OBLIGATIONS AND CONTRACTS -2ND EXAM

Kristine Confesor

1291-1304- NOVATION

1
2

LICAROS V. GATMAITAN
W/N the MoA between petitioner and respondent is one of assignment of
credit or one of conventional subrogation.
#1 will determine W/N 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 effect 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 Court of Appeals thus ruled that the MoA 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 MoA
is a conventional subrogation which requires the consent of the debtor, AngloAsean Bank, for its validity. We note with approval the following pronouncement of
the CA:
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).
W/N AGREEMENT WAS PERFECTED. If the same MoA 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 MoA
prevented the agreement from becoming effective, much less from being a source
of any cause of action for the signatories thereto. [13]
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.
xxx
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 Anglo-Asean 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.
2
GARCIA V. LLAMAS
Novation cannot be presumed. It must be clearly shown either by the express
assent of the parties or by the complete incompatibility between the old and the
new agreements. Petitioner herein fails to show either requirement convincingly;
hence, the summary judgment holding him liable as a joint and solidary debtor
stands.
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. Indelegacion, 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 modificatorywhen 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]
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 constitutesnovation[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 formers place in the relation.[1
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.
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.

OBLIGATIONS AND CONTRACTS -2ND EXAM

Kristine Confesor

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 the P400,000 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]
3
CALIFORNIA BUS LINES V. STATE INVESTMENTS
In this case, the attendant facts do not make out a case of novation. The
restructuring agreement between Delta and CBLI executed onOctober 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.
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.
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, 8040, 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.
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.
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.
4
AQUINTEY V. TIBONG
FACTS:
On May 6, 1999, petitioner Agrifina Aquintey filed before the RTC of Baguio City, a
complaint for sum of money and damages against spouses Felicidad and Rico
Tibong. Agrifina alleged that Felicidad had secured loans from her on several
occasions but despite demands, the spouses Tibong failed to pay their outstanding
loan, amounting to P773,000.00 exclusive of interests.
Spouses Tibong admitted that they had secured loans from Agrifina. The proceeds
of the loan were then re-lent to other borrowers at higher interest rates.
they had executed deeds of assignment in favor of Agrifina, and that their debtors
had executed promissory notes in Agrifina's favor.
this resulted in a novation of the original obligation to Agrifina.
by virtue of these documents, Agrifina became the new collector of their debtors;
and the obligation to pay the balance of their loans had been extinguished.
Denied the material averments in paragraphs 2 and 2.1 of the complaint.
While they did not state the total amount of their loans, they declared that they did
not receive anything from Agrifina without any written receipt.
In their Pre-Trial Brief, the spouses Tibong maintained that they have never
obtained any loan from Agrifina without the benefit of a written document.
RTC ISSUES:
Whether or not plaintiff is entitled to her claim of P773,000.00;
Whether or not plaintiff is entitled to stipulated interests in the promissory notes;
and
Whether or not the parties are entitled to their claim for damages.9
The trial court ruled that Felicidad's obligation had not been novated by the deeds
of assignment and the promissory notes executed by Felicidad's borrowers. It
explained that the documents
did not contain any express agreement to novate and extinguish Felicidad's
obligation.
the deeds and notes were separate contracts which could stand alone from the
original indebtedness of Felicidad. Considering, however, Agrifina's admission that
she was able to collect from Felicidad's debtors the total amount of P301,000.00,
this should be deducted from the latter's accountability. Hence, the balance,
exclusive of interests, amounted to P472,000.00.

CA affirmed with modification the decision of the RTC

other than Agrifina's bare testimony that she had lost the promissory notes and
acknowledgment receipts, she failed to present competent documentary evidence
to substantiate her claim that Felicidad had, likewise, borrowed the amounts of
P100,000.00, P34,000.00, and P2,000.00. Of the P637,000.00 total account,
P585,659.00 was covered by the deeds of assignment and promissory notes;
hence, the balance of Felicidad's account amounted to only P51,341.00.
sustained the trial court's ruling that Felicidad's obligation to Agrifina had not been
novated by the deeds of assignment and promissory notes executed in the latter's
favor.
Although Agrifina was subrogated as a new creditor in lieu of Felicidad, Felicidad's
obligation to Agrifina under the loan transaction remained;
there was no intention on their part to novate the original obligation.
the legal effects of the deeds of assignment could not be totally disregarded.
The assignments of credits were onerous, hence, had the effect of payment, pro
tanto, of the outstanding obligation.
The fact that Agrifina never repudiated or rescinded such assignments only shows
that she had accepted and conformed to it.
Consequently, she cannot collect both from Felicidad and her individual debtors
without running afoul to the principle of unjust enrichment.
Agrifina's primary recourse then is against Felicidad's individual debtors on the
basis of the deeds of assignment and promissory notes.
deeds of assignment executed by Felicidad had the effect of payment of her
outstanding obligation to Agrifina in the amount of P585,659.00.
since an assignment of credit is in the nature of a sale, the assignors remained
liable for the warranties as they are responsible for the existence and legality of
the credit at the time of the assignment.
ISSUE
W/N the obligation of respondents to pay the balance of their loans, including
interest, was partially extinguished by the execution of the deeds of assignment in
favor of petitioner, relative to the loans of Edna Papat-iw, Helen Cabang, Antoinette
Manuel, and Fely Cirilo in the total amount of P371,000.00.
HELD:
petitioner had no right to collect from respondents the total amount of
P301,000.00, which includes more than P178,980.00 which respondent Felicidad
collected from Tibong, Dalisay, Morada, Chomacog, Cabang, Casuga, Gelacio, and
Manuel. Petitioner cannot again collect the same amount from respondents;
otherwise, she would be enriching herself at their expense. Neither can petitioner
collect from respondents more than P103,500.00 which she had already collected
from Nimo, Cantas, Rivera, Donguis, Fernandez and Ramirez.
There is no longer a need for the Court to still resolve the issue of whether
respondents' obligation to pay the balance of their loan account to petitioner was
partially extinguished by the promissory notes executed by Juliet Tibong, Corazon
Dalisay, Rita Chomacog, Carmelita Casuga, Merlinda Gelacio and Antoinette
Manuel because, as admitted by petitioner, she was able to collect the amounts
under the notes from said debtors and applied them to respondents' accounts.
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.
The burden to prove the defense that an obligation has been extinguished by
novation falls on the debtor. 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, extinguishing an
existing obligation and,
creating a new one in its stead. This kind of novation presupposes a confluence of
four essential requisites:
(1) a previous valid obligation; P
(2) an agreement of all parties concerned to a new contract; A
(3) the extinguishment of the old obligation; and E
(4) the birth of a valid new obligation. N
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.
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.

OBLIGATIONS AND CONTRACTS -2ND EXAM

Kristine Confesor

Thus, the consent of those three persons is necessary. 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. 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.
In Di Franco v. Steinbaum,
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 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. 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.
In Vda. de Jayme v. Court of Appeals,
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 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
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. 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
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.
5

The requisites for DACION EN PAGO are: P-D-A

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.
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 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.

RICARZE V. CA

Petitioner argues that the substitution of Caltex by PCIB as private complainant at

this late stage of the trial is prejudicial to his defense. He argues that the
substitution is tantamount to a substantial amendment of the Informations which is
prohibited under Section 14, Rule 110 of the Rules of Court.
In the case at bar, the substitution of Caltex by PCIB as private complaint is NOT a
substantial amendment. The substitution did not alter the basis of the charge in
both Informations, nor did it result in any prejudice to petitioner. The documentary
evidence in the form of the forged checks remained the same, and all such
evidence was available to petitioner well before the trial. Thus, he cannot claim
any surprise by virtue of the substitution.
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

OBLIGATIONS AND CONTRACTS -2ND EXAM

Kristine Confesor

an occurred onMarch 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 1302[30] 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.

there had been no transaction or privity of contract between him, on

one hand, and Ms. Picache and respondent, on the other.
The assignment by Ms. Picache of the promissory notes to respondent
was a mere ploy and simulation to effect the unjust enforcement of the
invalid promissory notes and to insulate Ms.Picache from any direct
counterclaims, and he never consented or agreed to the said
assignment.

ISSUE:W/N there was an assignment

no novation/subrogation in the case at bar.

of

credit

and

that

there

was

HELD:
Petitioner asserts the position that
consent of the debtor to the assignment of credit is a basic/essential
element in order for the assignee to have a cause of action against the
debtor. Without the debtors consent, the recourse of the assignee in
case of non-payment of the assigned credit, is to recover from the
assignor.
even if there was indeed an assignment of credit, as alleged by the
respondent, then there had been a novation of the original loan
contracts when the respondent was subrogated in the rights of
Ms. Picache, the original creditor.
ART. 1300. Subrogation of a third person in the rights of the
creditor is either legal or conventional. The former is not
presumed, except in cases expressly mentioned in this
Code; the latter must be clearly established in order that it
may take effect.
ART. 1301. Conventional subrogation of a third person
requires the consent of the original parties and the third
person.
-

According to petitioner, the assignment of credit constitutes

conventional subrogation which requires the consent of the original
parties to the loan contract, namely, Ms. Picache (the creditor) and
petitioner (the debtor); and the third person, the respondent (the
assignee). Since petitioner never gave his consent to the assignment
of credit, then the subrogation of respondent in the rights of
Ms. Picache as creditor by virtue of said assignment is without force
and effect.

The transaction between Ms. Picache and respondent was an assignment of

credit, NOT conventional subrogation, and does not require petitioners
consent as debtor for its validity and enforceability.
An assignment of credit has been defined as 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 or exchange or donation/ - and without need of the
debtor's consent/, transfers that credit and its accessory rights to another (known
as the assignee), /who acquires the power to enforce it/to the same extent as the
assignor could have enforced it against the debtor.[20]
On the other hand, subrogation, by definition, is 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.[21]
Although it may be said that the effect of the assignment of credit is to subrogate
the assignee in the rights of the original creditor, this Court still cannot definitively
rule that assignment of credit and conventional subrogation are one and the same.

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.
CONVENTIONAL SUBROGATION
ASSIGNMENT OF CREDIT
6
LEDONIO V. CAPITOL
the debtors consent is necessary; requires an agreement among the parties
NOT required; mere notice to debtor; takes effe
DEVELOPMENT
concerned the original creditor, the debtor, and the new creditor.
debtor has knowledge thereof.
FACTS:
extinguishes an obligation and gives rise to a new one
assignment refers to the same right which pass
Herein respondent Capitol Development Corporation filed a complaint for the
another
collection of a sum of money against herein petitioner Edgar Ledonio.
nullity of an old obligation may be cured by subrogation such that the new
but the nullity of an obligation is not remedied by
obligation
will
be
perfectly
valid;
creditors right to another.
CDC alleged that
Ledonio obtained from a Ms. Picache two loans, with the aggregate
Article 1300 of the Civil Code provides that conventional subrogation must be
principal amount ofP60,000.00, and covered by promissory notes duly
clearly established in order that it may take effect. Since it is petitioner who claims
signed by petitioner.
that there is conventional subrogation in this case, the burden of proof rests upon
In the first PN, petitioner promised to pay to the order of
him to establish the same[25] by a preponderance of evidence.[26]
Ms. Picache the
principal
amount
of P30,000.00,
in
monthly
In Licaros v. Gatmaitan,[27] this Court ruled that there was conventional
installments of P3,000.00, with the first monthly installment due on9
subrogation, not just an assignment of credit; thus, consent of the debtor is
January 1989.
required for the effectivity of the subrogation. This Court arrived at such a
In the second promissory note, petitioner again promised to pay to the
conclusion in said case based on its following findings
order of Ms. Picache the principal amount of P30,000.00, with 36%
interest per annum, on 1 December 1988.
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
On 1 April 1989, Ms. Picache executed an Assignment of Credit[7] in favor of
conventional subrogation which requires the consent of the debtor,
CDC, which reads xxx: The foregoing document was signed by two witnesses and
Anglo-Asean Bank, for its validity. We note with approval the following
duly acknowledged by Ms. Picache before a Notary Public also on 1 April 1989.
pronouncement of the Court of Appeals:
Since petitioner did not pay any of the loans covered by the promissory notes
"Immediately discernible from above is the common feature of
when they became due, respondent -- sent petitioner several demand letters.
[8]
contracts involving conventional subrogation, namely, the approval of
Despite receiving the said demand letters, petitioner still failed and refused to
the debtor to the subrogation of a third person in place of the creditor.
settle his indebtedness, thus, prompting respondent to file the Complaint with the
That Gatmaitan andLicaros had intended to treat their agreement as
RTC.
one of conventional subrogation is plainly borne by a stipulation in
their Memorandum of Agreement, to wit:
Ledonio sought the dismissal of the Complaint averring
that respondent had no cause of action against him
"WHEREAS, the parties herein have come to an agreement on the
denied obtaining any loan from Ms. Picache and questioned the
nature, form and extent of their mutual prestations which they now
genuineness and due execution of the promissory notes, for they were
record herein with the express conformity of the third parties
the result of intimidation and fraud; hence, void.
concerned" (emphasis supplied),

OBLIGATIONS AND CONTRACTS -2ND EXAM

Kristine Confesor
which third party is admittedly Anglo-Asean Bank.
Had the intention been merely to confer on appellant the status of a
mere "assignee" of appellee's 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).
xxxx
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. To
our mind, this provision which contemplates the signed conformity of
Anglo-Asean Bank,
taken
together
with
the
aforementioned preambulatoryclause leads to the conclusion that both
parties intended that Anglo-AseanBank should signify its agreement
and conformity to the contractual arrangement between petitioner and
respondent. The fact that Anglo-AseanBank 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.

None of the foregoing circumstances are attendant in the present case. The
Assignment of Credit, executed by Ms. Picache in favor of respondent, was a
simple deed of assignment. There is nothing in the said Assignment of Credit
which imparts to this Court, whether literally or deductively, that a conventional
subrogation was intended by the parties thereto. The terms of the Assignment of
Credit only convey the straightforward intention of Ms. Picache to sell, assign,
transfer, and convey to respondent the debt due her from petitioner, as evidenced
by the two promissory notes of the latter, dated 9 November 1988 and 10
November 1988, for the consideration of P60,000.00. By virtue of the same
document, Ms. Picache gave respondent full power to sue for, collect and
discharge, or sell and assign the very same debt. The Assignment of Credit was
signed solely by Ms. Picache, witnessed by two other persons. No reference was
made to securing the conforme of petitioner to the transaction, nor any space
provided for his signature on the said document.
Perhaps more in point to the case at bar is Rodriguez v. Court of Appeals,
which this Court found that

[28]

in

The basis of the complaint is not a deed of subrogation but an

assignment of credit whereby the private respondent became the
owner, not the subrogee of the credit since the assignment was
supported by HK $1.00 and other valuable considerations.
xxxx
The petitioner further contends that the consent of the debtor is
essential to the subrogation. Since there was no consent on his part,
then he allegedly is not bound.
Again, we find for the respondent. The questioned deed of assignment is neither
one of subrogation nor a power of attorney as the petitioner alleges. The deed of
assignment clearly states that the private respondent became an assignee and,
therefore, he became the only party entitled to collect the indebtedness. As a
result of the Deed of Assignment, the plaintiff acquired all rights of the assignor
including the right to sue in his own name as the legal assignee. Moreover, in
assignment, the debtor's consent is not essential for the validity of the assignment
(Art. 1624 in relation to Art. 1475, Civil Code), his knowledge thereof affecting only
the validity of the payment he might make (Article 1626, Civil Code).
Note: the assignment was made in a notarized document; notified through demand
letters sent on registered mail, signed by representatives.
7

VALENZUELA V. KALAYAAN

FACTS: Petitioners claim that there was a valid novation in the present case. They
aver that the CA failed to see that the original contract between the petitioners
and Kalayaan was altered, changed, modified and restructured, as a consequence
of the change in the person of the principal debtor and the monthly amortization to
be paid for the subject property. When they agreed to a monthly amortization of
P10,000.00 per month, the original contract was changed; and Kalayaan
recognized Juliets capacity to pay, as well as her designation as the new debtor.
The original contract was novated and the principal obligation to pay for the
remaining half of the subject property was transferred from petitioners to Juliet.
When Kalayaan accepted the payments made by the new debtor, Juliet, it waived
its right to rescind the previous contract. Thus, the action for rescission filed by
Kalayaan against them, was unfounded, since the contract sought to be rescinded
was no longer in existence.
ISSUE: w/n CA failed to apply to the instant case the pertinent provisions of the
new civil code regarding the principle of novation as a mode of extinguishing an
obligation.
HELD:
In the present case, the nature and characteristics of a contract to sell is
determinative of the propriety of the remedy of rescission and the award of
attorneys fees.

Under a contract to sell, the seller retains title to the thing to be sold until the
purchaser fully pays the agreed purchase price.The full payment is a positive
suspensive condition, the non-fulfillment of which is not a breach of contract, but
merely an event that prevents the seller from conveying title to the purchaser. The
non-payment of the purchase price renders the contract to sell ineffective and
without force and effect.[23] Unlike a contract of sale, where the title to the
property passes to the vendee upon the delivery of the thing sold, in a contract to
sell, ownership is, by agreement, reserved to the vendor and is not to pass to the
vendee until full payment of the purchase price. Otherwise stated, in a contract of
sale, the vendor loses ownership over the property and cannot recover it until and
unless the contract is resolved or rescinded; whereas, in a contract to sell, title is
retained by the vendor until full payment of the purchase price. In the latter
contract, payment of the price is a positive suspensive condition, failure ofwhich is
not a breach but an event that prevents the obligation of the vendor to convey title
from becoming effective.[24]
Since the obligation of respondent did not arise because of the failure of
petitioners to fully pay the purchase price, Article 1191[25] of the Civil Code would
have no application. Article 1191 of the New Civil Code will not apply because it
presupposes an obligation already extant. There can be no rescission of an
obligation that is still non-existing, the suspensive condition not having happened.

The parties contract to sell explicitly provides that Kalayaan shall execute and
deliver the corresponding deed of absolute sale over the subject property to the
petitioners upon full payment of the total purchase price. Since petitioners failed to
fully pay the purchase price for the entire property, Kalayaans obligation to convey
title to the property did not arise. Thus, Kalayaan may validly cancel the contract
to sell its land to petitioner, not because it had the power to rescind the contract,
but because their obligation thereunder did not arise.
Inasmuch as the suspensive condition did not take place, Kalayaan cannot be
compelled to transfer ownership of the property to petitioners.
As regards petitioners claim of novation, we do not give credence to petitioners
assertion that the contract to sell was novated when Juliet was allegedly
designated as the new debtor and substituted the petitioners in paying the balance
of the purchase price.

Novation is the extinguishment of an obligation by the substitution or

change of the obligation by a subsequent one which extinguishes or modifies the
first, either by changing the object or principal conditions, or by substituting
another in place of the debtor, or by subrogating a third person in the rights of the
creditor.[29]

Article 1292 of the Civil Code provides that [i]n order that an obligation
may be extinguished by another which substitutes the same, it is imperative that it
be so declared in unequivocal terms, or that the old and the new obligations be on
every point incompatible with each other. Novation is never presumed. Parties to a
contract must expressly agree that they are abrogating their old contract in favor
of a new one. In the absence of an express agreement, novation takes place only
when the old and the new obligations are incompatible on every point.[30] The test
of incompatibility is whether or not the two obligations can stand together, each
one having its independent existence. If they cannot, they are incompatible and
the latter obligation novates the first.[31]
Thus, in order that a novation can take place, the concurrence of the following
requisites are indispensable:
1)
2)
3)
4)

There
There
There
There

must
must
must
must

be
be
be
be

a previous valid obligation; P

an agreement of the parties concerned to a new contract; A
the extinguishment of the old contract; and E
the validity of the new contract. N

In the instant case, none of the requisites are present. There is only one existing
and binding contract between the parties, because Kalayaan never agreed to the
creation of a new contract between them or Juliet. True, petitioners may have
offered that they be substituted by Juliet as the new debtor to pay for the
remaining obligation. Nonetheless, Kalayaan did not acquiesce to the proposal.
Its acceptance of several payments after it demanded that petitioners pay their
outstanding obligation did not modify their original contract. Petitioners,
admittedly, have been in default; and Kalayaans acceptance of the late payments
is, at best, an act of tolerance on the part of Kalayaan that could not have modified
the contract.
As to the partial payments made by petitioners from September 16, 1994 to
December 20, 1997, amounting to P788,000.00, this Court resolves that the said
amount be returned to the petitioners, there being no provision regarding forfeiture
of payments made in the Contract to Sell. To rule otherwise will be unjust
enrichment on the part of Kalayaan at the expense of the petitioners.
Also, the three percent (3%) penalty interest appearing in the contract is patently
iniquitous and unconscionable as to warrant the exercise by this Court of its judicial
discretion. Article 2227 of the Civil Code provides that [l]iquidated damages,

OBLIGATIONS AND CONTRACTS -2ND EXAM

Kristine Confesor

whether intended as an indemnity or a penalty, shall be equitably reduced if they

are iniquitous or unconscionable. A perusal of the Contract to Sell reveals that the
three percent (3%) penalty interest on unpaid monthly installments (per condition
No. 3) would translate to a yearly penalty interest of thirty-six percent (36%).
Although this Court on various occasions has eliminated altogether the three
percent (3%) penalty interest for being unconscionable,[32] We are not inclined to
do the same in the present case. A reduction is more consistent with fairness and
equity.We should not lose sight of the fact that Kalayaan remains an unpaid seller
and that it has suffered, one way or another, from petitioners non-performance of
its contractual obligations. In view of such glaring reality, We invoke the authority
granted to us by Article 1229[33] of the Civil Code, and as equity dictates, the
penalty interest is accordingly reimposed at a reduced rate of one percent (1%)
interest per month, or twelve percent (12%) per annum,[34] to be deducted from
the partial payments made by the petitioners.
8
ISSUES:
1
2
3

TOMIMBANG V. TOMIMBANG

Whether petitioner's obligation is due and demandable;

Whether respondent is entitled to attorney's fees; and
Whether interest should be imposed on petitioner's indebtedness and,
if in the affirmative, at what rate.

Petitioner contends that the loan is not yet due and demandable because the
suspensive condition the completion of the renovation of the apartment units - has
not yet been fulfilled.
Respondent admits that initially, they agreed that payment of the loan shall be
made upon completion of the renovations. However, respondent claims that during
their meeting with some family members in the house of their brother Genaro
sometime in the second quarter of 1997, he and petitioner entered into a new
agreement whereby petitioner was to start making monthly payments on her loan,
which she did from June to October of 1997. In respondent's view, there was a
novation of the original agreement, and under the terms of their new agreement,
petitioner's obligation was already due and demandable.
Respondent also maintains that when petitioner disappeared from the family
compound without leaving information as to where she could be found, making it
impossible to continue the renovations, petitioner thereby prevented the fulfillment
of said condition. He claims that Article 1186 of the Civil Code, which provides
that the condition shall be deemed fulfilled when the obligor voluntarily prevents
its fulfillment, is applicable to this case.
In his Comment to the present petition, respondent raised for the first time, the
issue that the loan contract between him and petitioner is actually one with a
period, not one with a suspensive condition. In his view, when petitioner began to
make partial payments on the loan, the latter waived the benefit of the
term, making the loan immediately demandable.
HELD: NO MERIT
It is undisputed that herein parties entered into a valid loan contract. The only
question is, has petitioner's obligation become due and demandable? YES.
The evidence on record clearly shows that after renovation of 7-8 apartment units
had been completed, petitioner and respondent agreed that the former shall
already start making monthly payments on the loan even if renovation on the last
unit (Unit A) was still pending. Genaro Tomimbang, the younger brother of herein
parties, testified that a meeting was held among petitioner, respondent, himself
and their eldest sister Maricion, sometime during the first or second quarter of
1997, wherein respondent demanded payment of the loan, and petitioner agreed
to pay. Indeed, petitioner began to make monthly payments from June to October
of 1997 totalling P93,500.00.[8] In fact, petitioner even admitted in her Answer with
Counterclaim that she had started to make payments to plaintiff [herein
respondent] as the same was in accord with her commitment to pay
whenever she was able; x x x
Evidently, by virtue of the subsequent agreement, the parties mutually dispensed
with the condition that petitioner shall only begin paying after the completion of all
renovations. There was, in effect, a modificatory or partial novation, of
petitioner's obligation. Article 1291 of the Civil Code provides, thus:
Art. 1291. Obligations may be modified by:
(1)
Changing their object or principal conditions;
(2)
Substituting the person of the debtor;
(3)
Subrogating a third person in the rights of the creditor.
(Emphasis supplied)
In Iloilo Traders Finance, Inc. v. Heirs of Sps. Soriano,[10] the Court expounded on
the nature of novation, to wit:
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; x x x .
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 new valid 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. [11]
In Ong v. Bogalbal,[12] the Court also stated, thus:

x x x the effect of novation may be partial or total. There is

partial novation when there is only a modification or change in some
principal conditions of the obligation. It is total, when the obligation is
completely extinguished. Also, the term principal conditions in Article
1291 should be construed to include a change in the period to comply
with the obligation. Such a change in the period would only be a partial
novation since the period merely affects the performance, not the
creation of the obligation.[13]
As can be gleaned from the foregoing, the aforementioned four essential
elements and the requirement that there be total incompatibility between the old
and new obligation, apply only to extinctive novation. In partial novation, only
the terms and conditions of the obligation are altered, thus, the main obligation is
not changed and it remains in force.
Petitioner stated in her Answer with Counterclaim [14] that she agreed and complied
with respondent's demand for her to begin paying her loan, since she believed this
was in accordance with her commitment to pay whenever she was able. Her
partial performance of her obligation is unmistakable proof that indeed
the original agreement between her and respondent had been novated by
the deletion of the condition that payments shall be made only after
completion of renovations. Hence, by her very own admission and partial
performance of her obligation, there can be no other conclusion but that under the
novated agreement, petitioner's obligation is already due and demandable.
9
MILLA V. PEOPLE
Facts:
Respondent Carlo Lopez (Lopez) was the Financial Officer of private respondent,
Market Pursuits, Inc. (MPI). In March 2003, Milla represented himself as a real
estate developer from Ines Anderson Development Corporation, which was
engaged in selling business properties in Makati, and offered to sell MPI a property
therein located. For this purpose, he
showed Lopez a photocopy of (TCT) registered in the name of spouses Farley and
Jocelyn Handog (Sps. Handog), as well as a SPA purportedly executed by the
spouses in favor of Milla.[3] Lopez verified with the Registry of Deeds of Makati and
confirmed that the property was indeed registered under the names of Sps.
Handog. Since Lopez was convinced by Millas authority, MPI purchased the
property for P2 million, issuing Security Bank and Trust Co. (SBTC) Check in the
amount of P1.6 million. After receiving the check, Milla gave Lopez
(1)
a notarized Deed of Absolute Sale executed by Sps.
Handog in favor of MPI and
(2)
an original Owners Duplicate Copy of TCT
Milla then gave Regino Acosta (Acosta), Lopezs partner, a copy of the new TCT No.,
registered in the name of MPI. Thereafter, it tendered in favor of Milla SBTC Check
in the amount ofP400,000 as payment for the balance.[5] Milla turned over TCT No.
218777 to Acosta, but did not furnish the latter with the receipts for the transfer
taxes and other costs incurred in the transfer of the property. This failure to turn
over the receipts prompted Lopez to check with the Register of Deeds, where he
discovered that (1) the Certificate of Title given to them by Milla could not be found
therein; (2) there was no transfer of the property from Sps. Handog to MPI; and (3)
TCT No. 218777 was registered in the name of a certain Matilde M. Tolentino.[6]
Consequently, Lopez demanded the return of the amount of P2 million from Milla,
who then issued Equitable PCI Check Nos. in the amount of P1 million each.
However, these checks were dishonored for having been drawn against insufficient
funds. When Milla ignored the demand letter sent by Lopez, the latter, by virtue of
the authority vested in him by the MPI Board of Directors, filed a Complaint against
the former on 4 August 2003two Informations for Estafa Thru Falsification of Public
Documents were filed against Milla for having committed estafa through the
falsification of the notarized Deed of Absolute Sale and TCT No.
ISSUE:
W/N the principle of novation can exculpate Milla from criminal liability?
No.
Held:
The principle of novation cannot be applied to the case at bar.
Milla contends that his issuance of Equitable PCI Check Nos. 188954 and 188955
before the institution of the criminal complaint against him novated his obligation
to MPI, thereby enabling him to avoid any incipient criminal liability and converting
his obligation into a purely civil one. This argument does not persuade.
The principles of novation cannot apply to the present case as to extinguish his
criminal liability. Milla cites People v. Nery[23] to support his contention that his
issuance of the Equitable PCI checks prior to the filing of the criminal complaint
averted his incipient criminal liability. However, it must be clarified that mere
payment of an obligation before the institution of a criminal complaint does not, on
its own, constitute novation that may prevent criminal liability. This Courts ruling in
Nery in fact warned:
It may be observed in this regard that novation is not one of the means recognized
by the Penal Code whereby criminal liability can be extinguished; hence, the role of
novation may only be to either prevent the rise of criminal liability or to cast doubt
on the true nature of the original petition, whether or not it was such that its
breach would not give rise to penal responsibility, as when money loaned is made
to appear as a deposit, or other similar disguise is resorted to (cf. Abeto vs. People,
90 Phil. 581; Villareal, 27 Phil. 481).
Even in Civil Law the acceptance of partial payments, without further change in the
original relation between the complainant and the accused, can not produce
novation. For the latter to exist, there must be proof of intent to extinguish the
original relationship, and such intent can not be inferred from the mere acceptance
of payments on account of what is totally due.Much less can it be said that the
acceptance of partial satisfaction can effect the nullification of a criminal liability
that is fully matured, and already in the process of enforcement. Thus, this Court
has ruled that the offended partys acceptance of a promissory note for all or part
of the amount misapplied does not obliterate the criminal offense

OBLIGATIONS AND CONTRACTS -2ND EXAM

Kristine Confesor

Further, in Quinto v. People,[25] this Court exhaustively explained the concept of

novation in relation to incipient criminal liability,viz:
Novation is never presumed, 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.
The extinguishment of the old obligation by the new one is a necessary element of
novation which may be effected either expressly or impliedly. The term expressly
means that the contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. 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. 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. The second is when the old and the new obligations
are incompatible on every point. The test of incompatibility is whether or not the
two obligations can stand together, each one having its independent existence. If
they cannot, they are incompatible and the latter obligation novates the first.
Corollarily, changes that breed incompatibility must be essential in nature and not
merely accidental. The incompatibility must take place in any of the essential
elements of the obligation, such as its object, cause or principal conditions thereof;
otherwise, the change would be merely modificatory in nature and insufficient to
extinguish the original obligation.
The changes alluded to by petitioner consists only in the manner of payment.
There was really no substitution of debtors since private complainant merely
acquiesced to the payment but did not give her consent to enter into a new
contract. The appellate court observed:
xxx xxx xxx
The acceptance by complainant of partial payment tendered by the buyer, Leonor
Camacho, does not evince the intention of the complainant to have their
agreement novated. It was simply necessitated by the fact that, at that time,
Camacho had substantial accounts payable to complainant, and because of the
fact that appellant made herself scarce to complainant. (TSN, April 15, 1981, 3132) Thus, to obviate the situation where complainant would end up with nothing,
she was forced to receive the tender of Camacho. Moreover, it is to be noted that
the aforesaid payment was for the purchase, not of the jewelry subject of this case,
but of some other jewelry subject of a previous transaction. (Ibid. June 8, 1981, 1011)
The criminal liability for estafa already committed is then not affected by the
subsequent novation of contract, for it is a public offense which must be
prosecuted and punished by the State in its own conation. (Emphasis supplied.)
[26]
In the case at bar, the acceptance by MPI of the Equitable PCI checks tendered by
Milla could not have novated the original transaction, as the checks were only
intended to secure the return of the P2 million the former had already given him.
Even then, these checks bounced and were thus unable to satisfy his liability.
Moreover, the estafa involved here was not for simple misappropriation or
conversion, but was committed through Millas falsification of public documents, the
liability for which cannot be extinguished by mere novation..
10
HEIRS OF SERVANDO V. GONZALES
HELD:
new obligation extinguishes the prior agreement only when the substitution is
unequivocally declared, or the old and the new obligations are incompatible on
every point. A compromise of a final judgment operates as a novation of the
judgment obligation upon compliance with either of these two conditions.[18]
The receipt dated February 5, 1992, excerpted below, did not create a new
obligation incompatible with the old one under the promissory note, viz:
February 5, 1992
Received from SERVANDO FRANCO BPI Managers Check No. 001700 in
the amount of P400,00.00 as partial payment of loan. Balance of
P375,000.00 to be paid on or before FEBRUARY 29, 1992. In case of
default an interest will be charged as stipulated in the promissory note
subject of this case.
(Sgd)
V. Gonzalez[19]
To be clear, novation is not presumed. This means that the parties to a contract
should expressly agree to abrogate the old contract in favor of a new one. In the
absence of the express agreement, the old and the new obligations must be
incompatible on every point.[20] According to
California Bus Lines, Inc. v. State Investment House, Inc.:[21]

The extinguishment of the old obligation by the new one is a necessary

element of novation which may be effected either expressly or
impliedly. The term expressly means that the contracting parties
incontrovertibly disclose that their object in executing the new contract
is to extinguish the old one. 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. 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 is incompatibility when the two obligations cannot stand
together, each one having its independent existence. If the two
obligations cannot stand together, the latter obligation novates the
first. Changes that breed incompatibility must be essential in nature
and not merely accidental. The incompatibility must affect any of the
essential elements of the obligation, such as its object, cause or
principal conditions thereof; otherwise, the change is merely
modificatory in nature and insufficient to extinguish the original
obligation.[23]
In light of the foregoing, the issuance of the receipt created no new
obligation. Instead, the respondents only thereby recognized the original
obligation by stating in the receipt that the P400,000.00 was partial payment of
loan and by referring to the promissory note subject of the case in imposing the
interest. The loan mentioned in the receipt was still the same loan involving the
P500,000.00 extended to Servando. Advertence to the interest stipulated in the
promissory note indicated that the contract still subsisted, not replaced and
extinguished, as the petitioners claim.
The receipt dated February 5, 1992 was only the proof of Servandos payment of his
obligation as confirmed by the decision of the RTC. It did not establish the novation
of his agreement with the respondents. Indeed, the Court has ruled that
an obligation to pay a sum of money is not novated by an instrument
that expressly recognizes the old, or changes only the terms of
payment, or adds other obligations not incompatible with the old ones,
or the new contract merely supplements the old one.[24] A new
contract that is a mere reiteration, acknowledgment or ratification of
the old contract with slight modifications or alterations as to the cause
or object or principal conditions can stand together with the former
one, and there can be no incompatibility between them.[25]Moreover,
a creditors acceptance of payment after demand does not operate as a
modification of the original contract.[26]
Worth noting is that Servandos liability was joint and solidary with his codebtors. In a solidary obligation, the creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously.[27] The choice to
determine against whom the collection is enforced belongs to the creditor until the
obligation is fully satisfied.[28] Thus, the obligation was being enforced against
Servando, who, in order to escape liability, should have presented evidence to
prove that his obligation had already been cancelled by the new obligation or that
another debtor had assumed his place. In case of change in the person of the
debtor, the substitution must be clear and express,[29] and made with the consent
of the creditor.[30] Yet, these circumstances did not obtain herein, proving
precisely that Servando remained a solidary debtor against whom the entire or
part of the obligation might be enforced.
Lastly, the extension of the maturity date did not constitute a novation of the
previous agreement. It is settled that an extension of the term or period of the
maturity date does not result in novation.[31]
11
PNB V. SORIANO
FACTS:
On March 20, 1997, [PNB] extended a credit facility in the form of [a] Floor Stock
Line (FSL) in the increased amount of (30 Million) to Lisam Enterprises, Inc.
[LISAM], a family-owned and controlled corporation that maintains Current
Account with PNB.
x x x. Soriano is the chairman and president of LISAM, she is also the authorized
signatory in all LISAMs Transactions with [PNB].
On various dates, LISAM made several availments of the FSL in the total amount
of (P 29,645,944.55), the proceeds of which were credited to its current account
with [PNB]. For each availment, LISAM through [Soriano], executed 52 Trust
Receipts (TRs). In addition to the promissory notes, showing its receipt of the items
in trust with the duty to turn-over the proceeds of the sale thereof to [PNB].
Sometime on January 21-22, 1998, [PNBs] authorized personnel conducted an
actual physical inventory of LISAMs motor vehicles and motorcycles and found
that only four (4) units covered by the TRs amounting to (158,100.00) (sic)
remained unsold.
Out of the (29,644,944.55) as the outstanding principal balance [of] the total
availments on the line covered by TRs, [LISAM] should have remitted to [PNB]
(29,487,844.55). Despite several formal demands, respondent Soriano failed and
refused to turn over the said [amount to] the prejudice of [PNB].3
Given the terms of the TRs which read, in pertinent part:
RECEIVED in Trust from the [PNB], Naga Branch, Naga City, Philippines, the motor
vehicles ("Motor Vehicles") specified and described in the Invoice/s issued by

OBLIGATIONS AND CONTRACTS -2ND EXAM

Kristine Confesor

HONDA PHILIPPINES, INC. (HPI) to Lisam Enterprises, Inc., (the "Trustee") hereto
attached as Annex "A" hereof, and in consideration thereof, the trustee hereby
agrees to hold the Motor Vehicles in storage as the property of PNB, with the liberty
to sell the same for cash for the Trustees account and to deliver the proceeds
thereof to PNB to be applied against its acceptance on the Trustees account.
Under the terms of the Invoices and (sic) the Trustee further agrees to hold the
said vehicles and proceeds of the sale thereof in Trust for the payment of said
acceptance and of any [of] its other indebtedness to PNB.
xxxx
For the purpose of effectively carrying out all the terms and conditions of the Trust
herein created and to insure that the Trustee will comply strictly and faithfully with
all undertakings hereunder, the Trustee hereby agrees and consents to allow and
permit PNB or its representatives to inspect all of the Trustees books, especially
those pertaining to its disposition of the Motor Vehicles and/or the proceeds of the
sale hereof, at any time and whenever PNB, at its discretion, may find it necessary
to do so.
The Trustees failure to account to PNB for the Motor Vehicles received in Trust
and/or for the proceeds of the sale thereof within thirty (30) days from demand
made by PNB shall constitute prima facie evidence that the Trustee has converted
or misappropriated said vehicles and/or proceeds thereof for its benefit to the
detriment and prejudice of PNB.4 and Sorianos failure to account for the proceeds
of the sale of the motor vehicles, PNB, as previously adverted to, filed a complaintaffidavit before the Office of the City Prosecutor of Naga City charging Soriano with
fifty two (52) counts of violation of the Trust Receipts Law, in relation to Article 315,
paragraph 1(b) of the Revised Penal Code.
ISSUE:
W/N the approval by PNB of [LISAMs] restructuring proposal of its account with
PNB had changed the status of [LISAMs] obligations secured by Trust Receipts to
one of an ordinary loan, non-payment of which does not give rise to a criminal
liability.
HELD:
whether the restructuring of LISAMs loan account extinguished Sorianos criminal
liability. NO.
PNB admits that although it had approved LISAMs restructuring proposal, the
actual restructuring of LISAMs account consisting of several credit lines was never
reduced into writing. PNB argues that the stipulations therein such as the
provisions on the schedule of payment of the principal obligation, interests, and
penalties, must be in writing to be valid and binding between the parties. PNB
further postulates that assuming the restructuring was reduced into writing, LISAM
failed to comply with the conditions precedent for its effectivity, specifically, the
payment of interest and other charges, and the submission of the titles to the real
properties in Tandang Sora, Quezon City. On the whole, PNB is adamant that the
events concerning the restructuring of LISAMs loan did not affect the TR security,
thus, Sorianos criminal liability thereunder subsists.
On the other hand, the appellate court agreed with the ruling of the DOJ Secretary
that the approval of LISAMs restructuring proposal, even if not reduced into
writing, changed the status of LISAMs loan from being secured with Trust Receipts
(TRs) to one of an ordinary loan, non-payment of which does not give rise to
criminal liability. The Court of Appeals declared that there was no breach of trust
constitutive of estafa through misappropriation or conversion where the
relationship between the parties is simply that of creditor and debtor, not as
entruster and entrustee.
We cannot subscribe to the appellate courts reasoning. The DOJ Secretarys and
the Court of Appeals holding that, the supposed restructuring novated the loan
agreement between the parties is myopic.
To begin with, the purported restructuring of the loan agreement did not constitute
novation.
Novation is one of the modes of extinguishment of obligations; it is a single
juridical act with a diptych function. The substitution or change of the obligation by
a subsequent one extinguishes the first, resulting in the creation of a new
obligation in lieu of the old. It is not a complete obliteration of the obligor-obligee
relationship, but operates as a relative extinction of the original obligation.
Article 1292 of the Civil Code which provides:
Art. 1292. In order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms,
or that the old and the new obligations be on every point incompatible with each
other.
contemplates two kinds of novation: express or implied. The extinguishment of
the old obligation by the new one is a necessary element of novation, which may
be effected either expressly or impliedly.
In order for novation to take place, the concurrence of the following requisites is
indispensable: PAEN
Novation is never presumed, 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 unmistakable. The contracting parties must incontrovertibly
disclose that their object in executing the new contract is to extinguish the old one.
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.
Nonetheless, both kinds of novation must still be clearly proven.
In this case, without a written contract stating in unequivocal terms that the
parties were novating the original loan agreement, thus undoubtedly eliminating
an express novation, we look to whether there is an incompatibility between the

Floor Stock Line secured by TRs and the subsequent restructured Omnibus
Line which was supposedly approved by PNB.
The test of incompatibility is whether the two obligations can stand
together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. Corollarily, changes that
breed incompatibility must be essential in nature and not merely accidental.
The incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions thereof; otherwise, the
change would be merely modificatory in nature and insufficient to extinguish the
original obligation.
We have scoured the records and found no incompatibility between the Floor Stock
Line and the purported restructured Omnibus Line. While the restructuring was
approved in principle, the effectivity thereof was subject to conditions precedent
such as the payment of interest and other charges, and the submission of the titles
to the real properties in Tandang Sora, Quezon City. These conditions precedent
imposed on the restructured Omnibus Line were never refuted by Soriano who,
oddly enough, failed to file a Memorandum. To our mind, Sorianos bare assertion
that the restructuring was approved by PNB cannot equate to a finding of an
implied novation which extinguished Sorianos obligation as entrustee under the
TRs.
Moreover, as asserted by Soriano in her counter-affidavit, the waiver pertains to
penalty charges on the Floor Stock Line. There is no showing that the waiver
extinguished Sorianos obligation to "sell the [merchandise] for cash for [LISAMs]
account and to deliver the proceeds thereof to PNB to be applied against its
acceptance on [LISAMs] account." Soriano further agreed to hold the "vehicles and
proceeds of the sale thereof in Trust for the payment of said acceptance and of any
of its other indebtedness to PNB." Well-settled is the rule that, with respect to
obligations to pay a sum of money, the obligation is not novated by
1
an instrument that expressly recognizes the old,
2
changes only the terms of payment,
3
adds other obligations not incompatible with the old
ones, or
4
the new contract merely supplements the old one.
Besides, novation does not extinguish criminal liability. It stands to reason
therefore, that Sorianos criminal liability under the TRs subsists considering that
the civil obligations under the Floor Stock Line secured by TRs were not
extinguished by the purported restructured Omnibus Line. restructuring agreement
is not incompatible with the trust receipt transactions. restructuring agreement
recognizes the obligation due under the trust receipts when it required "payment
of all interest and other charges prior to restructuring."
5

SERFINO V. FAR EAST BANK

CASE: determination of the obligation of banks to a third party who claims

rights over a bank deposit standing in the name of another.
HELD: Claim for actual damages not meritorious because there could be
no pecuniary loss that should be compensated if there was no
assignment of credit
The spouses Serfinos claim for damages against FEBTC is premised on their claim
of ownership of the deposit with FEBTC. The deposit consists of Magdalenas
retirement benefits, which the spouses Serfino claim to have been assigned to
them under the compromise judgment. That the retirement benefits were
deposited in Graces savings account with FEBTC supposedly did not divest them of
ownership of the amount, as "the money already belongs to the [spouses Serfino]
having been absolutely assigned to them and constructively delivered by virtue of
the x x x public instrument[.]" 11 By virtue of the assignment of credit, the
spouses Serfino claim ownership of the deposit, and they posit that FEBTC was
duty bound to protect their right by preventing the withdrawal of the deposit since
the bank had been notified of the assignment and of their claim.
We find no basis to support the spouses Serfinos claim of ownership of
the deposit.
"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. 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."12 As a dation in
payment, the assignment of credit operates as a mode of extinguishing the
obligation;13 the delivery and transmission of ownership of a thing (in this case,
the credit due from a third person) by the debtor to the creditor is accepted as the
equivalent of the performance of the obligation.14
The terms of the compromise judgment, however, did not convey an intent to
equate the assignment of Magdalenas retirement benefits (the credit) as the
equivalent of the payment of the debt due the spouses Serfino (the obligation).
There was actually no assignment of credit; if at all, the compromise judgment
merely identified the fund from which payment for the judgment debt
would be sourced:

OBLIGATIONS AND CONTRACTS -2ND EXAM

Kristine Confesor

(c) That before the plaintiffs file a motion for execution of the decision or order
based [on this] Compromise Agreement, the defendant, Magdalena Cortez
undertake[s] and bind[s] herself to pay in full the judgment debt out of
her retirement benefits as Local [T]reasury Operation Officer in the City of
Bacolod, Philippines, upon which full payment, the plaintiffs waive, abandon and
relinquish absolutely any of their claims for attorneys fees stipulated in the
Promissory Note (Annex "A" to the Complaint). 15 [emphasis ours]
Only when Magdalena has received and turned over to the spouses Serfino the
portion of her retirement benefits corresponding to the debt due would the debt be
deemed paid.
In Aquitey v. Tibong,16 the issue raised was whether the obligation to pay the
loan was extinguished by the execution of the deeds of assignment. The Court
ruled in the affirmative, given that, in the deeds involved, the respondent (the
debtor) assigned to the petitioner (the creditor) her credits "to make good" the
balance of her obligation; the parties agreed to relieve the respondent of her
obligation to pay the balance of her account, and for the petitioner to collect the
same from the respondents debtors. 17 The Court concluded that the respondents
obligation to pay the balance of her accounts with the petitioner was
extinguished, pro tanto, by the deeds of assignment of credit executed by the
respondent in favor of the petitioner.18
In the present case, the judgment debt was not extinguished by the mere
designation in the compromise judgment of Magdalenas retirement benefits as
the fund from which payment shall be sourced. That the compromise agreement
authorizes recourse in case of default on other executable properties of the
spouses Cortez, to satisfy the judgment debt, further supports our conclusion that
there was no assignment of Magdalenas credit with the GSIS that would have
extinguished the obligation.
The compromise judgment in this case also did not give the supposed assignees,
the spouses Serfino, the power to enforce Magdalenas credit against the GSIS. In
fact, the spouses Serfino are prohibited from enforcing their claim until after the
lapse of one (1) week from Magdalenas receipt of her retirement benefits:
(d) That the plaintiffs shall refrain from having the judgment based upon this
Compromise Agreement executed until after one (1) week from receipt by the
defendant, Magdalena Cortez of her retirement benefits from the [GSIS] but fails to
pay within the said period the defendants judgment debt in this case, in which
case [this] Compromise Agreement [may be] executed upon any property of the
defendants that are subject to execution upon motion by the plaintiffs.19
An assignment of credit not only entitles the assignee to the credit itself, but also
gives him the power to enforce it as against the debtor of the assignor. Since no
valid assignment of credit took place, the spouses Serfino cannot validly claim
ownership of the retirement benefits that were deposited with FEBTC. Without
ownership rights over the amount, they suffered no pecuniary loss that
has to be compensated by actual damages. The grant of actual damages
presupposes that the claimant suffered a duly proven pecuniary loss. 20
6

recognizes that contracts that the PRA entered into in its own name and makes it
liable for the same. Thus:
Section 7.01. Liability of BCDA and [PRA]. BCDA and [PRA]shall be liable in
accordance herewith only to the extent of the obligations specifically undertaken
by BCDA and [PRA] herein and any other documents or agreements relating to the
Project, and in which they are parties.40
Romago claims that the CA award should be increased toP13,598,139.24 based on
the detailed account of expenses and cash payments as of December 31, 2005
that it submitted. But the Court cannot agree. Engineer J. R. Milan testified that
Romago received P86,479,617.61 out of P105,120,826.50 worth of work that it
accomplished, thereby leaving a deficiency of only P18,641,208.89.xxx
Had the above testimony been untrue, Romago should have refuted the same
considering that it had every opportunity to do so. On the contrary, it even
adopted the same document as its own exhibit. 42 In effect, Romago conceded the
correctness of the PRAs valuation of the balance due it.
In keeping with this Courts ruling in Eastern Shipping Lines, Inc. v. Court of
Appeals,43 the Court deems it proper to impose legal interest of 6% per annum on
the amount finally adjudged, reckoned from October 22,2004, the date the CIAC
rendered judgment until the same is wholly satisfied. 44
7

ACE FOODS V. MICROPACIFIC

ISSUE: W/N ACE Foods should pay MTCL the purchase price for the subject
products. YES.
HELD: Petition lacks merit.
A contract is what the law defines it to be, taking into consideration its essential
elements, and not what the contracting parties call it. 33 The real nature of a
contract may be determined from the express terms of the written agreement and
from the contemporaneous and subsequent acts of the contracting parties.
However, in the construction or interpretation of an instrument, the intention of
the parties is primordial and is to be pursued. The denomination or title
given by the parties in their contract is not conclusive of the nature of its
contents.34
The very essence of a contract of sale is the transfer of ownership in
exchange for a price paid or promised.35 This may be gleaned from Article
1458 of the Civil Code which defines a contract of sale as follows:
Art. 1458. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership and to deliver a
determinate thing, and the other to pay therefor a price certain in
money or its equivalent.

PHIL. RECLAMATION V. ROMAGO

A contract of sale may be absolute or conditional. (Emphasis supplied)

The PRA claims that its liability under its contract with Romago had been
extinguished by novation when it assigned all its obligations to the HPMC pursuant
to the provisions of the PFTA. The PRA insists that the CA erroneously applied to the
case the 2001 ruling of the Court in Public Estates Authority v. Uy 37 that also
involved the Heritage Park Project. Uy dealt only with the PRA and the HPMC came
into the picture only after the case has been filed. Here, while Romago first dealt
with the PRA, it eventually dealt with the HPMC before the construction company
can finish the contracted works, evidencing novation of parties.
In novation, a subsequent obligation extinguishes a previous one through
substitution either by changing the object or principal conditions, by substituting
another in place of the debtor, or by subrogating a third person into the rights of
the creditor.38 Novation requires (a) the existence of a previous valid obligation; (b)
the agreement of all parties to the new contract; (c) the extinguishment of the old
contract; and (d) the validity of the new one.39
There cannot be novation in this case since the proposed substituted parties did
not agree to the PRAs supposed assignment of its obligations under the contract
for the electrical and light works at Heritage Park to the HPMC. The latter definitely
and clearly rejected the PRAs assignment of its liability under that contract to the
HPMC. Romago tried to follow up its claims with the HPMC, not because of any new
contract it entered into with the latter, but simply because the PRA told it that the
HPMC would henceforth assume the PRAs liability under its contract with
Romago.1wphi1
Besides, Section 11.07 of the PFTA makes it clear that the termination of the PRAs
obligations is conditioned upon the turnover of documents, equipment, computer
hardware and software on the geographical information system of the Park; and
the completion and faithful performance of its respective duties and responsibilities
under the PFTA. More importantly, Section 11.07 did not say that the HPMC shall,
thereafter, assume the PRAs obligations. On the contrary, Section 7.01 of the PFTA

Corollary thereto, a contract of sale is classified as a consensual contract, which

means that the sale is perfected by mere consent. No particular form is required
for its validity. Upon perfection of the contract, the parties may reciprocally
demand performance, i.e., the vendee may compel transfer of ownership of the
object of the sale, and the vendor may require the vendee to pay the thing sold.36
In contrast, a contract to sell is defined as a bilateral contract whereby the
prospective seller, while expressly reserving the ownership of the property despite
delivery thereof to the prospective buyer, binds himself to sell the property
exclusively to the prospective buyer upon fulfillment of the condition agreed
upon, i.e., the full payment of the purchase price. A contract to sell may not even
be considered as a conditional contract of sale where the seller may likewise
reserve title to the property subject of the sale until the fulfillment of a suspensive
condition, because in a conditional contract of sale, the first element of consent is
present, although it is conditioned upon the happening of a contingent event which
may or may not occur.37
In this case, the Court concurs with the CA that the parties have agreed to
a contract of sale and not to a contract to sell as adjudged by the RTC. Bearing in
mind its consensual nature, a contract of sale had been perfected at the precise
moment ACE Foods, as evinced by its act of sending MTCL the Purchase Order,
accepted the latters proposal to sell the subject products in consideration of the
purchase price of P646,464.00. From that point in time, the reciprocal obligations
of the parties i.e., on the one hand, of MTCL to deliver the said products to ACE
Foods, and, on the other hand, of ACE Foods to pay the purchase price therefor
within thirty (30) days from delivery already arose and consequently may be
demanded. Article 1475 of the Civil Code makes this clear:

OBLIGATIONS AND CONTRACTS -2ND EXAM

Kristine Confesor
Art. 1475. The contract of sale is perfected at the moment there is a
meeting of minds upon the thing which is the object of the contract
and upon the price.

From that moment, the parties may reciprocally demand performance, subject to
the provisions of the law governing the form of contracts.
At this juncture, the Court must dispel the notion that the stipulation anent MTCLs
reservation of ownership of the subject products as reflected in the Invoice
Receipt, i.e., the title reservation stipulation, changed the complexion of the
transaction from a contract of sale into a contract to sell. Records are bereft of
any showing that the said stipulation novated the contract of sale
between the parties which, to repeat, already existed at the precise
moment ACE Foods accepted MTCLs proposal. To be sure, novation, in its
broad concept, may either be extinctive or modificatory. 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. In either case, however,
novation is never presumed, 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.38
In the present case, it has not been shown that the title reservation
stipulation appearing in the Invoice Receipt had been included or had
subsequently modified or superseded the original agreement of the
parties. The fact that the Invoice Receipt was signed by a representative of ACE
Foods does not, by and of itself, prove animus novandi since: (a) it was not shown
that the signatory was authorized by ACE Foods (the actual party to the
transaction) to novate the original agreement; (b) the signature only proves that
the Invoice Receipt was received by a representative of ACE Foods to show the fact
of delivery; and (c) as matter of judicial notice, invoices are generally issued at the
consummation stage of the contract and not its perfection, and have been even
treated as documents which are not actionable per se, although they may prove
sufficient delivery. 39
Thus, absent any clear indication that the title reservation stipulation was actually
agreed upon, the Court must deem the same to be a mere unilateral imposition on
the part of MTCL which has no effect on the nature of the parties original
agreement as a contract of sale. Perforce, the obligations arising thereto, among
others, ACE Foodss obligationto pay the purchase price as well as to accept
the delivery of the goods,40 remain enforceable and subsisting.1wphi1
As a final point, it may not be amiss to state that the return of the subject products
pursuant to a rescissory action 41 is neither warranted by ACE Foodss claims of
breach either with respect to MTCLs breach of its purported "after delivery
services" obligations or the defective condition of the products - since such claims
were not adequately proven in this case. The rule is clear: each party must prove
his own affirmative allegation; one who asserts the affirmative of the issue has the
burden of presenting at the trial such amount of evidence required by law to obtain
a favorable judgment, which in civil cases, is by preponderance of
evidence. 42 This, however, ACE Foods failed to observe as regards its allegations of
breach. Hence, the same cannot be sustained.
8

DAVID V. DAVID

In a sale with right to repurchase, title and ownership of the property sold are
immediately vested in the vendee, subject to the resolutory condition of
repurchase by the vendor within the stipulated period.

Spouses Go], in lieu of [Roberto]." 6 The Spouses Go then deposited the amount
of P10M to Robertos account.7
After the execution of the MOA, Roberto gave Eduardo P2,8M and returned to him
one of the truck tractors and trailers subject of the deed of sale. Eduardo
demanded for the return of the other truck tractor and trailer, but Roberto refused
to heed the demand.
Thus, Eduardo initiated this replevin suit against Roberto, alleging that he was
exercising the right to repurchase under the deed of sale; and that he was entitled
to the possession of the other motor vehicle and trailer.
In his answer, Roberto denied that Eduardo could repurchase the properties in
question; and insisted that the MOA had extinguished their deed of sale by
novation.
RTC In favor of Eduardo, holding that the stipulation giving Eduardo the right to
repurchase had made the deed of sale a conditional sale; that Eduardo had fulfilled
the conditions for the exercise of the right to repurchase; that the ownership of the
properties in question had reverted to Eduardo; that Robertos defense of novation
had no merit; and that due to Robertos bad faith in refusing to satisfy Eduardos
claim, Eduardo should be awarded litigation expenses and attorneys fees.
CA promulgated its decision affirming the RTC. It opined that although there was
no express exercise of the right to repurchase, the sum of all the relevant
circumstances indicated that there was an exercise of the right to repurchase
pursuant to the deed of sale, that the findings of the RTC to the effect that the
conditions for the exercise of the right to repurchase had been adequately satisfied
by Eduardo, and that no novation as claimed by Roberto had intervened.
ISSUES: Did the CA err in holding that there was no novation of the deed of sale
with assumption of mortgage when the parties executed a MOA for the sale of the
subject house and lot and, thereafter sold the said property to third persons;
HELD:
A sale with right to repurchase is governed by Article 1601 of the Civil Code,
which provides that: "Conventional redemption shall take place when the vendor
reserves the right to repurchase the thing sold, with the obligation to comply with
the provisions of Article 1616 and other stipulations which may have been agreed
upon." Conformably with Article 1616, 14 the seller given the right to repurchase
may exercise his right of redemption by paying the buyer: (a) the price of the sale,
(b) the expenses of the contract, (c) legitimate payments made by reason of the
sale, and (d) the necessary and useful expenses made on the thing sold.
The deed of sale entered into by Eduardo and Roberto contained the following
stipulation on the right to repurchase, to wit:
x x x the Vendors are given the right to repurchase the aforesaid described real
property, together with the improvements thereon, and the two (2) motor vehicles,
together with their respective trailers from the Vendee within a period of three (3)
years from the execution of this document on the purchase price agreed upon by
the parties after considering the amount previously paid to the Vendors in the
amount of TWO MILLION PESOS (P2,000,000.00), Philippine Currency, with an
interest of twelve percent (12%) per annum and the amount paid with the
Development Bank of the Philippines with an interest of twelve percent (12%) per
annum.15

FACTS:
Respondent (Eduardo) initiated this replevin suit against Roberto his first cousin
and former business partner, to recover the possession of one unit of International
Truck Tractor and Mi-Bed Trailer.
Eduardo and his brother (Edwin), acting on their own and in behalf of their co-heirs,
sold their inherited properties to Roberto, specifically: (a) a parcel of land with an
area of 1,231 square meters, together with all the improvements existing thereon,
located in Baguio City and covered by TCT and (b) two units International CO 9670
Truck Tractor with two Mi-Bed Trailers.3 A deed of sale with assumption of mortgage
(deed of sale)4 embodied the terms of their agreement, stipulating that the
consideration for the sale wasP6M of which P2M was to be paid to Eduardo and
Edwin, and the remaining P4M to be paid to (DBP) in Baguio City to settle the
outstanding obligation secured by a mortgage on such properties. The parties
further agreed to give Eduardo and Edwin the right to repurchase the properties
within a period of three years from the execution of the deed of sale based on the
purchase price agreed upon, plus 12% interest per annum.
Roberto and Edwin executed a (MOA) 5 with (Spouses Go), by which they agreed to
sell the Baguio City lot to the latter for a consideration of P10M. The MOA stipulated
that "in order to save payment of high and multiple taxes considering that the x x
x subject matter of this sale is mortgaged with DBP, Baguio City, and sold [to
Roberto], Edwin will execute the necessary Deed of Absolute Sale in favor of [the

The CA and the RTC both found and held that Eduardo had complied with the
conditions stipulated in the deed of sale and prescribed by Article 1616 of the Civil
Code. Pertinently, the CA stated:
It should be noted that the alleged repurchase was exercised within the stipulated
period of three (3) years from the time the Deed of Sale with Assumption of
Mortgage was executed. The only question now, therefore, which remains to be
resolved is whether or not the conditions set forth in the Deed of Sale with
Assumption of Mortgage, i.e. the tender of the purchase price previously agreed
upon, which is Php2.0 Million, plus 12% interest per annum, and the amount paid
by the defendant to DBP, had been satisfied.
From the testimony of the defendant himself, these preconditions for the exercise
of plaintiff's right to repurchase were adequately satisfied by the latter. Thus, as
stated, from the Php10 Million purchase price which was directly paid to the
defendant, the latter deducted his expenses plus interests and the loan, and the
remaining amount he turned over to the plaintiff. This testimony is an unequivocal
acknowledgement from defendant that plaintiff and his co-heirs exercised their
right to repurchase the property within the agreed period by satisfying all the
conditions stipulated in the Deed of Sale with Assumption of Mortgage. Moreover,
defendant returned to plaintiff the amount of Php2.8 Million from the total
purchase price of Php10.0 Million. This only means that this is the excess amount
pertaining to plaintiff and co-heirs after the defendant deducted the repurchase
price of Php2.0 Million plus interests and his expenses. Add to that is the fact that

10

OBLIGATIONS AND CONTRACTS -2ND EXAM

Kristine Confesor

defendant returned one of the trucks and trailers subject of the Deed of Sale with
Assumption of Mortgage to the plaintiff. This is, at best, a tacit acknowledgement
of the defendant that plaintiff and his co-heirs had in fact exercised their right to
repurchase.16x x x
Considering that the factual findings of the trial court, when affirmed by the CA,
are binding on the Court,17 the Court affirms the judgment of the CA upholding
Eduardos exercise of the right of repurchase. Roberto could no longer assail the
factual findings because his petition for review on certiorari was limited to the
review and determination of questions of law only. A question of law exists when
the doubt centers on what the law is on a certain set of undisputed facts, while a
question of fact exists when the doubt centers on the truth or falsity of the alleged
facts.18 Whether the conditions for the right to repurchase were complied with, or
whether there was a tender of payment, is a question of fact. With both the RTC
and the CA finding and holding that Eduardo had fulfilled the conditions for the
exercise of the right to repurchase, therefore, we conclude that Eduardo had
effectively repurchased the properties subject of the deed of sale.
In Metropolitan Bank and Trust Company v. Tan,19 the Court ruled that a
redemption within the period allowed by law is not a matter of intent but of
payment or valid tender of the full redemption price within the period. Verily, the
tender of payment is the sellers manifestation of his desire to repurchase the
property with the offer of immediate performance. 20 As we stated in Legaspi v.
Court of Appeals,21 a sincere tender of payment is sufficient to show the exercise of
the right to repurchase. Here, Eduardo paid the repurchase price to Roberto by

depositing the proceeds of the sale of the Baguio City lot in the latters account.
Such payment was an effective exercise of the right to repurchase.
On the other hand, the Court dismisses as devoid of merit Robertos insistence that
the MOA had extinguished the obligations established under the deed of sale by
novation.
With both the RTC and the CA concluding that the MOA was consistent with the
deed of sale, novation whereby the deed of sale was extinguished did not occur. In
that regard, it is worth repeating that the factual findings of the lower courts are
binding on the Court.
In sales with the right to repurchase, the title and ownership of the property
sold are immediately vested in the vendee, subject to the resolutory condition of
repurchase by the vendor within the stipulated period. 23 Accordingly, the ownership
of the affected properties reverted to Eduardo once he complied with the condition
for the repurchase, thereby entitling him to the possession of the other motor
vehicle with trailer.

11