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FIRST UNITED CONSTRUCTORS v.

BAYANIHAN
Facts:
Issue:
Held:
LICAROS v. GATMAITAN
Facts: Enticed by the lucrative prospects of doing business with Anglo-Asean, Abelardo Licaros, a
Filipino businessman, decided to make a fund placement with said bank sometime in the 1980s. As it
turned out, the grim outcome of Licaros foray in overseas fund investment was not exactly what he
envisioned it to be. More particularly, Licaros, after having invested in Anglo-Asean, encountered
tremendous and unexplained difficulties in retrieving, not only the interest or profits, but even the very
investments he had put in Anglo-Asean.
Confronted with the dire prospect of not getting back any of his investments, Licaros then decided to
seek the counsel of Antonio P. Gatmaitan, a reputable banker and investment manager who had been
extending managerial, financial and investment consultancy services to various firms and
corporations both here and abroad. To Licaros relief, Gatmaitan was only too willing enough to
help. Gatmaitan voluntarily offered to assume the payment of Anglo-Aseans indebtedness to Licaros
subject to certain terms and conditions. In order to effectuate and formalize the parties respective
commitments, the two executed a notarized MEMORANDUM OF AGREEMENT on July 29, 1988
HIGHLIGHTS OF THE MEMO OF
AGREEMENT:
Conformably with his undertaking under
paragraph 1 of the aforequoted agreement,
Gatmaitan executed in favor of Licaros a NONNEGOTIABLE PROMISSORY NOTE WITH
ASSIGNMENT OF CASH DIVIDENDS (Exhs.
A; also Exh. 2), which promissory note,
appended as Annex A to the same
Memorandum of Agreement, states in full, thus
Thereafter, Gatmaitan presented to Anglo-Asean the Memorandum of Agreement earlier executed by
him and Licaros for the purpose of collecting the latters placement thereat of U.S.$150,000.00. Albeit
the officers of Anglo-Asean allegedly committed themselves to look into [this matter], no formal
response was ever made by said bank to either Licaros or Gatmaitan. To date, Anglo-Asean has not
acted on Gatmaitans monetary claims.
Evidently, because of his inability to collect from Anglo-Asean, Gatmaitan did not bother anymore to
make good his promise to pay Licaros the amount stated in his promissory note (Exh. A; also Exh.
2). Licaros, however, thought differently. He felt that he had a right to collect on the basis of the
promissory note regardless of the outcome of Gatmaitan's recovery efforts. Thus, in July 1996, Licaros,
thru counsel, addressed successive demand letters to Gatmaitan (Exhs. C and D), demanding
payment of the latters obligations under the promissory note. Gatmaitan, however, did not accede to
these demands.
Hence, this case.
Issue: W/N the Memorandum of Agreement between petitioner and respondent is one of assignment
of credit or one of conventional subrogation.

Held: This matter is determinative of whether or not respondent became liable to petitioner under the
promissory note considering that its efficacy is dependent on the Memorandum of Agreement, the note
being merely an annex to the said memorandum.[6]
An assignment of credit has been defined as the process of transferring the right of the
assignor to the assignee who would then have the right to proceed against the debtor. The
assignment may be done gratuitously or onerously, in which case, the assignment has an
effect similar to that of a sale.[7]
On the other hand, subrogation has been defined as the transfer of all the rights of the creditor
to a third person, who substitutes him in all his rights. It may either be legal or
conventional. Legal subrogation is that which takes place without agreement but by
operation of law because of certain acts. Conventional subrogation is that which takes
place by agreement of parties.[8]
The general tenor of the foregoing definitions of the terms subrogation and assignment of
credit may make it seem that they are one and the same which they are not. A noted
expert in civil law notes their distinctions thus:
Under our Code, however, conventional subrogation is not identical to assignment of
credit. In the former, the debtors consent is necessary; in the latter it is not
required. Subrogation extinguishes the obligation and gives rise to a new one; assignment
refers to the same right which passes from one person to another. The nullity of an old
obligation may be cured by subrogation, such that a new obligation will be perfectly valid;
but the nullity of an obligation is not remedied by the assignment of the creditors right to
another.[9]
For our purposes, the crucial distinction deals with the necessity of the consent of the debtor in
the original transaction. In an assignment of credit, the consent of the debtor is not
necessary in order that the assignment may fully produce legal effects. [10] What the law
requires in an assignment of credit is not the consent of the debtor but merely notice to
him as the assignment takes eff nect only from the time he has knowledge thereof. [11] A
creditor may, therefore, validly assign his credit and its accessories without the debtors
consent.[12] On the other hand, conventional subrogation requires an agreement among the
three parties concerned the original creditor, the debtor, and the new creditor. It is a new
contractual relation based on the mutual agreement among all the necessary
parties. Thus, Article 1301 of the Civil Code explicitly states that (C)onventional
subrogation of a third person requires the consent of the original parties and of the third
person.
The trial court, in finding for the petitioner, ruled that the Memorandum of Agreement was in the
nature of an assignment of credit. As such, the court a quo held respondent liable for the amount
stated in the said agreement even if the parties thereto failed to obtain the consent of Anglo-Asean
Bank. On the other hand, the appellate court held that the agreement was one of conventional
subrogation which necessarily requires the agreement of all the parties concerned. The Court of
Appeals thus ruled that the Memorandum of Agreement never came into effect due to the
failure of the parties to get the consent of Anglo-Asean Bank to the agreement and, as
such, respondent never became liable for the amount stipulated.
We agree with the finding of the Court of Appeals that the Memorandum of Agreement dated July
29, 1988 was in the nature of a conventional subrogation which requires the consent of the

debtor, Anglo-Asean Bank, for its validity. We note with approval the following pronouncement of
the Court of Appeals:
Immediately discernible from above is the common feature of contracts involving
conventional subrogation, namely, the approval of the debtor to the subrogation of a third
person in place of the creditor. That Gatmaitan and Licaros had intended to treat their
agreement as one of conventional subrogation is plainly borne by a stipulation in their
Memorandum of Agreement, to wit:
WHEREAS, the parties herein have come to an agreement on the nature, form and extent
of their mutual prestations which they now record herein with the express conformity of
the third parties concerned (emphasis supplied),
which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status of a mere assignee of
appellees credit, there is simply no sense for them to have stipulated in their agreement
that the same is conditioned on the express conformity thereto of Anglo-Asean
Bank. That they did so only accentuates their intention to treat the agreement as one of
conventional subrogation. And it is basic in the interpretation of contracts that the
intention of the parties must be the one pursued (Rule 130, Section 12, Rules of Court).
Given our finding that the Memorandum of Agreement (Exh. B; also Exh. 1), is not one of
assignment of credit but is actually a conventional subrogation, the next question that comes to
mind is whether such agreement was ever perfected at all. Needless to state, the perfection or
non-perfection of the subject agreement is of utmost relevance at this point. For, if the
same Memorandum of Agreement was actually perfected, then it cannot be denied that
Gatmaitan still has a subsisting commitment to pay Licaros on the basis of his promissory
note. If not, Licaros suit for collection must necessarily fail.
Here, it bears stressing that the subject Memorandum of Agreement expressly requires the
consent of Anglo-Asean to the subrogation. Upon whom the task of securing such consent
devolves, be it on Licaros or Gatmaitan, is of no significance. What counts most is the hard
reality that there has been an abject failure to get Anglo-Aseans nod of approval over
Gatmaitans being subrogated in the place of Licaros. Doubtless, the absence of such
conformity on the part of Anglo-Asean, which is thereby made a party to the same
Memorandum of Agreement, prevented the agreement from becoming effective, much less
from being a source of any cause of action for the signatories thereto. [13]
Aside for the whereas clause cited by the appellate court in its decision, we likewise note that on the
signature page, right under the place reserved for the signatures of petitioner and
respondent, there is, typewritten, the words WITH OUR CONFORME. Under this notation,
the words ANGLO-ASEAN BANK AND TRUST were written by hand. [14] To our mind, this
provision which contemplates the signed conformity of Anglo-Asean Bank, taken together
with the aforementioned preambulatory clause leads to the conclusion that both parties
intended that Anglo-Asean Bank should signify its agreement and conformity to the
contractual arrangement between petitioner and respondent. The fact that Anglo-Asean
Bank did not give such consent rendered the agreement inoperative considering that, as
previously discussed, the consent of the debtor is needed in the subrogation of a third
person to the rights of a creditor.

In this petition, petitioner assails the ruling of the Court of Appeals that what was entered into by the
parties was a conventional subrogation of petitioners rights as creditor of the Anglo-Asean Bank which
necessarily requires the consent of the latter. In support, petitioner alleges that: (1) the Memorandum
of Agreement did not create a new obligation and, as such, the same cannot be a conventional
subrogation; (2) the consent of Anglo-Asean Bank was not necessary for the validity of the
Memorandum of Agreement; (3) assuming that such consent was necessary, respondent failed to
secure the same as was incumbent upon him; and (4) respondent himself admitted that the
transaction was one of assignment of credit.
Petitioner argues that the parties to the Memorandum of Agreement could not have intended the same
to be a conventional subrogation considering that no new obligation was created. According to
petitioner, the obligation of Anglo-Asean Bank to pay under Contract No. 00193 was not extinguished
and in fact, it was the basic intention of the parties to the Memorandum of Agreement to enforce the
same obligation of Anglo-Asean Bank under its contract with petitioner. Considering that the old
obligation of Anglo-Asean Bank under Contract No. 00193 was never extinguished under the
Memorandum of Agreement, it is contended that the same could not be considered as a conventional
subrogation.
We are not persuaded.
It is true that conventional subrogation has the effect of extinguishing the old obligation
and giving rise to a new one. However, the extinguishment of the old obligation is the
effect of the establishment of a contract for conventional subrogation. It is not a requisite
without which a contract for conventional subrogation may not be created. As such, it is
not determinative of whether or not a contract of conventional subrogation was
constituted.
Moreover, it is of no moment that the subject of the Memorandum of Agreement was the
collection of the obligation of Anglo-Asean Bank to petitioner Licaros under Contract No.
00193. Precisely, if conventional subrogation had taken place with the consent of AngloAsean Bank to effect a change in the person of its creditor, there is necessarily created a
new obligation whereby Anglo-Asean Bank must now give payment to its new creditor,
herein respondent.
Petitioner next argues that the consent or conformity of Anglo-Asean Bank is not necessary to the
validity of the Memorandum of Agreement as the evidence on record allegedly shows that it was never
the intention of the parties thereto to treat the same as one of conventional subrogation. He claims
that the preambulatory clause requiring the express conformity of third parties, which admittedly was
Anglo-Asean Bank, is a mere surplusage which is not necessary to the validity of the agreement.
As previously discussed, the intention of the parties to treat the Memorandum of Agreement
as embodying a conventional subrogation is shown not only by the whereas clause but
also by the signature space captioned WITH OUR CONFORME reserved for the signature
of a representative of Anglo-Asean Bank. These provisions in the aforementioned
Memorandum of Agreement may not simply be disregarded or dismissed as superfluous.
It is a basic rule in the interpretation of contracts that (t)he various stipulations of a contract
shall be interpreted together, attributing to the doubtful ones that sense which may result
from all of them taken jointly.[15] Moreover, under our Rules of Court, it is mandated that (i)n
the construction of an instrument where there are several provisions or particulars, such a
construction is, if possible, to be adopted as will give effect to all. [16] Further, jurisprudence

has laid down the rule that contracts should be so construed as to harmonize and give effect
to the different provisions thereof.[17]
In the case at bench, the Memorandum of Agreement embodies certain provisions that are
consistent with either a conventional subrogation or assignment of credit. It has not been
shown that any clause or provision in the Memorandum of Agreement is inconsistent or
incompatible with a conventional subrogation. On the other hand, the two cited provisions
requiring consent of the debtor to the memorandum is inconsistent with a contract of
assignment of credit. Thus, if we were to interpret the same as one of assignment of
credit, then the aforementioned stipulations regarding the consent of Anglo-Asean Bank
would be rendered inutile and useless considering that, as previously discussed, the
consent of the debtor is not necessary in an assignment of credit.
Petitioner next argues that assuming that the conformity of Anglo-Asean was necessary to the validity
of the Memorandum of Agreement, respondent only had himself to blame for the failure to secure such
conformity as was, allegedly, incumbent upon him under the memorandum.
As to this argument regarding the party responsible for securing the conformity of Anglo-Asean Bank,
we fail to see how this question would have any relevance on the outcome of this case . Having ruled
that the consent of Anglo-Asean was necessary for the validity of the Memorandum of
Agreement, the determinative fact is that such consent was not secured by either
petitioner or respondent which consequently resulted in the invalidity of the said
memorandum.
With respect to the argument of petitioner that respondent himself allegedly admitted in open court
that an assignment of credit was intended, it is enough to say that respondent apparently used the
word assignment in his testimony in the general sense. Respondent is not a lawyer and as
such, he is not so well versed in law that he would be able to distinguish between the
concepts of conventional subrogation and of assignment of credit. Moreover, even
assuming that there was an admission on his part, such admission is not conclusive on this
court as the nature and interpretation of the Memorandum of Agreement is a question of
law which may not be the subject of stipulations and admissions. [18]
Considering the foregoing, it cannot then be said that the consent of the debtor Anglo-Asean
Bank is not necessary to the validity of the Memorandum of Agreement. As above stated,
the Memorandum of Agreement embodies a contract for conventional subrogation and in
such a case, the consent of the original parties and the third person is required. [19] The
absence of such conformity by Anglo-Asean Bank prevented the Memorandum of
Agreement from becoming valid and effective. Accordingly, the Court of Appeals did not
err when it ruled that the Memorandum of Agreement was never perfected.
GARCIA v. LLAMAS
Facts: On 23 December 1996[,] [petitioner and de Jesus] borrowed P400,000.00 from [respondent];
that, on the same day, [they] executed a promissory note wherein they bound themselves jointly
and severally to pay the loan on or before 23 January 1997 with a 5% interest per month; that the
loan has long been overdue and, despite repeated demands, [petitioner and de Jesus] have failed and
refused to pay it; and that, by reason of the unjustified refusal, [respondent] was compelled to engage
the services of counsel.
Resisting the complaint, [Petitioner Garcia,] in his [Answer,] averred that he assumed no liability
under the promissory note because he signed it merely as an accommodation party for x x x de
Jesus; and, alternatively, that he is relieved from any liability arising from the note

inasmuch as the loan had been paid by x x x de Jesus by means of a check dated 17 April
1997; and that, in any event, the issuance of the check and [respondents] acceptance
thereof novated or superseded the note.
[Respondent] tendered a reply to [Petitioner] Garcias answer, thereunder asserting that the loan
remained unpaid for the reason that the check issued by x x x de Jesus bounced.
Issue: W/N there was novation of the obligation.
Held: Petitioner seeks to extricate himself from his obligation as joint and solidary debtor by insisting
that novation took place, either through the substitution of De Jesus as sole debtor or the replacement
of the promissory note by the check. Alternatively, the former argues that the original obligation was
extinguished when the latter, who was his co-obligor, paid the loan with the check.
The fallacy of the second (alternative) argument is all too apparent. The check could not have
extinguished the obligation, because it bounced upon presentment. By law, [9] the delivery
of a check produces the effect of payment only when it is encashed.
We now come to the main issue of whether novation took place.
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a third
person to the rights of the creditor. [10] 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.[11] Both modes of substitution by the debtor require the consent of the creditor.
[12]

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is


terminated by the creation of a new one that takes the place of the former. It is
merely modificatory when the old obligation subsists to the extent that it remains compatible with
the amendatory agreement.[13] 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.[14] 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.[15]

Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point. [16] The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence. [17]
Applying the foregoing to the instant case, we hold that no novation took place.
The parties did not unequivocally declare that the old obligation had been extinguished by the
issuance and the acceptance of the check, or that the check would take the place of the note. There is
no incompatibility between the promissory note and the check. As the CA correctly observed, the
check had been issued precisely to answer for the obligation. On the one hand, the note
evidences the loan obligation; and on the other, the check answers for it. Verily, the two
can stand together.
Neither could the payment of interests -- which, in petitioners view, also
constitutes novation[18] -- change the terms and conditions of the obligation. Such payment was
already provided for in the promissory note and, like the check, was totally in accord with the terms
thereof.
Also unmeritorious is petitioners argument that the obligation was novated by the substitution of
debtors. In order to change the person of the debtor, the old one must be expressly
released from the obligation, and the third person or new debtor must assume
the formersplace in the relation.[19] Well-settled is the rule that novation is never
presumed.[20] Consequently, that which arises from a purported change in the person of the
debtor must be clear and express.[21] It is thus incumbent on petitioner to show clearly and
unequivocally that novation has indeed taken place.
In the present case, petitioner has not shown that he was expressly released from the
obligation, that a third person was substituted in his place, or that the joint
and solidary obligation was cancelled and substituted by the solitary undertaking of De
Jesus. The CA aptly held:
x x x. Plaintiffs acceptance of the bum check did not result in substitution by de Jesus either, the
nature of the obligation being solidary due to the fact that the promissory note expressly declared that
the liability of appellants thereunder is joint and [solidary.] Reason: under the law, a creditor may
demand payment or performance from one of the solidary debtors or some or all of them
simultaneously, and payment made by one of them extinguishes the obligation. It
therefore follows that in case the creditor fails to collect from one of the solidary debtors,
he may still proceed against the other or others. x x x [22]
Moreover, it must be noted that for novation to be valid and legal, the law requires that the
creditor expressly consent to the substitution of a new debtor. [23] Since novation implies a
waiver of the right the creditor had before the novation, such waiver must be express. [24] It
cannot be supposed, without clear proof, that the present respondent has done away with
his right to exact fulfillment from either of the solidary debtors.[25]
More important, De Jesus was not a third person to the obligation. From the beginning, he
was a joint and solidary obligor of theP400,000 loan; thus, he can be released from it only

upon its extinguishment. Respondents acceptance of his check did not change the person
of the debtor, because a joint and solidary obligor is required to pay the entirety of the
obligation.
It must be noted that in a solidary obligation, the creditor is entitled to demand the
satisfaction of the whole obligation from any or all of the debtors. [26] It is up to the former
to determine against whom to enforce collection. [27] Having made himself jointly and
severally liable with De Jesus, petitioner is therefore liable[28] for the entire obligation.[29]
CALIFORNIA BUS LINES v. STATE
INVESTMENTS1
Facts: Delta Motors Corporation applied for financial assistance from respondent State Investment
House, Inc., a domestic corporation engaged in the business of quasi-banking. SIHI agreed to extend a
credit line to Delta which eventually became indebted to SIHI. Meanwhile, petitioner purchased on
installment basis several buses to Delta. To secure the payment of the obligation petitioner executed
promissory notes in favor of Delta. When petitioner defaulted on the payments of the debts, it entered
into an agreement with delta to cover its due obligations. However, petitioner still had trouble meeting
its obligations with delta. Pursuant to the memorandum of agreement delta executed a deed of sale
assigning to respondent, the promissory notes from petitioner. Respondent subsequently sent a
demand letter to petitioner requiring remitting payments due on the promissory notes. Petitioner
replied informing respondent of the fact that delta had taken over its management and operations.
Issue:
Held: Novation has been defined as the extinguishment of an obligation by the substitution or change
of the obligation by a subsequent one which terminates the first, either by changing the object or
principal conditions, or by substituting the person of the debtor, or subrogating a third person in the
rights of the creditor.[40]
Novation, in its broad concept, may either be extinctive or modificatory.[41] It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the former; it is
merely modificatory when the old obligation subsists to the extent it remains compatible with the
amendatory agreement.[42] An extinctive novation results either by changing the object or principal
conditions (objective or real), or by substituting the person of the debtor or subrogating a third person
in the rights of the creditor (subjective or personal). [43] Novation has two functions: one to extinguish
an existing obligation, the other to substitute a new one in its place. [44] For novation to take place, four
essential requisites have to be met, namely, (1) a previous valid obligation; (2) an agreement of all
parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a
valid new obligation.[45]

1 CBLIs Contention: CBLI first contends that the Restructuring Agreement did not merely change the incidental elements of the
obligation under all sixteen (16) promissory notes, but it also increased the obligations of CBLI with the addition of new obligations
that were incompatible with the old obligations in the said notes. [37] CBLI adds that even if the restructuring agreement did not
totally extinguish the obligations under the sixteen (16) promissory notes, the July 24, 1984, compromise agreement executed in
Civil Case No. 0023-P did.[38] CBLI cites paragraph 5 of the compromise agreement which states that the agreement between it and
CBLI was in full and final settlement, adjudication and termination of all their rights and obligations as of the date of (the)
agreement, and of the issues in (the) case. According to CBLI, inasmuch as the five promissory notes were subject matters of the
Civil Case No. 0023-P, the decision approving the compromise agreement operated as res judicata in the present case.Held: The
attendant facts do not make out a case of novation. The restructuring agreement between Delta and CBLI executed on October 7,
1981, shows that the parties did not expressly stipulate that the restructuring agreement novated the promissory notes. Absent an
unequivocal declaration of extinguishment of the pre-existing obligation, only a showing of complete incompatibility between the old
and the new obligation would sustain a finding of novation by implication. 59 However, our review of its terms yields no
incompatibility between the promissory notes and the restructuring agreement.

Novation is never presumed,[46] and the animus novandi, whether totally or partially, must appear by
express agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken. [47]
The extinguishment of the old obligation by the new one is a necessary element
of novation which may be effected either expressly or impliedly. [48] The term "expressly"
means that the contracting parties incontrovertibly disclose that their object in executing
the new contract is to extinguish the old one. [49] Upon the other hand, no specific form is
required for an implied novation, and all that is prescribed by law would be an
incompatibility between the two contracts.[50] While there is really no hard and fast rule to
determine what might constitute to be a sufficient change that can bring about novation,
the touchstone for contrariety, however, would be an irreconcilable incompatibility
between the old and the new obligations.
There are two ways which could indicate, in fine, the presence of novation and thereby produce the
effect of extinguishing an obligation by another which substitutes the same. The first is
when novation has been explicitly stated and declared in unequivocal terms. Thesecond 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.[51] If they cannot, they are incompatible and the latter
obligation novates the first.[52] 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.[53]
The necessity to prove the foregoing by clear and convincing evidence is accentuated where the
obligation of the debtor invoking the defense of novation has already matured.[54]
With respect to obligations to pay a sum of money, this Court has consistently applied the well-settled
rule that the obligation is not novated by an instrument that expressly recognizes the old,
changes only the terms of payment, and adds other obligations not incompatible with the
old ones, or where the new contract merely supplements the old one.[55]
In Inchausti & Co. v. Yulo[56] this Court held that an obligation to pay a sum of money is
not novated in a new instrument wherein the old is ratified, by changing only the term of
payment
and
adding
other
obligations
not
incompatible
with
the
old
one. In Tible v. Aquino[57] andPascual v. Lacsamana[58] this Court declared that it is well settled that a
mere extension of payment and the addition of another obligation not incompatible with
the old one is not a novation thereof.
In this case, the attendant facts do not make out a case of novation. The restructuring
agreement between Delta and CBLI executed on October 7, 1981, shows that the parties
did not expressly stipulate that the restructuring agreement novated the promissory
notes. Absent an unequivocal declaration of extinguishment of the pre-existing obligation,
only a showing of complete incompatibility between the old and the new obligation would
sustain a finding of novation by implication.[59] However, our review of its terms yields no
incompatibility between the promissory notes and the restructuring agreement.
The five promissory notes, which Delta assigned to SIHI on September 13, 1983, contained the
following common stipulations:
1.

They were payable in 60 monthly installments up to July 31, 1985;

2.

Interest: 14% per annum;

3.

Failure to pay any of the installments would render the entire remaining balance due
and payable at the option of the holder of the notes;

4.

In case of judicial collection on the notes, the maker (CBLI) and co-maker (its president,
Mr. Dionisio O. Llamas, Jr) were solidarily liable of attorneys fees and expenses of 25%
of the amount due in addition to the costs of suit.

The restructuring agreement, for its part, had the following provisions:
WHEREAS, CBL and LLAMAS admit their past due installment on the following promissory notes:
a. PN Nos. 16 to 26 (11 units)
Past Due as of September 30, 1981 P1,411,434.00
b. PN Nos. 52 to 57 (24 units)
Past Due as of September 30, 1981 P1,105,353.00
WHEREAS, the parties agreed to restructure the above-mentioned past due installments under the
following terms and conditions:
a. PN Nos. 16 to 26 (11 units) 37 months
PN Nos. 52 to 57 (24 units) 46 months
b. Interest Rate: 16% per annum
c. Documentation Fee: 2% per annum
d. Penalty previously incurred and Restructuring fee: 4% p.a.
e. Mode of Payment: Daily Remittance
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereby agree and
covenant as follows:
1. That the past due installment referred to above plus the current and/or falling due amortization as
of October 1, 1981 for Promissory Notes Nos. 16 to 26 and 52 to 57 shall be paid by CBL and/or
LLAMAS in accordance with the following schedule of payments:
Daily payments of P11,000.00 from
October 1 to December 31, 1981
Daily payments of P12,000.00 from
January 1, 1982 to March 31, 1982

Daily payments of P13,000.00 from


April 1, 1982 to June 30, 1982
Daily payments of P14,000.00 from
July 1, 1982 to September 30, 1982
Daily payments of P15,000.00 from
October 1, 1982 to December 31, 1982
Daily payments of P16,000.00 from
January 1, 1983 to June 30, 1983
Daily payments of P17,000.00 from
July 1, 1983
2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily cash payments due
to DMC in accordance with the schedule in paragraph 1. DMC may send a collector to receive the
amount due at CBLs premises. All delayed remittances shall be charged additional 2% penalty
interest per month.
3. All payments shall be applied to amortizations and penalties due in accordance with paragraph of
the restructured past due installments above mentioned and PN Nos. 16 to 26 and 52 to 57.
4. DMC may at anytime assign and/or send its representatives to monitor the operations of CBL
pertaining to the financial and field operations and service and maintenance matters of M.A.N.
units. Records needed by the DMC representatives in monitoring said operations shall be made
available by CBL and LLAMAS.
5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and 52 to 57, CBL or
LLAMAS shall remit in lump sum whatever balance is left after deducting all payments made from what
is due and payable to DMC in accordance with paragraph 1 of this agreement and PN Nos. 16 to 26
and 52 to 57.
6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed upon and the total
accumulated unremitted amount has reached and (sic) equivalent of Sixty (60) days, DMC
and Silverio shall exercise any or all of the following options:
(a)

The whole sum remaining then unpaid plus 2% penalty per month and 16% interest
per annum on total past due installments will immediately become due and
payable. In the event of judicial proceedings to enforce collection, CBL and LLAMAS
will pay to DMC an additional sum equivalent to 25% of the amount due for attorneys
fees and expenses of collection, whether actually incurred or not, in addition to the
cost of suit;

(b)

To enforce in accordance with law, their rights under the Chattel Mortgage over
various M.A.N. Diesel bus with Nos. CU 80-39, 80-40, 80-41, 80-42, 80-43, 80-44 and
80-15, and/or

(c)

To take over management and operations of CBL until such time that CBL and/or
LLAMAS have remitted and/or updated their past due account with DMC.

7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for the M.A.N. Diesel Buses
and shall make available to CBL at the price prevailing at the time of purchase, an inventory of spare
parts consisting of at least ninety (90%) percent of the needs of CBL based on a moving 6-month
requirement to be prepared and submitted by CBL, and acceptable to DMC, within the first week of
each month.
8. Except as otherwise modified in this Agreement, the terms and conditions stipulated in PN Nos. 16
to 26 and 52 to 57 shall continue to govern the relationship between the parties and that the Chattel
Mortgage over various M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-44
and CM No. 80-15 as well as the Deed of Pledge executed by Mr. Llamas shall continue to secure the
obligation until full payment.
9. DMC and SILVERIO undertake to recall or withdraw its previous request to Notary Public Alberto
G. Doller and to instruct him not to proceed with the public auction sale of the shares of stock of CBL
subject-matter of the Deed of Pledge of Shares. LLAMAS, on the other hand, undertakes to move for
the immediate dismissal of Civil Case No. 9460-P entitled Dionisio O. Llamas vs. Alberto G. Doller, et
al., Court of First Instance of Pasay, Branch XXIX.[60]
It is clear from the foregoing that the restructuring agreement, instead of containing
provisions absolutely incompatible with the obligations of the judgment, expressly
ratifies such obligations in paragraph 8 and contains provisions for satisfying them. There
was no change in the object of the prior obligations. The restructuring agreement merely
provided for a new schedule of payments and additional security in paragraph 6 (c) giving
Delta authority to take over the management and operations of CBLI in case CBLI fails to
pay installments equivalent to 60 days. Where the parties to the new obligation expressly
recognize the continuing existence and validity of the old one, there can be no novation.
[61]
Moreover, this Court has ruled that an agreement subsequently executed between a seller
and a buyer that provided for a different schedule and manner of payment, to restructure
the mode of payments by the buyer so that it could settle its outstanding obligation in
spite of its delinquency in payment, is not tantamount to novation. [62]
The addition of other obligations likewise did not extinguish the promissory notes. In Young v. CA[63],
this Court ruled that a change in the incidental elements of, or an addition of such element to,
an obligation, unless otherwise expressed by the parties will not result in its
extinguishment.
In fine, the restructuring agreement can stand together with the promissory notes.
AQUINTEY v. TIBONG
Facts:
Issue:
Held: Under Article 1231(b) of the New Civil Code, novation is enumerated as one of the ways by
which obligations are extinguished. Obligations may be modified by changing their object or principal
creditor or by substituting the person of the debtor. 63 The burden to prove the defense that an

obligation has been extinguished by novation falls on the debtor. 64 The nature of novation was
extensively explained in Iloilo Traders Finance, Inc. v. Heirs of Sps. Oscar Soriano, Jr.,65 as follows:
Novation may either be extinctive or modificatory, much being dependent on the nature of the
change and the intention of the parties. Extinctive novation is never presumed; there must be
an express intention to novate; in cases where it is implied, the acts of the parties must clearly
demonstrate their intent to dissolve the old obligation as the moving consideration for the
emergence of the new one. Implied novation necessitates that the incompatibility between the
old and new obligation be total on every point such that the old obligation is completely
superseded by the new one. The test of incompatibility is whether they can stand together,
each one having an independent existence; if they cannot and are irreconciliable, the
subsequent obligation would also extinguish the first.
An extinctive novation would thus have the twin effects of, first, extinguishing an existing
obligation and, second, creating a new one in its stead. This kind of novation presupposes a
confluence of four essential requisites: (1) a previous valid obligation; (2) an agreement of all
parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the
birth of a valid new obligation. Novation is merely modificatory where the change brought
about by any subsequent agreement is merely incidental to the main obligation (e.g., a change
in interest rates or an extension of time to pay); in this instance, the new agreement will not
have the effect of extinguishing the first but would merely supplement it or supplant some but
not all of its provisions.66 (Citations Omitted)
Novation which consists in substituting a new debtor (delegado) in the place of the original one
(delegante) may be made even without the knowledge or against the will of the latter but not without
the consent of the creditor. Substitution of the person of the debtor may be effected by delegacion,
meaning, the debtor offers, and the creditor (delegatario), accepts a third person who consents to the
substitution and assumes the obligation. Thus, the consent of those three persons is necessary. 67 In
this kind of novation, it is not enough to extend the juridical relation to a third person; it is necessary
that the old debtor be released from the obligation, and the third person or new debtor take his place
in the relation.68 Without such release, there is no novation; the third person who has assumed the
obligation of the debtor merely becomes a co-debtor or a surety. If there is no agreement as to
solidarity, the first and the new debtor are considered obligated jointly. 69
In Di Franco v. Steinbaum,70 the appellate court ruled that as to the consideration necessary to support
a contract of novation, the rule is the same as in other contracts. The consideration need not be
pecuniary or even beneficial to the person promising. It is sufficient if it be a loss of an inconvenience,
such as the relinquishment of a right or the discharge of a debt, the postponement of a remedy, the
discontinuance of a suit, or forbearance to sue.
In City National Bank of Huron, S.D. v. Fuller,71 the Circuit Court of Appeals ruled that the theory of
novation is that the new debtor contracts with the old debtor that he will pay the debt, and
also to the same effect with the creditor, while the latter agrees to accept the new debtor
for the old. A novation is not made by showing that the substituted debtor agreed to pay the debt; it
must appear that he agreed with the creditor to do so.Moreover, the agreement must be based
on the consideration of the creditor's agreement to look to the new debtor instead of the
old. It is not essential that acceptance of the terms of the novation and release of the debtor be shown
by express agreement. Facts and circumstances surrounding the transaction and the subsequent
conduct of the parties may show acceptance as clearly as an express agreement, albeit implied. 72

We find in this case that the CA correctly found that respondents' obligation to pay the balance of their
account with petitioner was extinguished, pro tanto, by the deeds of assignment of credit executed by
respondent Felicidad in favor of petitioner.
An assignment of credit is an agreement by virtue of which the owner of a credit, known as the
assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the
consent of the debtor, transfers his credit and accessory rights to another, known as the assignee, who
acquires the power to enforce it to the same extent as the assignor could enforce it against the
debtor.73 It may be in the form of sale, but at times it may constitute a dation in payment, such as
when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against
a third person.74
In Vda. de Jayme v. Court of Appeals,75 the Court held that dacion en pago is the delivery and
transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the
performance of the obligation. It is a special mode of payment where the debtor offers another thing to
the creditor who accepts it as equivalent of payment of an outstanding debt. The undertaking really
partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of
the debtor, payment for which is to be charged against the debtor's obligation. As such, the essential
elements of a contract of sale, namely, consent, object certain, and cause or consideration must be
present. In its modern concept, what actually takes place in dacion en pago is an objective novation of
the obligation where the thing offered as an accepted equivalent of the performance of an obligation is
considered as the object of the contract of sale, while the debt is considered as the purchase price. In
any case, common consent is an essential prerequisite, be it sale or novation, to have the effect of
totally extinguishing the debt or obligation.76
The requisites for dacion en pago are: (1) there must be a performance of the prestation in lieu of
payment (animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a
credit against the third person; (2) there must be some difference between the prestation due and that
which is given in substitution (aliud pro alio); and (3) there must be an agreement between the creditor
and debtor that the obligation is immediately extinguished by reason of the performance of a
prestation different from that due.77
All the requisites for a valid dation in payment are present in this case. As gleaned from the deeds,
respondent Felicidad assigned to petitioner her credits "to make good" the balance of her obligation.
Felicidad testified that she executed the deeds to enable her to make partial payments of her account,
since she could not comply with petitioner's frenetic demands to pay the account in cash. Petitioner
and respondent Felicidad agreed to relieve the latter of her obligation to pay the balance of her
account, and for petitioner to collect the same from respondent's debtors.
Admittedly, some of respondents' debtors, like Edna Papat-iw, were not able to affix their conformity to
the deeds. In an assignment of credit, however, the consent of the debtor is not essential for its
perfection; the knowledge thereof or lack of it affecting only the efficaciousness or inefficaciousness of
any payment that might have been made. The assignment binds the debtor upon acquiring knowledge
of the assignment but he is entitled, even then, to raise against the assignee the same defenses he
could set up against the assignor 78 necessary in order that assignment may fully produce legal effects.
Thus, the duty to pay does not depend on the consent of the debtor. The purpose of the notice is only
to inform that debtor from the date of the assignment. Payment should be made to the assignee and
not to the original creditor.
The transfer of rights takes place upon perfection of the contract, and ownership of the right, including
all appurtenant accessory rights, is acquired by the assignee 79 who steps into the shoes of the original
creditor as subrogee of the latter80 from that amount, the ownership of the right is acquired by the

assignee. The law does not require any formal notice to bind the debtor to the assignee, all that the
law requires is knowledge of the assignment. Even if the debtor had not been notified, but came to
know of the assignment by whatever means, the debtor is bound by it. If the document of assignment
is public, it is evidence even against a third person of the facts which gave rise to its execution and of
the date of the latter. The transfer of the credit must therefore be held valid and effective from the
moment it is made to appear in such instrument, and third persons must recognize it as such, in view
of the authenticity of the document, which precludes all suspicion of fraud with respect to the date of
the transfer or assignment of the credit.81
As gleaned from the deeds executed by respondent Felicidad relative to the accounts of her other
debtors, petitioner was authorized to collect the amounts of P6,000.00 from Cabang, and P63,600.00
from Cirilo. They obliged themselves to pay petitioner. Respondent Felicidad, likewise, unequivocably
declared that Cabang and Cirilo no longer had any obligation to her.
Equally significant is the fact that, since 1990, when respondent Felicidad executed the deeds,
petitioner no longer attempted to collect from respondents the balance of their accounts. It was only in
1999, or after nine (9) years had elapsed that petitioner attempted to collect from respondents. In the
meantime, petitioner had collected from respondents' debtors the amount of P301,000.00.
While it is true that respondent Felicidad likewise authorized petitioner in the deeds to collect the
debtors' accounts, and for the latter to pay the same directly, it cannot thereby be considered that
respondent merely authorized petitioner to collect the accounts of respondents' debtors and for her to
apply her collections in partial payments of their accounts. It bears stressing that petitioner, as
assignee, acquired all the rights and remedies passed by Felicidad, as assignee, at the time of the
assignment.82 Such rights and remedies include the right to collect her debtors' obligations to her.
Petitioner cannot find solace in the Court's ruling in Magdalena Estates. In that case, the Court ruled
that the mere fact that novation does not follow as a matter of course when 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 would be released from responsibility. Thus, the creditor can
still enforce the obligation against the original debtor.
In the present case, petitioner and respondent Felicidad agreed that the amounts due from
respondents' debtors were intended to "make good in part" the account of respondents. Case law is
that, an assignment will, ordinarily, be interpreted or construed in accordance with the rules of
construction governing contracts generally, the primary object being always to ascertain and carry out
the intention of the parties. This intention is to be derived from a consideration of the whole
instrument, all parts of which should be given effect, and is to be sought in the words and language
employed.83
Indeed, the Court must not go beyond the rational scope of the words used in construing an
assignment, words should be construed according to their ordinary meaning, unless something in the
assignment indicates that they are being used in a special sense. So, if the words are free from
ambiguity and expressed plainly the purpose of the instrument, there is no occasion for interpretation;
but where necessary, words must be interpreted in the light of the particular subject matter. 84 And
surrounding circumstances may be considered in order to understand more perfectly the intention of
the parties. Thus, the object to be accomplished through the assignment, and the relations and
conduct of the parties may be considered in construing the document.
Although it has been said that an ambiguous or uncertain assignment should be construed most
strictly against the assignor, the general rule is that any ambiguity or uncertainty in the meaning of an
assignment will be resolved against the party who prepared it; hence, if the assignment was prepared

by the assignee, it will be construed most strictly against him or her. 85 One who chooses the words by
which a right is given ought to be held to the strict interpretation of them, rather than the other who
only accepts them.86
Considering all the foregoing, we find that respondents still have a balance on their account to
petitioner in the principal amount of P33,841.00, the difference between their loan of P773,000.00
less P585,659.00, the payment of respondents' other debtors amounting to P103,500.00, and
the P50,000.00 payment made by respondents.
RICARZE v. CA
Facts:
Issue:
Held: Petitioner next argues that in no way was PCIB subrogated to the rights of Caltex, considering
that he has no knowledge of the subrogation much less gave his consent to it. Alternatively, he posits
that if subrogation was proper, then the charges against him should be dismissed, the two
Informations being "defective and void due to false allegations."
Petitioner was charged of the crime of estafa complex with falsification document. In estafa one of the
essential elements "to prejudice of another" as mandated by article 315 of the Revise Penal Code.
The element of "to the prejudice of another" being as essential element of the felony should be clearly
indicated and charged in the information with TRUTH AND LEGAL PRECISION.
This is not so in the case of petitioner, the twin information filed against him alleged the felony
committed "to the damage and prejudice of Caltex." This allegation is UNTRUE and FALSE for there is
no question that as early as March 24, 1998 or THREE (3) LONG MONTHS before the twin information
were filed on June 29, 1998, the prejudice party is already PCIBank since the latter Re-Credit the value
of the checks to Caltex as early as March 24, 1998. In effect, assuming there is valid subrogation
as the subject decision concluded, the subrogation took place an occurred on March 24,
1998 THREE (3) MONTHS before the twin information were filed.
The phrase "to the prejudice to another" as element of the felony is limited to the person DEFRAUDED
in the very act of embezzlement. It should not be expanded to other persons which the loss may
ultimately fall as a result of a contract which contract herein petitioner is total stranger.
In this case, there is no question that the very act of commission of the offense of September 24, 1997
and October 15, 1997 respectively, Caltex was the one defrauded by the act of the felony.
In the light of these facts, petitioner submits that the twin information are DEFECTIVE AND VOID due to
the FALSE ALLEGATIONS that the offense was committed to the prejudice of Caltex when it truth and in
fact the one prejudiced here was PCIBank.
The twin information being DEFECTIVE AND VOID, the same should be dismissed without prejudice to
the filing of another information which should state the offense was committed to the prejudice of
PCIBank if it still legally possible without prejudicing substantial and statutory rights of the petitioner. 27
Petitioners argument on subrogation is misplaced. The Court agrees with respondent PCIBs comment
that petitioner failed to make a distinction between legal and conventional subrogation. Subrogation is
the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. 28 It
may either be legal or conventional. Legal subrogation is that which takes place without agreement but

by operation of law because of certain acts. 29 Instances of legal subrogation are those provided in
Article 130230 of the Civil Code. Conventional subrogation, on the other hand, is that which takes place
by agreement of the parties.31 Thus, petitioners acquiescence is not necessary for
subrogation to take place because the instant case is one of legal subrogation that occurs
by operation of law, and without need of the debtors knowledge.
Contrary to petitioners asseverations, the case of People v. Yu Chai Ho 32 relied upon by the appellate
court is in point. The Court declared
We do not however, think that the fiscal erred in alleging that the commission of the crime resulted to
the prejudice of Wm. H. Anderson & Co. It is true that originally the International Banking Corporation
was the prejudiced party, but Wm. H. Anderson & Co. compensated it for its loss and thus became
subrogated to all its rights against the defendant (article 1839, Civil Code). Wm. H. Anderson & Co.,
therefore, stood exactly in the shoes of the International Banking Corporation in relation to the
defendant's acts, and the commission of the crime resulted to the prejudice of the firm previously to
the filing of the information in the case. The loss suffered by the firm was the ultimate result of the
defendant's unlawful acts, and we see no valid reason why this fact should not be stated in the
information; it stands to reason that, in the crime of estafa, the damage resulting therefrom need not
necessarily occur simultaneously with the acts constituting the other essential elements of the crime.
Thus, being subrogated to the right of Caltex, PCIB, through counsel, has the right to
intervene in the proceedings, and under substantive laws is entitled to restitution of its
properties or funds, reparation, or indemnification.
Petitioners gripe that the charges against him should be dismissed because the allegations in both
Informations failed to name PCIB as true offended party does not hold water.