ETERNAL GARDENS MEMORIAL PARK CORPORATION VS.

COURT
OF APPEALS and NORTH PHILIPPINE UNION MISSION OF THE
SEVENTH DAY ADVENTIST, G.R. No. 124554, 9 December 1997
-BITAS

FACTS:
Petitioner EGMPC and respondent NPUM entered into an agreement on
October 6, 1976, the petitioner agreeing to develop a parcel of land owned by
NPUM into a memorial park, subdividing the said land into small lots and to remit
to NPUM 40% of its net gross collection.
Two claimants of said parcel of land later on surfaced, Maysilo Estate and
the heirs of Vicente Singzon Encarnacion. EGMPC filed an action for Interpleader
against the claimants. In turn, the heirs of Vicente Singzon Encarnacion filed an
action for Quieting of Title.
From the interpleader action, EGMPC assailed the appellate court's
resolution requiring "petitioner Eternal Gardens [to] deposit whatever amounts are
due from it under the Land Development Agreement with a reputable bank to be
designated by the respondent court." The cases were dismissed by the trial court
and the appellate court affirmed insofar as it dismissed the claims of the intervenors,
including the Maysilo Estate, and the titles of NPUM to the subject parcel of land
were declared valid. The trial court's decision in favor of the heirs of Singzon was
reversed and set aside. Through the Supreme Court resolution, the Court of Appeals
proceeded with the disposition of the case and required the parties to appear on June
16, 1994 with counsel and accountants as well as books of account and related
records to determine the remaining accrued rights and liabilities of the parties.
The accounting of the parties’ respective obligations was referred to
Carmencita Angelo, the court’s accountant, to whom the documents were submitted.
The NPUM submitted a Summary of Sales and Total Amounts Due while the
EGMPC did not submit any, thus the Appellate Court declared the EGMPC to have
waived its right to present the necessary documents required and proceeded on the
basis of the documents submitted by NPUM.

ISSUE:
Whether or not EGMPC is liable for interest because there was still the
unresolved issue of ownership over the property subject of the Land Development
Agreement of October 6, 1976.

RULING:
The Supreme Court held that the argument is without merit. EGMPC under
the agreement had the obligation to remit monthly to NPUM forty percent (40%) of
its net gross collection from the development of a memorial park on property owned
by NPUM. It also provides for the designation of a depository/trustee bank to act as
the depository/trustee for all funds collected by EGMPC. There was no obstacle,
legal or otherwise, to the compliance by EGMPC of this provision in the contract,
even on the affectation that it did not know to whom payment was to be made.
Disregarding the agreement, EGMPC cannot "suspend" payment on the
pretext that they did not know who the rightful owner among the subject property
claimants is. It had a remedy under the New Civil Code of the Philippines to give in
consignation the amounts due, as these fell due.
Consignation produces the effect of payment. The rationale for consignation
is to avoid the performance of an obligation becoming more onerous to the debtor
by reason of causes not imputable to him. For its failure to consign the amounts due,

pg. 1
EGMPC’s obligation to NPUM necessarily became more onerous as it became
liable for interest on the amounts it failed to remit.
Thus, the Court of Appeals correctly held Eternal Gardens liable for interest
at the rate of twelve percent (12%). The withholding of the amounts due under the
agreement was tantamount to a forbearance of money.

pg. 2
 NAGA TELEPHONE CO., INC. (NATELCO) vs. COURT OF APPEALS
G.R. No. 107112 February 24, 1994
-Sabalberino
FACTS:
Petitioner is a telephone company rendering service in Naga City while
respondent is a private corporation established for the purpose of operating an
electric power service in the same city.
On November 1, 1977, the parties entered into a contract for the use by
petitioners in the operation of its telephone service the electric light posts of private
respondent. In consideration therefor, petitioners agreed to install, free of charge,
ten (10) telephone connections for the use by private respondent in specified places.
After the contract had been enforced for over ten (10) years, private
respondent filed against petitioners for reformation of the contract with damages,
on the ground that it is too one-sided in favor of petitioners; that it is not in
conformity with the guidelines of the National Electrification Administration
(NEA) which direct that the reasonable compensation for the use of the posts is
P10.00 per post, per month; that after eleven (11) years of petitioners' use of the
posts, the telephone cables strung by them thereon have become much heavier with
the increase in the volume of their subscribers, worsened by the fact that their
linemen bore holes through the posts at which points those posts were broken during
typhoons.

ISSUE:
Whether respondent court erred in making a contract for the parties by
invoking Article 1267 of the New Civil Code.

RULING:
Article 1267 speaks of "service" which has become so difficult. The term
"service" should be understood as referring to the "performance" of the obligation.
The obligation of private respondent consists in allowing petitioners to use its posts,
which is the service contemplated in said article. Furthermore, this article reveals
that it is not a requirement thereunder that the contract be for future service with
future unusual change. Article 1267 states in our law the doctrine of unforseen
events based on the discredited theory of rebus sic stantibus; under this theory, the
parties stipulate in the light of certain prevailing conditions, and once these
conditions cease to exist the contract also ceases to exist. Considering practical
needs and the demands of equity and good faith, the disappearance of the basis of a
contract gives rise to a right to relief in favor of the party prejudiced.

pg. 3
 SILAHIS MARKETING CORP VS. IAC
G.R. No. L-74027, 7 December 1989
-Gervacio
FACTS:
On various dates in October, November and December, 1975, Gregorio de
Leon doing business under the name and style of Mark Industrial Sales sold and
delivered to Silahis Marketing Corporation, and its president Jose Taylo various
items of merchandise covered by several invoices in the aggregate amount of
P22,213.75 payable within thirty (30) days from date of the covering invoices.
Allegedly due to Silahis’ failure to pay its account upon maturity despite repeated
demands, de Leon filed a complaint for the collection of the said accounts including
accrued interest thereon in the amount of P661.03 and attorney’s fees of P5,000.00
plus costs of litigation. The answer admitted the allegations of the complaint insofar
as the invoices were concerned but presented as affirmative defenses; [a] a debit
memo for P22,200.00 as unrealized profit for a supposed commission that Silahis
should have received from de Leon for the sale of sprockets in the amount of
P111,000.00 made directly to Dole Philippines, Incorporated by the latter sometime
in August 1975; and [b] Silahis’ claim that it is entitled to return the stainless steel
screen which was found defective by its client, Borden International, Davao City,
and to have the corresponding amount cancelled from its account with de Leon.

ISSUE:
Whether or not the commissions be regarded as a valid compensation.

RULING:
It must be remembered that compensation takes place when two persons, in
their own right, are creditors and debtors to each other. Article 1279 of the Civil
Code provides that: “In order that compensation may be proper, 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 consist 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 be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.”

Undoubtedly, petitioner admits the validity of its outstanding accounts with private
respondent in the amount of P22,213.75 as contained in its answer. But whether the
private respondent is liable to pay the petitioner a 20% margin or commission on
the subject sale to Dole Philippines, Inc. is vigorously disputed. This circumstance
prevents legal compensation from taking place.

The Court agrees with respondent appellate court that there is no evidence
on record from which it can be inferred that there was an agreement between the
petitioner and private respondent prohibiting the latter from selling directly to Dole
Philippines, Incorporated. Definitely, it cannot be asserted that the debit memo was
a contract binding between the parties considering that the same, as correctly found
by the appellate court, was not signed by private respondent nor was there any
mention therein of any commitment by the latter to pay any commission to the
former involving the sale of sprockets to Dole Philippines, Inc. in the amount of
P111,000.00. Indeed, such document can be taken as self-serving with no probative
value absent a showing or at the very least an inference, that the party sought to be
bound assented to its contents or showed conformity thereto.

pg. 4
pg. 5
 FRANCIA VS IAC, GR NO. 67649, JUNE 28, 1988
-Gabor
FACTS:
Engracio Francia is the registered owner of a residential lot and a two-story
house built upon it situated at Pasay City, Metro Manila. The lot, with an area of
about 328 square meters, is described and covered by TCT No. 4739 (37795) of the
Registry of Deeds of Pasay City. On October 15, 1977, a 125 square meter portion
of Francia's property was expropriated by the Republic of the Philippines for the
sum of P4,116.00 representing the estimated amount equivalent to the assessed
value of the aforesaid portion. Since 1963 up to 1977 inclusive, Francia failed to
pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public
auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential
Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax
delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at
that time helping his uncle ship bananas. On March 3, 1979, Francia received a
notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New
Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No.
4739 (37795) and the issuance in his name of a new certificate of title. Upon
verification through his lawyer, Francia discovered that a Final Bill of Sale had been
issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The
auction sale and the final bill of sale were both annotated at the back of TCT No.
4739 (37795) by the Register of Deeds. On March 20, 1979, Francia filed a
complaint to annul the auction sale.

The lower court dismissed Francia’s complaint.

The Intermediate Appellate Court affirmed the decision of the lower court.
Hence, the petition for review before the Supreme Court.

ISSUE:
Whether the auction sale should be annulled.
(Sub-issue) WON Francia’s P2,400 tax delinquency was legally compensated by
the P4,116 paid to him for the expropriation.

RULING:
No, the auction sale should not be annulled. SC said: Francia contends that
his tax delinquency of P2,400.00 has been extinguished by legal compensation. He
claims that the government owed him P4,116.00 when a portion of his land was
expropriated on October 15, 1977. Hence, his tax obligation had been set-off by
operation of law as of October 15, 1977. But there is no legal basis for Francia’s
contention. By legal compensation, obligations of persons, who in their own right
are reciprocally debtors and creditors of each other, are extinguished (Art. 1278,
Civil Code). The circumstances of the case do not satisfy the requirements provided
by Article 1279, to wit:
(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 consist 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;

pg. 6
 (5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.

We have consistently ruled that there can be no off-setting of taxes against

the claims that the taxpayer may have against the government. A person cannot
refuse to pay a tax on the ground that the government owes him an amount equal to
or greater than the tax being collected. The collection of a tax cannot await the
results of a lawsuit against the government. In the case of Republic v. Mambulao
Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes cannot be
the subject of set-off or compensation. We stated that:
A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action or
any indebtedness of the state or municipality to one who is liable to the state
or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. ... (80 C.J.S.,
7374). "The general rule based on grounds of public policy is well-settled
that no set-off is admissible against demands for taxes levied for general or
local governmental purposes. The reason on which the general rule is based,
is that taxes are not in the nature of contracts between the party and party but
grow out of duty to, and are the positive acts of the government to the making
and enforcing of which, the personal consent of individual taxpayers is not
required. ..."

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331)
where we stated that: "... internal revenue taxes cannot be the subject of
compensation: Reason: government and taxpayer are not mutually creditors and
debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is
not such a debt, demand, contract or judgment as is allowed to be set-off."

pg. 7
 URACA VS COURT OF APPEALS et al 278 SCRA 702
SEPTEMBER 5, 1997
-Palamos
FACTS:
Velezes’ offer to sell the property at P 1,050,000.00 was unconditionally
accepted by the petitioner. However, the Velezes’ increased the price to P
1,400,000.00. Petitioner asked to pay a downpayment of P 1,000,000.00 while the
rest was to be paid in installment but it resulted to the Velezes’ selling the property
to Avenue Group instead, for P 1, 050, 000.00. Trial court said that there were two
perfected contract of sale to petitioners, one for P 1, 050,000.00 and another was
for P 1,400,000.00 but the appellate court pronounced that the first contract of sale
was subsequently novated when the seller raised the price to P 1, 400, 000.00.
ISSUE:
WON there was a valid novation making the first contract of sale invalid.
RULING:
Article 1231 of the Civil Code states that novation is one of the ways to
wipe out an obligation. Extinctive novation requires:
(1) existence of previous valid obligation;
(2) the agreement of all the parties to a new contract;
(3) extinguishment of the old obligation or contract;
(4) validity of a new one.
The foregoing clearly show that novation is effected only when a new
contract has extinguished an earlier contract by the same parties. They did not
reach a new agreement on the new price hence there was no new contact that was
perfected consequently the first one is still subsisting.

pg. 8
 PEOPLE’S BANK AND TRUST COMPANY, plaintiff-appellee, vs.
SYVEL’S INCORPORATED, ANTONIO Y. SYYAP and ANGEL Y
SYYAP, defendants-appellants, G.R. No. L-29280. August 11, 1988.
-Corot

FACTS:
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 in
Manila and Pasay City. The chattel mortgage was duly registered in the
corresponding registry of deeds of Manila and Pasay City. The chattel mortgage was
in connection with a credit commercial line in the amount of P900, 000 granted the
said defendant corporation, the expiry date of which was May 20, 1966.
On May 20, 1965, defendants Mr. Syyap and Ms. Syyap executed an
undertaking in favor of the plaintiff whereby they both agreed to guarantee
absolutely and unconditionally and without the benefit of excussion the full and
prompt payment of any indebtedness to be incurred on account of the said credit
line. Against the credit line granted the defendant Syvel’s 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
extra-judicially the chattel mortgage. However, because of an attempt to have the
matter settled, the extra-judicial foreclosure was not pushed thru. As no payment
had been paid, this case was eventually filed in this Court.
On petition of the plaintiff based on the affidavits executed by plaintiff bank
and Atty. Berenguer on January 12, 1967, to the effect, among others, that the
defendants are disposing of their properties with intent to defraud their creditors, a
preliminary writ of attachment was issued. As a consequence of the issuance of the
writ of attachment, the defendants, in their answer to the complaint set up a
compulsory counterclaim for damages.
Appellants admit that they are indebted to the appellee bank in the amount of
P601,633.01, breakdown of which is as follows: P568,577.76 as principal and
P33,055.25 as interest. After the filing of the case and during its pendency,
defendant Antonio V. Syyap proposed to have the case amicably settled and for that
purpose a conference was held in which Mr. Antonio de las Alas, Jr., Vice President
of plaintiff People’s Bank and Trust Company, defendant Antonio V. Syyap and
Atty. Mendoza were present. Mr. Syyap requested that the plaintiff dismiss this case
as he did not want to have the goodwill of Syvel’s Incorporated impaired, and
offered to execute a real estate mortgage on his real property located in Bacoor,
Cavite. Mr. de las Alas consented, and so the Real Estate Mortgage was executed
by defendant Antonio Syyap and his wife Margarita Bengco Syyap on June 22,
1967. Defendants did not agree with plaintiff’s motion to dismiss which included
the dismissal of their counterclaim and filed instead their own motion to dismiss on
the ground that by the execution of said real estate mortgage, the obligation secured
by the chattel mortgage subject of this case was novated, and therefore, appellee’s
cause of action thereon was extinguished.

ISSUE:
Whether the lower court erred in not holding that the obligation secured by
the Chattel Mortgage sought to be foreclosed in the above-entitled case was novated
by the subsequent execution between appellee and appellant Antonio V, Syyap of a

pg. 9
real estate mortgage as additional collateral to the obligation secured by said chattel
mortgage.

RULING:
Appellants contention is without merit. Novation takes place when the object
or 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, records show that in the real estate mortgage, appellants agreed that the
chattel mortgage “shall remain in full force and shall not be impaired by this (real
estate) mort-gage.” 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. PREMISES CONSIDERED, this appeal is DISMISSED for lack of
merit and the judgment appealed from is AFFIRMED.

pg. 10
ELSA B. REYES vs. COURT OF APPEALS, SECRETARY OF JUSTICE,
AFP-MUTUAL BENEFIT ASSOCIATION, INC. & GRACIELA
ELEAZAR, G.R. No. 120817 November 4, 1996
-Muñoz
FACTS:
Elsa Reyes is the president of Eurotrust Capital Corporation, a domestic
corporation engaged in credit financing. Graciela Eleazar, is the president of B.E.
Ritz Mansion International Corporation (BERMIC), a domestic enterprise
engaged in real estate development. The other respondent, Armed Forces of the
Philippines Mutual Benefit Association Inc. (AFP-MBAI) is a corporation duly
organized primarily to perform welfare services for the Armed Forces of the
Philippines.
Elsa Reyes alleges that Eurotrust and Bermic entered into a loan agreement
to finance the construction of Ritz Condominium and Gold Business Park.
Bermic issued 21 postdated checks to cover payments of the loan packages.
However, the checks were dishonored by the drawee bank, RCBC, due to stop
payment order made by Graciela Eleazar. Eleazar failed to make good
dishonored checks, prompting Reyes to file for BP 22 and Estafa.
Meanwhile, respondent AFP-MBAI, which invested its funds with
Eurotrust, found out that the amounts paid by AFP-MBAI to Eurotrust for those
securities were in turn lent by Elsa Reyes to Bermic and others
When Eleazar came to know that the funds originally loaned by Eurotrust
to Bermic belonged to AFP-MBAI, she requested a meeting with Eurotrust
representatives. Thus, agreed that Bermic would directly settle its obligations with
the real owners of the fund AFP-MBAI and DECS-IMC.
However, Graciela Eleazar later learned that Elsa Reyes continued to collect
on the PDC’s issued contrary to their agreement. So, Bermic wrote to Eurotrust
to hold the amounts “in constructive trust” for the real owners. But Reyes
continued to collect on. Upon her counsel’s advice, Eleazar had the payment
stopped. Hence, her checks issued in favor of Eurotrust were dishonored.
After investigation, the office of the Provincial Prosecutor of Rizal issued a
resolution dismissing the complaints filed by Elsa Reyes against Graciela Eleazar
on the ground that when the latter assumed the obligation of Reyes to AFP-MBAI,
it constituted novation, extinguishing any criminal liability on the part of Eleazar.
Petitioner avers that she could not be held criminally liable for the crime
charged because the contract of sale of securities between her and respondent
AFP-MBAI was novated by substitution of debtor. She claims that private
respondent Eleazar, instead of fulfilling her obligation under the contract of loan
to pay petitioner the amount of debts, assumed petitioner’s obligation under the
contract of sale to make payments to respondent AFP-MBAI directly.
ISSUE:
Whether there was novation.
RULING:
No novation took place at the case at bar.

pg. 11
 Admittedly, in order that a novation can take place, the concurrence of the
following requisites are indispensable:
1. There must be a previous valid obligation,
2. There must be an agreement of the parties concerned to a new contract,
3. There must be the extinguishment of the old contract, and
4. There must be the validity of the new contract.
Upon the facts shown in the record, the last three essential requisites of novation
are wanting in the instant case. No new agreement for substitution of creditor war
forged among the parties concerned which would take the place of the preceding
contract.
The absence of a new contract extinguishing the old one destroys any
possibility of novation by conventional subrogation. In concluding that a novation
took place, the respondent court relied on the two letters which, according to it,
formalized the agreement that BERMIC would directly settle its obligation with
the real owners of the funds AFP-MBAI and DECS-IMC.
The fact that respondent Eleazar made payments to AFP-MBAI and the
latter accepted them does not ipso facto result in novation. There must be an express
intention to novate -animus novandi (Novation is never presumed.)
Article 1300 of the Civil Code provides inter alia that conventional
subrogation must be clearly established in order that it may take effect.
Article 1293 of the Civil Code is explicit, thus:
Novation which consists in substituting a new debtor in the
place of the original one, may be made even without or against the
will of the latter, but not without the consent of the creditor. Payment
by the new debtor gives him the rights mentioned in Articles 1236
and 1237.
The consent of the creditor to a novation by change of debtor is as
indispensable as the creditor’s consent in conventional subrogation in order that a
novation shall legally take place. The mere circumstance of AFP-MBAI receiving
payments from respondent Eleazar who acquiesced to assume the obligation of
petitioner under the contract of sale of securities, when there is clearly no
agreement to release petitioner from her responsibility, does not constitute
novation, at most, it only creates a juridical relation of co-debtorship or suretyship
on the part of respondent Eleazar to the contractual obligation of petitioner to AFP-
MBAI and the latter can still enforce the obligation against the petitioner.
In the civil law setting, novatio is literally construed as to make new. So it
is deeply rooted in the Roman Law Jurisprudence, the principle novation non
praesumitur - that novation is never presumed.

pg. 12
 SOLOMON BOYSAW and ALFREDO M. YULO, JR. vs. INTERPHIL
PROMOTIONS, INC., LOPE SARREAL, SR., and MANUEL NIETO, JR.,
G.R. No. L-22590 March 20, 1987
-Enage
FACTS:
On May 1, 1961, Solomon Boysaw and his then Manager, Willie Ketchum,
signed with Interphil Promotions, Inc. represented by Lope Sarreal, Sr., a contract
to engage Gabriel "Flash" Elorde in a boxing contest for the junior lightweight
championship of the world.
On July 2, 1961, Ketchum on his own behalf and on behalf of his associate
Frank Ruskay, assigned to J. Amado Araneta the managerial rights over Solomon
Boysaw.
On September 1, 1961, J. Amado Araneta assigned to Alfredo J. Yulo, Jr. the
managerial rights over Boysaw that he earlier acquired from Ketchum and Ruskay.

On September 5, 1961, Alfredo Yulo, Jr. wrote to Sarreal informing him of

his acquisition of the managerial rights over Boysaw and indicating his and
Boysaw's readiness to comply with the boxing contract of May 1, 1961. On the same
date, on behalf of Interphil Sarreal wrote a letter to the GAB expressing concern
over reports that there had been a switch of managers in the case of Boysaw, of
which he had not been formally notified, and requesting that Boysaw be called to
an inquiry to clarify the situation.

The GAB called a series of conferences of the parties concerned culminating

in the issuance of its decision to schedule the Elorde-Boysaw fight for November 4,
1961. However, Yulo, Jr. refused to accept the change in the fight date, maintaining
his refusal even after Sarreal on September 26, 1961, offered to advance the fight
date to October 28, 1961 which was within the 30-day period of allowable
postponements provided in the principal boxing contract of May 1, 1961.

While an Elorde-Boysaw fight was eventually staged, the fight contemplated

in the May 1, 1961 boxing contract never materialized

As a result of the foregoing occurrences, Boysaw and Yulo, Jr. sued Interphil,
Sarreal, Sr. and Manuel Nieto, Jr. for damages allegedly occasioned by the refusal
to honor their commitments under the boxing contract of May 1, 1961.

ISSUE:
Whether consent is an indispensable requirement in novation.

RULING:
Yes.

pg. 13
 The assignments, from Ketchum to Araneta, and from Araneta to Yulo, were
in fact novations of the original contract which, to be valid, should have been
consented to by Interphil.
Under the law when a contract is unlawfully novated by an applicable and
unilateral substitution of the obligor by another, the aggrieved creditor is not bound
to deal with the substitute
The consent of the creditor to the change of debtors, whether
in expromision or delegacion is an indispensable requirement. Substitution of one
debtor for another may delay or prevent the fulfillment of the obligation by reason
of the inability or insolvency of the new debtor, hence, the creditor should agree to
accept the substitution in order that it may be binding on him.
The refusal of appellants to accept a postponement without any other reason
but the implementation of the terms of the original boxing contract entirely
overlooks the fact that by virtue of the violations they have committed of the terms
thereof, they have forfeited any right to its enforcement.

pg. 14
 VICTOR D. YOUNG and JOHNNY YOUNG, vs. COURT OF APPEALS,
G.R. No. 83271, May 8, 1991
-Espedilla
FACTS:
On November 7, 1961, the estates of Humiliano Rodriguez and Timoteo Rodriguez
leased to Victor D. Young a parcel of land consisting of 840 square meters and
located at Colon Street, Cebu City, on which the latter's building, then known as
Liza Theater (later renamed Nation Theater), was standing. The contract of lease
contained the following stipulation:
(8) That at the end of this lease contract or after the twenty-first (21st) year,
the LESSORS may purchase the LIZA THEATRE building (excluding
movie projectors, equipment, and other movables of the business of the
LESSEE) at their option from the LESSEE by paying the market value
thereof if acceptable to the LESSEE; provided, however, that if the
LESSORS do not exercise this option to buy, the LESSEE shall continue for
another period of TWENTY-ONE (21) YEARS and the rental will be agreed
upon by the parties with the prevailing rental of properties near the premises
as the basis.
On December 18, 1961, exactly the same contract was again executed by the same
parties, except that the estate of Humiliano Rodriguez was this time represented by
Antolin A. Jariol, instead of Miguela Rodriguez, as one of the signatories.
On November 5, 1982, or two days before the expiration of the first contract, the
heirs (except Natividad) filed a suit for specific performance against Victor D.
Young to compel him to sell to them his theater-building for P 135,000.00. They
tendered this amount with the clerk of court by way of consignation. They also sued
Victor Young's son, Johnny, as an unwilling co-plaintiff.
The defendants contended that the plaintiffs had no cause of action because the
complaint was premature. The lease contract of November 7, 1961, had been
novated by the second lease contract dated December 18, 1961; hence, the lease was
terminated on December 18, 1982, and not November 7, 1982.
ISSUE:
Whether there was a valid novation on the contract entered into by the
parties?
RULING:
NO. Novation has been defined as the extinguishment of an obligation by a
subsequent one which terminates it, either by changing its object or principal
conditions, referred to as objective or real novation or by substituting a new debtor
in place of the old one, or by subrogating a third person to the rights of the creditor,
also called as subjective or personal novation. But as explained by this
Court, novation is never presumed; it must be explicitly stated or there must be a
manifest incompatibility between the old and the new obligations in every aspect.
The test of incompatibility between two obligations or contracts, is whether or not
they can stand together, each one having an independent existence. If they cannot,
they are incompatible, and the later obligation novates the first.

pg. 15
 There was clearly no implied novation for lack of an essential change in the
object, cause, or principal conditions of the obligation. At most, the substitution of
a signatory in the second contract can be considered only an accidental modification
which, according to Tolentino, "does not extinguish an existing obligation. When
the changes refer to secondary agreements, and not to the object or principal
conditions of the contract, there is no novation; such changes will produce
modifications of incidental facts, but will not extinguish the original obligation.
Hence, it is not proper to consider an obligation novated by unimportant
modifications which do not alter its essence.

pg. 16
pg. 17
 ANTONIO GARCIA, JR., v. COURT OF APPEALS, LASAL
DEVELOPMENT CORPORATION, G.R. No. 80201, November 20, 1991

-Bitas

FACTS:

Western Minolco Corporation (WMC) obtained from the Philippine

Investments Systems Organization (PISO) two loans for P2,500,000.00 and
P1,000,000.00 for which it issued the corresponding promissory notes payable on
May 30, 1977. On the same date, Antonio Garcia and Ernest Kahn executed a
surety agreement binding themselves jointly and severally for the payment of the
loan of P2,500,000.00 on due date.

Upon failure of WMC to pay after repeated demands, demand was made on
Garcia pursuant to the surety agreement. Garcia also failed to pay. Hence, on April
5, 1983, Lasal Development Corporation (to which the credit had been assigned
earlier by PISO) sued Garcia for recovery of the debt in the Regional Trial Court
of Makati.

On May 18, 1983, Garcia moved to dismiss on the grounds that: (a) the
complaint stated no cause of action; (b) the suit would result in unjust enrichment
of the plaintiff because he had not received any consideration from PISO; (c) the
surety agreement violated the doctrine of the limited liability of corporations; and
(d) the principal obligation had been novated.

After considering the arguments and evidence of the parties, the trial court
granted the motion and dismissed the complaint on the ground that the surety
agreement was invalid for absence of consideration. On appeal, the respondent
court reversed Judge Jesus M. Elbinias and remanded the records of the case for
trial on the merits. Garcia then came to this Court in this petition for review
on certiorari, pleading the same arguments raised in the trial court.

ISSUE/S:

1. Whether or not the extension of the original period of payment and the
compounding interest on the principal obligation novated the contract and thus
release the surety of his obligation.

2. Whether or not the prepayment of the restructured loans of WMC before the
distribution of dividends to the common stockholders, the proposed sale on
installments of its assets to Negros Occidental Copperfield Mines, and the
preference given to other creditors of WMC over PISO novated the contract.

3. Whether or not the exchange of communications made by WMC with DBP,

together with the memorandum of agreement are sufficient to establish the new
undertaking made by WMC with all its creditors, including DBP.

RULING:

1. No. In the surety agreement clearly stipulated that the petitioner not only
consented to an extension in the payment of the obligation but even waived his
right to be notified of such extension, he cannot now claim that he has been
released from his undertaking because of the extension granted to the principal.

pg. 18
 As for the compounded interest, SC It was held by citing the case of BPI vs
Gooch and Redfern, however, that the change in the rate of interest was merely a
collateral agreement between the creditor bank and the principal debtor that did
not affect the surety. When the debtor promised to pay the extra rate of interest on
demand of the plaintiff, the liability he assumed was his alone and was separate
and apart from the original contract. His agreement to pay the additional rate of
interest was an additional burden upon him and him only. That obligation in no
way affected the original contract of the surety, whose liability remained
unchanged.

2. It is axiomatic, and only fair, that the creditors of a corporation must be paid
first before dividends may be distributed among the stockholders. Unsecured
creditors are given preference in bankruptcy or insolvency proceedings because
secured creditors can after all go against the security given by the debtor. As for
the installment sale of WMC’s assets to Negros Occidental Copperfield Mines,
which might make it difficult for the petitioner to recover any amount it may have
to pay on the loan of WMC, this was a risk he took when he signed the surety
agreement. As it did not prohibit the alienation of the properties of the principal
debtor, the sale to Negros cannot be considered a novation of the original
agreement. In fact, the proposed sale was intended precisely to enable WMC to
meet its pending obligations.

3. No. The petitioner failed to establish the validity of the new contract, an
essential requisite for the novation of a previous valid obligation.
It is true as a general rule no form of words or writing is necessary to give
effect to a novation. Nevertheless, since the parties involved here are
corporations, it must first be proved that the contracts, assuming they were made,
were executed by the persons possessing the proper authority to bind their
respective principals. Annexes 1-4 are a mere exchange of correspondence
between the officers of WMC and DBP. Although they contain the provisions and
proposals that, according to petitioner, should suffice to establish that the original
contract between WMC and PISO has been materially altered, they cannot be
considered per se sufficient to give rise to a valid new obligation. WMC was in
fact directed by Joseph W. Edralin, the Assistant Executive Officer of the DBP, to
communicate with Atty. Hilario Oraolino of the Office of the Chief Legal Counsel
for the preparation and execution of the necessary legal documents to cover the
approval and confirmation of the several proposals made. No such documents, as
duly signed by the parties, were ever presented in court. Annexes 5 to 7 10 are also
incomplete documents and not binding without the signatures of the supposed
contracting parties.
Novation of contract cannot be presumed. In order that an obligation may be
extinguished by another which substitutes 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 (Art. 1292, Civil Code). 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. Novation requires the creation of new
contractual relations as well as the extinguishment of the old. There must be a
consent of all the parties to the substitution, resulting in the extinction of the old
obligation and the creation of a valid new one (Tiu Siuco v. Habana, 45 Phil. 707).
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

pg. 19
novated in a new instrument by changing the term of payment and adding other
obligations not incompatible with the old one (Inchausti & Co. v. Yulo, 34 Phil.
978). 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 so declared in unequivocal terms or
that there is complete and substantial incompatibility between the two obligations
(Sandico v. Paquing, 42 SCRA 322). 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 new one (Dungo v. Lopeña,
L-19377, Dec. 29, 1962, 6 SCRA 1007; Magdalena Estates, Inc. v. Rodriguez, 18
SCRA 967; Rizal Commercial Banking Corp. v. Militante, AC GR CV 04077,
Sept. 20, 1985; Investors Finance Corp. v. Cruz, AC GR CV 04710, Nov. 27,
1985).

pg. 20
 AJAX MARKETING, TAN, TAN, YEE AND SPS. SEE V. CA, MBC,
SHERIFF OF MANILA, G.R. No. 118585, September 14, 1995
-Gervacio
FACTS:
Ylang-Ylang Merchandising Company, a partnership between Angelita
Rodriguez and Antonio Tan, obtained a loan of P250,000.00 from the MBTC, and
to secure payment of the same, spouses Marcial See and Lilian Tan constituted a
real estate mortgage in favor of said bank over their property in Paco, Manila,
covered by TCT No. 105233. The mortgage was annotated at the back of the title.
After the partnership had changed its name to Ajax Marketing Company (without
changing its composition), it obtained a loan of P150,000.00 from MBTC. Again
to secure the loan, spouses Marcial See and Lilian Tan executed in favor of said
bank a second real estate mortgage over the same property. As in the first instance,
the mortgage was duly annotated.
Ajax Marketing Company was converted into a corporation denominated as
Ajax Marketing and Development Corporation, with the original partners
(Rodriguez and Tan) as incorporators and three (3) additional incorporators,
namely, Elisa Tan, and Jose San Diego and Tessie San Diego. Ajax Marketing and
Development Corporation obtained from MBTC a loan of P600,000.00, the
payment of which was secured by another real estate mortgage executed by spouses
Marcial See and Lilian Tan in favor of said bank over the same property in Paco,
Manila. Again, the third real estate mortgage was annotated on the TCT.
The 3 loans with an aggregate amount of P1,000,000.00 were re-structured
and consolidated into one loan, and Ajax Marketing and Development Corporation
executed a Promissory Note. Petitioners argue that novation occurred when their
three loans secured by the same real estate property were consolidated into a single
loan of P1 million under Promissory Note, extinguishing their monetary obligations
and releasing the mortgaged property from liability.

ISSUE:
1. Whether novation occurred.
2. Whether a real estate mortgage can cover future debts.

RULING:

1. NO.
The well settled rule is that novation is never presumed. The attendant facts
herein do not make a case of novation. There is nothing in the records to show the
unequivocal intent of the parties to novate the three loan agreements through the
execution of the promissory note.
Petitioners agreed to apply the real estate property to secure obligations that
they may thereafter obtain including their renewals or extensions with the principals
fixed at P600,000.00, P150,000.00, and P250,000.00 which when added have an
aggregate sum of P1.0 million. The PN merely restructured and renewed the three
previous loans to expediently make the loans current. There was no change in the
object of the prior obligations. The consolidation of the three loans, contrary to
petitioners’ contention, did not release the mortgaged real estate property from any
liability because the mortgage annotations at the back of TCT No. 105233, in fact,
all remained un-cancelled, thus indicating the continuing subsistence of the real
estate mortgages.

2. YES

pg. 21
 An action to foreclose a mortgage is usually limited to the amount mentioned
in the mortgage, but where on the four corners of the mortgage contracts, as in this
case, the intent of the contracting parties is manifest that the mortgaged property
shall also answer for future loans or advancements then the same is not improper as
it is valid and binding between the parties. For merely consolidating and expediently
making current the three previous loans, the loan of P1.0 million under PN, secured
by the real estate property, was correctly included in the foreclosure’s bid price.
Petitioners’ reliance on the C & C Commercial Corp. v. Phil. National
Bank case is misplaced. In that case, the foreclosure sale included previously
incurred unsecured obligations in favor of PNB which were not in the
contemplation of the mortgage contract, whereas in the instant case, the mortgages
were one in providing that the mortgaged real estate property shall also secure
future advancements or loans, as well as renewals or extensions of the same.

pg. 22
 Mario Espina vs CA, GR no. 116805, June 22, 2000
-Gabor
FACTS:
Mario S. Espina is the registered owner of a Condominium Unit in
Antipolo, Rizal. Such ownership is evidenced by a Condominium Certificate of
Title. On November 29, 1991, Mario S. Espina, as seller, and Rene G. Diaz, as
buyer, executed a Provisional Deed of Sale, whereby the former sold to the latter
the aforesaid condominium unit for the amount of P100,000.00 to be paid upon the
execution of the contract and the balance to be paid through PCI Bank postdated
checks. During this time, Diaz was a lessee of the said unit.
On January 25, 1992, Diaz through Ms. Socorro Diaz, his wife, paid private
Mario Espina P200,000.00, which was acknowledged by him as partial payment
for the condominium unit subject of this controversy. On July 26, 1992, Espina
sent Diaz a "Notice of Cancellation" of the Provisional Deed of Sale. However,
despite the Notice of Cancellation from Espina, the latter accepted payment from
Diaz per Metrobank Check which was encashed on October 28, 1992 in the
amount of P100,000.00 (there was no express indication whether this would be
applied to the purchase of the property or the unpaid rentals).
On February 24, 1993, Espina filed a complaint for Unlawful Detainer
(Rentals have not been paid for a while) against Diaz before the MTC of Antipolo,
Branch 1. On November 12, 1993, the trial court rendered its decision, ordering
Diaz to vacate the condominium unit. On appeal to RTC, the decision of the MTC
was affirmed. On petition for review, the CA reversed the appealed decision and
dismissed the complaint for unlawful detainer. MR was denied. Hence, the appeal
via petition for review on certiorari before the SC.
ISSUE:
The basic issue raised is whether the Court of Appeals erred in ruling that
the provisional deed of sale novated the existing contract of lease and that
petitioner had no cause of action for ejectment against respondent Diaz.
RULING:
We resolve the issue in favor of petitioner (Espina). According to
respondent Diaz, the provisional deed of sale that was subsequently executed by
the parties novated the original existing contract of lease. The contention cannot
be sustained. Respondent originally occupied the condominium unit in question in
1987 as a lessee. While he occupied the premises as lessee, petitioner agreed to
sell the condominium unit to respondent by installments. The agreement to sell
was provisional as the consideration was payable in installments.
The question is, did the provisional deed of sale novate the existing lease
contract? The answer is no. The novation must be clearly proved since its
existence is not presumed. "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." Novation takes place only if the parties expressly so provide,
otherwise, the original contract remains in force. In other words, the parties to a
contract must expressly agree that they are abrogating their old contract in favor of
a new one. Where there is no clear agreement to create a new contract in place of
the existing one, novation cannot be presumed to take place, unless the terms of

pg. 23
the new contract are fully incompatible with the former agreement on every point.
Thus, a deed of cession of the right to repurchase a piece of land does not
supersede a contract of lease over the same property. In the provisional deed of
sale in this case, after the initial down payment, respondent's checks in payment of
six installments all bounced and were dishonored upon presentment for the reason
that the bank account was closed. Consequently, on July 26, 1992, petitioner
terminated the provisional deed of sale by a notarial notice of cancellation.
Nonetheless, respondent Diaz continued to occupy the premises, as lessee, but
failed to pay the rentals due. On October 28, 1992, respondent made a payment of
P100,000.00 that may be applied either to the back rentals or for the purchase of
the condominium unit. On February 13, 1993, petitioner gave respondent a notice
to vacate the premises and to pay his back rentals. Failing to do so, respondent's
possession became unlawful and his eviction was proper. Hence, on February 24,
1993, petitioner filed with the Municipal Trial Court, Antipolo, Rizal, Branch 01
an action for unlawful detainer against respondent Diaz.
Now respondent contends that the petitioner's subsequent acceptance of
such payment effectively withdrew the cancellation of the provisional sale. We do
not agree. Unless the application of payment is expressly indicated, the payment
shall be applied to the obligation most onerous to the debtor. In this case, the
unpaid rentals constituted the more onerous obligation of the respondent to
petitioner. As the payment did not fully settle the unpaid rentals, petitioner's cause
of action for ejectment survives. Thus, the Court of Appeals erred in ruling that the
payment was "additional payment" for the purchase of the property.

pg. 24
 FORTUNE MOTORS (PHILS.) CORPORATION and EDGAR L.
RODRIGUEZA, petitioners, vs. THE HONORABLE COURT OF APPEALS
and FILINVEST CREDIT CORPORATION, respondents, G.R. No. 112191.
February 7, 1997.
-Palamos
FACTS:
Petitioners herein executed an undated “Surety Undertaking” where they
“absolutely, unconditionally and solidarily guarantee the “full, faithful and prompt
performance, payment and discharge of any and all obligations and agreements” of
Fortune Motor (Phils) Corporation to Respondent and its affiliated and subsidiary
companies.
The following year, Petitioner Fortune, Respondent Filinvest and Canlubang
Automotive Resources Corporation (“CARCO”) entered into an “Automotive
Wholesale Financing Agreement” wherein CARCO will deliver motor vehicles to
Fortune for the purpose of resale in the latter’s ordinary course of business; Fortune,
in turn, will execute trust receipts over said vehicles and accept drafts drawn by
CARCO, which will discount the same together with the trust receipts and invoices
and assign them in favor of Respondent Filinvest, which will pay the motor vehicles
for Fortune. Under the same agreement, Petitioner Fortune, as trustee of the motor
vehicles, was to report and remit proceeds of any sale for cash or on terms to
Respondent Filinvest immediately without necessity of demand.
Several vehicles were delivered by CARCO to Petitioner Fortune and trust
receipts covered by demand drafts and deeds of assignment were executed in favor
of Respondent Filinvest. But when the demand drafts matured, not all the proceeds
of the vehicles which petitioner had sold were remitted and likewise failed to turn
over several unsold vehicles covered by the trust receipts.
Thus, Respondent Filinvest through counsel, sent a demand letter to petitioner
fortune. Despite said demands, the amount was still not paid. Hence, respondent
filed in the RTC of Manila a complaint for a sum of money with preliminary
attachment against the petitioners.
The trial court declared that there was no factual issue to be resolved except
for the correct balance of defendant’s account with Filinvest as agreed upon by the
parties during pre-trial.
Filinvest presented testimonial and documentary evidence but defendants,
instead of presenting their evidence filed a “motion for judgement on demurrer to
evidence” anchored principally on the ground that the Surety Undertakings were
null and void because at the time they were executed, there was no principal
obligation existing. The trial court denied the motion and scheduled the case for
reception of defendant’s evidence, however, defendats failed to present their
evidence prompting the court to deem them have waived their right to present
evidence.

ISSUE:
Whether the Court of Appeals erred when it declared that there was no
novation?

RULING:
NO
On the matter of novation, this has already been ruled upon when this Court
denied defendants’ Motion to dismiss on the argument that what happened was
really an assignment of credit, and not a novation of contract, which does not
require the consent of the debtors. The fact of knowledge is enough. Besides, as

pg. 25
explained by the plaintiff, the mother or the principal contract was the Financing
Agreement, whereas the trust receipts, the sight drafts, as well as the Deeds of
assignment were only collaterals or accidental modifications which do not
extinguish the original contract by way of novation. This proposition holds true even
if the subsequent agreement would provide for more onerous terms for, at any rate,
it is the principal or mother contract that is to be followed. When the changes refer
to secondary agreements and not to the object or principal conditions of the contract,
there is no novation; such changes will produce modifications of incidental facts,
but will not extinguish the original obligation.

pg. 26
 SOCORRO VDA. DE MONDRAGON and the Heirs of the Estate of
DOMINADOR MONDRAGON vs. HON. INTERMEDIATE APPELLATE
COURT & the SPOUSES MANUEL and BELEN BAYONA, G.R. No. 71889
April 17, 1990

-Muñoz

FACTS:

The spouses Manuel and Belen Bayona are relatives of Socorro Vda. de
Mondragon and her late husband, Dominador Mondragon. On August 22, 1960, the
Mondragons agreed to sell to the Bayonas a 1000-square-meter portion of their Lot
995 of the Tacloban Cadastre for the price of P3 per square meter or a total of
P3,000. On the same date, one-half of the agreed price (P1,500) was paid by the
Bayonas. Further payments were made by them in cash and in kind, amounting to
an additional sum of P297, leaving an unpaid balance of P1,203.

On April 11, 1975, the Mondragons agreed to sell to the Bayonas an unsold
portion of their Lot No. 901 of the Tacloban Cadastre for P15,000, of which P7,900
was admittedly received by the Mondragons from the Bayonas.

On April 11, 1978, the Bayonas filed a complaint for specific performance
and damages with preliminary attachment in the Court of First Instance of Leyte,
Branch III (now Regional Trial Court of Leyte, Branch VI), against Socorro Vda.
de Mondragon and the Heirs of Dominador Mondragon, alleging that they had
demanded several times from the defendants the execution of the deeds of sale of
the portions of Lots 995 and 901 that had been sold to them, but the defendants
unjustifiably failed to execute the deeds; instead, the defendants have been selling
their lots to other persons and may dispose of the properties which are the subject
of the aforementioned agreements, with intent to defraud the plaintiffs; and, that due
to the contractual breach committed by the Mondragons, the plaintiffs incurred
expenses of litigation and suffered moral and exemplary damages.

In their answer, the defendants alleged that the Bayonas failed to pay the
balance of the purchase price for Lot 995, decided to abandon the transaction and
buy Lot 901 instead that it was agreed that the amount they paid for Lot 905 would
be considered as partial payment for Lot 901; that they could not possibly execute
a deed of sale of Lot 901 in favor of the plaintiffs because the balance of the purchase
price has not been paid. Defendants moved to dismiss the complaint for lack of a
cause of action and prescription. The plaintiffs opposed the motion and the trial
court denied it. Hoping that the case would be settled amicably between the parties,
"who are after all related to each other and are practically neighbors," the court
appointed the Acting Clerk of Court as Commissioner to try to settle the case.

The plaintiffs submitted a Proposed Compromise Agreement in which the

defendants submitted a Counter proposal for the Compromise Agreement.

On September 30, 1981, the trial court rendered a decision holding that there
was a novation of the first contract to sell Lot 995. It observed that Lot 995 is located
in the City of Tacloban where both parties lived as neighbors, hence, its subdivision
and sale to third persons could not have been done without the consent or knowledge
of the plaintiffs, who did nothing about it except to send a demand letter two and a
half years later. It held that only the contract to sell Lot 901 existed between the

pg. 27
plaintiffs and the defendants, for the agreed price of P15,000, out of which P9,697
had already been paid (P7,900 as advance payment, plus P1,797 paid for Lot 995 or
a total of P9,697), leaving a balance of P5,303 only.

Upon the denial of their motion for reconsideration of the decision, the
plaintiffs appealed to the Intermediate Appellate Court which rejected the novation
theory and reversed the lower court's finding.

Defendants-appellees filed a motion for reconsideration of the decision,

which the Appellate Court denied. Hence, this petition for review.

ISSUE:

Whether the agreement to sell a portion of Lot 995 was novated by the agreement
to sell a portion of Lot 901.

RULING:

Neither express nor implied novation of the first contract to sell by the second
contract. Both contracts are completely independent of each other and can stand
alone.

The novation of obligations is governed by the following provisions of the

New Civil Code:

Article 1291. Obligations may be modified by:

1. Changing their object or principal conditions;

2. Substituting the person of the debtor;
3. Subrogating a third person in the rights of the creditor.ch

Article 1292. In order that an obligation may be extinguished by

another which substitutes 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 with each other.

The express mandate of the law that for an obligation to be extinguished by

another which substitutes 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," (Art. 1292, Civil Code,) sets the guidelines to be
followed in appraising the defense of novation. There can be no novation unless the
two distinct and successive binding contracts take place, with the later one designed
to replace the preceding convention (Montelibano vs. Bacolod-Murcia Milling Co.,
Inc., 5 SCRA 36).

Novation by presumption has never been favored. To be sustained, it need be

established that the old and the new contracts are incompatible in all points, or that
the will to novate appears by express agreement of the parties or in acts of similar
import." (Anastacio Dungo vs. Adriano Lopez, et al., 6 SCRA 1007.)

In the absence of an express release, nothing less than a showing of complete

incompatibility between the obligations would justify a finding of novation by
implication.

pg. 28
pg. 29