i. Express and Implied Novation

Requisites of novation (OIC –SN)

• Valid Old obligation;

XPNs:

• When the annulment may be claimed only by the debtor and he consented to the novation; and
• When ratification validates acts which are voidable.
• Intent to extinguish or to modify the old obligation;
• Capacity and consent of all the parties to the new obligation (except in case of expromission where the old debtor does not participate);
• An unequivocal declaration of novation or, for implied novation, old and new obligations that are on every point incompatible with each other; and
• Valid New obligation.

NOTE: Subsequent Void Obligation – A subsequent void obligation intended to novate an old one has no legal effect and is considered as if the parties have not agreed upon it in the first place. The original obligation shall subsist.

HOWEVER, if in coming up with the new but void obligations, parties agree that it shall in any event extinguish the old obligation, such old obligation will not be revived. (NCC, Art. 1297)

Presumption of novation

Novation is never presumed; it must be proven as a fact either by:

• Explicit declaration – If it be so declared in unequivocal terms; or
• Material incompatibility – That the old and the new obligations be on every point incompatible with each other. (NCC, Art. 1292)

Express novation

Takes place only when the parties unequivocally declare their intent to novate the obligation.

Implied novation

It is imperative that the old and new obligations must be incompatible with each other. The test of incompatibility between the old and the new obligations is to determine whether or not both of them can stand together, each having its own independence. If they can stand together, there is no incompatibility; consequently, there is no novation. If they cannot stand together, there is incompatibility; consequently, there is novation. (Borja v. Mariano, G.R. No. L-44041, October 28, 1938)

NOTE: Novation is never presumed and the animus novandi (intent to make a new obligation) 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.

Novation by substitution of debtor

The consent of the creditor is mandatory both in delegacion and expromission. (NCC, Art. 1293) It may be expressed or implied from his acts but not from his mere acceptance of payment by a third party, for there is no true transfer of debt.

NOTE: Creditor’s consent or acceptance of the substitution of the old debtor by a new one may be given at any time and in any form while the agreement of the debtor subsists. (Asia Banking Corp. v. Elser, G.R. No. L-30266, March 25, 1929)

Requisites of delegacion

• Substitution is upon the initiative or proposal of the old debtor himself by proposing to the creditor the entry of another (third person) as the new debtor who will replace him in payment of the obligation;
• The creditor accepts and the new debtor agrees to the proposal of the old debtor; and
• The old debtor is released from the obligation with the consent of the creditor.

Insolvency of the new debtor in delegacion

GR: Insolvency of the new debtor (delegado), who has been proposed by the original debtor (delegante) and accepted by the creditor (delegatario), shall not revive the action of the latter against the original obligor. (NCC, Art. 1295)

XPN: The creditor may proceed against the original debtor if, when the debt was delegated, the new debtor’s insolvency already existed and was either publicly known or known to the original debtor. (NCC, Art. 1295)

In both cases, the insolvency must have existed at the time the old debtor delegated his debt.

Requisites of expromission

• Substitution is upon the initiative or proposal of a third person who will step into the shoes of the debtor;
• Creditor must give his consent to the proposal of the third person; and
• Old debtor must be released from the obligation with the consent of the creditor.

Insolvency of the new debtor in expromission

If substitution is without the knowledge or against the will of the debtor, the new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor. (NCC, Art. 1294)

NOTE: In delegación, the new debtor’s insolvency does not revive the creditor’s action against the original debtor, unless the insolvency already existed and was publicly known, or was known to the original debtor, when the debt was delegated. Mere nonperformance or the original debtor’s consent is insufficient. (NCC, Art. 1295)

Q: The Arco and Lim allegedly agreed that Arco would either pay Lim the value of the raw materials or deliver to him their finished products of equivalent value. Lim alleged that when he delivered the raw materials, Arco issued a post-dated check as partial payment. When he deposited the check, however, it was dishonored for being drawn against a closed account. Thereafter, Arco and Sy executed a memorandum of agreement where Arco bound themselves to deliver their finished products to Megapack Container Corporation owned by Sy. According to the memorandum, the raw materials would be supplied by Lim. Was the obligation between Arco and Lim novated because of the agreement entered into by Arco and Sy?

A: NO. Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed and may be implied only if the old and new contracts are incompatible on every point. In this case, Lim was not privy to the memorandum of agreement; thus, it could not substitute Sy as his new debtor without Lim’s conformity. If the memorandum of agreement was intended to novate the original agreement between the parties, Lim must have first agreed to the substitution of Sy as his new debtor. The memorandum of agreement must also state in clear and unequivocal terms that it has replaced the original obligation of petitioner Arco to Lim. Neither of these circumstances is present in this case. Since there was no novation, petitioner Arco’s obligation to respondent remains valid and existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount. (Arco Pulp and Paper Co., Inc. And Candida A. Santos v. Dan T. Lim, Doing Business Under The Name and Style Of Quality Papers & Plastic Products Enterprises, G.R. NO. 206806, June 25, 2014)

Q: DBP guaranteed Galleon’s foreign loans. In return, Galleon undertook to secure a first mortgage on its five new vessels and two second-hand vessels. Pursuant to Letter of Instructions No. 1155, Galleon's stockholders and NDC entered into a Memorandum of Agreement, where NDC and Galleon undertook to prepare and sign a share purchase agreement covering 100% of Galleon's equity for P46,740,755.00. The share purchase agreement also provided for the release of Sta. Ines, Cuenca, Tinio and Construction Development Corporation of the Philippines from the personal counterguarantees they issued in DBP's favor under the Deed of Undertaking. Sta. Ines, Cuenca, Tinio, Cuenca Investment, and Universal Holdings claimed that DBP can no longer go after them for any deficiency judgment since NDC had been subrogated in their place as borrowers, hence the Deed of Undertaking between Sta. Ines, Cuenca Investment, Universal Holdings, Cuenca, and Tinio and DBP had been extinguished and novated." Did the Memorandum of Agreement novate the Deed of Undertaking executed between DBP and Sta. Ines, Cuenca Investment, Universal Holdings, Cuenca, and Tinio?

A: NO. It should be noted that in order to give novation its legal effect, the law requires that the creditor should consent to the substitution of a new debtor. The general rule is that, “in the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the corporation.” Aside from Ongpin being the concurrent head of DBP and NDC at the time the Memorandum of Agreement was executed, there was no proof presented that Ongpin was duly authorized by the DBP to give consent to the substitution by NDC as a co-guarantor of Galleon’s debts. Ongpin is not DBP, therefore, it is wrong to assume that DBP impliedly gave its consent to the substitution simply by virtue of the personality of its Governor. Novation is never presumed. The animus novandi, whether partial or total, “must appear by express agreement of the parties, or by their acts which are too clear and unequivocal to be mistaken.” There was no such animus novandi in the case at bar between DBP and respondents, thus, respondents have not been discharged as Galleon’s co-guarantors under the Deed of Undertaking and they remain liable to DBP. (Development Bank of the Philippines vs. Sta. Ines Melale Forest Products Corp., G.R. No. 193068, February 1, 2017)

SUMMARY

Q: Metro Corporation obtained a loan from Allied Bank covered by promissory notes, letters of credit, and trust receipts. By way of security, Metro’s officers individually executed a continuing guaranty in favor of Allied Bank. Metro’s officers failed to settle their obligations prompting Allied Bank to demand for payment to no avail. In order to settle their debts, they offered the sale of Metro’s remaining assets (machines and equipment) to the Bank which the latter refused. Meanwhile, Starpeak Corporation, acting through Allied Bank’s counsel, entered into an agreement with Metro to buy the machines that were reduced to mere scraps of metals. Starpeak, unfortunately, reneged on its obligation to Metro. In this regard, Metro asseverates that their failure to pay their outstanding loan obligations to Allied Bank must be considered as force majeure, and since Allied Bank was the party, through their counsel, that accepted the terms and conditions of payment proposed by Starpeak, petitioners must therefore be deemed to have settled their obligations to Allied Bank. Were the loan obligations under the promissory notes, letters of credit, and trust receipts already extinguished?

A: NO. Article 1231 of the New Civil Code states that obligations are extinguished either by payment or performance, the loss of the thing due, the condonation or remission of the debt, the confusion or merger of the rights of creditor and debtor, compensation or novation. Starpeak and Metro’s agreement is a sale of assets contract, while Metro’s obligations to Allied Bank arose from various loan transactions. Absent any showing that the terms and conditions of the latter transactions have been, in any way, modified or novated by the terms and conditions in the Starpeak-Metro agreement, said contracts should be treated separately and distinctly from each other, such that the existence, performance or breach of one would not depend on the existence, performance or breach of the other. The performance or breach of the agreement bears no relation to the performance or breach of the subject loan transactions, they being separate and distinct sources of obligations. Metro’s loan obligations to Allied Bank remain subsisting for the basic reason that the former has not been able to prove that the same had already been paid or, in any way, extinguished. (Metro Concast Steel Corporation, Spouses Jose S. Dychiao And Tiuoh Yan, Spouses Guillermo And Mercedes Dychiao, And Spouses Vicente And Filomena Dychiao vs. Allied Bank Corporation, G.R. No. 177921, December 4, 2013)

Q: SDIC issued to Danilo a Diners Card (credit card) with Jeannete as his surety. Danilo used this card and initially paid his obligations to SDIC. Thereafter, Danilo wrote SDIC a letter requesting it to upgrade his Regular Diners Club Card to a Diamond (Edition) one. As a requirement of SDIC, Danilo secured from Jeanette her approval and the latter obliged. Danilo's request was granted and he was issued a Diamond (Edition) Diners Club Card. Danilo had incurred credit charged plus appropriate interest and service charge. However, he defaulted in the payment of this obligation. Was the upgrading a novation of the original agreement governing the use of Danilo Alto's first credit card, as to extinguish that obligation?

A: YES. Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit declaration, or by material incompatibility. There is no doubt that the upgrading was a novation of the original agreement covering the first credit card issued to Danilo Alto, basically since it was committed with the intent of cancelling and replacing the said card. However, the novation did not serve to release Jeanette from her surety obligations because in the surety undertaking she expressly waived discharge in case of change or novation in the agreement governing the use of the first credit card. (Molino v. Security Diners International Corp., G.R. No. 136780, August 16, 2001)

Q: J.C. Construction bought steel bars from Matibay Steel Industries (MSI) which is owned by Buddy Batungbacal. J.C. failed to pay the purchased materials worth P500,000 on due date. J.C. persuaded its client Amoroso with whom it had receivables to pay its obligation to MSI. Amoroso agreed and paid MSI the amount of P50,000. After 2 other payments, Amoroso stopped making further payments.

Buddy filed a complaint for collection of the balance of the obligation and damages against J.C. J.C. denied any liability claiming that its obligation was extinguished by reason of novation which took place when MSI accepted partial payments from Amoroso on its behalf. Was the obligation of JC to MSI extinguished by novation? Why? (2014 Bar)

A: NO. Under Art. 1292 of the NCC, in order that an obligation may be extinguished by another which substitute 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 be incompatible with each other. Novation by substitution of the debtor requires the consent of the creditor as provided in Art. 1293. This requirement is not present in this case.

It was ruled that the mere fact that the creditor received payment from a third person does not constitute novation and does not extinguish the obligation of the original debtor. Thus, the obligation of JC to MSI subsists. (Magdalena Estates Inc., v. Rodriguez, G.R. No. L-18411, December 17, 1966)

PRACTICE QUESTIONS (part 5 of 5)

Q: Metro Corporation obtained a loan from Allied Bank covered by promissory notes, letters of credit, and trust receipts. By way of security, Metro’s officers individually executed a continuing guaranty in favor of Allied Bank. Metro’s officers failed to settle their obligations prompting Allied Bank to demand for payment to no avail. In order to settle their debts, they offered the sale of Metro’s remaining assets (machines and equipment) to the Bank which the latter refused. Meanwhile, Starpeak Corporation, acting through Allied Bank’s counsel, entered into an agreement with Metro to buy the machines that were reduced to mere scraps of metals. Starpeak, unfortunately, reneged on its obligation to Metro. In this regard, Metro asseverates that their failure to pay their outstanding loan obligations to Allied Bank must be considered as force majeure, and since Allied Bank was the party, through their counsel, that accepted the terms and conditions of payment proposed by Starpeak, petitioners must therefore be deemed to have settled their obligations to Allied Bank. Have the loan obligations under the promissory notes, letters of credit, and trust receipts already been extinguished?

A: NO. Art. 1231 of the NCC states that obligations are extinguished either by payment or performance, the loss of the thing due, the condonation or remission of the debt, the confusion or merger of the rights of creditor and debtor, compensation or novation. Starpeak and Metro’s agreement is a sale of assets contract, while Metro’s obligations to Allied Bank arose from various loan transactions. Absent any showing that the terms and conditions of the latter transactions have been, in any way, modified or novated by the terms and conditions in the Starpeak-Metro agreement, said contracts should be treated separately and distinctly from each other, such that the existence, performance or breach of one would not depend on the existence, performance or breach of the other. The performance or breach of the agreement bears no relation to the performance or breach of the subject loan transactions, they being separate and distinct sources of obligations. Metro’s loan obligations to Allied Bank remain subsisting for the basic reason that the former has not been able to prove that the same had already been paid or, in any way, extinguished. (Metro Concast Steel Corporation, Sps. Dychiao v. Allied Bank Corporation, G.R. No. 177921, 04 Dec. 2013)

Q: SDIC issued to Danilo a Diners Card (credit card) with Jeannete as his surety. Danilo used this card and initially paid his obligations to SDIC. Thereafter, Danilo wrote SDIC a letter requesting it to upgrade his Regular Diners Club Card to a Diamond (Edition) one. As a requirement of SDIC, Danilo secured from Jeanette her approval and the latter obliged. Danilo's request was granted and he was issued a Diamond (Edition) Diners Club Card. Danilo had incurred credit charges plus appropriate interest and service charge. However, he defaulted in the payment of this obligation. Was the upgrading a novation of the original agreement governing the use of Danilo Alto's first credit card, as to extinguish that obligation?

A: YES. Under Art. 1292 of the NCC, an obligation is extinguished by a substitute obligation only if the parties declare that intent in unequivocal terms or the old and new obligations are incompatible on every point. Novation is never presumed. Upgrading the card does not, by itself, establish that the original obligation was extinguished; no express agreement or incompatibility extinguishing it is established by the upgrade alone. Jeanette’s approval of the upgrade did not release her from her surety undertaking. (Molino v. Security Diners International Corp., G.R. No. 136780, 16 Aug. 2001)

Q: J.C. Construction bought steel bars from Matibay Steel Industries (MSI) which is owned by Buddy Batungbacal. J.C. failed to pay the purchased materials worth P500,000 on due date. J.C. persuaded its client Amoroso with whom it had receivables to pay its obligation to MSI. Amoroso agreed and paid MSI the amount of P50,000. After 2 other payments, Amoroso stopped making further payments.

Buddy filed a complaint for collection of the balance of the obligation and damages against J.C. J.C. denied any liability claiming that its obligation was extinguished by reason of novation which took place when MSI accepted partial payments from Amoroso on its behalf. Was the obligation of JC to MSI extinguished by novation? Why? (2014 Bar)

A: NO. Under Art. 1292 of the NCC, in order that an obligation may be extinguished by another which substitute 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 by substitution of the debtor requires the consent of the creditor as provided in Art. 1293. This requirement is not present in this case.

It was ruled that the mere fact that the creditor received payment from a third person does not constitute novation and does not extinguish the obligation of the original debtor. Thus, the obligation of JC to MSI subsists. (Magdalena Estates Inc., v. Rodriguez, G.R. No. L-18411, 17 Dec. 1966)