f. Novation

Material Alteration of Principal Contract

Any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract without the consent of the surety, will release the surety from liability.

Such material alteration would constitute a novation or change of the principal contract, which is consequently extinguished. Upon such extinguishments, the accessory contract to guaranty is also terminated and the guarantor cannot be held liable on the new contract to which he has not given his consent.

NOVATION

It is the substitution or change of an obligation by another, resulting in its extinguishment or modification, either by changing the object or principal conditions, or by substituting another in the place of the debtor or by subrogating a third person to the rights of the creditor.

Two-fold functions of novation

• In extinctive novation, the old obligation is extinguished and a new obligation takes its place.
• In modificatory novation, the original obligation remains but is modified.

Kinds of novation

As to essence

• Objective or real novation – Changing the object or principal conditions of the obligation. (NCC, Art. 1291)

NOTE: In payment of sum of money, the first obligation is not novated by a second obligation that:

• Expressly recognizes the first obligation;
• Changes only the terms of payment;
• Adds other obligation not incompatible with the old ones; or
• Merely supplements the first one.
• Subjective or personal novation – Change of the parties.

Substituting the person of the debtor (passive novation) – may be made without the knowledge of or against the will of the latter, but not without the consent of the creditor.

• Delegacion – The substitution is initiated by the old debtor himself (delegante) by convincing another person (delegado) to take his place and to pay his obligation to the creditor. (1996, 2001 Bar)
• Expromission – The substitution of the old debtor by a new debtor is upon the initiative or proposal of a third person. (1996, 2001 Bar)

NOTE: If it is the creditor who initiated the change of debtor, it is considered expromission.

• Mixed – Combination of the objective and subjective novation.

As to form of their constitution

• Express – The parties declared in unequivocal terms that the obligation is extinguished by the new obligation.
• Implied – No express declaration that the old obligation is extinguished by the new one. The old and new obligations are incompatible with each other on every point. (NCC, Art. 1292)

As to extent of their effects

• Total or extinctive – The original obligation is extinguished.

NOTE: Four requisites of extinctive novation:

• A previous valid obligation;
• An agreement of all parties concerned to a new contract;
• The extinguishment of the old obligation; and
• The birth of a valid new obligation. (Iloilo Traders Finance, Inc., v. Heirs of Soriano, G.R. No. 149683, June 16, 2003)

The extinctive novation would thus have the twin effects of first, extinguishing an existing obligation and second, creating a new one in its stead.

• Partial or modificatory – Original obligation is not extinguished but merely modified.

As to subrogation

• Legal subrogation – Arises in the cases specified by law. (NCC, Art. 1300 & 1302)
• Conventional subrogation – Requires the consent of the original parties and the third person. (NCC, Arts. 1300-1301)

As to presence or absence of condition

• Pure – New obligation is not subject to a condition.
• Conditional – When the creation of the new obligation is subject to a condition.

Effects of novation

• Extinguishment of principal also extinguishes the accessory, except:
• Mortgagor, pledgor, surety or guarantor agrees to be bound by the new obligation (Tolentino, 1999); or
• Stipulation made in favor of a third person such as stipulation pour autrui (NCC, Art. 1311) unless beneficiary consents to the novation. (NCC, Art. 1296)
• If old obligation is:
• Void – Novation is void. (NCC, Art. 1298)
• Voidable – Novation is valid provided that the annulment may be claimed only by the debtor or when ratification validates acts. (NCC, Art. 1298)
• If the old obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. (NCC, Art. 1299)
• If old obligation is conditional and the new obligation is pure:
• If resolutory and it occurred – Old obligation already extinguished; no new obligation since nothing to novate.
• If suspensive and it did not occur – It is as if there is no obligation; thus, there is nothing to novate.
• If the new obligation is:
• Void – Original one shall subsist, unless the parties intended that the former relation should be extinguished in any event. (NCC, Art. 1297)
• Voidable – Novation can take place, except when such new obligation is annulled. In such case, old obligation shall subsist.
• Pure obligation – Conditions of old obligation deemed attached to the new, unless otherwise stipulated. (Tolentino, 1999)
• Conditional Obligation:
• If resolutory – Valid until the happening of the condition. (NCC, Art. 1181)
• If suspensive and did not materialize – No novation, old obligation is enforced. (NCC, Art. 1181)

NOTE: Novation does not extinguish criminal liability. (PNB v. Soriano, G.R. No. 164051, October 3, 2012)

Q: Will a contract of suretyship, which is secondary to a principal obligation, be extinguished when novation occurs?

A: IT DEPENDS. A surety is released from its obligation when there is a material alteration of the principal contract in connection with which the bond is given, such as a change which imposes a new obligation on the promising party, or which takes away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form. (Philippine Charter Insurance Corporation v. Petroleum Distributors & Service Corporation, G.R. No. 180898, April 18, 2012)

Furthermore, a surety is not released by a change in the contract, which does not have the effect of making its obligation more onerous. (Stronghold Insurance Company, Inc. v. Tokyu Construction Company, G.R. Nos. 158820-21, June 5, 2009) An obligation is extinguished by novation when the parties unequivocally declare that result or when the old and new obligations are incompatible on every point. (NCC, Art. 1292) Whether a change releases a surety is a separate question.