AJAX MARKETING & DEVELOPMENT CORP. VS.

COURT OF APPEALS Facts: Ylang-Ylang Merchandising Company, a partnership between Angelita Rodriquez and Antonio Tan, obtained a loan of P250,000.00 from Metropolitan Bank and Trust Company, and to secure payment of the same, spouses Marcial See and Lilian Tan constituted a real estate mortgage in favor of the said bank over the property in the District of Paco, Manila. The partnership had changed its name to Ajax Marketing Company without changing its composition and it obtained a loan of P150, 000.00 from the same bank and executed a second real estate mortgage over the same property. As the partnership converted into a corporation and changed its name into Ajax Marketing and Development Corporation with the original partners and additional incorporators, another loan was obtained from the same mortgagee of P600, 000.00. In December 1980, the three loans were re-structured into one loan and Ajax Marketing represented by Antonio Tan and Elisa Tan in their capacity as solidary co-obligor executed a Promissory Note. The petitioner argue that a novation occurs when their three loans which are all secured by the same real estate property were consolidated, thereby extinguishing their monetary obligations and releasing the mortgaged property from liability. Issue: Whether or not there is a novation occurred when the three loans which are all secured by the same real estate property were consolidated into one single loan under a Promissory Note? Held: 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 creditor. It is never presumed and 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 declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the new one. There is nothing in the records to show the unequivocal intent of the parties to novate the three loan agreements, no indication of the extinguishment of, or an incompatibility with. In addition, the consolidation of the three loans did not release the mortgaged real estate property from liability because the mortgage annotations, all remained uncancelled, indicating the subsistence of the real estate mortgage. Neither can it be validly contended that there was a change or substitution in the persons of either the creditor or the debtor. The conversation from a partnership to a corporation, without sufficient evidence that they were expressly released from their obligations, with new corporate personality, a third person or new debtor within the context of subjective novation. Novation purported change in the third person must be clear and express. Clearly then, neither objective nor subjective novation occurred

ROMEO C. GARCIA v. DIONISIO V. LLAMAS Doctrine: - Novation cannot be presumed. It must be clearly and unequivocally shown that it indeed took place, either by the express assent of the parties or by the complete incompatibility between the old and the new agreements. - 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 promissor and debtor from the beginning. Facts: Petitioner and Eduardo De Jesus borrowed P400,000.00 from respondent. Both 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. The loan has long been overdue and, despite repeated demands, both have failed and refused to pay it. Hence, a complaint was filed against both. Resisting the complaint, Garcia averred that he assumed no liability because he signed merely as an accommodation party for De Jesus; and that he is relieved from any liability arising from the note inasmuch as the loan had been paid by De Jesus by means of a check dated 17 April 1997; and that, in any event, the issuance of the check and respondents acceptance thereof novated or superseded the note. Respondent answered that there was no novation to speak of because the check bounced. Issues: 1. Whether or not there was novation in the obligation 2. Whether or not the defense that petitioner was only an accommodation party had any basis Held: 1. No. 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 formers place in the relation (Reyes v. CA). Well-settled is the rule that novation is never presumed (Security Bank v. Cuenca). Consequently, that which arises from a purported change in the person of the debtor must be clear and express. It is thus incumbent on petitioner to show clearly and unequivocally that novation has indeed taken place. Petitioner failed to do this. 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. 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 (Idolor v. CA, February 7, 2001). Article 1293 of the Civil Code defines novation as follows:

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

In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In expromision, the initiative for the change does not come from and may even be made without the knowledge of the debtor, since it consists of a third persons 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. 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 (Babst v. CA). Whether extinctive or modificatory, novation is made either by changing the object or the principal conditions, referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as subjective or personal novation (Spouses Bautista v. Pilar Development Corporation, 371 Phil. 533, August 17, 1999). For novation to take place, the following requisites must concur: 1) There must be a previous valid obligation. 2) The parties concerned must agree to a new contract. 3) The old contract must be extinguished. 4) There must be a valid new contract (Security Bank v Cuenca, October 3, 2000) 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 (Article 1292, NCC). The test of incompatibility is whether the two obligations can stand together, each one with its own independent existence (Molino v. Security Diners International Corporation, August 16, 2001). 2. No. The note was made payable to a specific person rather than to bearer or to order a requisite for negotiability under the Negotiable Instruments Law (NIL). Hence, petitioner cannot avail himself of the NILs provisions on the liabilities and defenses of an accommodation party. Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory note. Under Article 29 of the NIL, 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 promissor and debtor from the beginning.

MERCANTILE INSURANCE CO., INC vs. HON. COURT OF APPEALS and REPARATIONS COMMISSION Facts: On 6 February 1964, the Philippine Government represented by the Repacom in Japan and Jose Lopez entered into a Procurement Contract with Japanese suppliers for the acquisition of a fishing vessel, later named M/V "Jolo Lema," priced at US$174,900.00. On 28 August 1964, pursuant to the Protocol of Delivery signed in Japan, the "Jolo Lema" was delivered to Jose Lopez.On 24 September 1964; Jose Lopez posted a bond guaranteed by petitioner Mercantile in favor of Repacom. In that bond, Lopez undertook to pay Repacom the amount of P68,385.90 in the event of his failure to comply with any of his obligations under the Contract of Conditional Purchase and Sale. On 2 March 1965, Repacom and Lopez entered into a Conditional Contract of Purchase and Sale covering the vessel "Jolo Lema" for US$179,000.00 or its peso equivalent at the "preferred" rate of exchange, without prejudice to re-adjustment should the Supreme Court confirm that the imposition of the free market rate of exchange was proper or valid. The "Terms and Conditions" of the Contract, inter alia provided that:. . . should the Conditional Vendee fail to pay any of the yearly installments when due, or utilize the goods for any illegal purpose or purposes other than that for which the goods have been produced, or otherwise fail to comply with any of the terms and conditions of this contract or with any of the applicable provisions of the Reparations law and/or of the Rules and Regulations promulgated pursuant thereto, then the Conditional Vendor is hereby given the option to either rescind the contract upon notice to the Conditional Vendee in which case all sums already paid by the Conditional Vendee shall be forfeited as rentals in favor of the Conditional Vendor, and also that the Conditional Vendee shall deliver peacefully to the Conditional Vendor the property, subject of this contract or sue for specific performance in which case the whole amount remaining unpaid in this contract shall immediately become due and payable. Among the other obligations undertaken by Lopez under the Contract was the posting of a performancebond in favor of Repacom to secure Lopez' compliance with his obligations. Lopez failed to pay the first installment without interest on its due date despite repeated demands made on him. Repacom then demanded payment from Mercantile but the latter also refused to pay. Thereupon, on 28 August 1965, Repacom confiscated the Mercantile bond and demanded payment of the amount of P68, 386.90 covered by the bond. Subsequently, Lopez posted EGCI Bond No. 65-1103 dated 20 November 1965 in the amount of P36, 906.51, issued by Eagle Guaranty Co., Inc. ("Eagle") in favor of Repacom to secure compliance by Lopez of his obligations under the Contract of Conditional Purchase and Sale .The first installment with interest in the amount of P36, 906.51 under the Schedule of Payments fell due on28 August 1966. Despite repeated demands made by Repacom, Lopez refused to pay that installment. Notice was sent to Eagle who likewise refused to pay. Thereupon, Repacom confiscated EGCI Bond No.65-1103.On 14 February 1967, Repacom instituted an action in the then Court of First Instance of Manila against Mercantile, Eagle and Jose Lopez for the collection of the unpaid purchase price of the fishing vessel M/V"Jolo Lema" as well as for interest, liquidated damages, attorney's fees and costs. This case was, however, dismissed upon motion of Repacom. Petitioner makes an issue of the fact that the price of the vessel was reduced as a result of the issuance of the writ. Petitioner calls attention to the posting of the Eagle bond subsequent to the issuance of the writ and concludes that it was to guarantee payment of the ten percent (10%) of the reduced price of the vessel that the Eagle bond was posted, and that the Mercantile bond was accordingly released. It is further contended that petitioner's bond could not have secured Lopez' obligation under the Contract of Conditional Purchase and Sale since the latter was concluded after petitioner's bond had been issued. Petitioner argues that the Mercantile bond guaranteed only the procurement contract entered into prior to the issuance of the writ of preliminary injunction, and that the writ of preliminary injunction in effect had made the Mercantile bond unenforceable. Issues: 1.) Does posting of another bond by Lopez constitute novation through substitution of the debtor?

2.) Does reduction of price of the vessel released the mercantile bond? Held: 1.) The fact that subsequent to the execution of the Contract of Conditional Purchase and Sale, Lopez posted another bond, the Eagle bond, does not by itself suggest that there was a novation of Mercantile's obligation through a substitution of the debtor. The general rule is that novation in never presumed; it must always be clearly and unequivocally shown. Thus, "the mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute novation, and the creditor can still enforce the obligation against the original debtor." In the case at bar, the records do not at all show any express intention of the parties to extinguish the Mercantile bond. The original relationship between Jose Lopez, Mercantile and Repacom remained unchanged despite the posting of the Eagle bond, there having been no agreement between Repacom, Jose Lopez and Eagle to release Mercantile from the latter's obligation under its bond. The rule is that "in a case of subjective novation through a change in the person of debtor, it is not enough that the juridical relation between the original parties is extended to include a third person, as this constitutes only an increase in the number of persons liable to the obligee. It is essential that the old debtor be released from the obligation and the third person takes his place in the relation. If the older debtor is not released, there is no novation; the third person becomes merely a co-debtor, surety or co-surety. 2.)The Supreme court held that It is of no moment that the purchase price of the vessel was reduced. The said reduction was merely a result of the conversion of the price of the vessel "Jolo Lema" in U.S. Dollars to Philippine Pesos using the preferred rate of exchange instead of the free market rate of exchange which was originally intended by the parties. Such was merely an adjustment of the peso value of the vessel; the dollar value thereof remained at US$174,900.00 and the required amount of the performance bond was still ten percent (10%) of US$174,900.00.The reduction of the peso purchase price did not extinguish Mercantile's commitments under the bond. It must be recalled that under its bond Mercantile undertook to secure ten percent (10%) of the purchase price of the vessel which at that time was pegged at P683, 859.00 after converting the dollar price into the corresponding peso price using the free market rate of exchange. With the adjustment of the vessels peso price mandated by the writ of preliminary injunction, Mercantile's undertaking to pay a certain number of pesos under certain conditions was adjusted downward but not extinguished.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 83271 May 8, 1991 VICTOR D. YOUNG and JOHNNY YOUNG, petitioners, vs. COURT OF APPEALS, as nominal party respondent, and FAUSTA B. JAGDON, AMPARO R. CASAFRANCA and MIGUELA R. JARIOL, respondents. Ramires, Corro & Associates for petitioners. Navarro Law Office collaborating counsel for petitioners. Manuel V Trinidad and Efren V. Ramirez for private respondents.

CRUZ, J.:p 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. During the period of the lease, the two estates were finally settled, and the land leased to Victor Young was distributed among Fausta R. Jagdon, Amparo R. Casafranca, Miguela R. Jariol, the herein private respondents, and Teresita R. Natividad. Natividad later sold her share, consisting of 223 square meters, to Johnny Young, son of Victor D. Young. 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. Moreover, even if the lease ended on November 7, 1982, the action brought by the respondent on November 5, 1982, was still premature because the plaintiffs had not yet then notified Victor Young of the exercise of their option. The lease expired without a valid exercise of the option and the lease contract was thus renewed for another 21 years. In his decision dated May 28, 1986, Judge Ramon Am. Torres of the Regional Trial Court of Cebu found in favor of the plaintiffs and held that there was no novation. The second contract was executed merely to substitute the correct signatory. As there was no express stipulation therein that it superseded and replaced the first contract, the complaint was not prematurely filed. The dispositive portion of the decision read: WHEREFORE, judgment is hereby rendered: (a) declaring the sum of P250,000.00 as the fair market value of the building known as the Liza Theatre (Nation Theatre); (b) declaring the plaintiffs as the legal owners of the said building when they shall have paid the defendant Victor Young the sum of P250,000.00; (c) ordering the defendant Victor Young to pay the plaintiffs the sum of P50,000.00 as moral damages, Pl0,000.00 as attorney's fees for Fausta R. Jagdon and another P 10,000.00 as attorney's fees for the other plaintiffs and costs of the suit; (d) ordering the defendant Johnny Young to pay his proportionate share of the sum of P250,000.00 as well as in the sum of P20,000.00 incurred by the plaintiffs as attorney's fees. SO ORDERED. On appeal, the decision was modified by the respondent court which, while agreeing that there was no novation of the first contract, declared that the original period of the lease was extended by the second contract. It did not find that the complaint was premature because although the action below had been filed a month early, the question became moot and academic when Victor D. Young declared in his letter dated November 9, 1982, his refusal to sell the building in question. This stand was confirmed in the answer he filed on December 7, 1982, in which he rejected the plaintiffs' offer of P135,000.00. The respondent court also held that the plaintiffs' complaint could be considered originally as an action for declaratory relief, which was later converted into an ordinary action for specific performance. It is this decision that is now questioned in this petition for review. Law and jurisprudence on the concept and effects of novation are well settled in this jurisdiction. 2 In Caneda, Jr. v.Court of Appeals, we held: 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
1

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. (Emphasis supplied.) A careful examination of the text of the two contracts will show that the only change introduced in the second contract was the substitution by Antolin A. Jariol of his wife Miguela as signatory for the estate of Humiliano Rodriguez. There was no express declaration in the second contract that it was novating the first. To determine if there was at least an implied novation because of a clear incompatibility between the old and new contracts, we apply the rule that In order that there may be implied novation arising from incompatibility of the old and new obligations, the change must refer to the object, the cause, or the principal conditions of the obligation. In other words, there must be an essential change. 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 3 extinguish the original obligation." Hence, he concludes, "it is not proper to consider an obligation novated by unimportant modifications which 4 do not alter its essence." There being no novation, the lease is properly deemed to have commenced on November 7, 1961, and so ended 21 years later on November 7, 1982. It is significant that it was in fact from this first date that Victor Young effectively started as lessee. We do not agree with the respondent court that there was an extension of the period of lease in the second contract. As earlier explained, the only reason for the execution of the second contract was to change the signatory. There is no clear showing from the language of that contract that the parties intended to extend the lease for one month. According to Article 1370 of the new Civil Code: If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulation shall control. But although the lease contract was not novated or extended, the action for specific performance was still premature because it was filed before the petitioner was given a chance to refuse the option. The complaint was filed on November 5, 1982, and it was only on the following day, or on November 6, 1982, that the plaintiffs informed Victor Young of their decision to buy the theater-building. The tender of the purchase price is further proof of the fact that Victor Young was informed of that decision only on November 6, 1982. The action was premature not because the option was exercised prior to the expiration of the lease but because the complaint was filed before the defendant could reject the lessors' offer. No right of the plaintiffs had as yet been violated when they filed their complaint on November 5, 1982. Since a "cause of action" requires, as essential elements, not only a legal right of the plaintiff and a correlative obligation of the defendant but also "an act or omission of the defendant in violation of said legal right," the cause of action does not accrue until the party obligated 5 refuses, expressly or impliedly, to comply with its duty.

Therefore unless the plaintiff has a valid and subsisting cause of action at the time his action is commenced, the defect cannot be cured or remedied by the acquisition or accrual of one while the action is pending, and a supplemental complaint or an amendment setting up such 6 after-accrued cause of action is not permissible. (Emphasis supplied.) The Court adds that even if the case was prematurely filed, it did not follow that the option was not properly exercised. An option may be exercised at any time before the expiration of the period agreed upon. An "option" is defined as a contract granting a person the privilege to buy or not to buy certain objects at any time 7 within the agreed period at a fixed price. It is settled that when the offer has stated a fixed period for 8 acceptance, the offeree may accept at any time until such period expires. The ruling of the respondent court that the complaint for specific performance could be originally regarded as a petition for declaratory relief is not acceptable. The Rules of Court provide that an action for declaratory 9 relief may be filed by "any person" and does not say it may be initiated by the court itself motu proprio. More importantly, there was as yet no refusal or denial by the defendants of the plaintiffs' claimed right to buy the theater-building when the complaint was filed on November 5, 1986. In fact, as previously noted, it was only the following day that the defendants were informed of the plaintiffs' decision to exercise their option under the contract. Before that date, there was no uncertainty about the said option to justify the filing of a petition for declaratory relief. Hence, there was no cause of action to support a declaratory relief proceeding. We dismiss out of hand the argument that the merger of the character of the lessor and the lessee in Johnny Young resulted in the extinguishment of the right to the option to buy. It is utterly fallacious. Victor Young did not purchase any portion of the land covered by the lease; it was his son, Johnny Young, who did. The sale to the son of part of the land under lease to the father did not extinguish the plaintiffs' option to buy, which was enforceable against Victor D. Young and no other. The respondent court rejected the petitioner's contention that the case has become moot and academic because the theater subject of the option was no longer existing, having been gutted by fire. Its reason was that there was no adequate evidence of such destruction. On the contrary, the record contains a certificate from the Deputy Chief of Constabulary that the building was indeed burned to the ground on January 31, 10 1987. This fact indeed rendered the action for specific performance no longer viable. Since the action filed by the private respondents was premature, they are not entitled to any award of damages. Neither may the petitioners recover on their counterclaim because the private respondents filed their complaint in the honest belief that they had a right to the relief they were seeking. Attorney's fees are also not due to either of the parties because it has not been shown that any of them acted "in a wanton, fraudulent, reckless, oppressive, or malevolent manner." The parties must therefore bear their own costs. WHEREFORE, the challenged decision is SET ASIDE and a new judgment is rendered: (a) DISMISSING the complaint for specific performance; (b) DECLARING the lease terminated as of November 7, 1982; and (c) ORDERING petitioner Victor D. Young to vacate the leased premises. It is so ordered. Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ., concur.

SPOUSES FLORANTE and LAARNI BAUTISTA, petitioners, vs. PILAR DEVELOPMENT CORPORATION, respondent. Interest Novation CB Circular 905 In 1978, Bautista, a lawyer, acquired a loan (abt. P100k) from Apex Corp. The terms of the loan are: that interest rate is at 12% per yr; that interest rate may be increased/decreased by Apex if authorized by law; that there is a 10% penalty of the amount due in case of litigation; that no notice is needed in case Apex will assign the credit to another. These were all put into a promissory note. In 1982, Bautista is already behind in payment so he executed another promissory note in favor of Apex. The balance then was at P140k. Apex increased the interest rate to 21% pursuant to CB Circular 705 which nd allowed the maximum 21%. There is de-escalation clause this time around. The 2 PN expressly cancelled st the 1 PN. In 1983, CB Circular 905 was issued. In same year, Bautista failed to make payments. In 1984, Apex assigned the credit to Pilar Devt w/o notice to Bautista. Pilar sued Bautista. Bautista now nd st claims that the 2 PN is one and the same as the 1 ; that interest rate should be at 12%; that CB Circ. 905 does not allow escalation of rate in the absence of a de-escalation clause. st ISSUE: Whether or not to follow the 1 promissory note. nd st HELD: No. The 2 promissory note novated the 1 PN. This was expressly agreed upon by both parties. nd st Hence, the 2 PN is distinct and separate from the 1 . Therefore, the imposition of the 21% rate is valid as it was agreed upon. This regardless of the absence of a de-escalation clause. The operative law was CB Circ. nd 705 which was in effect when 2 PN was signed in 82. Also, the assignment of credit is valid even if it was w/o notice to Bautista because the same was agreed upon.