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Republic of the Philippines said bank, pursuant to the Resolution of the

SUPREME COURT Board of Directors of MULTI adopted on


Manila August 31, 1977 which reads:

FIRST DIVISION WHEREAS, at least 90% of the


Company's gross sales is generated
G.R. No. 99398 & 104625 January by the sale of tin-plates
26, 2001 manufactured by Elizalde Steel
CHESTER BABST, petitioner, Consolidated, Inc.;
vs. WHEREAS, it is to the best interests
COURT OF APPEALS, BANK OF THE of the Company to continue handling
PHILIPPINE ISLANDS, ELIZALDE STEEL said tin-plate line;
CONSOLIDATED, INC., and PACIFIC
MULTI-COMMERCIAL CORPORATION, WHEREAS, Elizalde Steel
respondents. Consolidated, Inc. has requested the
x ------------------------------------------------ x assistance of the Company in
ELIZALDE STEEL CONSOLIDATED, INC., obtaining credit facilities to enable it
petitioner, to maintain the present level of its
vs. tin-plate manufacturing output and
COURT OF APPEALS, BANK OF THE the Company is willing to extend said
PHILIPPINE ISLANDS, PACIFIC MULTI- requested assistance;
COMMERCIAL CORPORATION and NOW, THEREFORE, for and in
CHESTER BABST, respondents. consideration of the foregoing
YNARES-SANTIAGO, J.: premises ---

These consolidated petitions seek the BE IT RESOLVED AS IT IS HEREBY


review of the Decision dated April 29, 1991 RESOLVED, That the PRESIDENT &
of the Court of Appeals in CA-G.R. CV No. GENERAL MANAGER, ANTONIO
172821 entitled, "Bank of the Philippine ROXAS CHUA, be, as he is hereby
Islands, Plaintiff-Appellee versus Elizalde empowered to allow and authorize
Steel Consolidated, Inc., Pacific Multi- ELIZALDE STEEL CONSOLIDATED,
Commercial Corporation, and Chester G. INC. to avail and make use of the
Babst, Defendants-Appellants." Credit Line of PACIFIC MULTI-
COMMERCIAL CORPORATION with the
The complaint was commenced principally COMMERCIAL BANK & TRUST
to enforce payment of a promissory note COMPANY OF THE PHILIPPINES,
and three domestic letters of credit which Makati, Metro Manila;
Elizalde Steel Consolidated, Inc. (ELISCON)
executed and opened with the Commercial RESOLVED, FURTHER, That the Pacific
Bank and Trust Company (CBTC). Multi-Commercial Corporation
guarantee, as it does hereby
On June 8, 1973, ELISCON obtained from guarantee, solidarily, the payment of
CBTC a loan in the amount of the corresponding Letters of Credit
P8,015,900.84, with interest at the rate of upon maturity of the same;
14% per annum, evidenced by a
promissory note.2 ELISCON defaulted in its RESOLVED, FINALLY, That copies of
payments, leaving an outstanding this resolution be furnished the
indebtedness in the amount of Commercial Bank & Trust Company
P2,795,240.67 as of October 31, 1982.3 of the Philippines, Makati, Metro
Manila, for their information.4
The letters of credit, on the other hand,
were opened for ELISCON by CBTC using Subsequently, on September 26, 1978,
the credit facilities of Pacific Multi- Antonio Roxas Chua and Chester G. Babst
Commercial Corporation (MULTI) with the executed a Continuing Suretyship,5
whereby they bound themselves jointly and ELISCON, in its Answer,14 argued that the
severally liable to pay any existing complaint was premature since DBP had
indebtedness of MULTI to CBTC to the made serious efforts to settle its obligations
extent of P8,000,000.00 each. with BPI.
Sometime in October 1978, CBTC opened Babst also filed his Answer alleging that he
for ELISCON in favor of National Steel signed the Continuing Suretyship on the
Corporation three (3) domestic letters of understanding that it covers only
credit in the amounts of P1,946,805.73,6 obligations which MULTI incurred solely for
P1,702,869.327 and P200,307.72,8 its benefit and not for any third party
respectively, which ELISCON used to liability, and he had no knowledge or
purchase tin black plates from National information of any transaction between
Steel Corporation. ELISCON defaulted in its MULTI and ELISCON.15
obligation to pay the amounts of the letters MULTI, for its part, denied knowledge of the
of credit, leaving an outstanding account, merger between BPI and CBTC, and
as of October 31, 1982, in the total amount averred that the guaranty under its board
of P3,963,372.08.9 resolution did not cover purchases made by
On December 22, 1980, the Bank of the ELISCON in the form of trust receipts. It set
Philippine Islands (BPI) and CBTC entered up a cross-claim against ELISCON alleging
into a merger, wherein BPI, as the surviving that the latter should be held liable for any
corporation, acquired all the assets and judgment which the court may render
assumed all the liabilities of CBTC.10
against it in favor of BPI.16
Meanwhile, ELISCON encountered financial On February 20, 1987, the trial court
difficulties and became heavily indebted to rendered its Decision,17 the dispositive
the Development Bank of the Philippines portion of which reads:
(DBP). In order to settle its obligations, WHEREFORE, in view of all the
ELISCON proposed to convey to DBP by foregoing, the Court hereby renders
way of dacion en pago all its fixed assets judgment in favor of the plaintiff and
mortgaged with DBP, as payment for its against all the defendants:
total indebtedness in the amount of
P201,181,833.16. On December 28, 1978, 1) Ordering defendant ELISCON to
ELISCON and DBP executed a Deed of pay the plaintiff the amount of
Cession of Property in Payment of Debt.11 P2,795,240.67 due on the promissory
note, Annex "A" of the Complaint as
In June 1981, ELISCON called its creditors of 31 October 1982 and the amount
to a meeting to announce the take-over by of P3,963,372.08 due on the three (3)
DBP of its assets. domestic letters of credit, also as of
In October 1981, DBP formally took over 31 October 1982;
the assets of ELISCON, including its 2) Ordering defendant ELISCON to
indebtedness to BPI. Thereafter, DBP pay the plaintiff interests and related
proposed formulas for the settlement of all charges on the principal of said
of ELISCON's obligations to its creditors, but promissory note of P2,102,232.02 at
BPI expressly rejected the formula the rates provided in said note from
submitted to it for not being acceptable.12 and after 31 October 1982 until full
Consequently, on January 17, 1983, BPI, as payment thereof, and on the principal
successor-in-interest of CBTC, instituted of the three (3) domestic letters of
with the Regional Trial Court of Makati, credit of P3,564,349.25 interests and
Branch 147, a complaint13 for sum of related charges at the rates provided
money against ELISCON, MULTI and Babst, in said letters of credit, from and
which was docketed as Civil Case No. after 31 October 1982 until full
49226. payment;
3) Ordering defendant ELISCON to the underlining to show the principal
pay interests at the legal rate on all changes from the decision of the
interests and related charges but lower court) thus:
unpaid as of the filing of this 1) Ordering appellant ELISCON to pay
complaint, until full payment thereof; the appellee BPI the amount of
4) Ordering defendant ELISCON to P2,731,005.60 due on the promissory
pay attorney's fees equivalent to 10% note, Annex "A" of the Complaint as
of the total amount due under the of 31 October 1982 and the amount
preceding paragraphs; of P3,963,372.08 due on the three (3)
5) Ordering defendants Pacific Multi- domestic letters of credit, also as of
Commercial Corporation and 31 October 1982;
defendant Chester Babst to pay, 2) Ordering appellant ELISCON to pay
jointly and severally with defendant the appellee BPI interests and related
ELISCON, the total sum of charges on the principal of said
P3,963,372.08 due on the three (3) promissory note of P2,102,232.02 at
domestic letters of credit as of 31 the rates provided in said note from
October 1982 with interests and and after 31 October 1982 until full
related charges on the principal payment thereof, and on the principal
amount of P3,963,372.08 at the rates of the three (3) domestic letters of
provided in said letters of credit from credit of P3,564,349.25 interests and
30 October 1982 until fully paid, but related charges at the rates provided
to the extent of not more than in said letters of credit, from and
P8,000,000.00 in the case of after 31 October 1982 until full
defendant Chester Babst; payment;
6) Ordering defendant Pacific Multi- 3) Ordering appellant ELISCON to pay
Commercial Corporation and appellee BPI interest at the legal rate
defendant Chester Babst to pay, on all interests and related charges
jointly and severally plaintiff interests but unpaid as of the filing of this
at the legal rate on all interests and complaint, until full payment thereof;
related charges already accrued but 4) Ordering appellant Pacific Multi-
unpaid on said three (3) domestic Commercial Corporation and
letters of credit as of the date of the appellant Chester G. Babst to pay
filing of this Complaint until full appellee BPI, jointly and severally
payment thereof; with appellant ELISCON, the total
7) Ordering defendant Pacific Multi- sum of P3,963,372.08 due on the
Commercial Corporation and three (3) domestic letters of credit as
defendant Chester Babst to pay, of 31 October 1982 with interest
jointly and severally, attorney's fees and .related charges on the principal
of not less than 10% of the total amount of P3,963,372.08 at the rates
amount due under paragraphs 5 and provided in said letters of credit from
6 hereof. With costs. 30 October 1982 until fully paid, but
SO ORDERED. to the extent of not more than
P8,000,000.00 in the case of
In due time, ELISCON, MULTI and Babst defendant Chester Babst;
filed their respective notices of appeal.18
5) Ordering appellant Pacific Multi-
On April 29, 1991, the Court of Appeals Commercial Corporation and
rendered the appealed Decision as follows: defendant Chester Babst to pay,
WHEREFORE, the judgment appealed jointly and severally, appellee BPI
from is MODIFIED, to now read (with interests at the legal rate on all
interests and related charges already THE NEWLY SUBSTITUTED DEBTOR IN
accrued but unpaid on said three (3) PLACE OF ELISCON.
domestic letters of credit as of the D. THE DBP TAKEOVER OF THE
date of the filing of this Complaint ENTIRE ELISCON AMOUNTED TO AN
until full payment thereof and the ACT OF GOVERNMENT WHICH WAS A
plaintiff's lawyer's fees in the nominal FORTUITOUS EVENT EXCULPATING
amount of P200.000.00; ELISCON FROM FURTHER LIABILITIES
6) Ordering appellant ELISCON to TO RESPONDENT BPI.
reimburse appellants Pacific Multi- E. PETITIONER ELISCON SHOULD NOT
Commercial Corporation and Chester BE HELD LIABLE TO PAY
Babst whatever amount they shall RESPONDENT BPI THE AMOUNTS
have paid in said Eliscon's behalf STATED IN THE DISPOSITIVE PORTION
particularly referring to the three (3) OF RESPONDENT COURT OF APPEALS'
letters of credit as of 31 October DECISION:21
1982 and other related charges.
BPI filed its Comment22 raising the following
No costs. arguments, to wit:
SO ORDERED.19 1. Respondent BPI is legally entitled
ELISCON filed a Motion for Reconsideration to recover from ELISCON, MULTI and
of the Decision of the Court of Appeals Babst the past due obligations with
which was, however, denied in a Resolution CBTC prior to the merger of BPI with
dated March 9, 1992.20 Subsequently, CBTC.
ELISCON filed a petition for review on 2. BPI did not give its consent to the
certiorari, docketed as G.R. No. 104625, on DBP take-over of ELISCON. Hence, no
the following grounds: valid novation has been effected.
A. THE BANK OF THE PHILIPPINE 3. Express consent of creditor to
ISLANDS IS NOT ENTITLED TO substitution should be recorded in the
RECOVER FROM PETITIONER ELISCON books.
THE LATTER'S OBLIGATION WITH
COMMERCIAL BANK AND TRUST 4. Petitioner Chester G. Babst and
COMPANY (CBTC) respondent MULTI are jointly and
solidarily liable to BPI for the unpaid
B. THERE WAS A VALID NOVATION OF letters of credit of ELISCON.
THE CONTRACT BETWEEN ELISCON
AND BPI THERE BEING A PRIOR 5. The question of the liability of
CONSENT TO AND APPROVAL BY BPI ELISCON to BPI has been clearly
OF THE SUBSTITUTION BY DBP AS established.
DEBTOR IN LIEU OF THE ORIGINAL 6. Since MULTI and Chester G. Babst
DEBTOR, ELISCON, THEREBY are guarantors of the debts incurred
RELEASING ELISCON FROM ITS by ELISCON, they may recover from
OBLIGATION TO BPI. the latter what they may have paid
C. PACIFIC MULTI COMMERCIAL for on account of that guaranty.
CORPORATION AND CHESTER BABST Chester Babst filed a Comment with
CANNOT LAWFULLY RECOVER FROM Manifestation,23 wherein he contends that
ELISCON WHATEVER AMOUNT THEY the suretyship agreement he executed with
MAY BE REQUIRED TO PAY TO BPI AS Antonio Roxas Chua was in favor of MULTI;
SURETIES OF ELISCON'S OBLIGATION and that there is nothing therein which
TO BPI; THEIR CAUSE OF ACTION authorizes MULTI, in turn, to guarantee the
MUST BE DIRECTED AGAINST DBP AS obligations of ELISCON.
In its Comment,24 MULTI maintained that MEETING OF ELISCON'S CREDITORS
inasmuch as BPI had full knowledge of the IN JUNE 1981 TO VOICE HIS
purpose of the meeting in June 1981, OBJECTION TO THE ANNOUNCED
wherein the takeover by DBP of ELISCON TAKEOVER BY THE DBP OF THE
was announced, it was incumbent upon the ASSETS OF ELISCON AND
said bank to formally communicate its ASSUMPTION OF ITS LIABILITIES,
objection to the assumption of ELISCON's CONSTITUTED AN IMPLIED CONSENT
liabilities by DBP in answer to the call for TO THE ASSUMPTION BY DBP OF THE
the meeting. Moreover, there was no OBLIGATIONS OF ELISCON TO BPI.
showing that the availment by ELISCON of 4. IN NOT TAKING JUDICIAL NOTICE
MULTI's credit facilities with CBTC, which THAT THE DBP TAKEOVER OF THE
was supposedly guaranteed by Antonio ENTIRE ELISCON WAS AN ACT OF
Roxas Chua, was indeed authorized by the GOVERNMENT CONSTITUTING A
latter pursuant to the resolution of the FORTUITOUS EVENT EXCULPATING
Board of Directors of MULTI. ELISCON FROM ANY LIABILITY TO BPI.
In compliance with this Court's Resolution 5. IN NOT FINDING THAT THE DACION
dated March 17, 1993,25 the parties EN PAGO BETWEEN DBP AND BPI
submitted their respective memoranda. RELIEVED ELISCON, MULTI AND
Meanwhile, in a petition for review filed BABST OF ANY LIABILITY TO BPI.
with this Court, which was docketed as G.R. 6. IN FINDING THAT MULTI AND
No. 99398, Chester Babst alleged that the BABST BOUND THEMSELVES
Court of Appeals acted without jurisdiction SOLIDARILY WITH ELISCON WITH
and/or with grave abuse of discretion when: RESPECT TO THE OBLIGATION
1. IT AFFIRMED THE LOWER COURT'S INVOLVED HERE.
HOLDING THAT THERE WAS NO 7. IN RENDERING JUDGMENT IN
NOVATION INASMUCH AS FAVOR OF BPI AND AGAINST ELISCON
RESPONDENT BANK OF THE ORDERING THE LATTER TO PAY THE
PHILIPPINE ISLANDS (OR BPI) HAD AMOUNTS STATED IN THE
PRIOR CONSENT TO AND APPROVAL DISPOSITIVE PORTION OF THE
OF THE SUBSTITUTION AS DEBTOR BY DECISION; AND ORDERING
THE DEVELOPMENT BANK OF THE PETITIONER AND MULTI TO PAY SAID
PHILIPPINES (OR DBP) IN THE PLACE AMOUNTS JOINTLY AND SEVERALLY
OF ELIZALDE STEEL CONSOLIDATED, WITH ELISCON.26
INC. (OR ELISCON) IN THE LATTER 'S
OBLIGATION TO BPI. Petitioner Babst alleged that DBP sold all of
ELISCON's assets to the National
2. IT CONFIRMED THE LOWER Development Company, for the latter to
COURT'S CONCLUSION THAT THERE take over and continue the operation of its
WAS NO IMPLIED CONSENT OF THE business. On September 11, 1981, the
CREDITOR BANK OF THE PHILIPPINE Board of Governors of the DBP adopted
ISLANDS TO THE SUBSTITUTION BY Resolution No. 2817 which states that DBP
DEVELOPMENT BANK OF THE shall enter into a contractual arrangement
PHILIPPINES OF THE ORIGINAL with NDC for the latter to pay ELISCON's
DEBTOR ELIZALDE STEEL creditors, including BPI in the amount of
CONSOLIDATED, INC. P4,015,534.54. This was followed by a
3. IT AFFIRMED THE LOWER COURT'S Memorandum of Agreement executed on
FINDING OF LACK OF MERIT OF THE May 4,1983 by and between DBP and NDC,
CONTENTION OF ELISCON THAT THE wherein they stipulated, inter alia, that
FAILURE OF THE OFFICER OF BPI, NDC shall pay to ELISCON's creditors,
WHO WAS PRESENT DURING THE through DBP, the amount of
P299,524,700.00. Among the creditors cannot lawfully recover from ELISCON, but
mentioned in the agreement was BPI, with from the DBP which had been substituted
a listed credit of P4,015,534.54. as the new debtor.
Furthermore, petitioner Babst averred that MULTI filed its Comrnent,29 admitting the
the assets of ELISCON which were acquired correctness of the petition and adopting
by the DBP, and later transferred to the the Comment of ELISCON insofar as it is not
NDC, were placed under the Asset inconsistent with the positions of Babst and
Privatization Trust pursuant to Proclamation MULTI.
No. 50, issued by then President Corazon C. At the outset, the preliminary issue of BPI's
Aquino on December 8, 1986. right of action must first be addressed.
In its Comment, BPI countered that by
27
ELISCON and MULTI assail BPI's legal
virtue of its merger with CBTC, it acquired capacity to recover their obligation to
all the latter's rights and interest including CBTC. However, there is no question that
all receivables; that in order to effect a there was a valid merger between BPI and
valid novation by substitution of debtors, CBTC. It is settled that in the merger of two
the consent of the creditor must be existing corporations, one of the
express; that in addition, the consent of BPI corporations survives and continues the
must appear in its books, it being a private business, while the other is dissolved and
corporation; that BPI intentionally did not all its rights, properties and liabilities are
consent to the assumption by DBP of the acquired by the surviving corporation.30
obligations of ELISCON because it wanted Hence, BPI has a right to institute the case
to preserve intact its causes of action and a quo.
legal recourse against Pacific Multi- We now come to the primordial issue in this
Commercial Corporation and Babst as case — whether or not BPI consented to the
sureties of ELISCON and not of DBP; that assumption by DBP of the obligations of
MULTI expressly bound itself solidarily for ELISCON.
ELISCON's obligations to CBTC in its
Resolution wherein it allowed the latter to Article 1293 of the Civil Code provides:
use its credit facilities; and that the Novation which consists in
suretyship agreement executed by Babst substituting a new debtor in the place
does not exclude liabilities incurred by of the original one, may be made
MULTI on behalf of third parties, such as even without the knowledge or
ELISCON. against the will of the latter, but not
ELISCON likewise filed a Comment, 28 without the consent of the creditor.
wherein it manifested that of the seven Payment by the new debtor gives him
errors raised by Babst in his petition, six the rights mentioned in articles 1236
are arguments which ELISCON itself raised and 1237.
in its previous pleadings. It is only the sixth BPI contends that in order to have a valid
assigned error --- that the Court of Appeals novation, there must be an express
erred in finding that MULTI and Babst consent of the creditor. In the case of
bound themselves solidarily with ELISCON Testate Estate of Mota, et al. v. Serra,31 this
--- that ELISCON takes exception to. More Court held:
particularly, ELISCON pointed out the It should be noted that in order to
contradictory positions taken by Babst in give novation its legal effect, the law
admitting that he bound himself to pay the requires that the creditor should
indebtedness of MULTI, while at the same consent to the substitution of a new
time completely disavowing and denying debtor. This consent must be given
any such obligation. It stressed that should expressly for the reason that, since
MULTI or Babst be finally adjudged liable novation extinguishes the personality
under the suretyship agreement, they
of the first debtor who is to be Inc., with respect to Luis R. Yangco's
substituted by a new one, it implies stock in said corporation, and the
on the part of the creditor a waiver of acts of the board of directors after
the right that he had before the Henry W. Elser had acquired said
novation, which waiver must be shares, in substituting the latter for
express under the principle of Luis R. Yangco, are a clear and
renuntiatio non proesumitur, unmistakable expression of its
recognized by the law in declaring consent. When this court said in
that a waiver of right may not be the case of Estate of Mota vs.
performed [should read: presumed] Serra (47 Phil. 464), that the
unless the will to waive is creditor's express consent is
indisputably shown by him who holds necessary in order that there
the right.32 may be a novation of a contract
The import of the foregoing ruling, by the substitution of debtors, it
however, was explained and clarified by did not wish to convey the
this Court in the later case of Asia Banking impression that the word
Corporation v. EIser33 in this wise: "express" was to be given an
unqualified meaning. as
The aforecited article 1205 [now indicated in the authorities or
1293] of the Civil Code does not cases. both Spanish and
state that the creditor's consent American, cited in said decision.34
to the substitution of the new
debtor for the old be express, or Subsequently, in the case of Vda. e Hijos
given at the time of the substitution, de Pio Barretto y Cia., Inc. v. Albo & Sevilla,
and the Supreme Court of Spain, in Inc., et al.,35 this Court reiterated the rule
its judgment of June 16, 1908, that there can be implied consent of the
construing said article, laid down the creditor to the substitution of debtors.
doctrine that "article 1205 of the Civil In the case at bar, Babst, MULTI and
Code does not mean or require that ELISCON all maintain that due to the failure
the creditor's consent to the change of BPI to register its objection to the take-
of debtors must be given over by DBP of ELISCON's assets, at the
simultaneously with the debtor's creditors' meeting held in June 1981 and
consent to the substitution, its thereafter, it is deemed to have consented
evident purpose being to preserve to the substitution of DBP for ELISCON as
the creditor's full right, it is sufficient debtor.
that the latter's consent be given at We find merit in the argument. Indeed,
any time and in any form whatever, there exist clear indications that BPI was
while the agreement of the debtors aware of the assumption by DBP of the
subsists." The same rule is stated in obligations of ELISCON. In fact, BPI admits
the Enciclopedia Juridica Española, that ---
volume 23, page 503, which reads:
"'The rule that this kind of novation, "the Development Bank of the
like all others, must be express, is not Philippines (DBP), for a time, had
absolute; for the existence of the proposed a formula for the
consent may well be inferred settlement of Eliscon's past
from the act of the creditor, obligations to its creditors, including
since volition may as well be the plaintiff [BPI], but the formula
expressed by deeds as by was expressly rejected by the plaintiff
words." The understanding between as not acceptable (long before the
Henry W. Elser and the principal filing of the complaint at bar)."36
director of Yangco, Rosenstock & Co.,
The Court of Appeals held that even if the payment. In fact, DBP, which had stepped
account officer who attended the June 1981 into the shoes of ELISCON, was capable of
creditors' meeting had expressed consent payment. Its authorized capital stock was
to the assumption by DBP of ELISCON' s increased by the government.39 More
debts, such consent would not bind BPI for importantly, the National Development
lack of a specific authority therefor. In its Company took over the business of
petition, ELISCON counters that the mere ELISCON and undertook to pay ELISCON's
presence of the account officer at the creditors, and earmarked for that purpose
meeting necessarily meant that he was the amount of P4,015,534.54 for payment
authorized to represent BPI in that to BPI.40
creditors' meeting. Moreover, BPI did not Notwithstanding the fact that a reliable
object to the substitution of debtors, institution backed by government funds
although it objected to the payment was offering to pay ELISCON's debts, not as
formula submitted by DBP. mere surety but as substitute principal
Indeed, the authority granted by BPI to its debtor, BPI, for reasons known only to
account officer to attend the creditors' itself, insisted in going after the sureties.
meeting was an authority to represent the The course of action chosen taxes the
bank, such that when he failed to object to credulity of this Court. At the very least,
the substitution of debtors, he did so on suffice it to state that BPI's actuation in this
behalf of and for the bank. Even granting regard runs counter to the good faith
arguendo that the said account officer was covenant in contractual relations, provided
not so empowered, BPI could have for by the Civil Code, to wit:
subsequently registered its objection to the ART. 19. Every person must, in the
substitution, especially after it had already exercise of his rights and in the
learned that DBP had taken over the assets performance of his duties, act with
and assumed the liabilities of ELISCON. Its justice, give everyone his due, and
failure to do so can only mean an observe honesty and good faith
acquiescence in the assumption by DBP of
ELISCON's obligations. As repeatedly ART. 1159. Obligations arising from
pointed out by ELISCON and MULTI, BPI's contract have the force of law
objection was to the proposed payment between the contracting parties and
formula, not to the substitution itself. should be complied with in good
faith.
BPI gives no cogent reason in withholding
its consent to the substitution, other than BPI's conduct evinced a clear and
its desire to preserve its causes of action unmistakable consent to the substitution of
and legal recourse against the sureties of DBP for ELISCON as debtor. Hence, there
ELISCON. It must be remembered, was a valid novation which resulted in the
however, that while a surety is solidarily release of ELISCON from its obligation to
liable with the principal debtor, his BPI, whose cause of action should be
obligation to pay only arises upon the directed against DBP as the new debtor.
principal debtor's failure or refusal to pay. A Novation, in its broad concept, may
contract of surety is an accessory promise either be extinctive or modificatory .It
by which a person binds himself for another is extinctive when an old obligation is
already bound, and agrees with the creditor terminated by the creation of a new
to satisfy the obligation if the debtor does obligation that takes the place of the
not.37 A surety is an insurer of the debt; he former; it is merely modificatory
promises to pay the principal's debt if the when the old obligation subsists to
principal will not pay.38 the extent it remains compatible with
In the case at bar, there was no indication the amendatory agreement. An
that the principal debtor will default in extinctive novation results either by
8
changing the object or principal Exh. "E".
9
conditions (objective or real), or by Exh. "F".
10
Exhs. "K" and "K-1".
substituting the person of the debtor 11
Record, pp. 186-188.
or subrogating a third person in the 12
Exh. "I"; Record, p. 58.
rights of the creditor (subjective or 13
Record, pp. 1-7.
14
personal). Under this mode, novation Ibid., pp. 47-48.
15
would have dual functions — one to Id., pp. 49-52.
16
Id., 63-65.
extinguish an existing obligation, the 17
Penned by Judge Teofilo L. Guadiz, Jr.:
other to substitute a new one in its Record. pp. 356-365
place — requiring a conflux of four 18
Record, pp. 366, 367-68, 370.
19
essential requisites, (1) a previous Rollo, G.R. No. 99398. pp. 73-74.
20
valid obligation; (2) an agreement of Rollo, G.R. No. 104625, p. 76.
21
Ibid., p. 25.
all parties concerned to a new 22
Id., pp. 108-135.
contract; (3) the extinguishment of 23
Id., pp. 145-150.
the old obligation; and (4) the birth of 24
Id., pp. 159-163.
25
a valid new obligation.41 Id., p. 193.
26
Ibid., pp. 13-14.
The original obligation having been 27
Id., pp. 265-291.
extinguished, the contracts of suretyship 28
Id., pp. 296-303.
29
executed separately by Babst and MULTI, Id., pp. 432-33.
30
being accessory obligations, are likewise Associated Bank v. Court of Appeals, 291
SCRA 511, 520 (1998).
extinguished.42 31
47 Phil., 464 (1925).
32
Hence, BPI should enforce its cause of Supra., at 469-70.
33
54 Phil., 994 (1929).
action against DBP. It should be stressed 34
Supra., at 1004-1005; emphasis ours.
that notwithstanding the lapse of time 35
62 Phil., 593 (1935).
within which these cases have remained 36
Exh. "1", Civil Case No. 49226, Reply to
pending, the prescriptive period for BPI to ELISCON's Answer; Record, p. 58.
37
file its action was interrupted when it filed E. Zobel, Inc. v. Court of Appeals, 290
SCRA 1, 6 (1998).
Civil Case No. 49226.43 38
Palmares v. Court of Appeals, 288 SCRA
WHEREFORE, the consolidated petitions 422, 435 (1998).
39
are GRANTED. The appealed Decision of Rollo, G.R. No. 99398, p. 25.
40
Ibid., pp. 19-20.
the Court of Appeals, which held ELISCON, 41
Quinto v. People, 305 SCRA 708, 714
MULTI and Babst solidarily liable for (1999).
payment to BPI of the promissory note and 42
CIVIL CODE, Art. 1296. When the principal
letters of credit, is REVERSED and SET obligation is extinguished in consequence of
ASIDE. BPI's complaint against ELISCON, a novation, accessory obligations may
subsist only insofar as they may benefit third
MULTI and Babst is DISMISSED. persons who did not give their consent.
SO ORDERED. 43
CIVIL CODE, Art. 1155.

Davide, Jr., Puno, Kapunan, and Pardo, JJ.,


concur.

Footnotes:
1
Associate Justice Cezar D. Francisco,
ponente; Associate Justices Jaime M. Lantin
and Fortunato A. Vailoces, concurring.
2
Exhibit "A".
3
Exh. "B".
4
Exh. "H".
5
Exh. "I".
6
Exh. "C".
7
Exh. "D".