express stipulation stated in the Invoice Receipt issued by
MTCL and signed by ACE Foods, i.e., the title reservation stipulation, it is still the former who holds
title to the products until full payment of the purchase price therefor. In this relation, it noted that the
full payment of the price is a positive suspensive condition, the non-payment of which prevents the
obligation to sell on the part of the seller/vendor from materializing at all.  Since title remained with
23

MTCL, the RTC therefore directed it to withdraw the subject products from ACE Foods’s premises.
Also, in view of the foregoing, the RTC found it unnecessary to delve into the allegations of breach
since the non-happening of the aforesaid suspensive condition ipso jure prevented the obligation to
sell from arising. 24

Dissatisfied, MTCL elevated the matter on appeal. 25

The CA Ruling

In a Decision  dated October 21, 2011, the CA reversed and set aside the RTC’s ruling, ordering
26

ACE Foods to pay MTCL the amount of P646,464.00, plus legal interest at the rate of 6% per annum
to be computed from April 4, 2002, and attorney’s fees amounting to P50,000.00. 27

It found that the agreement between the parties is in the nature of a contract of sale, observing that
the said contract had been perfected from the time ACE Foods sent the Purchase Order to MTCL
which, in turn, delivered the subject products covered by the Invoice Receipt and subsequently
installed and configured them in ACE Foods’s premises.  Thus, considering that MTCL had already
28

complied with its obligation, ACE Foods’s corresponding obligation arose and was then duty bound
to pay the agreed purchase price within thirty (30) days from March 5, 2002.  In this light, the CA
29

concluded that it was erroneous for ACE Foods not to pay the purchase price therefor, despite its
receipt of the subject products, because its refusal to pay disregards the very essence of reciprocity
in a contract of sale.  The CA also dismissed ACE Foods’s claim regarding MTCL’s failure to
30

perform its "after delivery services" obligations since the letter-proposal, Purchase Order and Invoice
Receipt do not reflect any agreement to that effect. 31

Aggrieved, ACE Foods moved for reconsideration which was, however, denied in a
Resolution   dated February 8, 2012, hence, this petition.
32

The Issue Before the Court

The essential issue in this case is whether ACE Foods should pay MTCL the purchase price for the
subject products.

The Court’s Ruling

The petition lacks merit.

A contract is what the law defines it to be, taking into consideration its essential elements, and not
what the contracting parties call it.  The real nature of a contract may be determined from the
33

express terms of the written agreement and from the contemporaneous and subsequent acts of the
contracting parties. However, in the construction or interpretation of an instrument, the intention of
the parties is primordial and is to be pursued. The denomination or title given by the parties in
their contract is not conclusive of the nature of its contents.
34

The very essence of a contract of sale is the transfer of ownership in exchange for a price paid
or promised.   This may be gleaned from Article 1458 of the Civil Code which defines a contract of
35

sale as follows:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership and to deliver a determinate thing, and the other to pay therefor a price certain in
money or its equivalent.

A contract of sale may be absolute or conditional. (Emphasis supplied)

Corollary thereto, a contract of sale is classified as a consensual contract, which means that the
sale is perfected by mere consent. No particular form is required for its validity. Upon perfection of
the contract, the parties may reciprocally demand performance, i.e., the vendee may compel transfer
of ownership of the object of the sale, and the vendor may require the vendee to pay the thing sold. 36

In contrast, a contract to sell is defined as a bilateral contract whereby the prospective seller, while
expressly reserving the ownership of the property despite delivery thereof to the prospective buyer,
binds himself to sell the property exclusively to the prospective buyer upon fulfillment of the condition
agreed upon, i.e., the full payment of the purchase price. A contract to sell may not even be
considered as a conditional contract of sale where the seller may likewise reserve title to the
property subject of the sale until the fulfillment of a suspensive condition, because in a conditional
contract of sale, the first element of consent is present, although it is conditioned upon the
happening of a contingent event which may or may not occur. 37

In this case, the Court concurs with the CA that the parties have agreed to a contract of sale and not
to a contract to sell as adjudged by the RTC. Bearing in mind its consensual nature, a contract of
sale had been perfected at the precise moment ACE Foods, as evinced by its act of sending MTCL
the Purchase Order, accepted the latter’s proposal to sell the subject products in consideration of the
purchase price of P646,464.00. From that point in time, the reciprocal obligations of the parties – i.e.,
on the one hand, of MTCL to deliver the said products to ACE Foods, and, on the other hand, of
ACE Foods to pay the purchase price therefor within thirty (30) days from delivery – already arose
and consequently may be demanded. Article 1475 of the Civil Code makes this clear:

Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing
which is the object of the contract and upon the price.

From that moment, the parties may reciprocally demand performance, subject to the provisions of
the law governing the form of contracts.

At this juncture, the Court must dispel the notion that the stipulation anent MTCL’s reservation of
ownership of the subject products as reflected in the Invoice Receipt, i.e., the title reservation
stipulation, changed the complexion of the transaction from a contract of sale into a contract to sell.
Records are bereft of any showing that the said stipulation novated the contract of sale between the
parties which, to repeat, already existed at the precise moment ACE Foods accepted MTCL’s
proposal. To be sure, 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. In either case, however, novation is never presumed,
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.38

In the present case, it has not been shown that the title reservation stipulation appearing in the
Invoice Receipt had been included or had subsequently modified or superseded the original
agreement of the parties. The fact that the Invoice Receipt was signed by a representative of ACE
Foods does not, by and of itself, prove animus novandi since: (a) it was not shown that the signatory
was authorized by ACE Foods (the actual party to the transaction) to novate the original agreement;
(b) the signature only proves that the Invoice Receipt was received by a representative of ACE
Foods to show the fact of delivery; and (c) as matter of judicial notice, invoices are generally issued
at the consummation stage of the contract and not its perfection, and have been even treated as
documents which are not actionable per se, although they may prove sufficient delivery.   Thus,
39

absent any clear indication that the title reservation stipulation was actually agreed upon, the Court
must deem the same to be a mere unilateral imposition on the part of MTCL which has no effect on
the nature of the parties’ original agreement as a contract of sale. Perforce, the obligations arising
thereto, among others, ACE Foods’s obligation to pay the purchase price as well as to accept the
delivery of the goods,  remain enforceable and subsisting.
40
1âwphi1

As a final point, it may not be amiss to state that the return of the subject products pursuant to a
rescissory action  is neither warranted by ACE Foods’s claims of breach – either with respect to
41

MTCL’s breach of its purported "after delivery services" obligations or the defective condition of the
products - since such claims were not adequately proven in this case. The rule is clear: each party
must prove his own affirmative allegation; one who asserts the affirmative of the issue has the
burden of presenting at the trial such amount of evidence required by law to obtain a favorable
judgment, which in civil cases, is by preponderance of evidence.   This, however, ACE Foods failed
42

to observe as regards its allegations of breach. Hence, the same cannot be sustained.

WHEREFORE, the petition is DENIED. Accordingly, the Decision dated October 21, 2011 and
Resolution dated February 8, 2012 of the Court of Appeals in CA-G.R. CV No. 89426 are
hereby AFFIRMED.

SO ORDERED.