Art 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit.
CASES:
MILLAR v CA
Millar obtained a favorable judgment ordering respondent Gabriel to pay him a certain sum. A writ of execution was issued and the jeep of respondent Gabriel was seized. The parties entered into an agreement (a chattel mortgage) whereby, to secure the payment of the judgment debt, agreed to mortgage the vehicle in favor of the petitioner. Respondent Gabriel failed to pay. The CA ruled in favor of the respondent on the ground that the subsequent agreement of the parties impliedly novated the judgment obligation.
ISSUE: WON the subsequent agreement of the parties impliedly novated the judgment obligation.
RULING:
• NO. The subsequent agreement of the parties did not novate the judgment obligation by implication.
• Implied novation entails incompatibility of the old and the new obligations.
• The mere reduction of the amount due does not constitute sufficient incompatibility, especially in the light of the explanation of the petitioner that the reduced indebtedness was result of the partial payments made by the respondent before the execution of the subsequent agreement.
• The stipulation for the payment of the obligation under the terms of the chattel mortgage serves only to provide an express and specific method for its extinguishment, which is payment in two equal installments. The chattel mortgage simply gave a method and more time to enable him to fully satisfy the judgment indebtedness.
• The chattel mortgage agreement in no manner introduced any substantial modification or alteration of the judgment.
• Instead of extinguishing the obligation of the respondent arising from the agreement, the deed of chattel mortgage expressly ratified and confirmed the existence of the same.
Doctrine:
• Only those essential and principal changes introduced by the new obligation producing an alteration or modification of the essence of the old obligation result in implied novation.
• When the new obligation merely reiterates or ratifies the old obligation, such does not effectuate any substantial incompatibility between the two obligations.
DORMITORIO v FERNANDEZ
The case involves two decisions rendered by the respondent Judge Fernandez. In dispute is a certain lot bought by Lazalita from the Municipality of Victorias. Lazalita had been in continuous possession of the lot and had introduced valuable improvements therein. It turned out that the lot bought by Lazalita was converted into a municipal road and that the lot in his possession is actually the lot bought by Dormitorio. The first order issued by Respondent Judge was favorable to Dormitorio. Lazalita appealed and brought an action against the Municipality of Victorias. The parties executed an “Agreed Stipulation of Facts” which provides Lazalita the option to be paid a just amount to acquire another lot or for Victorias to give Lazalita another lot. In his second order, respondent Judge set aside the first order on the basis of the
“Agreed Stipulation of Facts.”
Ruling:
• Court upheld the judgment of the respondent Judge in setting aside his first order in accordance with the Agreed Stipulation of Facts.
• The presence of animus novandi (intent) is undeniable for there is a later decision expressly superseding the earlier one.
• The later decision was the result of a compromise, it had the effect of res judicata. The parties, therefore, were bound by it.
Doctrine:
When, after judgment has become final, facts and circumstances transpire which render its execution impossible or unjust, the interested party may ask the court to modify or alter the judgment to harmonize the same with justice and the facts.
ZAPANTE v DE ROTAECHE
Ramon Echevarria, as legal representative of a commercial firm, commenced an action against Zapanta for the purpose of recovering a sum of money. Judgment was rendered in favor of plaintiff firm. Zapanta and the firm entered into an agreement which contained a provision that “said commercial firm shall be at liberty to enter suit against him” with reference to the judgment.
By virtue of the agreement, Zapanta continued to make payments but left a certain amount of balance. For failure of Zapanta to comply with the provisions of the agreement, the defendant sued for the purpose of recovering the balance. A writ of execution was issued. The sheriff attached and sold practically all the property which the plaintiff had.
Issue: WON the provision of the agreement “said commercial firm shall be at liberty to enter suit against him,” had the effect of extinguishing the rights of the defendant which resulted from the judgment rendered against him.
Ruling:
• The agreement does not expressly extinguish the obligations existing in said judgment. On the contrary, it expressly recognizes the obligations existing between the parties in said judgment and expressly provides a method by which the same shall be extinguished.
• The contract, instead of containing provisions “absolutely incompatible” with the obligations of the judgment, expressly ratifies such obligations and contains provisions for satisfying them.
• Court ruled in favor of defendant. When the plaintiff failed to comply with the conditions of said contract, the defendant had a right to resort to the methods provided by law for the satisfaction of the obligations created by the judgment.
Doctrine:
• In order that an obligation be extinguished by novation, the law requires that the novation or extinguishment shall be expressly declared or that the old and new obligations shall be absolutely incompatible.
TAN SIUCO v HABANA
The plaintiff Tan Siuco entered into a written contract with defendant Habana for the construction of a certain building. At different times during the construction, modifications, alterations and changes were requested by the defendant. Before any change was made, the question of plaintiff’s compensation was mentioned and that in referring to such changes, the defendant said “pase cuenta” (bring in your bill). After the construction, the plaintiff seeks to recover an amount over and above the agreed original amount. The trial court ruled in favor of the plaintiff on the ground that, in legal effect, the written contract was annulled and set aside by the action and conduct of the parties. That the whole combined actions and conduct of the parties amounted to a novation. For such reason, plaintiff is entitled to recover on a quantum meruit.
Issue: WON the actions and conduct of the parties had novated the written agreement entered by them
Ruling:
• The law states that there must be an express intention to novate – animus novandi. A novation is never presumed.
• When the defendant said “pase cuenta” (bring in your bill), the court reasoned that defendant intended that plaintiff should bring in his bill for the reasonable value of any alterations and changes which were made at his request.
• There is no claim or pretense that anything was said by either party about terminating or rescinding the contract.
The statement “bring in your bill” was never intended to apply to the original contract and should be confined and
limited to a bill for the amount of any changes, alterations, or modifications made at defendant’s request.
• Thus, plaintiff was never released from the original contract. He was entitled to recover upon a quantum meruit, and as to what was the reasonable value of the building as it was constructed.
Doctrine:
• The intention of the parties to novate must be very clear and expressed.
GUERRERO v CA
Jose Robles borrowed a sum of money from Chan Too, to ensure payment of which the Alto Surety and Insurance Co. executed a bond, whereby it bound itself jointly and severally with Robles for the payment of the loan to Chan Too. In consideration of the issuance of the bond, Robles, Vicente Legarda and herein petitioner Guerrero executed an “Agreement of Counter-Guaranty with Mortgage and Pledge,” undertaking jointly and severally to indemnify ALTO for any damage, loss, payments. The agreement contains a provision which states: “indemnities will be paid to the surety company as soon as demand is received from the creditor or as soon as it becomes liable to make payment xxx.” Robles failed to pay his indebtedness to Chan Too. Judgment was rendered by the lower court against Robles and ALTO on the basis of a compromise agreement executed by the parties. This case is instituted by ALTO against petitioner Guerrero on the basis of the
“Agreement of Counter-Guaranty with Mortgage and Pledge.”
Issue: WON the petitioner was released from his obligation under the counter-guaranty agreement by virtue of novation.
Ruling:
• NO, the petitioner was not released under his obligation by virtue of the counter-guaranty agreement.
• A perusal of the terms of the counter-guaranty agreement reveals that it is one of indemnity.
• Based on the terms of said agreement, the liability of the petitioner has likewise matured upon demand. The release of his obligation by virtue of novation must be proved by clear and convincing evidence.
• In the absence of an express release, nothing less than a showing of complete incompatibility between the two
obligations – “agreement of counter-guaranty” and the compromise agreement – would justify a finding of novation by implication.
• No such incompatibility exists in this case between the two obligations that would sustain the defense of novation.
GARCIA JR. v CA
Western Minolco Corporation (WMC) obtained from Philippine Investments Systems Organization (PISO) two loans. Garcia and Kahn executed a surety agreement binding themselves jointly and severally for the payment of the loan. Upon failure of WMC to pay after repeated demands, demand was made on Garcia pursuant to the surety agreement. Garcia likewise failed to pay. Lasal Development Corporation (to which the credit had been assigned by PISO) sued Garcia for the recovery of the debt.
RULING:
• The Court did not sustain the claim of petitioner that the various communications made by WMC with DBP, together with the memorandum of agreement, are sufficient to establish the new obligation made by WMC with all its creditors.
• While it is true that, as a general rule, no form of words or writing is necessary to give effect to a novation.
Nevertheless, since the parties involved are corporations, it must first be proved that that the contracts were executed by authorized persons. This point was not sufficiently proven. Thus, such communications cannot be considered to give rise to a valid new obligation.
DOCTRINE:
• Novation requires the validity of a new obligation.
• A valid new obligation is an essential requisite for the novation of a previous valid obligation.
• In the case of juridical persons particularly a corporation, a valid obligation must be given effect through persons with authority to enter into contract/agreement in behalf of the corporation.
LIGUTAN v CA
Petitioners Ligutan obtained a loan from respondent Security Bank and Trust Company. The obligation matured and petitioners failed to pay. Despite demands, petitioners still defaulted on their obligation. The bank filed a complaint for recovery of the due amount. During the pendency of the case, petitioners executed a real estate mortgage to secure the existing indebtedness of petitioners with the bank.
ISSUE: WON the subsequent execution of the real estate mortgage as security for the existing loan would have resulted in the extinguishment of the original contract because of novation.
RULING:
• The subsequent execution of the real estate mortgage did not result in the extinguishment of the original contract.
• Petitioners acknowledge that the real estate mortgage contract does not contain any express stipulation by the parties intending it to supersede the existing loan agreement between the petitioners and the bank.
Respondent bank has correctly postulated that the mortgage is but an accessory contract to secure the loan.
Doctrine:
An obligation to pay a sum of money is not extinctively novated by a new instrument which merely changes the terms of payment or adding compatible covenants or where the old contract is merely supplemented by the new one.
Additional information from the case
• Extinctive novation requires:
1. a previous valid obligation
1. the agreement of all parties to the new contract 2. the extinguishment of the obligation
3. validity of the new obligation
• 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 obligation be on every point incompatible with each other.
• The incompatibility should take place in any of the essential elements of the obligation:
1. the juridical relation or tie
• Ex: from a mere commodatum to a lease of things 1. the object or principal condition
• Ex: change of the nature of the prestation 1. the subjects
• Ex: substitution of the debtor or the subrogation of the creditor
• Extinctive novation does not necessarily imply that the new agreement should be complete by itself; certain terms and conditions may be carried, expressly or by implication, over to the new obligation.
BROADWAY CENTRUM v TROPICAL FOOD
Petitioner Broadway Centrum and private respondent Tropical Hut executed a contract of lease. Tropical Hut was experiencing low sales volume and was proposing for a reduction in rentals.
Broadway, recognizing that the low sales volume was the result of the temporary closure of a major thoroughfare, executed a
“provisional and temporary” agreement with Broadway which temporarily reduced the rentals of Tropical conditioned upon good faith implementation by Tropical of the six principal suggestions of Broadway to improve operations of Tropical. Months after, Broadway informed Tropical that rental will be increased gradually.
Tropical was adamant that it cannot afford any increase in rentals.
Issue: WON the provisional and temporary agreement had novated the contract of lease.
Ruling:
Basis in law
• Novation is the extinguishment of an obligation by the substitution of that obligation with a subsequent one, which terminates it, either by:
• changing its object or principal conditions; or
• by substituting a new debtor in place of the old one; or
• by subrogating a third person to the rights of the creditor.
• Novation through a change of the object or principal conditions of an existing obligation is referred to as an objective (or real) novation.
• If objective novation is to take place, it is essential that the new obligation expressly declare that the old obligation is to be extinguished or that the new obligation be on every point incompatible with the old one.
• The rule that novation is never presumed is not to be avoided by merely referring to partial novation. The will to novate, whether totally or partially, must appear by express agreement of the parties, by their acts which are too clear and unequivocal to be mistaken.
Applying the law to the case
• The provisional and temporary agreement did not extinguish or alter the obligations of Tropical and the rights of Broadway under the lease contract.
1. The agreement was by its own terms a “provisional and temporary agreement” conditioned upon good faith implementation of six suggestions made by Broadway to improve the operations of Tropical. The non-specification by Broadway of the period of time during which the reduced rentals would remain in effect, only meant that Broadway retained for itself the discretionary right to return to the original contractual rates whenever Broadway felt it appropriate to do so.
1. The formal notarized lease contract made it clear that a temporary and provisional reduction of rentals was not to be construed as alteration or waiver of any of the terms of the lease contract itself.
2. The course of negotiations between Broadway and Tropical before the execution of the provisional and temporary agreement clearly indicated that what they were negotiating was a temporary and provisional reduction of rentals.
3. The agreement was bereft of any sign of mutual recognition that the reduced rentals had so permanently replaced the contract stipulations on rentals.
• Only evidence of the clearest and most explicit kind will suffice for the purpose of novation.
OTHER CAUSES