G.R. No.

149683               June 16, 2003

ILOILO TRADERS FINANCE INC., Petitioner,

vs.
HEIRS OF OSCAR SORIANO JR., and MARTA L. SORIANO, Respondents.

DECISION

VITUG, J.:

On 23 October 1979 and 29 February 1980, the spouses Oscar Soriano and Marta Soriano executed two
promissory notes, secured by real property mortgages, in favor of petitioner Iloilo Traders Finance, Inc. (ITF). When
the Sorianos defaulted on the notes, ITF, on 23 June 1981, moved for the extrajudicial foreclosure of the mortgages.
Evidently, in order to forestall the foreclosure, respondent spouses filed, on 27 August 1981, a complaint for
"Declaration of a Void Contract, Injunction and Damages." On 06 January 1982, the trial court issued a writ of
preliminary injunction to suspend the public sale of the hypothecated property. On 16 August 1983, the parties
entered into an "Amicable Settlement" and, after affixing their signatures thereon, submitted the agreement before
the court. Instead of approving forthwith the amicable settlement, the trial court required the parties to first give
some clarifications on a number of items. The order read in part -

"Paragraph 4 of the compromise agreement dated August 16, 1983 states: ‘That the plaintiffs waive any claims,
counterclaims, attorney’s fees or damages that they may have against herein defendants.’

"Plaintiffs and defendant Iloilo Traders Finance, Inc., are directed to clarify whether the words ‘herein defendants’
include defendants Bernadette Castellano and the provincial sheriff of Iloilo.

"If the plaintiffs desire to dismiss the complaint against defendants Castellano and the provincial sheriff of Iloilo, they
should state it categorically and in writing.

"Furthermore, the Court wants to know from the plaintiffs and defendant Iloilo Traders Finance, Inc., if the writ of
preliminary injunction issued on January 6, 1982 should be lifted as to all three defendants.

"The clarification herein sought after by the Court shall be made in writing and signed by the parties concerned,
assisted by their respective attorneys.

"This Order shall be complied with within a period of ten (10) days from notice hereof." 1

The parties failed to comply with the court order. Resultantly, the trial court disapproved the amicable settlement and
set the case for pre-trial. Nothing much could be gleaned from the records about what might have transpired next
not until seven years later when the Soriano couple filed a motion to submit anew the amicable settlement. The
motion was opposed by ITF on the ground that the amount expressed in the settlement would no longer be accurate
considering the lapse of seven years, implying in a way that it could be amendable thereto if the computation were
to be revised. The trial court denied the Soriano motion. Significantly, while the order of denial was made on the
thesis that the debtor spouses, without the consent of ITF, could not unilaterally resurrect the amicable settlement,
the trial court, nevertheless, made the following observations -

"x x x (T)hat in relation to the disapproved Amicable Settlement, the intention of ITF to agree and abide by the
provisions thereof, as evidenced by the signatures thereto of its President and counsels, cannot be ignored. That
intention pervades to the present time since the disapproval by the court pertains only to a technicality which in no
way intruded into the substance of the agreement reached by the parties. Such being the case, the Amicable
Settlement had novated the original agreement of that parties as embodied in the promissory note. The rights and
obligations of the parties, therefore, at this time should be based on the provisions of the amicable settlement, these
should pertain to the principal amount as of that date which the parties pegged at P431,200.00 and the legal rate of
interest thereon.

"The foregoing should however be a good issue in another forum, not in the present case." 2

Taking cue from the court order, the Sorianos withdrew their complaint and, on 16 October 1991, filed a case for
novation and specific performance, docketed Civil Case No. 20047, before the Regional Trial Court, Branch 37, of
Iloilo City. The case ultimately concluded with a finding made by the trial court in favor of herein respondents. On
appeal to it, the Court of Appeals affirmed the judgment of the court a quo.

The parties have submitted that the issue focuses on whether or not the amicable settlement entered into between
the parties has novated the original obligation and also, as they would correctly suggest in their argument, on
whether the proposed terms of the amicable settlement were carried out or have been rendered inefficacious.

The "amicable settlement" read -

"COME NOW plaintiffs and defendant Iloilo Traders Finance, Inc., assisted by their respective undersigned counsels
and to this Honorable Court most respectfully submit the following Amicable Settlement, thus:

"1. That the total of the two (2) accounts of plaintiff to herein defendant as of June 30, 1983 is Two Hundred
Ninety Thousand Six Hundred Ninety One Pesos (P290,691.00) of which amount P10,691.00 shall be paid
by plaintiffs to herein defendant at the time of the signing of this Amicable Settlement;

"2. That to this amount of P290,691.00 shall be added P151,200.00 by way of interest for 36 months thus
making a total of Four Hundred Thirty One Thousand Two Hundred Pesos (P431,200.00);

"3. That this amount of P431,200.00 shall be paid by plaintiffs to herein defendant in 36 monthly installments
as follows, the first installment at P12,005.00 shall be paid on or before August 16, 1983 and the 2nd to 36th
installments at P11,977.00 shall be paid on the 15th day of each month thereafter until fully paid;

"4. That the plaintiffs waive any claims, counterclaims, attorney’s fees or damages that they may have
against herein defendants;

"5. That should plaintiffs fail to comply with the terms of this Amicable Settlement the preliminary injunction
issued in the case shall be immediately dissolved and the foreclosure and public auction sale of the
properties of the plaintiffs subject of the mortgage to defendant shall immediately take place and the
corresponding writ of execution shall issue from this Court;

"6. That this Amicable Settlement is submitted as the basis for decision in this case.

"WHEREFORE, it is respectfully prayed of this Honorable Court that the foregoing Amicable Settlement be
approved." 3

Novation may either be extinctivé or modificatory, much being dependent on the nature of the change and the
intention of the parties. Extinctive novation is never presumed; there must be an express intention to novate; in
4 

cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation
as the moving consideration for the emergence of the new one. Implied novation necessitates that the
5 

incompatibility between the old and new obligation be total on every point such that the old obligation is completely
superseded by the new one. The test of incompatibility is whether they can stand together, each one having an
independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the
first.

An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second,
creating a new one in its stead. This kind of novation presupposes a confluence 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. Novation is merely modificatory where the change brought
6 

about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates or 7 

an extension of time to pay ); in this instance, the new agreement will not have the effect of extinguishing the first
8 

but would merely supplement it or supplant some but not all of its provisions. 1âwphi1

An amicable settlement or a compromise is a contract whereby the parties, by making reciprocal concessions, avoid
a litigation or put an end to one already commenced. It may be judicial or extrajudicial; the absence of court
9 

approval notwithstanding, the agreement can become the source of rights and obligations of the parties.
10 

It would appear that the arrangement reached by the Soriano spouses and ITF would have the original obligation of
respondent spouses on two promissory notes for the sums of P150,000.00 and P80,000.00, both secured by real
estate mortgages, impliedly modified. The amicable settlement contained modificatory changes. Thus, (1) it
increased the indebtedness of the Soriano spouses, merely due to accruing interest, from P290,691.00 to
P431,200.00; (2) it extended the period of payment and provided for new terms of payment; and (3) it provided for a
waiver of claims, counterclaims, attorney’s fees or damages that the debtor-spouses might have against their
creditor, but the settlement neither cancelled, nor materially altered the usual clauses in, the real estate mortgages,
e.g., the foreclosure of the mortgaged property in case of default.

Verily, the parties entered into the agreement basically to put an end to Civil Case No. 14007 then pending before
the Regional Trial Court. Concededly, the provisions of the settlement were beneficial to the respondent couple.
11 

The compromise extended the terms of payment and implicitly deferred the extrajudicial foreclosure of the
mortgaged property. It was well to the interest of respondent spouses to ensure its judicial approval; instead, they
went to ignore the order of the trial court and virtually failed to make any further appearance in court. This conduct
on the part of respondent spouses gave petitioner the correct impression that the Sorianos did not intend to be
bound by the compromise settlement, and its non-materialization negated the very purpose for which it was
executed.

Given the circumstances, the provisions of Article 2041 of the Civil Code come in point -
"If one of the parties fails or refuses to abide by the compromise, the other party may either enforce the compromise
or regard it as rescinded and insist upon his original demand."

As so well put in Diongzon vs. Court of Appeals, a "supposed new agreement is deemed not to have taken effect
12 

where a debtor never complied with his undertaking." In such a case, the other party is given the option to enforce
the provisions of the amicable settlement or to rescind it and may insist upon the original demand without the
13 

necessity for a prior judicial declaration of rescission.

14

WHEREFORE, the decision of the Court of Appeals in C.A. G.R. CV No. 46910, affirming that of the court a quo, is
REVERSED and SET ASIDE, and another is entered dismissing the complaint in Civil Case No. 20047 before the
Regional Trial Court, Branch 37, of Iloilo City. No costs.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
G.R. Nos. 149840-41             March 31, 2006
SPS. FRANCISCO AND RUBY REYES, Petitioners,
vs.
BPI FAMILY SAVINGS BANK, INC., and MAGDALENA L. LOMETILLO, in her capacity as ex-officio Provincial
Sheriff for Iloilo, Respondents.

DECISION

CORONA,J.:

Via this petition for review under Rule 45 of the Rules of Court, petitioners assail the decision 1 of the Court of
Appeals (CA) in CA-G.R. SP Nos. 45629 and 45877 and its resolution denying their motion for reconsideration.

The facts are simple.

On March 24, 1995, the Reyes spouses executed a real estate mortgage on their property in Iloilo City in favor of
respondent BPI Family Savings Bank, Inc. (BPI-FSB) to secure a P15,000,000 loan of Transbuilders Resources and
Development Corporation (Transbuilders). The mortgage contract between petitioners and BPI-FSB provided,
among others:

That for and in consideration of the above-mentioned sum received by way of a loan, and other credit
accommodations of whatever nature obtained by the Borrower/Mortgagor, the Borrower/Mortgagor by this
Agreement, hereby constitutes a first mortgage, special and voluntary over the property/ies specifically described in
Annex "A", together with all existing improvements as well as those that may hereafter be made to exist or
constructed thereon, inclusive of all fruits and rents, in favor of the Bank, its successors and assigns. 2

When Transbuilders failed to pay its P15M loan within the stipulated period of one year, the bank restructured the
loan through a promissory note executed by Transbuilders in its favor. The pertinent provisions of the promissory
note3 stated that:

1. The proceeds of the Note shall be applied to loan account no. 21108336 4; and

2. The new obligation of Transbuilders to respondent Bank for fifteen million (P15,000,000.00) shall be paid
in twenty (20) quarterly installments commencing on September 28, 1996 and at an interest rate of eighteen
(18%) per annum.

Petitioners aver that they were not informed about the restructuring of Transbuilders’ loan. In fact, when they
learned of the new loan agreement sometime in December 1996, they wrote BPI-FSB requesting the cancellation of
their mortgage and the return of their certificate of title to the mortgaged property. They claimed that the new loan
novated the loan agreement of March 24, 1995. Because the novation was without their knowledge and consent,
they were allegedly released from their obligation under the mortgage.

When BPI-FSB refused to cancel the mortgage, petitioners filed separate petitions for mandamus and prohibition
with the Regional Trial Court (RTC) of Manila to compel the bank to return their certificate of title and cancel the
mortgage. BPI-FSB, on the other hand, instituted extrajudicial foreclosure proceedings against petitioners in Iloilo
City after Transbuilders defaulted in its payments. Consequently, a sheriff’s notice of sale of petitioners’ property at
public auction was issued.

The Manila RTC dismissed petitioners’ actions for mandamus and prohibition. Their appeal to the Court of Appeals
was likewise dismissed:

The mortgage contract between the petitioners and the respondent BPI does not limit the obligation or loan for
which it may stand to the loan agreement between Transbuilders and BPI, dated March 24, 1995, considering that
under the terms of that contract, the intent of all the parties, including the petitioners, to secure future indebtedness
is apparent…. On the whole, the contract of loan/mortgage dated March 24, 1995, appears to include even
the new loan agreement between Transbuilders and BPI, entered into on June 28, 1996.

xxx xxx xxx

There is likewise no merit to the petitioners’ submission that there was a novation of the March 24, 1995 contract.
There is no clear intent of the parties to make the new contract completely supersede and abolish the old
loan/mortgage contract. The established rule is that novation is never presumed. Novation will not be allowed unless
it is clearly shown by express agreement, or by acts of equal import. Thus, to effect an objective novation it is
imperative that the new obligation expressly declares that the old obligation is thereby extinguished or that the new
obligation be on every point incompatible with the new one. (Ajax Marketing & Development Corporation v. Court of
Appeals, 248 SCRA 222 [1995]) Without such clear intent to abolish the old contract, there is no merit to affirm the
existence of a novation.
There is no basis therefore, to the charge that respondent BPI had gravely erred in not surrendering the petitioners’
certificate of title, as the mortgage undertaking of the petitioners has not been cancelled. For the same reason, the
respondent BPI acted within its prerogative when it initiated extra-judicial foreclosure proceedings over the
petitioners’ property.

WHEREFORE, premises considered, the instant appeals from the Decision of the Regional Trial Court of Iloilo City
in CA-G.R. SP No. 45887 and the Order of dismissal of the Regional Trial Court of Manila in CA-G.R. SP No. 45629
are hereby DISMISSED.

SO ORDERED.5 (emphasis ours)

Petitioners moved for a reconsideration of the decision but were unsuccessful. Hence, this appeal.

The only issue for our consideration is whether there was a novation of the mortgage loan contract between
petitioners and BPI-FSB that would result in the extinguishment of petitioners’ liability to the bank.

We agree with the CA that there was none.

Novation is defined as the extinguishment of an obligation by the substitution or change of the obligation by a
subsequent one which terminates the first, either by changing the object or principal conditions, or by substituting
the person of the debtor, or subrogating a third person in the rights of the creditor. 6

Article 1292 of the Civil Code on novation further provides:

Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative
that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
with each other.

The cancellation of the old obligation by the new one is a necessary element of novation which may be effected
either expressly or impliedly. While there is really no hard and fast rule to determine what might constitute sufficient
change resulting in novation, the touchstone, however, is irreconcilable incompatibility between the old and the new
obligations.7

In Garcia, Jr. v. Court of Appeals, 8 we held that:

In every novation there are four essential requisites:(1) a previous valid obligation; (2) the agreement of all the
parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the new one. There must be
consent of all the parties to the substitution, resulting in the extinction of the old obligation and the creation of a valid
new one. The acceptance of the promissory note by the plaintiff is not novation of the contract. The legal doctrine is
that an obligation to pay a sum of money is not novated in a new instrument by changing the term of payment and
adding other obligations not incompatible with the old one. It is not proper to consider an obligation novated as in
the case at bar by the mere granting of extension of payment which did not even alter its essence. To sustain
novation necessitates that the same be declared in unequivocal terms or that there is complete and substantial
incompatibility between the two obligations. 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 or wherein the old contract is merely supplementing the old one.

Thus, the well-settled rule is that, with respect to obligations to pay a sum of money, the obligation is not novated by
an instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not
incompatible with the old ones, or the new contract merely supplements the old one. 9

BPI-FSB and Transbuilders only extended the repayment term of the loan from one year to twenty quarterly
installments at 18% interest per annum. There was absolutely no intention by the parties to supersede or abrogate
the old loan contract secured by the real estate mortgage executed by petitioners in favor of BPI-FSB. In fact, the
intention of the new agreement was precisely to revive the old obligation after the original period expired and the
loan remained unpaid. The novation of a contract cannot be presumed. In the absence of an express agreement,
novation takes place only when the old and the new obligations are incompatible on every point. 10

Moreover, under the real estate mortgage executed by them in favor of BPI-FSB, petitioners undertook to secure
the P15M loan of Transbuilders to BPI-FSB "and other credit accommodations of whatever nature obtained by the
Borrower/Mortgagor." While this stipulation proved to be onerous to petitioners, neither the law nor the courts will
extricate a party from an unwise or undesirable contract entered into with all the required formalities and with full
awareness of its consequences. 11 Petitioners voluntarily executed the real estate mortgage on their property in favor
of BPI-FSB to secure the P15M loan of Transbuilders. They cannot now be allowed to repudiate their obligation to
the bank after Transbuilders’ default. While petitioners’ liability was written in fine print and in a contract prepared by
BPI-FSB, it has been the consistent holding of this Court that contracts of adhesion are not invalid per se. On
numerous occasions, we have upheld the binding effects of such contracts. 12

WHEREFORE, the petition is hereby DENIED for lack of merit.

SO ORDERED.

RENATO C. CORONA
Associate Justice

WE CONCUR :

REYNATO S. PUNO
Associate Justice
Chairperson

ANGELINA SANDOVAL-GUTIERREZ ADOLFO S. AZCUNA

Associate Justice Asscociate Justice

CANCIO C. GARCIA
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, I certify that the
conclusions in the above decision had been reached in consultation before the case was assigned to the writer of
the opinion of the Court’s Division.

ARTEMIO V. PANGANIBAN
Chief Justice
G.R. No. 115158 September 5, 1997

EMILLA M. URACA, CONCORDIA D. CHING and ONG SENG, represented by ENEDINO H.

FERRER, petitioners,
vs.
COURT OF APPEALS, JACINTO VELEZ, JR., CARMEN VELEZ TING, AVENUE MERCHANDISING, INC., FELIX
TING AND ALFREDO GO, respondents.

PANGANIBAN, J.:

Novation is never presumed; it must be sufficiently established that a valid new agreement or obligation has
extinguished or changed an existing one. The registration of a later sale must be done in good faith to entitle the
registrant to priority in ownership over the vendee in an earlier sale.

Statement of the Case

These doctrines are stressed by this Court as it resolves the instant petition challenging the December 28, 1993
Decision  of Respondent Court of Appeals  in CA-G.R. SP No. 33307, which reversed and set aside the judgment of
1 2

the Regional Trial Court of Cebu City, Branch 19, and entered a new one dismissing the petitioners' complaint. The
dispositive portion of the RTC decision reads: 3

WHEREFORE, judgment is hereby rendered:

1) declaring as null and void the three (3) deeds of sale executed by the Velezes to Felix C. Ting,
Manuel Ting and Alfredo Go;

2) ordering Carmen Velez Ting and Jacinto M. Velez, Jr. to execute a deed of absolute sale in favor
of Concordia D. Ching and Emilia M. Uraca for the properties in question for P1,400,000.00, which
sum must be delivered by the plaintiffs to the Velezes immediately after the execution of said
contract;

3) ordering Carmen Velez Ting and Jacinto M. Velez, Jr. to reimburse Felix C. Ting, Manuel C. Ting
and Alfredo Go whatever amount the latter had paid to the former;

4) ordering Felix C. Ting, Manuel C. Ting and Alfredo Go to deliver the properties in question to the
plaintiffs within fifteen (15) days from receipt of a copy of this decision;

5) ordering all the defendants to pay, jointly and severally, the plaintiffs the sum of P20,000.00 as
attorney's fees.

SO ORDERED.

The Antecedent Facts

The facts narrated by the Court of Appeals are as follows: 4

The Velezes (herein private respondents) were the owners of the lot and commercial building in
question located at Progreso and M.C. Briones Streets in Cebu City.

Herein (petitioners) were the lessees of said commercial building. 5

On July 8, 1985, the Velezes through Carmen Velez Ting wrote a letter to herein (petitioners)
offering to sell the subject property for P1,050,000.00 and at the same time requesting (herein
petitioners) to reply in three days.

On July 10, 1985, (herein petitioners) through Atty. Escolastico Daitol sent a reply-letter to the
Velezes accepting the aforesaid offer to sell.

On July 11, 1985, (herein petitioner) Emilia Uraca went to see Carmen Ting about the offer to sell
but she was told by the latter that the price was P1,400,000.00 in cash or manager's check and not
P1,050,000.00 as erroneously stated in their letter-offer after some haggling. Emilia Uraca agreed to
the price of P1,400,000.00 but counter-proposed that payment be paid in installments with a down
payment of P1,000,000.00 and the balance of P400,000 to be paid in 30 days. Carmen Velez Ting
did not accept the said counter-offer of Emilia Uraca although this fact is disputed by Uraca.

No payment was made by (herein petitioners) to the Velezes on July 12, 1985 and July 13, 1985.
 On July 13, 1985, the Velezes sold the subject lot and commercial building to the Avenue Group
(Private Respondent Avenue Merchandising Inc.) for P1,050,000.00 net of taxes, registration fees,
and expenses of the sale.

At the time the Avenue Group purchased subject property on July 13, 1985 from the Velezes, the
certificate of title of the said property was clean and free of any annotation of adverse claims or lis
pendens.

On July 31, 1985 as aforestated, herein (petitioners) filed the instant complaint against the Velezes.

On August 1, 1985, (herein petitioners) registered a notice of lis pendens over the property in
question with the Office of the Register of Deeds. 6

On October 30, 1985, the Avenue Group filed an ejectment case against (herein petitioners)
ordering the latter to vacate the commercial building standing on the lot in question.

Thereafter, herein (petitioners) filed an amended complaint impleading the Avenue Group as new
defendants (after about 4 years after the filing of the original complaint).

The trial court found two perfected contracts of sale between the Velezes and the petitioners involving the real
property in question. The first sale was for P1,050,000.00 and the second was for P1,400,000.00. In respect to the
first sale, the trial court held that "[d]ue to the unqualified acceptance by the plaintiffs within the period set by the
Velezes, there consequently came about a meeting of the minds of the parties not only as to the object certain but
also as to the definite consideration or cause of the contract."  And even assuming arguendo that the second sale
7

was not perfected, the trial court ruled that the same still constituted a mere modificatory novation which did not
extinguish the first sale. Hence, the trial court held that "the Velezes were not free to sell the properties to the
Avenue Group."  It also found that the Avenue Group purchased the property in bad faith.
8 9

Private respondents appealed to the Court of Appeals. As noted earlier, the CA found the appeal meritorious. Like
the trial court, the public respondent held that there was a perfected contract of sale of the property for
P1,050,000.00 between the Velezes and herein petitioners. It added, however, that such perfected contract of sale
was subsequently novated. Thus, it ruled: "Evidence shows that that was the original contract. However, the same
was mutually withdrawn, cancelled and rescinded by novation, and was therefore abandoned by the parties when
Carmen Velez Ting raised the consideration of the contract [by] P350,000.00, thus making the price P1,400,000.00
instead of the original price of P1,050,000.00. Since there was no agreement as to the 'second' price offered, there
was likewise no meeting of minds between the parties, hence, no contract of sale was perfected."   The Court of
10

Appeals added that, assuming there was agreement as to the price and a second contract was perfected, the later
contract would be unenforceable under the Statute of Frauds. It further held that such second agreement, if there
was one, constituted a mere promise to sell which was not binding for lack of acceptance or a separate
consideration. 11

The Issues

Petitioners allege the following "errors" in the Decision of Respondent Court:

Since it ruled in its decision that there was no meeting of the minds on the "second" price offered
(P1,400,000.00), hence no contract of sale was perfected, the Court of Appeals erred in not holding
that the original written contract to buy and sell for P1,050,000.00 the Velezes property continued to
be valid and enforceable pursuant to Art. 1279 in relation with Art. 1479, first paragraph, and Art.
1403, subparagraph 2 (e) of the Civil Code.

II

The Court of Appeals erred in not ruling that petitioners have better rights to buy and own the
Velezes' property for registering their notice of lis pendens ahead of the Avenue Group's registration
of their deeds of sale taking into account Art. 1544, 2nd paragraph, of the Civil Code.  12

The Court's Ruling

The petition is meritorious.

First Issue: No Extinctive Novation

The lynchpin of the assailed Decision is the public respondent's conclusion that the sale of the real property in
controversy, by the Velezes to petitioners for P1,050,000.00, was extinguished by novation after the said parties
negotiated to increase the price to P1,400,000.00. Since there was no agreement on the sale at the increased price,
then there was no perfected contract to enforce. We disagree.

The Court notes that the petitioners accepted in writing and without qualification the Velezes' written offer to sell at
P1,050,000.00 within the three-day period stipulated therein. Hence, from the moment of acceptance on July 10,
1985, a contract of sale was perfected since undisputedly the contractual elements of consent, object certain and
cause concurred.   Thus, this question is posed for our resolution: Was there a novation of this perfected contract?
13

Article 1600 of the Civil Code provides that "(s)ales are extinguished by the same causes as all other
obligations, . . . ." Article 1231 of the same Code states that novation is one of the ways to wipe out an obligation.
Extinctive novation requires: (1) the existence of a previous valid obligation; (2) the agreement of all the parties to
the new contract; (3) the extinguishment of the old obligation or contract; and (4) the validity of the new one.   The
14

foregoing clearly show that novation is effected only when a new contract has extinguished an earlier contract
between the same parties. In this light, novation is never presumed; it must be proven as a fact either by express
stipulation of the parties or by implication derived from an irreconcilable incompatibility between old and new
obligations or contracts.   After a thorough review of the records, we find this element lacking in the case at bar.
15

As aptly found by the Court of Appeals, the petitioners and the Velezes did not reach an agreement on the new
price of P1,400,000.00 demanded by the latter. In this case, the petitioners and the Velezes clearly did not perfect a
new contract because the essential requisite of consent was absent, the parties having failed to agree on the terms
of the payment. True, petitioners made a qualified acceptance of this offer by proposing that the payment of this
higher sale price be made by installment, with P1,000,000.00 as down payment and the balance of P400,000.00
payable thirty days thereafter. Under Article 1319 of the Civil Code,   such qualified acceptance constitutes a
16

counter-offer and has the ineludible effect of rejecting the Velezes' offer.   Indeed, petitioners' counter-offer was not
17

accepted by the Velezes. It is well-settled that "(a)n offer must be clear and definite, while an acceptance must be
unconditional and unbounded, in order that their concurrence can give rise to a perfected contract."   In line with this
18

basic postulate of contract law, "a definite agreement on the manner of payment of the price is an essential element
in the formation of a binding and enforceable contract of sale."   Since the parties failed to enter into a new contract
19

that could have extinguished their previously perfected contract of sale, there can be no novation of the latter.
Consequently, the first sale of the property in controversy, by the Velezes to petitioners for P1,050,000.00, remained
valid and existing.

In view of the validity and subsistence of their original contract of sale as previously discussed, it is unnecessary to
discuss public respondent's theses that the second agreement is unenforceable under the Statute of Frauds and
that the agreement constitutes a mere promise to sell.

Second Issue: Double Sale of an Immovable

The foregoing holding would have been simple and straightforward. But Respondent Velezes complicated the
matter by selling the same property to the other private respondents who were referred to in the assailed Decision
as the Avenue Group.

Before us therefore is a classic case of a double sale — first, to the petitioner; second, to the Avenue Group. Thus,
the Court is now called upon to determine which of the two groups of buyers has a better right to said property.

Article 1544 of the Civil Code provides the statutory solution:

xxx xxx xxx

Should it be immovable property, the ownership shall belong to the person acquiring it who in good
faith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first
in the possession; and, in the absence thereof, to the person who presents the oldest title, provided
there is good faith.

Under the foregoing, the prior registration of the disputed property by the second buyer does not by itself confer
ownership or a better right over the property. Article 1544 requires that such registration must be coupled with good
faith. Jurisprudence teaches us that "(t)he governing principle is primus tempore, potior jure (first in time, stronger in
right). Knowledge gained by the first buyer of the second sale cannot defeat the first buyer's rights except where the
second buyer registers in good faith the second sale ahead of the first, as provided by the Civil Code. Such
knowledge of the first buyer does not bar her from availing of her rights under the law, among them, to
register first her purchase as against the second buyer. But in converso, knowledge gained by the second buyer of
the first sale defeats his rights even if he is first to register the second sale, since such knowledge taints his prior
registration with bad faith. This is the price exacted by Article 1544 of the Civil Code for the second buyer being able
to displace the first buyer; that before the second buyer can obtain priority over the first, he must show that he acted
in good faith throughout (i.e, in ignorance of the first sale and of the first buyer's rights) — from the time of
acquisition until the title is transferred to him by registration or failing registration, by delivery of
possession."   (Emphasis supplied)
20
After a thorough scrutiny of the records of the instant case, the Court finds that bad faith tainted the Avenue Group's
purchase on July 13, 1985 of the Velezes' real property subject of this case, and the subsequent registration thereof
on August 1, 1995. The Avenue Group had actual knowledge of the Velezes' prior sale of the same property to the
petitioners, a fact antithetical to good faith. For a second buyer like the Avenue Group to successfully invoke the
second paragraph, Article 1544 of the Civil Code, it must possess good faith from the time of the sale in its favor
until the registration of the same. This requirement of good faith the Avenue Group sorely failed to meet. That it had
knowledge of the prior sale, a fact undisputed by the Court of Appeals, is explained by the trial court thus:

The Avenue Group, whose store is close to the properties in question, had known the plaintiffs to be
the lessee-occupants thereof for quite a time. Felix Ting admitted to have a talk with Ong Seng in
1983 or 1984 about the properties. In the cross-examination, Manuel Ting also admitted that about a
month after Ester Borromeo allegedly offered the sale of the properties Felix Ting went to see Ong
Seng again. If these were so, it can be safely assumed that Ong Seng had consequently told Felix
about plaintiffs' offer on January 11, 1985 to buy the properties for P1,000,000.00 and of their timely
acceptance on July 10, 1985 to buy the same at P1,050,000.00.

The two aforesaid admissions by the Tings, considered together with Uraca's positive assertion that
Felix Ting met with her on July 11th and who was told by her that the plaintiffs had transmitted
already to the Velezes their decision to buy the properties at P1,050,000.00, clinches the proof that
the Avenue Group had prior knowledge of plaintiffs' interest. Hence, the Avenue Group defendants,
earlier forewarned of the plaintiffs' prior contract with the Velezes, were guilty of bad faith when they
proceeded to buy the properties to the prejudice of the plaintiffs.  21

The testimony of Petitioner Emilia Uraca supports this finding of the trial court. The salient portions of her testimony
follow:

BY ATTY. BORROMEO: (To witness)

Q According to Manuel Ting in his testimony, even if they know, referring to the
Avenue Group, that you were tenants of the property in question and they were
neighbors to you, he did not inquire from you whether you were interested in buying
the property, what can you say about that?

A It was Felix Ting who approached me and asked whether I will buy the property,
both the house and the land and that was on July 10, 1985.

ATTY BORROMEO: (To witness)

Q What was your reply, if any?

A Yes, sir, I said we are going to buy this property because we have stayed for a
long time there already and we have a letter from Carmen Ting asking us whether we
are going to buy the property and we have already given our answer that we are
willing to buy.

COURT: (To witness)

Q What do you mean by that, you mean you told Felix Ting and you showed him that
letter of Carmen Ting?

WITNESS:

A We have a letter of Carmen Ting where she offered to us for sale the house and lot
and I told him that I have already agreed with Concordia Ching, Ong Seng and my
self that we buy the land. We want to buy the land and the building.  22

We see no reason to disturb the factual finding of the trial court that the Avenue Group, prior to the registration of
the property in the Registry of Property, already knew of the first sale to petitioners. It is hornbook doctrine that
"findings of facts of the trial court, particularly when affirmed by the Court of Appeals, are binding upon this
Court"   save for exceptional
23

circumstances   which we do not find in the factual milieu of the present case. True, this doctrine does not apply
24

where there is a variance in the factual findings of the trial court and the Court of Appeals. In the present case, the
Court of Appeals did not explicitly sustain this particular holding of the trial court, but neither did it controvert the
same. Therefore, because the registration by the Avenue Group was in bad faith, it amounted to no "inscription" at
all. Hence, the third and not the second paragraph of Article 1544 should be applied to this case. Under this
provision, petitioners are entitled to the ownership of the property because they were first in actual possession,
having been the property's lessees and possessors for decades prior to the sale.
Having already ruled that petitioners' actual knowledge of the first sale tainted their registration, we find no more
reason to pass upon the issue of whether the annotation of lis pendens automatically negated good faith in such
registration.

WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is hereby SET ASIDE and
the dispositive portion of the trial court's decision dated October 19, 1990 is REVIVED with the following
MODIFICATION — the consideration to be paid under par. 2 of the disposition is P1,050,000.00 and not
P1,400,000.00. No Costs.

SO ORDERED.

Narvasa, C.J., Melo and Francisco, JJ., concur.

Davide, Jr., J., concurs in the results.

G.R. No. 135046           August 17, 1999
SPOUSES FLORANTE and LAARNI BAUTISTA, petitioners,
vs.
PILAR DEVELOPMENT CORPORATION, respondent.

PUNO, J.:

This petition for review seeks to reverse and set aside the Decision and Resolution of the Court of Appeals in CA-
G.R. CV No. 513631 which reversed the Decision of the Regional Trial Court, Makati, Branch 138 in Civil Case No.
17702.2

The following facts are uncontroverted.

In 1978, petitioner spouses Florante and Laarni Bautista purchased a house and lot in Pilar Village, Las Pinas,
Metro Manila. To partially finance the purchase, they obtained from the Apex Mortgage & Loan Corporation (Apex) a
loan in the amount of P100,180.00. They executed a promissory note on December 22, 1978 obligating themselves,
jointly and severally, to pay the "principal sum of P100,180.00 with interest rate of 12% and service charge of 3%"
for a period of 240 months, or twenty years, from date, in monthly installments of P1,378.83. 3 Late payments were to
be charged a penalty of one and one-half per cent (1 1/2%) of the amount due. In the same promissory note,
petitioners authorized Apex to "increase the rate of interest and/or service charges" without notice to them in the
event that a law, Presidential Decree or any Central Bank regulation should be enacted increasing the lawful rate of
interest and service charges on the loan. 4 Payment of the promissory note was secured by a second mortgage on
the house and lot purchased by petitioners.5

Petitioner spouses failed to pay several installments. On September 20, 1982, they executed another promissory
note in favor of Apex. This note was in the amount of P142,326.43 at the increased interest rate of twenty-one per
cent (21%) per annum with no provision for service charge but with penalty charge of 1 1/2% for late payments.
Payment was to be made for a period of 196 months or 16.33 years in monthly installments of P2,526.68, inclusive
of principal and interest. Petitioner spouses also authorized Apex to "increase/decrease the rate of interest and/or
service charges" on the note in the event any law or Central Bank regulation shall be passed increasing or
decreasing the same.6

In November 1983, petitioner spouses again failed to pay the installments. On June 6, 1984, Apex assigned the
second promissory note to respondent Pilar Development Corporation without notice to petitioners. 1âwphi1.nêt

On August 31, 1987, respondent corporation, as successor-in-interest of Apex, instituted against petitioner spouses
Civil Case No. 17702 before the Regional Trial Court, Makati, Branch 138. Respondent corporation sought to collect
from petitioners the amount of P140,515.11 representing the unpaid balance of the principal debt from November
23, 1983, including interest at the rate of twenty-one per cent (21%) under the second promissory note, and 25%
and 36% per annum in accordance with Central Bank Circular No. 905, series of 1982. Respondent also sought
payment of ten per cent (10%) of the amount due as attorney's fees. 7

In their answer, petitioner spouses mainly contended that the terms of the second promissory note increasing the
interest rate to 21% and the escalation clauses authorizing Apex to increase interest rates pursuant to any law or
Central Bank regulation are null and void in the absence of a de-escalation clause in the same note. 8

After pre-trial, both parties submitted the case for decision on the sole issue of the interest rate.

The trial court rendered judgment on September 22, 1995. It ordered petitioner spouses to pay respondent
corporation the sum of P140,515.11, with interest at the rate of 12% per annum, plus service charge, viz:

WHEREFORE, judgment is hereby rendered as follows:

(a) Plaintiff is entitled to collect from the defendants the amount of P140,515.11 with interest at the rate of
12% per annum from November 23, 1983 until the amount is fully paid plus the stipulated service charge;

(b) Ordering defendants as joint and several obligors to pay plaintiff the amount stated in paragraph (a)
hereof;

(c) Counterclaim is hereby dismissed.

No pronouncement as to costs.

SO ORDERED.9

Both parties appealed to the Court of Appeals. In a Decision dated May 14, 1998, the appellate court reversed the
trial court by applying the interest rate of 21% per annum, and adding attorney's fees of 10%. Thus:
 IN VIEW OF ALL THE FOREGOING, the appealed judgment is hereby REVERSED and SET ASIDE and a
new one entered ordering the defendants to pay the plaintiffs the amount of P142,326.43, as principal with
interest at the rate of 21% from November 23, 1983 until the amount is fully paid; the sum equivalent to 10%
of the amount due as attorney's fees and the costs of this suit.

SO ORDERED.10

Petitioner spouses moved for reconsideration. In a Resolution dated August 18, 1998, the Court of Appeals denied
the motion but reduced the principal amount of the obligation from P142,326.42 to P140,515.11. 11

Hence this recourse.

Petitioner spouses claim that the Court of Appeals erred:

IN RULING THAT THE TWO (2) PROMISSORY NOTES EXECUTED BY THE PARTIES ARE INDEPENDENT OF
EACH OTHER.

CONVERSELY, IN NOT RULING THAT THE SAID PROMISSORY NOTES CONSTITUTE A SINGLE-LOAN
TRANSACTION.

II

IN RULING THAT THE APPLICABLE RATE OF INTEREST IS 21% PER ANNUM AS STIPULATED IN THE
SECOND PROMISSORY NOTE.

CONVERSELY, IN NOT RULING THAT THE ESCALATION OF INTEREST RATE FROM 12% PER ANNUM (1ST
PROMISSORY NOTE) TO 21% PER ANNUM (2ND PROMISSORY NOTE) IS UNLAWFUL.

III

IN RULING THAT 10% OF THE AMOUNT DUE IS AWARDABLE AS ATTORNEY'S FEES.

CONVERSELY, IN NOT RULING THAT THE AWARD OF 10% ATTORNEY'S FEES IS NOT PROPER UNDER
THE CIRCUMSTANCES.

IV

IN RULING THAT NOTICE OF ASSIGNMENT OF CREDIT IS "POINTLESS AND UNSUSTAINABLE ."

CONVERSELY, IN NOT RULING THAT NOTICE TO THE DEBTOR IS REQUIRED WHEN CREDIT IS ASSIGNED.

IN NOT RULING THAT UNDER THE CIRCUMSTANCES PETITIONERS ARE ENTITLED TO MORAL AND
EXEMPLARY DAMAGES.12

The controversy in this petition involves the rate of interest respondent creditor is entitled to collect on petitioners'
loan: whether it be 12% under the promissory note of December 22, 1978, or 21% under the promissory note of
September 20, 1982.

Petitioners claim that the interest rate of 12% per annum should be adjudged inasmuch as the two promissory notes
constitute one transaction. Allegedly, the first note defined the terms and conditions of the loan while the second
note is merely an extension of and derives its existence from the former. Hence, the second note is governed by the
stipulations in the first note.13

The two promissory notes are identically entitled "Promissory Note with Authority to Assign Credit." The notes were
prepared by Apex in standard form and consist of two (2) pages each. Except for one or two stipulations, they
contain the same provisions and the same blanks for the amount of the loan and other pertinent data subject of
each note. However, on the upper right portion of the second note, there appears a typewritten entry which reads:

This cancels PN # A-387-78 dated December 22, 1978. 14

Correspondingly, on the face of each page of the first promissory note, i.e., PN No. A-387-78 dated December 22,
1978, the word "Cancelled" is boldly stamped twice with the date "September 16, 1982" and a signature written in a
space inside the letters of the word.15
The first promissory note was cancelled by the express terms of the second promissory note. To cancel is to strike
out, to revoke, rescind or abandon, to terminate.16 In fine, the first note was revoked and terminated. Simply put, it
was novated. The extinguishment of an obligation by the substitution or change of the obligation by a subsequent
one which extinguishes or modifies the first is a novation. 17 Novation is made either by changing the object or
principal conditions, referred to as an objective or real novation; or by substituting the person of the debtor or
subrogating a third person to the rights of the creditor, which is known as subjective or personal novation. 18 In both
objective and subjective novation, a dual purpose is achieved — an obligation is extinguished and a new one is
created in lieu thereof.19 Novation may either be express, when the new obligation declares in unequivocal terms
that the old obligation is extinguished; or implied, when the new obligation is on every point incompatible with the old
one.20 Express novation takes place when the contracting parties expressly disclose that their object in making the
new contract is to extinguish the old contract, otherwise the old contract remains in force and the new contract is
merely added to it, and each gives rise to an obligation still in force. 21

Novation has four (4) essential requisites: (1) the existence of a previous valid obligation; (2) the agreement of all
parties to the new contract; (3) the extinguishment of the old contract; and (4) the validity of the new one. 22 In the
instant case, all four requisites have been complied with. The first promissory note was a valid and subsisting
contract when petitioner spouses and Apex executed the second promissory note. The second promissory note
absorbed the unpaid principal and interest of P142,326.43 in the first note which amount became the principal debt
therein, payable at a higher interest rate of 21% per annum. Thus, the terms of the second promissory note
provided for a higher principal, a higher interest rate, and a higher monthly amortization, all to be paid within a
shorter period of 16.33 years. These changes are substantial and constitute the principal conditions of the
obligation.23 Both parties voluntarily accepted the terms of the second note; and also in the same note, they
unequivocally stipulated to extinguish the first note. Clearly, there was animus novandi, an express intention to
novate.24 The first promissory note was cancelled and replaced by the second note. This second note became the
new contract governing the parties' obligations.

In their second assigned error, petitioners contend that in the second promissory note, the escalation of the interest
rate from 12% to 21% per annum is unlawful and cannot be imposed for failure of the escalation provisions to
include valid de-escalation clauses. In the absence of de-escalation clauses, the Court of Appeals allegedly erred in
applying Central Bank Circulars Nos. 705, 712 and 905 issued by the Monetary Board of the Central Bank of the
Philippines.25

At the time the parties executed the first promissory note in 1978, the interest of 12% was the maximum rate fixed
by the Usury Law for loans secured by a mortgage upon registered real estate. 26 On December 1, 1979, the
Monetary Board of the Central Bank of the Philippines 27 issued Circular No. 705 which fixed the effective rate of
interest on loan transactions with maturities of more than 730 days to twenty-one per cent (21%) per annum for both
secured and unsecured loans.28 On January 28, 1980, The Monetary Board issued Circular No. 712 reiterating the
effective interest rate of 21% on said loan transactions. 29 On January 1, 1983, CB Circular No. 905, series of 1982,
took effect. This Circular declared that the rate of interest on any loan or forbearance of any money, goods or
credits, regardless of maturity and whether secured or unsecured, "shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended. 30 In short, Circular No. 905 removed the ceiling on interest rates
for secured and unsecured loans, regardless of maturity. 31

When the second promissory note was executed on September 20, 1982, Central Bank Circulars Nos. 705 and 712
were already in effect. These Circulars fixed the effective interest rate for secured loan transactions with maturities
of more than 730 days, i.e., two (2) years, at 21% per annum. The interest rate of 21% provided in the second
promissory note was therefore authorized under these Circulars.

The question of whether the escalation clauses in the second promissory note are valid is irrelevant. Respondent
corporation has signified that it is collecting petitioners' debt only at the fixed interest rate of 21% per annum, as
expressly agreed upon in the second promissory note, not at the escalated rates authorized under the escalation
clauses.32 The Court of Appeals therefore did not err in applying the interest rate of 21% to petitioner's loan under
the second promissory note.

Neither did the Court of Appeals err in imposing attorney's fees of ten per cent (10%) on the amount, due. The
award of attorney's fees is expressly stipulated in the fourth paragraph of the promissory note itself, viz:

In case of non-payment of the amount of this note or any portion of it on demand when given due, or any
other amount/s due on account of this note, the entire obligation shall become due and demandable, and if
for the enforcement of the payment thereof, APEX MORTGAGE AND LOANS CORP. is constrained to
entrust the case to its attorneys, I/We, jointly and severally, bind myself/ourselves to pay TEN (10%) per
cent on the amount due on the note as attorney's fees, such amount in no case to be less than FIVE
HUNDRED (P500.00) PESOS in addition to the legal fees and other incidental expenses. 33

Petitioners' lack of bad faith in resisting imposition of the increased interest rate cannot serve to mitigate their liability
for liquidated damages. Petitioner Florante Bautista is a lawyer and he should have been aware of the effects of the
stipulations in the second promissory note and the pertinent CB Circulars on his obligation. At the same time, there
is no showing that the amount of liquidated damages is iniquitous and unconscionable for this court to equitably
reduce the same.34
Finally, the fact that petitioners were not notified of the assignment of their credit by Apex to herein respondent
corporation is not material. In the eighth paragraph of the second promissory note, petitioners expressly waived
notice to any assignment of credit, viz:

It is understood that APEX MORTGAGE AND LOANS CORPORATION has the right to assign this
promissory note, or make use of it as collateral in favor of any third person whomsoever and this will
constitute as an authority therefore waiver of notice of such action taken [sic].35

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. 36

IN VIEW WHEREOF, the petition is denied and the Decision and Resolution of the Court of Appeals in CA-G.R. CV
No. 51363 are affirmed. 1âwphi1.nêt

SO ORDERED.

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

G.R. No. 154402               July 21, 2008

HEIRS OF ANTONIO F. BERNABE (namely: EVELYN C. VDA. DE BERNABE and JOSE III, SHIRLEY ANN,
GREGORY, ALEXANDER, and MICHAEL, all surnamed BERNABE), Petitioners,
vs.
COURT OF APPEALS and TITAN CONSTRUCTION CORPORATION, Respondents.

DECISION

TINGA, J.:

Petitioners in this case seek the review of the Court of Appeals Decision 1 dated 22 January 2002 and
Resolution2 dated 16 June 2002 in CA-G.R. CV No. 63168 which affirmed the Decision 3 of the Regional Trial Court
(RTC) of Makati City, Branch 146 dated 1 December 1998 in Civil Case No. 90-2534.

This case stemmed from a Complaint 4 for specific performance filed by respondent Titan Construction Corporation
(Titan) on 11 September 1990 before the RTC against petitioners’ predecessor-in-interest, Antonio F. Bernabe, and
his siblings Patricio F. Bernabe, Jose F. Bernabe and Cecilia Bernabe Perez (the defendants), who are co-owners
of an undivided one-half (½) share in two (2) parcels of land located in La Huerta, Parañaque, Metro Manila. In an
undated Deed of Sale of Real Estate5 entered into by Titan and the defendants, the latter sold their one-half (½)
share in the properties to Titan for ₱17,700,00.00 to be paid in the following manner:

ONE MILLION (₱1,000,000.00) PESOS upon the signing by the VENDORS for this DEED OF SALE[,] provided[,]
however, that payment may be made each VENDORS [sic] as the latter signs this DEED OF SALE;

The balance shall be paid within, but not later than sixty (60) days after the acquisition by the VENDEE at the latter’s
expenses [sic] of a RIGHT OF WAY from the Municipal Government of Parañaque, Metro Manila, and upon the
presentation by the VENDORS of an agreement with the ERIBERTA DEVELOPMENT CORPORATION that the
latter has agreed that VENDOR’S [sic] share is the northern half and had waived the right of First Refusal as
provided for in the DEED OF PARTITION OF REAL ESTATE; and upon the surrender by the VENDORS of the titles
of the property subject of this DEED OF SALE. A violation by the VENDORS of the provision of this paragraph shall
be a ground for cancellation of this Deed title. 6

Titan prayed for judgment ordering defendants to comply with their obligations under the contract and to pay
damages, alleging that it had already paid a substantial portion of the down payment and was still waiting for the
defendants’ compliance with their undertaking which they had failed to perform despite repeated reminders.
Sometime in August 1990, Titan received a letter7 from the defendants’ counsel, Atty. Samuel A. Arcamo, (Atty.
Arcamo) canceling and revoking the deed of sale allegedly in view of Titan’s failure to comply with the terms of the
deed. Insisting that it was the defendants who had incurred in default, Titan also sought the award of damages.

Defendants Antonio and Jose filed their Answer, 8 alleging therein that they alone signed 9 the deed of sale because
the other defendants, Patricio and Cecilia, did not agree to the terms of the deed. They conceded that they received
the down payment corresponding to their share in the property subject of the sale, and claimed that they had written
to the municipal council of Parañaque for the grant of a right of way but the same had remained unacted upon since
Titan failed to comply with its undertaking to shoulder the expenses of the grant. They denied having authorized
Atty. Arcamo to cancel the deed of sale or even to send a letter of cancellation and revocation to respondent.
Patricio filed a separate Amended Answer,10 alleging that he had never met any of Titan’s representatives much less
entered into an agreement with anyone for the sale of the property or authorized anyone to act in his behalf
pertaining to any sale. Cecilia, however, was declared in default for failure to file an answer.

On 26 December 1991, while the case was pending, Jose died without leaving any heir except his co-defendants.

A compromise agreement was subsequently entered into by Titan and the remaining defendants, whereby the latter
agreed to the sale of their one-half (½) share in the properties to Titan and waived whatever cause of action for
damages they might have against each other. By virtue of the compromise agreement, similar Deeds of Conditional
Sale dated 3 March 1994 were separately entered into by respondent Titan as vendee, and defendants Patricio,
Cecilia, and Antonio, who is represented by his attorneys-in-fact, as vendors of their undivided shares in the two
properties. The three deeds were similarly worded and contained the same terms and conditions and differed only
as to the amount of the purchase price.11

The parties filed a Joint Motion for Judgment Based on Compromise Agreement. 12 Antonio opposed the motion,
contending that he had not entered into any compromise agreement. 13 It turned out, however, that the joint motion
though not signed by Antonio was executed in his behalf by his two children, Jose III and Shirley Ann, by virtue of
a Special Power of Attorney14 (SPA) that Antonio himself had executed. Thus, the motion was denied. 15

Later, on 16 August 1994, defendant Antonio died and left herein petitioners — his surviving spouse Evelyn Cruz
and her children, Jose III, Shirley Ann, Gregory and Michael — as his heirs.
Titan subsequently filed a supplemental complaint 16 alleging that Antonio had already received a substantial portion
of the down payment for the sale of his share in the properties; that prior to his death, Antonio executed a SPA in
favor of his two children, Jose III and Shirley Ann, empowering them to execute in his favor the 3 March 1994 Deed
of Conditional Sale17 involving his share in the properties; that on the basis of the deed, it made additional
substantial advances on the purchase price and even expended certain amounts to satisfy the judgment debt of
Antonio in Civil Case No. 92-2328; that the heirs of Antonio refused to execute the formal deed of sale; and that
through its exclusive efforts, the one-half share of the original defendants in both properties was segregated and
TCT No. 8679318 covering the same was subsequently issued.

Petitioners, as defendants, filed their Answer19 to the supplemental complaint essentially controverting the validity of
the contracts entered into by the parties. They denied that a consummated sale was made between Titan and the
original defendants since only an unconcluded negotiation is reflected in the Deed of Sale of Real Estate and that
the fact that the negotiations did not push through is shown by the absence of the signatures of defendants Patricio
and Cecilia. Petitioners also questioned the genuineness of the Deed of Conditional Sale, pointing out that it had
been signed only later by Titan’s representative. They argued that, hence, the Deed of Conditional Sale is null and
void and if found otherwise, should be cancelled and rescinded for failure of Titan to comply with its undertaking.

The compromise agreements entered into by Titan and defendants Patricio and Cecilia were approved by the RTC
in separate partial judgments.20 No settlement of the case was reached between Titan and petitioners.

After trial, the RTC decided in favor of Titan in its Decision dated 1 December 1998. The trial court upheld the
validity of both the Deed of Sale of Real Estate and the Deed of Conditional Sale. It held that there was no basis to
rescind the contracts since petitioners had not proven that Titan had failed to comply with its undertaking under
them. The dispositive portion of the RTC decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
defendant, ordering the latter to:

1. Execute the registrable Deed of Sale in favor of plaintiff upon payment by the latter of the remaini[n]g
purchase price;

2. And to pay plaintiff cost[s] of suit.

SO ORDERED.21

The RTC modified the decision in its Order22 dated 15 February 1999 by specifying that in view of the compromise
agreements entered into by Titan and defendants Patricio and Cecilia, the 1 December 1998 Decision should be
rendered against the heirs of Antonio. Accordingly, said heirs were ordered to execute a registrable Deed of
Absolute Sale over the one-third (1/3) share of Antonio in the property covered by TCT No. 86793 of the Register of
Deeds of Parañaque, pursuant to the Deed of Conditional Sale, upon Titan’s payment to them of the amount of
₱3,431,058.42 representing the balance of the purchase price.

Petitioners appealed the RTC decision to the Court of Appeals. The appeal was dismissed in the Decision dated 22
January 2002, and the RTC decision was affirmed in toto. Petitioners’ motion for reconsideration was denied in the
Resolution23 dated 16 July 2002.

In the present petition for review, petitioners submit the following issues for resolution by the Court:

(1) Under a deed of conditional sale of a parcel of land, may the vendee compel the vendors to execute a
registerable deed of sale based on the allegation that it had paid a substantial portion of the ₱1 million down
payment of the total consideration of ₱17,700,000.00, where it was expressly stipulated that the vendors
would execute the necessary deed of absolute sale in favor of the vendee only upon full payment?

(2) May the vendors in a deed of conditional sale ask for rescission of contract for failure of the vendee to
pay in full the agreed consideration? 24

Petitioners, contending that the Deed of Sale of Real Estate and Deed of Conditional Sale are contracts to sell and
not contracts of sale, allege that Titan has no cause of action to file the complaint for specific performance since it
failed to pay the purchase price in full as agreed upon in the contracts. Petitioners argue that the import of the
stipulations in the Deed of Sale of Real Estate—which was not signed by Titan’s representative or by two of the four
alleged vendors, and which was neither notarized nor registered and hence defective—is that full payment of the
purchase price must be made before ownership of the properties passes to Titan. The Deed of Conditional Sale,
which necessarily superseded and nullified the Deed of Sale of Real Estate, expressed this intent more clearly when
it stated that "upon full payment of the purchase price, Vendor shall execute the necessary Deed of Absolute Sale in
favor of Vendee transferring and conveying all his undivided shares in the x x x properties." 25

While Titan admitted that it had already made payments of substantial amounts, petitioners on the one hand argue
that this is not the full payment agreed upon in the Deed of Conditional Sale that would entitle Titan to demand the
execution of a deed of absolute sale in its favor. Petitioners believe that Titan should have at least tendered
payment to them or deposited the money in court by way of consignation if acceptance of payment was refused;
otherwise, Titan has no right to demand specific performance from petitioners. Thus, for failure of Titan to comply
with its obligations, petitioners pray for the rescission of the Deed of Conditional Sale and the dismissal of Titan’s
complaint for specific performance.

On the other hand, Titan dismisses petitioners’ claim that the Deed of Sale of Real Estate was superseded and
nullified by the subsequent Deed of Conditional Sale, arguing that neither of these documents exclusively controls
and determines the agreement between the parties. Instead, it relies on the declaration of the Court of Appeals that
there was a perfected contract of sale of real estate evidenced by the Deed of Sale of Real Estate. However, Titan
expounds, said contract was not in the form required for registration under the law and so the courts below, in
affirming it and requiring petitioners to execute a registerable deed, simply followed the provisions of the Civil Code
governing the form of contracts, particularly Articles 1356, 1357 and 1358. Titan adds that it is only upon the
execution of a registerable deed of sale that full payment of the consideration should be made, and that since the
contract still has to be put in a registerable form as required by law, there is nothing yet to rescind. Moreover, it
claims that it has not been shown to have breached the contract as in fact its obligation to pay the remainder of the
purchase price would arise only upon petitioners’ fulfillment of several conditions stipulated in the contract. It thus
argues that petitioners have no cause of action for rescission. 26

The petition should be denied.

The document that spells out the nature of the transaction of the parties is the Deed of Conditional Sale. Stemming
from the compromise agreement entered into by Titan and petitioners, the Deed of Conditional Sale has
superseded the Deed of Sale of Real Estate which is the original contract. The whole essence of a compromise is
that by making reciprocal concessions, the parties avoid litigation or put an end to one already commenced. 27 A
compromise agreement can be entered into without novating or supplanting existing contracts, 28 but in this case, the
irreconcilable incompatibility between the Deed of Sale of Real Estate and the Deed of Conditional Sale inevitably
resulted in extinctive novation.29

The first contract or the Deed of Sale of Real Estate embodies a perfected contract of sale. There is no stipulation in
the said deed that title to the properties would remain with defendants until full payment of the consideration, or that
the right to unilaterally resolve the contract upon Titan’s failure to pay within a fixed period is given to defendants.
Patently, the contract executed by the parties is a contract of sale and not a contract to sell.

When the parties entered into a compromise, they executed new contracts involving the shares of Patricio, Cecilia
and Antonio in the properties. These new contracts are the three deeds of conditional sale entered into by Titan with
Patricio, Cecilia and Antonio, the last represented by his attorneys-in-fact. These contracts, all entitled Deed of
Conditional Sale, are contracts to sell.

The difference between contracts of sale and contracts to sell is relevant. In a contract of sale, the title to the
property passes to the vendee upon the delivery of the thing sold; in a contract to sell, ownership is, by agreement,
reserved in the vendor and is not to pass to the vendee until full payment of the purchase price. Otherwise stated, in
a contract of sale, the vendor loses ownership over the property and cannot recover it until and unless the contract
is resolved or rescinded; whereas in a contract to sell, title is retained by the vendor until full payment of the price. In
the latter contract, payment of the price is a positive suspensive condition, failure of which is not a breach but an
event that prevents the obligation of the vendor to convey title from becoming effective. 30

A careful reading of the stipulations in the Deed of Conditional Sale conveys the intent of the parties to enter into a
contract to sell. The fourth paragraph of the contract explicitly states that only when full payment of the purchase
price is made shall Antonio execute the deed of absolute sale transferring and conveying his shares in the subject
properties. Clearly, the intent is to reserve ownership in the seller, Antonio, until the buyer, Titan, pays in full the
purchase price. The full payment of the purchase price does not automatically vest ownership in Titan. A deed of
absolute sale still has to be executed by Antonio.

As earlier noted, the Deed of Sale of Real Estate is substituted by the subsequent deeds of conditional sale.
The Deed of Sale of Real Estate and the deeds of conditional sale involve different parties and different amounts,
and impose different obligations. The original deed, on one hand, and the latter three, on the other, are incompatible
and cannot subsist all at the same time.

Titan filed the complaint for specific performance based on petitioners’ refusal to honor the Deed of Sale of Real
Estate. Titan’s prayer in the complaint was for petitioners to comply with their obligations under the deed or in other
words, to honor the contract. The same relief is reiterated in the supplemental complaint since petitioners also
refused to honor the Deed of Conditional Sale. Petitioners’ refusal to honor the contract permeates the records of
the case. Petitioners argued before the trial court that no consummated sale had been entered into by their father
Antonio, his co-owners and Titan; that the Deed of Sale of Real Estate embodied only an unconsummated
negotiation; and that the Deed of Conditional Sale, which petitioners Shirley Anne and Jose III signed in behalf of
their father, was spurious. They attacked the validity of the contracts but alternatively argued for rescission based
on Titan’s failure to comply with its prestations thereunder. 31 With the trial court’s finding that there was a valid
agreement between the parties for the sale of the properties, petitioners in their brief before the Court of Appeals
harped on Titan’s supposed failure to fulfill its obligations under the contract to sell and on that basis sought the
rescission of the contract.32 The same arguments are laid down before this court.

Thus, Titan has a cause of action since it has already partially performed the contract by making down and other
payments on the purchase price, as well as effecting and spending for the segregation and titling of the shares of
petitioners and their co-owners in the properties. Titan seeks only to enforce the contract. 1awphi1

Petitioners argue that Titan’s failure to pay the remainder of the purchase price constitutes a failure to perform its
obligation under the deed and thus a ground for rescission. The demand for rescission is based on Article 1191 33 of
the New Civil Code. This article refers to rescission applicable to reciprocal obligations. Reciprocal obligations are
those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously such that
the performance of one is conditioned upon the simultaneous fulfillment of the other. While Article 1191 uses the
term "rescission," the original term which was used in Article 1124 of the old Civil Code, from which the article was
based, was "resolution." Resolution is a principal action which is based on breach of a party 34 or breach of faith by
the other party who violates the reciprocity between them. The breach contemplated in the provision is the obligor’s
failure to comply with an existing obligation.35 Thus, the power to rescind is given only to the injured party. The
injured party is the party who has faithfully fulfilled his obligation or is ready and willing to perform his obligation. 36

Under the Deed of Conditional Sale, the balance of the purchase price should be paid within sixty (60) days from the
fulfillment of several conditions. At the time of the filing of the supplemental complaint, only three of the four
conditions had been carried out. Thus, at that point, the balance of the purchase price had not yet become due and
so, too, petitioners’ obligation to execute a registerable deed of absolute sale had not yet arisen.

The first condition, i.e., that Eriberta Development Corporation must agree to make the vendors’ share pertain to the
northern half of the properties, was deemed fulfilled with the segregation and titling of the interests of Antonio,
Patricio and Cecilia under TCT No. 86793.37 The separation of the property was registered on 12 October 1994, just
a few months after the parties executed the Deed of Conditional Sale. With the segregation of the property and the
issuance of TCT No. 86793, the fourth condition, i.e., that the titles to the properties be surrendered to Titan, was
also satisfied since the segregation would not have transpired had the old titles not been surrendered. 38 The second
condition involving the co-owners’ waiver of their right of first refusal was also complied with, as evidenced by similar
declarations in the deeds of conditional sale executed by Patricio and Cecilia. 39 It is only the third condition—the
acquisition of a right of way over the northern part of the property—that had not yet been fulfilled at the time of the
filing of the supplemental complaint.

It was only during the trial that the fulfillment and/or waiver of the third condition was established. Titan presented
proof that on 15 May 1995, its board of directors adopted a resolution declaring Titan’s waiver of the acquisition of a
right of way over the northern half portion of the properties as a condition to the sale, and its consequent willingness
to pay the purchase price even before the right of way is secured. 40 It was on the basis of the fulfillment of all the
conditions that the RTC ordered the execution of the registerable deed of sale but only upon Titan’s payment of the
balance. Although it was not explicitly stated, the trial court was essentially expressing that payment of the balance
had already become due. But since the trial court’s decision was appealed all the way to this Court, it could not
attain finality and execution could not be ordered. In short, the pendency of the appeal put resolution of the
controversy on hold.

Thus, petitioners cannot ask for rescission of the Deed of Conditional Sale since it has been proven that far from
violating the conditions of the deed, Titan was ready and willing to perform its contractual obligations. That the
balance had not yet become due and demandable is a result of the appeal from the RTC and CA decisions, and is
not due to Titan’s alleged refusal to comply with the contract. Accordingly, the Deed of Conditional Sale remains
valid, but petitioners cannot be compelled by specific performance to execute the deed of absolute sale in favor of
Titan until and unless Titan settles the balance of the purchase price as agreed upon.

Under the Deed of Conditional Sale, defendant Antonio promised to sell to Titan his "registered 1/12 interest and his
1/3 of 1/12 share in the 1/12 registered share of his late mother" in the properties covered by TCT No. 86793 for the
consideration of ₱5,889,333.00. The trial court had ordered petitioners to execute the registerable deed of absolute
sale of said shares upon payment to them by Titan of the amount of ₱3,431,058.42 representing the balance of the
purchase price thereof. The amount due was affirmed by the Court of Appeals which found that based on the
admitted exhibits, vouchers, checks, compromise agreement/partial judgments, the total payments already made by
Titan is ₱2,458,274.58 which, if subtracted from the agreed purchase price of ₱5,889,333.00, would yield
₱3,431,058.42.41 It is this amount that Titan should pay to petitioners sixty (60) days from the fulfillment of the
conditions in order to compel petitioners to execute the deed of absolute sale in its favor.

WHEREFORE, in view of the foregoing, the petition is DENIED. Respondent Titan Construction Corporation is
ORDERED to PAY petitioners Heirs of Antonio F. Bernabe the amount of ₱3,431,058.42

within sixty (60) days from the finality of this decision. Petitioners are ORDERED to ACCEPT the payment and
thereupon EXECUTE the proper deed of absolute sale. Both parties are ORDERED to COMPLY with the other
stipulations in the Deed of Conditional Sale. No pronouncement as to costs.
SO ORDERED.

DANTE O. TINGA
Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CONSUELO YNARES-SANTIAGO CONCHITA CARPIO MORALES

Associate Justice Associate Justice

PRESBITERO J. VELASCO, JR.

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Court’s Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairperson’s Attestation, it is hereby
certified that the conclusions in the above Decision had been reached in consultation before the case was assigned
to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice
G.R. No. 154127               December 8, 2003
ROMEO C. GARCIA, petitioner,
vs.
DIONISIO V. LLAMAS, respondent.

DECISION

PANGANIBAN, J.:

Novation cannot be presumed. It must be clearly shown either by the express assent of the parties or by the
complete incompatibility between the old and the new agreements. Petitioner herein fails to show either requirement
convincingly; hence, the summary judgment holding him liable as a joint and solidary debtor stands.

The Case

Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to nullify the November 26, 2001
1 

Decision and the June 26, 2002 Resolution of the Court of Appeals (CA) in CA-GR CV No. 60521. The appellate
2  3 

court disposed as follows:

"UPON THE VIEW WE TAKE OF THIS CASE, THUS, the judgment appealed from, insofar as it pertains to
[Petitioner] Romeo Garcia, must be, as it hereby is, AFFIRMED, subject to the modification that the award for
attorney’s fees and cost of suit is DELETED. The portion of the judgment that pertains to x x x Eduardo de Jesus is
SET ASIDE and VACATED. Accordingly, the case against x x x Eduardo de Jesus is REMANDED to the court of
origin for purposes of receiving ex parte [Respondent] Dionisio Llamas’ evidence against x x x Eduardo de Jesus." 4

The challenged Resolution, on the other hand, denied petitioner’s Motion for Reconsideration.

The Antecedents

The antecedents of the case are narrated by the CA as follows:

"This case started out as a complaint for sum of money and damages by x x x [Respondent] Dionisio Llamas
against x x x [Petitioner] Romeo Garcia and Eduardo de Jesus. Docketed as Civil Case No. Q97-32-873, the
complaint alleged that on 23 December 1996[,] [petitioner and de Jesus] borrowed ₱400,000.00 from [respondent];
that, on the same day, [they] executed a promissory note wherein they bound themselves jointly and severally to
pay the loan on or before 23 January 1997 with a 5% interest per month; that the loan has long been overdue and,
despite repeated demands, [petitioner and de Jesus] have failed and refused to pay it; and that, by reason of the[ir]
unjustified refusal, [respondent] was compelled to engage the services of counsel to whom he agreed to pay 25% of
the sum to be recovered from [petitioner and de Jesus], plus ₱2,000.00 for every appearance in court. Annexed to
the complaint were the promissory note above-mentioned and a demand letter, dated 02 May 1997, by [respondent]
addressed to [petitioner and de Jesus].

"Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability under the
promissory note because he signed it merely as an accommodation party for x x x de Jesus; and, alternatively, that
he is relieved from any liability arising from the note inasmuch as the loan had been paid by x x x de Jesus by
means of a check dated 17 April 1997; and that, in any event, the issuance of the check and [respondent’s]
acceptance thereof novated or superseded the note.

"[Respondent] tendered a reply to [Petitioner] Garcia’s answer, thereunder asserting that the loan remained unpaid
for the reason that the check issued by x x x de Jesus bounced, and that [Petitioner] Garcia’s answer was not even
accompanied by a certificate of non-forum shopping. Annexed to the reply were the face of the check and the
reverse side thereof.

"For his part, x x x de Jesus asserted in his [A]nswer with [C]ounterclaim that out of the supposed ₱400,000.00 loan,
he received only ₱360,000.00, the P40,000.00 having been advance interest thereon for two months, that is, for
January and February 1997; that[,] in fact[,] he paid the sum of ₱120,000.00 by way of interests; that this was made
when [respondent’s] daughter, one Nits Llamas-Quijencio, received from the Central Police District Command at
Bicutan, Taguig, Metro Manila (where x x x de Jesus worked), the sum of ₱40,000.00, representing the peso
equivalent of his accumulated leave credits, another ₱40,000.00 as advance interest, and still another ₱40,000.00
as interest for the months of March and April 1997; that he had difficulty in paying the loan and had asked
[respondent] for an extension of time; that [respondent] acted in bad faith in instituting the case, [respondent] having
agreed to accept the benefits he (de Jesus) would receive for his retirement, but [respondent] nonetheless filed the
instant case while his retirement was being processed; and that, in defense of his rights, he agreed to pay his
counsel ₱20,000.00 [as] attorney’s fees, plus ₱1,000.00 for every court appearance.

"During the pre-trial conference, x x x de Jesus and his lawyer did not appear, nor did they file any pre-trial brief.
Neither did [Petitioner] Garcia file a pre-trial brief, and his counsel even manifested that he would no [longer] present
evidence. Given this development, the trial court gave [respondent] permission to present his evidence ex parte
against x x x de Jesus; and, as regards [Petitioner] Garcia, the trial court directed [respondent] to file a motion for
judgment on the pleadings, and for [Petitioner] Garcia to file his comment or opposition thereto.

"Instead, [respondent] filed a [M]otion to declare [Petitioner] Garcia in default and to allow him to present his
evidence ex parte. Meanwhile, [Petitioner] Garcia filed a [M]anifestation submitting his defense to a judgment on the
pleadings. Subsequently, [respondent] filed a [M]anifestation/[M]otion to submit the case for judgement on the
pleadings, withdrawing in the process his previous motion. Thereunder, he asserted that [petitioner’s and de Jesus’]
solidary liability under the promissory note cannot be any clearer, and that the check issued by de Jesus did not
discharge the loan since the check bounced." 5

On July 7, 1998, the Regional Trial Court (RTC) of Quezon City (Branch 222) disposed of the case as follows:

"WHEREFORE, premises considered, judgment on the pleadings is hereby rendered in favor of [respondent] and
against [petitioner and De Jesus], who are hereby ordered to pay, jointly and severally, the [respondent] the
following sums, to wit:

‘1) ₱400,000.00 representing the principal amount plus 5% interest thereon per month from January 23,
1997 until the same shall have been fully paid, less the amount of ₱120,000.00 representing interests
already paid by x x x de Jesus;

‘2) ₱100,000.00 as attorney’s fees plus appearance fee of ₱2,000.00 for each day of [c]ourt appearance,
and;

‘3) Cost of this suit.’" 6

Ruling of the Court of Appeals

The CA ruled that the trial court had erred when it rendered a judgment on the pleadings against De Jesus.
According to the appellate court, his Answer raised genuinely contentious issues. Moreover, he was still required to
present his evidence ex parte. Thus, respondent was not ipso facto entitled to the RTC judgment, even though De
Jesus had been declared in default. The case against the latter was therefore remanded by the CA to the trial court
for the ex parte reception of the former’s evidence.

As to petitioner, the CA treated his case as a summary judgment, because his Answer had failed to raise even a
single genuine issue regarding any material fact.

The appellate court ruled that no novation -- express or implied -- had taken place when respondent accepted the
check from De Jesus. According to the CA, the check was issued precisely to pay for the loan that was covered by
the promissory note jointly and severally undertaken by petitioner and De Jesus. Respondent’s acceptance of the
check did not serve to make De Jesus the sole debtor because, first, the obligation incurred by him and petitioner
was joint and several; and, second, the check -- which had been intended to extinguish the obligation -- bounced
upon its presentment.

Hence, this Petition. 7

Issues

Petitioner submits the following issues for our consideration:

"I

Whether or not the Honorable Court of Appeals gravely erred in not holding that novation applies in the instant case
as x x x Eduardo de Jesus had expressly assumed sole and exclusive liability for the loan obligation he obtained
from x x x Respondent Dionisio Llamas, as clearly evidenced by:

a) Issuance by x x x de Jesus of a check in payment of the full amount of the loan of ₱400,000.00 in favor of
Respondent Llamas, although the check subsequently bounced[;]

b) Acceptance of the check by the x x x respondent x x x which resulted in [the] substitution by x x x de

Jesus or [the superseding of] the promissory note;

c) x x x de Jesus having paid interests on the loan in the total amount of ₱120,000.00;

d) The fact that Respondent Llamas agreed to the proposal of x x x de Jesus that due to financial difficulties,
he be given an extension of time to pay his loan obligation and that his retirement benefits from the
Philippine National Police will answer for said obligation.
"II

Whether or not the Honorable Court of Appeals seriously erred in not holding that the defense of petitioner that he
was merely an accommodation party, despite the fact that the promissory note provided for a joint and solidary
liability, should have been given weight and credence considering that subsequent events showed that the principal
obligor was in truth and in fact x x x de Jesus, as evidenced by the foregoing circumstances showing his assumption
of sole liability over the loan obligation.

"III

Whether or not judgment on the pleadings or summary judgment was properly availed of by Respondent Llamas,
despite the fact that there are genuine issues of fact, which the Honorable Court of Appeals itself admitted in its
Decision, which call for the presentation of evidence in a full-blown trial."
8

Simply put, the issues are the following: 1) whether there was novation of the obligation; 2) whether the defense that
petitioner was only an accommodation party had any basis; and 3) whether the judgment against him -- be it a
judgment on the pleadings or a summary judgment -- was proper.

The Court’s Ruling

The Petition has no merit.

First Issue:

Novation

Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting that novation took
place, either through the substitution of De Jesus as sole debtor or the replacement of the promissory note by the
check. Alternatively, the former argues that the original obligation was extinguished when the latter, who was his co-
obligor, "paid" the loan with the check.

The fallacy of the second (alternative) argument is all too apparent. The check could not have extinguished the
obligation, because it bounced upon presentment. By law, the delivery of a check produces the effect of payment
9 

only when it is encashed.

We now come to the main issue of whether novation took place.

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a
new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. Article 1293 of the
10 

Civil Code defines novation as follows:

"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him rights mentioned in articles 1236 and 1237."

In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In
expromision, the initiative for the change does not come from -- and may even be made without the knowledge of --
the debtor, since it consists of a third person’s assumption of the obligation. As such, it logically requires the consent
of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who
consents to the substitution and assumes the obligation; thus, the consent of these three persons are
necessary. Both modes of substitution by the debtor require the consent of the creditor.
11  12

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation
of a new one that takes the place of the former. It is merely modificatory when the old obligation subsists to the
extent that it remains compatible with the amendatory agreement. Whether extinctive or modificatory, novation is
13 

made either by changing the object or the principal conditions, referred to as objective or real novation; or by
substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as
subjective or personal novation. For novation to take place, the following requisites must concur:
14 

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract. 15

Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that
the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every
point. The test of incompatibility is whether the two obligations can stand together, each one with its own
16 

independent existence. 17

Applying the foregoing to the instant case, we hold that no novation took place.

The parties did not unequivocally declare that the old obligation had been extinguished by the issuance and the
acceptance of the check, or that the check would take the place of the note. There is no incompatibility between the
promissory note and the check. As the CA correctly observed, the check had been issued precisely to answer for
the obligation. On the one hand, the note evidences the loan obligation; and on the other, the check answers for it.
Verily, the two can stand together.

Neither could the payment of interests -- which, in petitioner’s view, also constitutes novation -- change the terms
18 

and conditions of the obligation. Such payment was already provided for in the promissory note and, like the check,
was totally in accord with the terms thereof.

Also unmeritorious is petitioner’s argument that the obligation was novated by the substitution of debtors. In order to
change the person of the debtor, the old one must be expressly released from the obligation, and the third person or
new debtor must assume the former’s place in the relation. Well-settled is the rule that novation is never
19 

presumed. Consequently, that which arises from a purported change in the person of the debtor must be clear and
20 

express. It is thus incumbent on petitioner to show clearly and unequivocally that novation has indeed taken place.
21 

In the present case, petitioner has not shown that he was expressly released from the obligation, that a third person
was substituted in his place, or that the joint and solidary obligation was cancelled and substituted by the solitary
undertaking of De Jesus. The CA aptly held:

"x x x. Plaintiff’s acceptance of the bum check did not result in substitution by de Jesus either, the nature of the
obligation being solidary due to the fact that the promissory note expressly declared that the liability of appellants
thereunder is joint and [solidary.] Reason: under the law, a creditor may demand payment or performance from one
of the solidary debtors or some or all of them simultaneously, and payment made by one of them extinguishes the
obligation. It therefore follows that in case the creditor fails to collect from one of the solidary debtors, he may still
proceed against the other or others. x x x " 22

Moreover, it must be noted that for novation to be valid and legal, the law requires that the creditor expressly
consent to the substitution of a new debtor. Since novation implies a waiver of the right the creditor had before the
23 

novation, such waiver must be express. It cannot be supposed, without clear proof, that the present respondent has
24 

done away with his right to exact fulfillment from either of the solidary debtors. 25

More important, De Jesus was not a third person to the obligation. From the beginning, he was a joint and solidary
obligor of the ₱400,000 loan; thus, he can be released from it only upon its extinguishment. Respondent’s
acceptance of his check did not change the person of the debtor, because a joint and solidary obligor is required to
pay the entirety of the obligation.

It must be noted that in a solidary obligation, the creditor is entitled to demand the satisfaction of the whole
obligation from any or all of the debtors. It is up to the former to determine against whom to enforce
26 

collection. Having made himself jointly and severally liable with De Jesus, petitioner is therefore liable for the entire
27  28 

obligation. 29

Second Issue:

Accommodation Party

Petitioner avers that he signed the promissory note merely as an accommodation party; and that, as such, he was
released as obligor when respondent agreed to extend the term of the obligation.

This reasoning is misplaced, because the note herein is not a negotiable instrument. The note reads:

"PROMISSORY NOTE

"₱400,000.00

"RECEIVED FROM ATTY. DIONISIO V. LLAMAS, the sum of FOUR HUNDRED THOUSAND PESOS, Philippine
Currency payable on or before January 23, 1997 at No. 144 K-10 St. Kamias, Quezon City, with interest at the rate
of 5% per month or fraction thereof.

"It is understood that our liability under this loan is jointly and severally [sic].
"Done at Quezon City, Metro Manila this 23rd day of December, 1996." 30

By its terms, the note was made payable to a specific person rather than to bearer or to order -- a requisite for
31 

negotiability under Act 2031, the Negotiable Instruments Law (NIL). Hence, petitioner cannot avail himself of the
NIL’s provisions on the liabilities and defenses of an accommodation party. Besides, a non-negotiable note is
merely a simple contract in writing and is evidence of such intangible rights as may have been created by the assent
of the parties. The promissory note is thus covered by the general provisions of the Civil Code, not by the NIL.
32 

Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory note. Under
Article 29 of Act 2031, an accommodation party is liable for the instrument to a holder for value even if, at the time of
its taking, the latter knew the former to be only an accommodation party. The relation between an accommodation
party and the party accommodated is, in effect, one of principal and surety -- the accommodation party being the
surety. It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an original
33 

promissor and debtor from the beginning. The liability is immediate and direct. 34

Third Issue:

Propriety of Summary Judgment

or Judgment on the Pleadings

The next issue illustrates the usual confusion between a judgment on the pleadings and a summary judgment.
Under Section 3 of Rule 35 of the Rules of Court, a summary judgment may be rendered after a summary hearing if
the pleadings, supporting affidavits, depositions and admissions on file show that (1) except as to the amount of
damages, there is no genuine issue regarding any material fact; and (2) the moving party is entitled to a judgment
as a matter of law.

A summary judgment is a procedural device designed for the prompt disposition of actions in which the pleadings
raise only a legal, not a genuine, issue regarding any material fact. Consequently, facts are asserted in the
35 

complaint regarding which there is yet no admission, disavowal or qualification; or specific denials or affirmative
defenses are set forth in the answer, but the issues are fictitious as shown by the pleadings, depositions or
admissions. A summary judgment may be applied for by either a claimant or a defending party.
36  37

On the other hand, under Section 1 of Rule 34 of the Rules of Court, a judgment on the pleadings is proper when an
answer fails to render an issue or otherwise admits the material allegations of the adverse party’s pleading. The
essential question is whether there are issues generated by the pleadings. A judgment on the pleadings may be
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sought only by a claimant, who is the party seeking to recover upon a claim, counterclaim or cross-claim; or to
obtain a declaratory relief. 39

Apropos thereto, it must be stressed that the trial court’s judgment against petitioner was correctly treated by the
appellate court as a summary judgment, rather than as a judgment on the pleadings. His Answer apparently raised
40 

several issues -- that he signed the promissory note allegedly as a mere accommodation party, and that the
obligation was extinguished by either payment or novation. However, these are not factual issues requiring trial. We
quote with approval the CA’s observations:

"Although Garcia’s [A]nswer tendered some issues, by way of affirmative defenses, the documents submitted by
[respondent] nevertheless clearly showed that the issues so tendered were not valid issues. Firstly, Garcia’s claim
that he was merely an accommodation party is belied by the promissory note that he signed. Nothing in the note
indicates that he was only an accommodation party as he claimed to be. Quite the contrary, the promissory note
bears the statement: ‘It is understood that our liability under this loan is jointly and severally [sic].’ Secondly, his
claim that his co-defendant de Jesus already paid the loan by means of a check collapses in view of the dishonor
thereof as shown at the dorsal side of said check." 41

From the records, it also appears that petitioner himself moved to submit the case for judgment on the basis of the
pleadings and documents.  In a written Manifestation, he stated that "judgment on the pleadings may now be
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42 

rendered without further evidence, considering the allegations and admissions of the parties." 43

In view of the foregoing, the CA correctly considered as a summary judgment that which the trial court had issued
against petitioner.

WHEREFORE, this Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.