EPCIB proposed a restructuring package with a soft payment scheme for the

outstanding loan balance of PhP 18,300,000. Under the counter-proposal, the bank would
book the accumulated past due loans to current status and charge interest at a fixed rate of
13.375% per annum, payable in either options: Petitioner Jaime Torres chose and agreed to
the second option, i.e., the equal annual amortizations of PhP 6,100,000 payable every
May.

May 2003 came, but petitioners failed to pay the stipulated annual amortization of
PhP 6,100,000 agreed upon. On June 23, 2003, petitioners tendered, and PCIB accepted, a
partial payment of PhP 2,521,609.62.

EPCIB made it abundantly clear on the OR that: “THE RECEIPT OF PAYMENT IS

WITHOUT PREJUDICE TO THE BANK’S RIGHT AND CLAIMS ARISING FROM THE FACT THE
ACCOUNT IS OVERDUE. NOR SHALL IT RENDER THE BANK LIABLE FOR ANY DAMAGE BY ITS
ACCEPTANCE OF PAYMENT.” EPCIB, through counsel, reminded and made it clear to
petitioners that their first partial payment did not detract from the past due character of
their outstanding loan for which reason it is demanding the remaining PhP 5,100,000 to
complete the first PhP 6,100,000 principal payment.
EPCIB proposed a new repayment scheme to which petitioners were not amenable.

On November 6, 2003, petitioners issued a Stop Payment Order[12] for their PhP
921,535.42 check. On November 10, 2003, EPCIB, through counsel, demanded full
settlement of petitioners’ loan obligation in the total amount of PhP 24,719,461.48.
EPCIB filed before the Office of the Clerk of Court and Ex-Officio Sheriff of the RTC in
Parañaque City its Petition for Sale[14] to extra-judicially foreclose the mortgaged property
covered
 On the very day of the scheduled foreclosure sale, January 9, 2004, the Pasig City
RTC issued a TRO,[16] enjoining EPCIB from proceeding with the scheduled foreclosure sale,
and set a date for the hearing on the application for a writ of preliminary injunction.

On March 10, 2004, the RTC issued an Order granting a writ of preliminary injunction
in favor of petitioners,

ISSUE: conditions, or by substituting a new debtor

whether there was indeed a
novation of the contract between the
parties
The Court’s Ruling
The petition is unmeritorious.
No Novation of Contract
As a civil law concept, novation is
the extinguishment of an obligation by the
substitution or change of the obligation by
a subsequent one which terminates it,
either by changing its objects or principal
in place of the old one, or by subrogating a
third person to the rights of the creditor.
[24] Novation may 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.[25] 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.[26] The
test of incompatibility lies on whether the
two obligations can stand together, each
one with its own independent existence. payment by the partial payments of the
[27] obligation.. The following acts of EPCIB
readily argue against the idea of its having
For novation, as a mode of agreed to a modification in the stipulated
extinguishing or modifying an obligation, to terms of payment: (a) its letter-reply to
apply, the following requisites must petitioners’ June 23, 2003 letter; (b) the
concur: August 27, 2003 demand-letter of EPCIB
for the full principal balance of PhP
1) There must be a 5,100,000 from petitioners; (c) the
previous valid obligation. September 17, 2003 letter of EPCIB
denying petitioners’ request for a partial
2) The parties payment; (d) the OR dated June 30, 2003
concerned must agree to a EPCIB issued where the following entries
new contract. were written: “THE RECEIPT OF PAYMENT IS
WITHOUT PREJUDICE TO THE BANK’S
3) The old contract must RIGHTS AND CLAIMS ARISING FROM THE
be extinguished. FACT THE ACCOUNT IS OVERDUE. NOR
SHALL IT RENDER THE BANK LIABLE FOR
4) There must be a ANY DAMAGE BY ITS ACCEPTANCE OF
valid new contract. PAYMENT”;
[28]
the notion of novation foisted by
petitioners on the Court cannot be
The parties did not unequivocally plausibly deduced from EPCIB’s
declare, let alone agree, that the obligation acceptance of such lesser amount.
had been modified as to the terms of there is clearly no incompatibility
between EPCIB’s receipt of the partial
payments of the principal amounts and
what was due in May 2003. As it were,
EPCIB accepted the partial payments
remitted, but demanded, at the same time,
the full payment of what was otherwise
due in May 2003.
Novatio non praesumitur, or novation is
never presumed,[29] is a well-settled
principle. Consequently, that which arises
from a purported modification in the terms
and conditions of the obligation must be
clear and express., the acts of EPCIB
before, simultaneously to, and after its
acceptance of payments from petitioners
argue against the idea of its having
acceded or acquiesced to petitioners’
request for a change of the terms of
payments of the secured loan. Thus, a
novation through an alleged implied
consent by EPCIB, as proffered and argued
by petitioners, cannot be given
HERNANDEZ- NIEVERA V HERNANDEZ
Project Movers Realty &
Development Corporation (PMRDC), one of
the respondents herein, is a duly organized
domestic corporation engaged in real
estate development. in 1995, it entered
through its president, respondent Mario
Villamor (Villamor), into various
agreements with co-respondents Home
Insurance & Guaranty Corporation (HIGC)
[5] and Land Bank of the Philippines (LBP),
in connection with the construction of the
Isabel Homes housing project in Batangas
and of the Monumento Plaza commercial
and recreation complex in Caloocan City.
In its Asset Pool Formation Agreement,
PMRDC conveyed to HIGC the constituent
assets of the two projects,[6] whereas LBP
agreed to act as trustee of the resulting
Asset Pool[7] for a consideration.[8] The
execution of the projects would be funded
largely through securitization, whereby LBP
would act as the nominal issuer of such
certificates with the Asset Pool itself acting
as the real issuer.[10] HIGC, in turn, would
provide guaranty coverage to these VENDEE shall pay the
participation certificates in accordance vendor option money
with its Contract of Guaranty with PMRDC
and LBP. [11] should the VENDEE fail to
exercise its option to
On November 13, 1997, PMRDC purchase the said
entered into a Memorandum of Agreement described parcels of land
(MOA) whereby it was given the option to within the stipulated
buy pieces of land owned by petitioners period, the option money
Carolina Hernandez-Nievera (Carolina), shall be forfeited in favor
Margarita H. Malvar (Margarita) and of the VENDOR and that
Demetrio P. Hernandez, Jr. (Demetrio). the VENDEE shall return
Demetrio, under authority of a Special to the VENDOR all the
Power of Attorney to Sell or Mortgage,[12] Transfer Certificates of
signed the MOA also in behalf of Carolina Title covering the said
and Margarita. The MOA materially described parcels of land
provides:
the VENDOR, at the request
1. THAT, the of the VENDEE, shall agree to
VENDEE shall have the convey the parcels of land to
option to purchase the any bank or financial
above-described parcels institution by way of
of land within a period of mortgage or to a Trustee by
twelve (12) months from way of a Trust Agreement at
the date of this any time from the date of this
instrument and that the instrument, PROVIDED,
 HOWEVER, that the VENDOR
is not liable for any mortgage
or loans or obligations that
will be incurred by way of
mortgage of Trust Agreement
that the VENDEE might enter
into;
As an implementation of the MOA,
the lands within Area I were then
mortgaged to Solid Bank for which
petitioners received consideration from
PMRDC.[14]
PMRDC saw the need to convey
additional properties to and augment the
value of its Asset Pool to support the
collateralization of additional participation
certificates to be issued.[15] Thus, on
March 23, 1998, it entered with LBP and
Demetrio – the latter purportedly acting
under authority of the same special power
of attorney as in the MOA – into a Deed of
Assignment and Conveyance whereby the
lands within Area II were transferred and
assigned to the Asset Pool in exchange for
a number of shares of stock which
supposedly had already been issued in the
name and in favor of Demetrio.
, petitioners instituted an action
before the RTC of San Pablo City, Laguna,
Branch 32 for the rescission of the MOA,
RTC rendered decision in favor
petitioners. On appeal, CA reversed the
ruling of RTC. Hence this petiotion.
Issue: won there was novation.
Ruling:
This seems to suggest that with the
execution of the DAC, PMRDC has already
entered into the exercise of its option
except that its obligation to deliver the
option money has, by subsequent
agreement embodied in the DAC, been
substituted instead by the obligation to
issue participation certificates in
Demetrio’s name but which, likewise, has
not yet been performed by PMRDC. sell is sufficient to enable him to make a
binding commitment under the DAC in
It is in the context of this vesture of behalf of Carolina and Margarita. In
power that Demetrio, representing his particular, it does include the authority to
shared interest with Carolina and extinguish PMRDC’s obligation under the
Margarita, entered into the MOA with MOA to deliver option money and agree to
PMRDC. It is likewise within this same a more flexible term by agreeing instead to
context that Demetrio later on entered into receive shares of stock in lieu thereof and
the DAC and accordingly extinguished the in consideration of the assignment and
previously subsisting obligation of PMRDC conveyance of the properties to the Asset
to deliver the stipulated option money and Pool. Indeed, the terms of his special
replaced said obligation with the delivery power of attorney allow much leeway to
instead of participation certificates in favor accommodate not only the terms of the
of Demetrio. MOA but also those of the subsequent
agreement in the DAC which, in this case,
the power conferred on Demetrio to necessarily and consequently has resulted
sell “for such price or amount”[46] is broad in a novation of PMRDC’s integral
enough to cover the exchange obligations
contemplated in the DAC between the
properties and the corresponding There are two ways
corporate shares in PMRDC, with the latter which could indicate, in fine,
replacing the cash equivalent of the option the presence of novation and
money initially agreed to be paid by thereby produce the effect of
PMRDC under the MOA extinguishing an obligation
Thus, it becomes clear that by another which substitutes
Demetrio’s special power of attorney to the same. The first is when
novation has been explicitly
stated and declared in
unequivocal terms. The
second is when the old and
the new obligations are
incompatible on every point.
The test of incompatibility is
whether the two obligations
can stand together, each one
having its independent
existence. If they cannot,
they are incompatible, and
the latter obligation novates
the first. Corollarily, changes
that breed incompatibility
must be essential in nature
and not merely accidental.
The incompatibility must take
place in any of the essential
elements of the obligation
such as its object, cause or
principal conditions thereof;
otherwise, the change would
be merely modificatory in
nature and insufficient to
extinguish the original
obligation.[49]
G.R. No. L-29280 August 11, 1988
PEOPLE'S BANK AND TRUST COMPANY,
plaintiff-appellee, vs.SYVEL'S
INCORPORATED, ANTONIO Y. SYYAP
and ANGEL Y SYYAP, defendants-
appellants.
This is an action for foreclosure of chattel
mortgage executed in favor of the plaintiff
by the defendant Syvel's Incorporated on
its stocks of goods, personal properties and
other materials owned by it and located at
its stores or warehouses The chattel
mortgage was in connection with a credit
commercial line in the amount of
P900,000.00 granted the said defendant
corporation, the expiry date of which was
May 20, 1966. On May 20, 1965,
defendants Antonio V. Syyap and Angel Y. Bengco Syyap on June 22, 1967. In that
Syyap executed an undertaking in favor of deed of mortgage, defendant Syyap
the plaintiff whereby they both agreed to admitted that as of June 16, 1967, the
guarantee absolutely and unconditionally indebtedness of Syvel's Incorporated was
and without the benefit of excussion the P601,633.01.
full and prompt payment of any
indebtedness to be incurred on account of No part of the amount has been paid by
the said credit line. Against the credit line either of the defendants. Hence their
granted the defendant Syvel's liabilities cannot be questioned
Incorporated the latter drew advances in
the form of promissory notes. In view of
the failure of the defendant corporation to
make payment in accordance with the
terms and conditions agreed upon in the
Commercial Credit Agreement the plaintiff
started to foreclose extrajudicially the ISSUE: WON the obligation secured by the
chattel mortgage. Chattel Mortgage sought to be foreclosed
was novated by the subsequent execution
After the filing of this case and during its
by Syyap of a real estate mortgage as
pendency, Syyap proposed to have the
additional collateral to the obligation
case settled. Mr. Syyap offered to execute
secured by said chattel mortgage.
a real estate mortgage on his real property
located in Bacoor, Cavite. Mr. De las Alas HELD:
consented, and so the Real Estate
Mortgage was executed by the defendant Novation takes place when the object or
Antonio V. Syyap and his wife Margarita principal condition of an obligation is
changed or altered. It is elementary that
novation is never presumed; it must be
explicitly stated or there must be manifest
incompatibility between the old and the
new obligations in every aspect.
In the case at bar, there is nothing in the
Real Estate Mortgage which supports
appellants'submission. The contract on its
face does not show the existence of an
explicit novation nor incompatibility on
every point between the "old and the
"new" agreements as the second contract
evidently indicates that the same was
executed as new additional security to the
chattel mortgage previously entered into
by the parties.
Moreover, appellants agreed that the
chattel mortgage "shall remain in full force
and shall not be impaired by this (real
estate) mortgage."
It is clear, therefore, that a novation was
not intended. The real estate mortgage
was evidently taken as additional security
for the performance of the contract.
SPOUSES JOSE T. VALENZUELA and
GLORIA VALENZUELA, Petitioners,
vs.
KALAYAAN DEVELOPMENT &
INDUSTRIAL CORPORATION,
Respondent.
G.R. No. 163244 June 22,
2009
Facts: Kalayaan Development & Industrial
Corporation discovered that Spouses Jose
and Gloria Valenzuela had occupied and
built a house on a parcel of land it owned,
and demanded that they vacate said
property. Upon negotiation, however,
petitioners and Kalayaan entered a
Contract to Sell wherein the petitioners
would purchase 236 square meters of the
subject property for P1,416,000 in twelve
equal monthly installments. The contract
further stated that upon failure to pay any
of said installments, petitioners would be
liable for liquidated penalty at 3% a month
compounded monthly until fully paid.
Kalayaan would also execute the deed of
absolute sale only upon full payment.
Petitioners were only able to pay monthly
installments amounting to a total of P208,
000.00. They then requested Kalayaan to
issue a deed of sale for 118 square meters
of the lot where their house stood, arguing
that since they had paid half the purchase
price, or a total of P708,000.00
representing 118 square meters of the
property. Kalayaan, on the other hand, sent
two demand letters asking petitioners to
pay their outstanding obligation including
agreed penalties.
Gloria Valenzuela’s sister, Juliet Giron,
assumed the remaining balance for the
118 square meters of the subject property
at P10,000.00 per month to Kalayaan,
which the latter accepted for and in behalf
of Gloria. Thereafter, Kalayaan demanded
that petitioners pay their outstanding
obligation, but were unheeded. Kalyaan
then filed a Complaint fot the Rescission of
Contract and Damages against petitioners.
The RTC of Caloocan rendered a Decision in
favor of Kalayaan, rescinding the contract
between the parties and ordering
petitioners to vacate the premises.
Petitioners sought recourse from the CA.
They aver that the CA failed to see that the
original contract between petitioners and
Kalayaan was altered, changed, modified
and restricted as a consequence of the
change in the person of the principal
debtor (Sps. Valenzuela to Juliet). When
Kalayaan agreed to a monthly amortization
of P10,000.00 per month the original
contract was changed, and that the same
recognized Juliet’s capacity to pay and her
designation as the new debtor.
Nevertheless, the CA affirmed the RTC
ruling.
Issue: If the original contract was novated
and the principal obligation to pay for the
remaining half of the subject property was
transferred from petitioners to Juliet.
Held: No. Novation is never presumed.
Novation is the extinguishment of an
obligation by the substitution or change of
the obligation by a subsequent one which
extinguishes or modifies the first, either by
changing the object or principal conditions,
or by substituting another in place of the
debtor, or by subrogating a third person in
the rights of the creditor. Parties to a
contract must expressly agree that they
are abrogating their old contract in favor of
a new one. In absence of an express
agreement, novation takes place only
when the old and new obligations are
incompatible on every point.
These are the indispensable requisites of
novation:
1) There must be a previous valid
obligation;
2) There must be an agreement of the
parties concerned to a new contract;
3) There must be the extinguishment of
the old contract; and
4) There must be the validity of the new
contract.
In the instant case, none of the
aforementioned requisites are present, as
Kalayaan never agreed to the creation of a
new contract between them or Juliet.
Kalayaan’s acceptance of the late
payments made by Juliet is, at best, an act
of tolerance on part of Kalayaan that could
not have modified the contract.
The non-fulfillment by petitioners of their
obligation to pay, which is a suspensive
condition for the obligation of Kalayaan to
sell and deliver the title to the property,
rendered the Contract to Sell ineffective
and without force and effect. The parties
stand as if the conditional obligation had
never existed; Kalayaan cannot be
compelled to transfer ownership of the
property to petitioners.
PHILIPPINE NATIONAL BANK,
petitioner, vs. THE COURT OF
 APPEALS and RAMON LAPEZ,[1]
doing business under the name
and style SAPPHIRE SHIPPING,
respondents.
The Facts
"'(a) The defendant applied/appropriated
the amounts of $2,627.11 and P34,340.38
from remittances of the plaintiff's
principals (sic) abroad.
"'(b) The first remittance was made by the
NCB of Jeddah for the benefit of the
plaintiff, to be credited to his account at
Citibank, Greenhills Branch; the second
was from Libya, and was intended to be
deposited at the plaintiff's account with the
defendant, No. 830-2410;
“‘(c) The plaintiff made a written demand
upon the defendant for remittance of the
equivalent of $2,627.11 by means of a
letter dated December 4, 1986 .
"'(d) There were indeed two instances in
the past, one in November 1980 and the
other in January 1981 when the plaintiff's
account No. 830-2410 was doubly credited
with the equivalents of $5,679.23 and
$5,885.38, respectively, which amounted
to an aggregate amount of P87,380.44.
"'(e) Defendant PNB made a demand upon
the plaintiff for refund of the double or
duplicated credits erroneously made on
plaintiff's account, by means of a letter
dated October 23, 1986 or 5 years and 11
months from November 1980, and 5 years
and 9 months from January 1981.
"'(f) The deduction of P34,340.38 was
made by the defendant not without the
knowledge and consent of the plaintiff,
who was issued a receipt.
ISSUES:
whether the herein petitioner was
legally justified in making the
compensation or set-off against the two
remittances coursed through it in favor of
private respondent to recover on the
double credits it erroneously made in 1980
and 1981, based on the principle of solutio
indebiti
HELD:
"'Article 1279 of the Civil Code provides:
"'In order that compensation may prosper,
it is necessary:
(1) That each one of the obligors
be bound principally, and that
he be at the same time a
principal creditor of the other;
(2) That both debts consists in a
sum of money, or if the things
due are consumable, they be of
the same kind, and also of the
same quality if the latter has
been stated;
(3) That the two debts be due;
(4) That they be liquidated and
demandable;
(5) That over neither of them there
by any retention or controversy,
commenced by third persons
and communicated in due time
to the debtor."'
What the petitioner bank is effectively
saying is that since the respondent Court
of Appeals ruled that petitioner bank could
not do a shortcut and simply intercept
funds being coursed through it, for
transmittal to another bank, and
eventually to be deposited to the account
of an individual who happens to owe some
amount of money to the petitioner, and
because respondent Court ordered
petitioner bank to return the intercepted
amount to said individual, who in turn was
found by the appellate Court to be means of an exchange of checks with
indebted to petitioner bank, THEREFORE, private respondent for the same amount.
there must now be legal compensation of The litigation could have ended there, but
the amounts each owes the other, and it did not. Instead, this plainly
hence, there is no need for petitioner bank unmeritorious case had to clog our docket
to actually return the amount, and finally, and take up the valuable time of this Court.
that petitioner bank ends up in exactly the
SOUTH AFRICAN AIRWAYS V.
same position as when it first took the
COMMISSIONER OF INTERNAL
improper and unwarranted shortcut by
REVENUE
intercepting the said money transfer,
G.R. No. 180356
notwithstanding the assailed Decision
February 16, 2010
saying that this could not be done!
We see in this petition a clever ploy to The Facts
use this Court to validate or legalize an
Petitioner South African Airways is a
improper act of the petitioner bank, with
foreign corporation organized and existing
the not impossible intention of using this
under and by virtue of the laws of the
case as a precedent for similar acts of
Republic of South Africa. Its principal office
interception in the future. This piratical
is located at Airways Park, Jones Road,
attitude of the nation's premier bank
Johannesburg International Airport, South
deserves a warning that it should not
Africa. In the Philippines, it is an internal air
abuse the justice system in its collection
carrier having no landing rights in the
efforts, particularly since we are aware
country. Petitioner has a general sales
that if the petitioner bank had been in
agent in the Philippines, Aerotel Limited
good faith, it could have easily disposed of
Corporation (Aerotel). Aerotel sells passage
this controversy in ten minutes flat by
documents for compensation or
commission for petitioner’s off-line flights
for the carriage of passengers and cargo
between ports or points outside the
territorial jurisdiction of the Philippines.
Petitioner is not registered with the
Securities and Exchange Commission as a
corporation, branch office, or partnership.
It is not licensed to do business in the
Philippines.
For the taxable year 2000, petitioner
filed separate quarterly and annual income
tax returns for its off-line flights.
On February 5, 2003, petitioner filed with
the Bureau of Internal Revenue, a claim for
the refund of the amount of PhP
1,727,766.38 as erroneously paid tax on
Gross Philippine Billings (GPB) for the
taxable year 2000. Such claim was
unheeded.
The CTA ruled that petitioner is a resident
foreign corporation engaged in trade or
business in the PhilippinesThe CTA stated
that petitioner is liable to pay a tax of 32%
on its income derived from the sales of
passage documents in the Philippines. On
this ground, the CTA denied petitioner’s
claim for a refund.
The Issue:
WON such offsetting of their liability under
sec.28 (a)(1) by the refund they are asking
is in the nature of legal compensation.
The Court’s Ruling
Petitioner Is Subject to Income Tax
at the Rate of 32% of Its Taxable
Income
Sec. 28(A)(1) of the 1997 NIRC is a general
rule that resident foreign corporations are
liable for 32% tax on all income from
sources within the Philippines. Sec. 28(A)
(3) is an exception to this general rule.
If an international air carrier maintains of the same kind, and
flights to and from the Philippines, it shall also of the same
be taxed at the rate of 2 1/2% of its Gross quality if the latter has
Philippine Billings, while international air been stated;
carriers that do not have flights to and (3) That the two
from the Philippines ome. debts be due;
(4) That they be
Article 1279 of the Civil Code liquidated and
contains the elements of legal demandable;
compensation, to wit: (5) That over
neither of them there
Art. 1279. In order that be any retention or
compensation may be controversy,
proper, it is necessary: commenced by third
persons and
(1) That each communicated in due
one of the obligors be time to the debtor.
bound principally, and
that he be at the same In several instances
time a principal prior to the instant case, the
creditor of the other; court have already made the
(2) That both pronouncement that taxes
debts consist in a sum cannot be subject to
of money, or if the compensation for the simple
things due are reason that the government
consumable, they be and the taxpayer are not
 creditors and debtors of each
other. There is a material
distinction between a tax and
debt. Debts are due to the
Government in its corporate
capacity, while taxes are due
to the Government in its
sovereign capacity.
Verily, petitioner’s argument is
correct that the offsetting of its tax refund
with its alleged tax deficiency is unavailing
under Art. 1279 of the Civil Code.
It must be remembered that the tax
under Sec. 28(A)(3)(a) is based on GPB,
while Sec. 28(A)(1) is based on taxable
income, that is, gross income less
deductions and exemptions, if any
WHEREFORE, the assailed July 19,
2007 Decision and October 30, 2007
Resolution of the CTA En Banc in CTA E.B.
Case No. 210 are SET ASIDE. The instant
case is REMANDED.

Be that as it may, this Court is

unable to affirm the assailed decision and
resolution of the CTA En Banc on the
outright denial of petitioner’s claim for a
refund. Even though petitioner is not
entitled to a refund due to the question on
the propriety of petitioner’s tax return
subject of the instant controversy, it would
not be proper to deny such claim without
making a determination of petitioner’s
liability under Sec. 28(A)(1).