Cases for Novation Until Prescription

8/19/2019 Cases for Novation Until Prescription

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CASES FOR NOVATION ESTOPELL

TRUST AND PRESCRIPTION

2016

NOVATION

Art. 1291. Obligations may be modifi ed by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the right of the creditor.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 145872 February 4, 2002

GLORIA OCAMPO-PAULE, petitioner,vs.HONORABLE COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.

D E C I S I O N

KAPUNAN, J.:

This is a petition for review of the Decision dated October 26, 2000 of the Court of

Appeals in CA-G.R. CR No. 224371

affirming petitioner Gloria Ocampo-Paule’s convictionfor the crime of estafa by the Regional Trial Court of Guagua, Pampanga, Branch 49.

During the period August, 1991 to April, 1993, petitioner received from privatecomplainant Felicitas M. Calilung several pieces of jewelry with a total value of Onehundred Sixty Three Thousand One hundred Sixty Seven Pesos and Ninety Five Centavos(P163,167.95). The agreement between private complainant and petitioner was that thelatter would sell the same and thereafter turn over and account for the proceeds of thesale, or otherwise return to private complainant the unsold pieces of jewelry within twomonths from receipt thereof. Since private complainant and petitioner are relatives, theformer no longer required petitioner to issue a receipt acknowledging her receipt of the

jewelry.

When petitioner failed to remit the proceeds of the sale of the jewelry or to return theunsold pieces to private complainant, the latter sent petitioner a demand letter.Notwithstanding receipt of the demand letter, petitioner failed to turn over the proceedsof the sale or to return the unsold pieces of jewelry. Private complainant wasconstrained to refer the matter to the barangay captain of Sta. Monica, Lubao,Pampanga.

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During the barangay conciliation proceedings, petitioner acknowledge having receivedfrom private complainant several pieces of jewelry worth P163,167.95. Both partieseventually executed an agreement entitled "Kasunduan sa Bayaran," whereby petitionerpromised to pay private complainant P3,000.00 every month to answer for the jewelry

which she received from the latter.

When petitioner failed to comply with the terms of the Kasunduan sa Bayaran , privatecomplainant sent her another demand letter dated March 9, 1994 but she still failed tocomply with her obligation.

Private complainant then filed a criminal complaint against petitioner in the Office ofthe Provincial Prosecutor. The Provincial Prosecutor recommended the filing of acriminal case against petitioner. Consequently, an information charging petitioner withestafa was filed in the Regional Trial Court of Guagua, Pampanga. The informationstated:

That in or about the period comprised from August 1991 to April 1993, in theMunicipality of Lubao, province of Pampanga, Philippines and within the jurisdiction ofthis honorable Court, the above-named accused GLORIA OCAMPO-PAULE received fromFelicita[s] M. Calilung various pieces of jewelry with a total value of ONE HUNDREDSIXTY FIVE (sic) THOUSAND THREE HUNDRED FORTY SEVEN (P163,347.00) PESOS,Philippine Currency for purposes of selling the same under the express obligation ofturning over and accounting for the proceeds of said jewelry if not sold, to the saidFelicita[s] U. Calilung within two (2) months from receipt hereof, once in possession ofthe said jewelry and far from complying with her obligation aforesaid, the said accused,did then and there willfully, unlawfully and feloniously, misappropriate, misapply andconvert the said amount to her own personal use and benefit to the damage andprejudice of said complainant in the total sum of P163,347.00, Philippine currency.

All contrary to law.2

Petitioner pleaded Not Guilty to the charge. After trial, the lower court rendered aDecision on August 17, 1998 finding petitioner guilty of estafa.

Petitioner appealed the lower court’s decision to the Court of Appeals, but the latterdismissed the appeal for lack of merit in its Decision dated October 26, 2000.3 Thedispositive portion thereof reads:

WHEREFORE, premises considered, the instant appeal is hereby DISMISSED and the

assailed decision is hereby AFFIRMED in toto.

SO ORDERED.4

Hence, the instant petition.

Petitioner contends that the appellate court erred in finding that petitioner hadconverted or misappropriated the proceeds of the sale of the jewelry, since the personsto whom she delivered the pieces of jewelry had not yet paid for the same. Petitioner

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insists that not having received the payment for said pieces of jewelry, she had nothingto misappropriate.5

Petitioner further argues that the Kasunduan executed by her and private complainant,

which stipulate that she was to pay for the pieces of jewelry received by her in monthlyinstallments of P3,000.00 resulted in the novation of her obligation and extinguishedher criminal liability.6

In his Comment, the Solicitor General argues that during the trial of the criminal casefor estafa, it was established beyond reasonable doubt that petitioner had committedthe crime charged, and that her criminal liability was not extinguished by the executionof the Kasunduan sa Bayaran . It is further contended that the petition raises questionsof fact which may not be reviewed in a petition for review on certiorari.7

There is no merit in petitioner’s arguments.

Art. 315, paragraph 1(b) of the Revised Penal Code provides:

Art. 315. Swindling. (estafa). —any person who shall defraud another by any of themeans mentioned herein below shall be punished by:

xxx

1. With unfaithfulness or abuse of confidence, namely:

(b) By misappropriating or converting, to the prejudice of another, money, goods, or anyother personal property received by the offender in trust or on commission, or for

administration, or under any other obligation involving the duty to make delivery of orreturn the same, even though such obligation be totally or partially guaranteed by abond; or by denying having received such money goods or other property.

The elements of estafa with abuse of confidence under this paragraph are: (1) thatmoney, goods or other personal property be received by the offender in trust, or oncommission, or for administration, or under any other obligation involving the duty tomake delivery of, or to return the same; (2) that there be misappropriation orconversion of such money or property of the offender; or denial on his part of suchreceipt; (3) that such misappropriation or conversion or denial to the prejudice ofanother; and (4) that there is a demand made by the offended party to the offender.8

Both the trial court and the Court of Appeals found that all the elements of estafa under Article 315, paragraph 1(b) are present in this case. In its Decision, the appellate courtaffirmed the finding of the trial court stating that:

These elements were amply and clearly established in this case, First, accused receivedthe jewelry for the purpose of selling the same under an express obligation to remit tocomplainant the proceeds thereof or to return those she is unable to sell therebycreating a fiduciary relationship between the[m]. Second, accused misappropriated the

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jewelry as shown by the fact that she failed to return the same or the proceeds thereofdespite demand and Third, the misappropriation prejudiced the private complainant.9

The rule is that factual findings of the Court of Appeals are conclusive on the parties on

and this Court, and carry even more weight when the appellate court affirms the factualfindings of the trial court.10 The Court finds no reason to depart from the foregoing rule,considering that the evidence on record supports the conclusion of both the trial and theappellate courts that petitioner is liable for estafa with abuse of confidence under

Article 315, paragraph 1(b) of the Revised Penal Code.

Likewise untenable is petitioner’s argument that there was a novation of her criminalliability when she and private complainant executed the Kasunduan sa Bayaran . It iswell-settled that the following requisites must be present for novation to take place: (1)a previous valid obligation; (2) agreement of all the parties to the new contract; (3)extinguishment of the old contract; and (4) validity of the new one.11

In Quinto vs. People , 12 the Court had occasion to discuss the concept of novation, asfollows:

Novation, in its broad concept, may either be extinctive or modificatory .1âwphi1 It is extinctivewhen an old obligation is terminated by the creation of a new obligation that takes theplace of the former; it is merely modificatory when the old obligation subsists to theextent it remains compatible with the amendatory agreement. xxx

Novation is never presumed, and the animus novandi , whether totally or partially, mustappear by express agreement of the parties, or by their acts that are too clear andunequivocal to be mistaken.

The extinguishment of the old obligation by the new one is a necessary element ofnovation which may be effected either expressly or impliedly. The term "expressly"means that the contracting parties incontrovertibly disclose that their object inexecuting the new contract is to extinguish the old one. Upon the other hand, nospecific form is required for an implied novation, and all that is prescribed by law wouldbe an incompatibility between the two contracts. While there is really no hard and fastrule to determine what might constitute to be a sufficient change that can bring aboutnovation, the touchstone for contrareity, however, would be an irreconcilableincompatibility between the old and the new obligations.

xxx The test of incompatibility is whether or not the two obligations can stand together,

each one having its independent existence.1âwphi1

If they cannot, they are incompatible andthe latter obligation novates the first. Corollarily, changes that breed incompatibilitymust be essential in nature and not merely accidental. The incompatibility must takeplace in any of the essential elements of the obligation, such as its object, cause orprincipal conditions thereof; otherwise, the change would be merely modificatory innature and insufficient to extinguish the original obligation.13

The execution of the Kasunduan sa Bayaran does not constitute a novation of theoriginal agreement between petitioner and private complainant. Said Kasunduan did not

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change the object or principal conditions of the contract between them. The change inmanner of payment of petitioner’s obligation did not render the Kasunduan incompatiblewith the original agreement, and hence, did not extinguish petitioner’s liability to remitthe proceeds of the sale of the jewelry or to return the same to private complainant. As

this Court held in Velasquez vs. Court of Appeals :14

An obligation to pay a sum of money is not novated, in a new instrument wherein theold is ratified, by changing only the terms of payment and adding other obligations notincompatible with the old one, or wherein the old contract is merely supplemented bythe new one.15

In any case, novation is not one of the grounds prescribed by the Revised Penal Code forthe guishment of criminal liability.16

WHEREFORE, the petition is hereby DENIED and the decision of the Court of Appeals inCA-G.R. CR No. 22437 is AFFIRMED.

SO ORDERED.


Manila

THIRD DIVISION

G.R. No. 126712 April 14, 1999

LEONIDA C. QUINTO, petitioner,vs.PEOPLE OF THE PHILIPPINES, respondent.

VITUG, J

Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court isthe decision of the Court of Appeals, promulgated on 27 September 1996, in People of

the Philippines vs . Leonida Quinto y Calayan , docketed CA-G.R. CR No. 16567, which hasaffirmed the decision of Branch 157 of the Regional Trial Court (RTC), National CapitalJudicial Region, Branch 157, Pasig City, finding Leonida Quinto y Calayan guilty beyondreasonable doubt of the crime of Estafa.

Leonida Quinto y Calayan, herein petitioner, was indicted for the crime of estafa under Article 315, paragraph 1(b), of the Revised Penal Code, in an information which read:

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That on or about the 23rd day of March 1977, in the Municipality ofMakati, Metro Manila, Philippines and within the jurisdiction of thisHonorable Court, the above-named accused, received in trust from one

Aurelia Cariaga the following pieces of jewelry, to wit:

One (1) set of marques with briliantitos

valued at P17,500.00

One (1) solo ring (2 karats & 30 points)

valued at P16,000.00

One (1) diamond ring (rosetas)

valued at P 2,500.00

with a total value of P36,000.00 for the purpose of selling the same oncommission basis and with the express obligation on the part of theaccused to turn over the proceeds of sale thereof, or to return the said

jewelries (sic ), if not sold, five (5) days after receipt thereof, but theaccused once in possession of the jewelries (sic ), far from complying withher obligation, with intent of gain, grave abuse of confidence and todefraud said Aurelia Cariaga, did then and there wilfully, unlawfully andfeloniously misappropriate, misapply and convert to her own personal useand benefit the said jewelries (sic ) and/or the proceeds of sale or torecturn the pieces of jewelry, to the damage and prejudice of the said

Aurelia Cariaga in the aforementioned amount of P36,000.00.

Contrary to law. 1

Upon her arraignment on 28 March 1978, petitioner Quinto pleaded not guilty; trial onthe merits thereupon ensued.

According to the prosecution, on or about 23 March 1977, Leonida went to see AureliaCariaga (private complainant) at the latter's residence in Makati. Leonida asked Aureliato allow her have some pieces of jewelry that she could show to prospective buyers.

Aurelia acceded and handed over to Leonida one (1) set of marqueswith briliantitos worth P17,500.00, one (1) solo ring of 2.30 karats worth P16,000.00

and one (1) rosetas ring worth P2,500.00. Leonida signed a receipt (Exhibit "A")therefor, thus:

RECEIPT

Pinatutunayan ko na tinanggap ko kay Gng. Aurelia B. Cariaga (ang) mgaalahas na nakatala sa ibaba, upang aking ipagbili sa pamamagitan ngBIGAY PALA o Commission at Kaliwaan lamang. Ako'y hindi


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pinahihintulutan (na) ipagbili ang mga ito ng Pautang. Pinananagutan kona ang mga alahas na ito ay hindi ko ipagkakaloob o ipagkakatiwala sakanino pa man upang ilagak o maipagbili nila, at ang mga ito ay ako angmagbibili sa ilalim ng aking pangangasiwa at pananagutan sa halagang

nakatala sa ibaba. At aking isasauli ang mga hindi na maipagbili sa loob ng5 days (sic ) araw mula sa petsa nito o sa kahilingan, na nasa mabuti atmalinis na kalagayan katulad ng tanggapin ko sa petsang ito.

MGA URI NG ALAHAS

1 set marques with titos 17,500.

1 solo 2 karats & 30 points 16,000.

1 ring Rosetas brill 2,500.

Makati, March 23, 1977

(Sgd.) 2

When the 5-day period given to her had lapsed, Leonida requested for and wasgranted additional time within which to vend the items. Leonida failed toconclude any sale and, about six (6) months later, Aurelia asked that the piecesof jewelry be returned. She sent to Leonida a demand letter which the latterignored. The inexplicable delay of Leonida in returning the items spurred thefiling of the case for estafa against her.

The defense proffered differently. In its version, the defense sought to prove thatLeonida was engaged in the purchase and sale of jewelry. She was used to buyingpieces of jewelry from a certain Mrs. Antonia Ilagan who later introduced her (Leonida)to Aurelia. Sometime in 1975, the two, Aurelia and Leonida, started to transact businessin pieces of jewelry among which included a solo ring worth P40,000.00 which was soldto Mrs. Camacho who paid P20,000.00 in check and the balance of P20,000.00 ininstallments later paid directly to Aurelia. The last transaction Leonida had with Mrs.Camacho involved a "marques" worth P16,000.00 and a ring valued at P4,000.00. Mrs.Camacho was not able to pay the due amount in full and left a balance of P13,000.00.Leonida brought Mrs. Camacho to Aurelia who agreed to allow Mrs. Camacho to pay thebalance in installments. Leonida was also able to sell for Aurelia a 2-karat diamond ringworth P17,000.00 to Mrs. Concordia Ramos who, unfortunately, was unable to pay the

whole amount. Leonida brought Mrs. Ramos to Aurelia and they talked about the termsof payment. As first payment, Mrs. Ramos gave Leonida a ring valued at P3,000.00. Thenext payment made by her was P5,000.00. Leonida herself then paid P2,000.00.

The RTC, in its 25th January 1993 decision, found Leonida guilty beyond reasonabledoubt of the crime of estafa and sentenced her to suffer the penalty of imprisonment ofseven (7) years and one (1) day of prision mayor as minimum to nine (9) yearsof prision mayor as maximum and to indemnify private complainant in the amount ofP36,000.00.


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Leonida interposed an appeal to the Court of Appeals which affirmed, in its 27thSeptember 1996 decision, the RTC's assailed judgment.

The instant petition before this Court would have it that the agreement between

petitioner and private complainant was effectively novated when the latter consented toreceive payment on installments directly from Mrs. Camacho and Mrs. Ramos.

The petition is bereft of merit.

Novation, in its broad concept, may either be extinctive or modificatory. It is extinctivewhen an old obligation is terminated by the creation of a new obligation that takes theplace of the former; it is merely modificatory when the old obligation subsists to theextent it remains compatible with the amendatory agreement. An extinctive novationresults either by changing the object or principal conditions (objective or real), or bysubstituting the person of the debtor or subrogating a third person in the rights of thecreditor (subjective or personal). 3 Under this mode, novation would have dual functions — one to extinguish an existing obligation, the other to substitute a new one in its place 4 — requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) anagreement of all parties concerned to a new contract; (3) the extinguishment of the oldobligation; and (4) the birth of a valid new obligation. 5

Novation is never presumed, 6 and the animus novandi , whether totally or partially, mustappear by express agreement of the parties, or by their acts that are too clear andunequivocal to be mistaken. 7

The extinguishment of the old obligation by the new one is a necessary element ofnovation which may be effected either expressly or impliedly. 8 The term "expressly"means that the contracting parties incontrovertibly disclose that their object in executing

the new contract is to extinguish the old one. 9 Upon the other hand, no specific form isrequired for an implied novation, 10 and all that is prescribed by law would be anincompatibility between the two contracts. While there is really no hard and fast rule todetermine what might constitute to be a sufficient change that can bring about novation, thetouchstone for contrariety, however, would be an irreconcilable incompatibility between theold and the new obligations. 11

There are two ways which could indicate, in fine, the presence of novation and therebyproduce the effect of extinguishing an obligation by another which substitutes thesame. The first is when novation has been explicitly stated and declared in unequivocalterms. The second is when the old and the new obligations are incompatible on everypoint. The test of incompatibility is whether or not the two obligations can stand

together, each one having its independent existence. If they cannot, they areincompatible and the latter obligation novates the first.12 Corollarily, changes that breedincompatibility must be essential in nature and not merely accidental. The incompatibilitymust take place in any of the essential elements of the obligation, such as its object, causeor principal conditions thereof; otherwise, the change would be merely modificatory innature and insufficient to extinguish the original obligation.

The changes alluded to by petitioner consists only in the manner of payment. There wasreally no substitution of debtors since private complainant merely acquiesced to the


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payment but did not give her consent 13 to enter into a new contract. The appellate courtobserved:

Appellant, however, insists that their agreement was novated when

complainant agreed to be paid directly by the buyers and on installmentbasis. She adds that her liability is merely civil in nature.

We are unimpressed.

It is to remembered that one of the buyers, Concordia Ramos, was notpresented to testify on the alleged aforesaid manner of payment.

The acceptance by complainant of partial payment tendered by the buyer,Leonor Camacho, does not evince the intention of the complainant to havetheir agreement novated. It was simply necessitated by the fact that, atthat time, Camacho had substantial accounts payable to complainant, andbecause of the fact that appellant made herself scarce to complainant.(TSN, April 15, 1981, 31-32) Thus, to obviate the situation wherecomplainant would end up with nothing, she was forced to receive thetender of Camacho. Moreover, it is to be noted that the aforesaid paymentwas for the purchase, not of the jewelry subject of this case, but of someother jewelry subject of a previous transaction. (Ibid . June 8, 1981, 10-11) 14

There are two forms of novation by substituting the person of the debtor, depending onwhose initiative it comes from, to wit: expromision and delegacion . In the former, theinitiative for the change does not come from the debtor and may even be made without

his knowledge. Since a third person would substitute for the original debtor and assumethe obligation, his consent and that of the creditor would be required. In the latter, thedebtor offers, and the creditor accepts, a third person who consents to the substitutionand assumes the obligation, thereby releasing the original debtor from the obligation;here, the intervention and the consent of all parties thereto would perforce benecessary. 15 In either of these two modes of substitution, the consent of the creditor, suchas can be seen, is an indispensable requirement. 16

It is thus easy to see why Cariaga's acceptance of Ramos and Camacho's payment oninstallment basis cannot be construed as a case ofeither expromision or delegacion sufficient to justify the attendance of extinctivenovation. Not too uncommon is when a stranger to a contract agrees to assume an

obligation; and while this may have the effect of adding to the number of persons liable,it does not necessarily imply the extinguishment of the liability of the firstdebtor. 17 Neither would the fact alone that the creditor receives guaranty or acceptspayments from a third person who has agreed to assume the obligation, constitute anextinctive novation absent an agreement that the first debtor shall be released fromresponsibility. 18

Petitioner's reliance on Candida Mariano vs. People 19 is misplaced. The factual milieu inMariano would indicate a clear intention on the part of the parties to release the accused


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from her responsibility as an agent and for her to instead assume the obligation of aguarantor. Unfortunately for petitioner in the case at bar, the factual findings of both thetrial court and the appellate court prove just the opposite which is that there has never beenany animus novandi between or among the parties.

Art. 315 of the Revised Penal Code defines estafa and penalizes any person who shalldefraud another by "misappropriating or converting, to the prejudice of another, money,goods, or any other personal property received by the offender in trust or oncommission, or for administration, or under any other obligation involving the duty tomake delivery of or to return the same, even though such obligation be totally orpartially guaranteed by a bond; or by denying having received such money, goods, orother property. It is axiomatic that the gravemen of the offense is the appropriation orconversion of money or property received to the prejudice of the owner. The terms"convert" and "misappropriate" have been held to connote "an act of using or disposingof another's property as if it were one's own or devoting it to a purpose or use differentfrom that agreed upon." The phrase, "to misappropriate to one's own use" has been said

to include "not only conversion to one's personal advantage, but also every attempt todispose of the property of another without right." 20 Verily, the sale of the pieces of jewelry on installments in contravention of the explicit terms of the authority granted to herin Exhibit "A" (supra ) is deemed to be one of conversion. Thus, neither the theory of "delayin the fulfillment of commission" nor that of novation posed by petitioner, can avoid theincipient criminal liability. In People vs. Nery , 21 this Court held:

It may be observed in this regard that novation is not one of the meansrecognized by the Penal Code whereby criminal liability can beextinguished; hence, the role of novation may only be either to preventthe rise of criminal liability or to cast doubt on the true nature of theoriginal basic transaction, whether or not it was such that its breach would

not give rise to penal responsibility . . .

The criminal liability for estafa already committed is then not affected by thesubsequent novation of contract, for it is a public offense which must beprosecuted and punished by the State in its own conation. 22

Finally, this Court fails to see any reversible error, let alone any grave abuse ofdiscretion, in the appreciation of the evidence by the Court of Appeals which, in fact,hews with those of the trial court. Indeed, under the circumstances, this Court must bedeemed bound by the factual findings of those courts.

Art. 315, 1st paragraph, of the Revised Penal Code, as amended by Presidential Decree

No. 818, provides that the penalty of "prison correccional in its maximum periodto prison mayor in its minimum period, if the amount of the fraud is over 12,000 butdoes not exceed 22,000 pesos, and if such amount exceeds the latter sum, the penaltyprovided in this paragraph shall be imposed in its maximum period, adding one year foreach additional 10,000 pesos; but the total penalty which may be imposed shall notexceed twenty years. In such case, and in connection with the accessory penaltieswhich may be imposed and for the purpose of the other provisions of this Code, thepenalty shall be termed prision mayor or reclusion temporal , as the case may be."


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In the leading case of People vs. Gabres 23 this Court ruled:

Under the Indeterminate Sentence Law, the maximum term of the penaltyshall be "that which, in view of the attending circumstances, could be

properly imposed" under the Revised Penal Code, and the minimum shallbe "within the range of the penalty next lower to that prescribed" for theoffense. The penalty next lower should be based on the penalty prescribedby the Code for the offense, without first considering any modifyingcircumstance attendant to the commission of the crime. The determinationof the minimum penalty is left by law to the sound discretion of the courtand it can be anywhere within the range of the penalty next lower withoutany reference to the periods into which it might be subdivided. Themodifying circumstances are considered only in the imposition of themaximum term of the indeterminate sentence.

The fact that the amounts involved in the instant case exceed P22,000.00should not be considered in the initial determination of the indeterminatepenalty; instead, the matter should be so taken as analogous to modifyingcircumstances in the imposition of the maximum term of the fullindeterminate sentence. This interpretation of the law accords with therule that penal laws should be construed in favor of the accused. Since thepenalty prescribed by law for the estafa charge against accused-appellantis prision correccional maximum to prision mayor minimum, the penaltynext lower would then be prision correccional minimum to medium. Thus,the minimum term of the indeterminate sentence should be anywherewithin six (6) months and one (1) day to four (4) years and two (2)months while the maximum term of the indeterminate sentence should atleast be six (6) years and one (1) day because the amounts involved

exceeded P22,000.00, plus an additional one (1) year for each additionalP10,000.00. 24

The penalty imposed by the trial court, affirmed by the appellate court, shouldaccordingly be modified.

WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED except that theimprisonment term is MODIFIED by now sentencing petitioner to an indeterminatepenalty of from two (2) years, eight (8) months and one (1) day of prisoncorreccional to seven (7) years and one (1) day of prision mayor . The civil liability ofappellant for P36,000.00 in favor of private complainant is maintained. Costs againstpetitioner. 1âwphi1.nêt

SO ORDERED.


Manila

FIRST DIVISION


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G.R. No. 159709 June 27, 2012

HEIRS OF SERVANDO FRANCO, Petitioners,vs.

SPOUSES VERONICA AND DANILO GONZALES, Respondents.

D E C I S I O N

BERSAMIN, J.:

There is novation when there is an irreconcilable incompatibility between the old andthe new obligations. There is no novation in case of only slight modifications; hence, theold obligation prevails.

The petitioners challenge the decision promulgated on March 19, 2003 ,1 whereby the

Court of Appeals (CA) upheld the issuance of a writ of execution by the Regional TrialCourt (RTC), Branch 16, in Malolos, Bulacan.

Antecedents

The Court adopts the following summary of the antecedents rendered by the Court inMedel v. Court of Appeals ,2the case from which this case originated, to wit:

On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando andLeticia) obtained a loan from Veronica R. Gonzales (hereafter Veronica), who wasengaged in the money lending business under the name "Gonzales Credit Enterprises",in the amount of P50,000.00, payable in two months. Veronica gave only the amount

of P47,000.00, to the borrowers, as she retained P3,000.00, as advance interest for onemonth at 6% per month. Servado and Leticia executed a promissory notefor P50,000.00, to evidence the loan, payable on January 7, 1986.

On November 19, 1985, Servando and Leticia obtained from Veronica another loan inthe amount of P90,000.00, payable in two months, at 6% interest per month. Theyexecuted a promissory note to evidence the loan, maturing on January 19, 1986. Theyreceived only P84,000.00, out of the proceeds of the loan.

On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.

On June 11, 1986, Servando and Leticia secured from Veronica still another loan in the

amount of P300,000.00, maturing in one month, secured by a real estate mortgage overa property belonging to Leticia Makalintal Yaptinchay, who issued a special power ofattorney in favor of Leticia Medel, authorizing her to execute the mortgage. Servandoand Leticia executed a promissory note in favor of Veronica to pay the sumof P300,000.00, after a month, or on July 11, 1986. However, only the sumof P275,000.00, was given to them out of the proceeds of the loan.

Like the previous loans, Servando and Medel failed to pay the third loan on maturity.

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On July 23, 1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel,consolidated all their previous unpaid loans totaling P440,000.00, and sought from

Veronica another loan in the amount of P60,000.00, bringing their indebtedness to atotal of P500,000.00, payable on August 23, 1986. They executed a promissory note,

reading as follows:

"Baliwag, Bulacan July 23, 1986

"Maturity Date August 23, 1986

"P500,000.00

"FOR VALUE RECEIVED, I/WE jointly and severally promise to pay to the order of VERONICA R. GONZALES doing business in the business style of GONZALES CREDITENTERPRISES, Filipino, of legal age, married to Danilo G. Gonzales, Jr., of Baliwag

Bulacan, the sum of PESOS ........ FIVE HUNDRED THOUSAND ..... (P500,000.00)PhilippineCurrency with interest thereon at the rate of 5.5PER CENT per month plus 2% service charge per annum from date hereof until fully paid according to the amortization schedulecontained herein. (Underscoring supplied)

"Payment will be made in full at the maturity date.

"Should I/WE fail to pay any amortization or portion hereof when due , all the otherinstallments together with all interest accrued shall immediately be due and payableand I/WE hereby agree to payan additional amount equivalent to one per cent (1%) per month of the amount due and

demandable as penalty charges in the form of liquidated damages until fully paid; andthe furthersum of TWENTY FIVE PER CENT (25%) thereof in full, withoutdeductions as Attorney's Fee whether actually incurred or not, of the total amount dueand demandable, exclusive of costs and judicial or extra judicial expenses.(Underscoring supplied)

"I, WE further agree that in the event the present rate of interest on loan is increased bylaw or the Central Bank of the Philippines, the holder shall have the option to apply andcollect the increased interest charges without notice although the original interest havealready been collected wholly or partially unless the contrary is required by law.

"It is also a special condition of this contract that the parties herein agree that the

amount of peso-obligation under this agreement is based on the present value of peso,and if there be any change in the value thereof, due to extraordinary inflation ordeflation, or any other cause or reason, then the peso-obligation herein contracted shallbe adjusted in accordance with the value of the peso then prevailing at the time of thecomplete fulfillment of obligation.

"Demand and notice of dishonor waived. Holder may accept partial payments and grantrenewals of this note or extension of payments, reserving rights against each and allindorsers and all parties to this note.


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"IN CASE OF JUDICIAL Execution of this obligation, or any part of it, the debtors waiveall his/their rights under the provisions of Section 12, Rule 39, of the Revised Rules ofCourt."

On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00,plus interests and penalties, evidenced by the above-quoted promissory note.

On February 20, 1990, Veronica R. Gonzales, joined by her husband Danilo G. Gonzales,filed with the Regional Trial Court of Bulacan, Branch 16, at Malolos, Bulacan, acomplaint for collection of the full amount of the loan including interests and othercharges.

In his answer to the complaint filed with the trial court on April 5, 1990, defendantServando alleged that he did not obtain any loan from the plaintiffs; that it wasdefendants Leticia and Dr. Rafael Medel who borrowed from the plaintiffs the sumof P500,000.00, and actually received the amount and benefited therefrom; that theloan was secured by a real estate mortgage executed in favor of the plaintiffs, and thathe (Servando Franco) signed the promissory note only as a witness.

In their separate answer filed on April 10,1990, defendants Leticia and Rafael Medelalleged that the loan was the transaction of Leticia Yaptinchay, who executed amortgage in favor of the plaintiffs over a parcel of real estate situated in San Juan,Batangas; that the interest rate is excessive at 5.5% per month with additional servicecharge of 2% per annum, and penalty charge of 1% per month; that the stipulation forattorney's fees of 25% of the amount due is unconscionable, illegal and excessive, andthat substantial payments made were applied to interest, penalties and other charges.

After due trial, the lower court declared that the due execution and genuineness of thefour promissory notes had been duly proved, and ruled that although the Usury Law hadbeen repealed, the interest charged by the plaintiffs on the loans was unconscionableand "revolting to the conscience". Hence, the trial court applied "the provision of theNew [Civil] Code" that the "legal rate of interest for loan or forbearance of money,goods or credit is 12% per annum."

Accordingly, on December 9, 1991, the trial court rendered judgment, the dispositiveportion of which reads as follows:

"WHEREFORE, premises considered, judgment is hereby rendered, as follows:

"1. Ordering the defendants Servando Franco and Leticia Medel, jointly and severally, topay plaintiffs the amount of P47,000.00 plus 12% interest per annum from November 7,1985 and 1% per month as penalty, until the entire amount is paid in full.

"2. Ordering the defendants Servando Franco and Leticia Y. Medel to plaintiffs, jointlyand severally the amount of P84,000.00 with 12% interest per annum and 1% per centper month as penalty from November 19,1985 until the whole amount is fully paid;


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"3. Ordering the defendants to pay the plaintiffs, jointly and severally, the amountof P285,000.00 plus 12% interest per annum and 1% per month as penalty from July11, 1986, until the whole amount is fully paid;

"4. Ordering the defendants to pay plaintiffs, jointly and severally, the amountof P50,000.00 as attorney's fees;

"5. All counterclaims are hereby dismissed.

"With costs against the defendants."

In due time, both plaintiffs and defendants appealed to the Court of Appeals.

In their appeal, plaintiffs-appellants argued that the promissory note, whichconsolidated all the unpaid loans of the defendants, is the law that governs the parties.

They further argued that Circular No. 416 of the Central Bank prescribing the rate ofinterest for loans or forbearance of money, goods or credit at 12% per annum, appliesonly in the absence of a stipulation on interest rate, but not when the parties agreedthereon.

The Court of Appeals sustained the plaintiffs-appellants' contention. It ruled that "theUsury Law having become ‘legally inexistent’ with the promulgation by the Central Bankin 1982 of Circular No. 905, the lender and borrower could agree on any interest thatmay be charged on the loan". The Court of Appeals further held that "the imposition of

‘an additional amount equivalent to 1% per month of the amount due and demandableas penalty charges in the form of liquidated damages until fully paid’ was allowed bylaw".

Accordingly, on March 21, 1997, the Court of Appeals promulgated it decision reversingthat of the Regional Trial Court, disposing as follows:

"WHEREFORE, the appealed judgment is hereby MODIFIED such that defendants arehereby ordered to pay the plaintiffs the sum of P500,000.00, plus 5.5% per monthinterest and 2% service charge per annum effective July 23, 1986, plus 1% per monthof the total amount due and demandable as penalty charges effective August 24, 1986,until the entire amount is fully paid.

"The award to the plaintiffs of P50,000.00 as attorney's fees is affirmed. And so is theimposition of costs against the defendants.

"SO ORDERED."

On April 15, 1997, defendants-appellants filed a motion for reconsideration of the saiddecision. By resolution dated November 25, 1997, the Court of Appeals denied themotion.3

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On review, the Court in Medel v. Court of Appeals struck down as void the stipulation onthe interest for being iniquitous or unconscionable, and revived the judgment of the RTCrendered on December 9, 1991, viz:

WHEREFORE, the Court hereby REVERSES and SETS ASIDE the decision of the Court of Appeals promulgated on March 21, 1997, and its resolution dated November 25, 1997.Instead, we render judgment REVIVING and AFFIRMING the decision dated December9, 1991, of the Regional Trial Court of Bulacan, Branch 16, Malolos, Bulacan, in CivilCase No. 134-M-90, involving the same parties.

No pronouncement as to costs in this instance.

SO ORDERED.4

Upon the finality of the decision in Medel v. Court of Appeals, the respondents moved for

execution.

5

Servando Franco opposed ,

6

claiming that he and the respondents had agreedto fix the entire obligation at P775,000.00.7 According to Servando, their agreement,which was allegedly embodied in a receipt dated February 5, 1992 ,8whereby he made aninitial payment of P400,000.00 and promised to pay the balance of P375,000.00 onFebruary 29, 1992, superseded the July 23, 1986 promissory note.

The RTC granted the motion for execution over Servando’s opposition, thus:

There is no doubt that the decision dated December 9, 1991 had already been affirmedand had already become final and executory. Thus, in accordance with Sec. 1 of Rule 39of the 1997 Rules of Civil Procedure, execution shall issue as a matter of right. It haslikewise been ruled that a judgment which has acquired finality becomes immutable and

unalterable and hence may no longer be modified at any respect except only to correctclerical errors or mistakes (Korean Airlines Co. Ltd. vs. C.A., 247 SCRA 599). In thisrespect, the decision deserves to be respected.

The argument about the modification of the contract or non-participation of defendantServando Franco in the proceedings on appeal on the alleged belief that the payment hemade had already absolved him from liability is of no moment. Primarily, the decisionwas for him and Leticia Medel to pay the plaintiffs jointly and severally the amountsstated in the Decision. In other words, the liability of the defendants thereunder issolidary. Based on this aspect alone, the new defense raised by defendant Franco isunavailing.

WHEREFORE, in the light of all the foregoing, the Court hereby grants the Motion forExecution of Judgment.

Accordingly, let a writ of execution be issued for implementation by the Deputy Sheriffof this Court.

SO ORDERED.9

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On March 8, 2001, the RTC issued the writ of execution.10

Servando moved for reconsideration ,11 but the RTC denied his motion.12

On March 19, 2003, the CA affirmed the RTC through its assailed decision, ruling thatthe execution was proper because of Servando’s failure to comply with the terms of thecompromise agreement, stating:13

Petitioner cannot deny the fact that there was no full compliance with the tenor of thecompromise agreement. Private respondents on their part did not disregard thepayments made by the petitioner. They even offered that whatever payments made bypetitioner, it can be deducted from the principal obligation including interest. However,private respondents posit that the payments made cannot alter, modify or revoke thedecision of the Supreme Court in the instant case.

In the case of Prudence Realty and Development Corporation vs. Court of Appeals, theSupreme Court ruled that:

"When the terms of the compromise judgment is violated, the aggrieved party mustmove for its execution, not its invalidation."

It is clear from the aforementioned jurisprudence that even if there is a compromiseagreement and the terms have been violated, the aggrieved party, such as the privaterespondents, has the right to move for the issuance of a writ of execution of the final

judgment subject of the compromise agreement.

Moreover, under the circumstances of this case, petitioner does not stand to suffer any

harm or prejudice for the simple reason that what has been asked by privaterespondents to be the subject of a writ of execution is only the balance of petitioner’sobligation after deducting the payments made on the basis of the compromiseagreement.

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSEand consequently DISMISSED for lack of merit.

SO ORDERED.

His motion for reconsideration having been denied ,14 Servando appealed. He waseventually substituted by his heirs, now the petitioners herein, on account of his

intervening death. The substitution was pursuant to the resolution dated June 15,2005.15

Issue

The petitioners submit that the CA erred in ruling that:

I

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THE 9 DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIALCOURT OF MALOLOS, BULACAN WAS NOT NOVATED BY THE COMPROMISE

AGREEMENT BETWEEN THE PARTIES ON 5 FEBRUARY 1992.

II

THE LIABILITY OF THE PETITIONER TO RESPONDENTS SHOULD BE BASED ONTHE DECEMBER 1991 DECISION OF BRANCH 16 OF THE REGIONAL TRIAL COURTOF MALOLOS, BULACAN AND NOT ON THE COMPROMISE AGREEMENT EXECUTEDIN 1992.

The petitioners insist that the RTC could not validly enforce a judgment based on apromissory note that had been already novated; that the promissory note had beenimpliedly novated when the principal obligation ofP500,000.00 had been fixedat P750,000.00, and the maturity date had been extended from August 23, 1986 toFebruary 29, 1992.

In contrast, the respondents aver that the petitioners seek to alter, modify or revoke thefinal and executory decision of the Court; that novation did not take place because therewas no complete incompatibility between the promissory note and the memorandumreceipt; that Servando’s previous payment would be deducted from the total liability ofthe debtors based on the RTC’s decision.

Issue

Was there a novation of the August 23, 1986 promissory note when respondent Veronica Gonzales issued the February 5, 1992 receipt?

Ruling

The petition lacks merits.

I

Novation did not transpire because noirreconcilable incompatibility existed

between the promissory note and the receipt

To buttress their claim of novation, the petitioners rely on the receipt issued on

February 5, 1992 by respondent Veronica whereby Servando’s obligation was fixedat P750,000.00. They insist that even the maturity date was extended until February 29,1992. Such changes, they assert, were incompatible with those of the originalagreement under the promissory note.

The petitioners’ assertion is wrong.


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A novation arises when there is a substitution of an obligation by a subsequent one thatextinguishes the first, either by changing the object or the principal conditions, or bysubstituting the person of the debtor, or by subrogating a third person in the rights ofthe creditor.16 For a valid novation to take place, there must be, therefore: (a) a previous

valid obligation; (b) an agreement of the parties to make a new contract; (c) anextinguishment of the old contract; and (d) a valid new contract .17 In short, the newobligation extinguishes the prior agreement only when the substitution is unequivocallydeclared, or the old and the new obligations are incompatible on every point. Acompromise of a final judgment operates as a novation of the judgment obligation uponcompliance with either of these two conditions.18

The receipt dated February 5, 1992, excerpted below, did not create a new obligationincompatible with the old one under the promissory note, viz:

February 5, 1992

Received from SERVANDO FRANCO BPI Manager’s Check No. 001700 in the amountof P400,00.00 as partial payment of loan. Balance of P375,000.00 to be paid on orbefore FEBRUARY 29, 1992. In case of default an interest will be charged as stipulatedin the promissory note subject of this case.

(Sgd) V. Gonzalez19

To be clear, novation is not presumed. This means that the parties to a contract shouldexpressly agree to abrogate the old contract in favor of a new one. In the absence of theexpress 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 ofnovation which may be effected either expressly or impliedly. 1âwphi1 The term "expressly"means that the contracting parties incontrovertibly disclose that their object inexecuting the new contract is to extinguish the old one. Upon the other hand, nospecific form is required for an implied novation, and all that is prescribed by law wouldbe an incompatibility between the two contracts. While there is really no hard and fastrule to determine what might constitute to be a sufficient change that can bring aboutnovation, the touchstone for contrariety, however, would be an irreconcilableincompatibility between the old and the new obligations.

There is incompatibility when the two obligations cannot stand together, each onehaving its independent existence. If the two obligations cannot stand together, thelatter obligation novates the first.22 Changes that breed incompatibility must beessential in nature and not merely accidental. The incompatibility must affect any of theessential elements of the obligation, such as its object, cause or principal conditionsthereof; otherwise, the change is merely modificatory in nature and insufficient toextinguish the original obligation.23

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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 receiptthat the P400,000.00 was "partial payment of loan" and by referring to "the promissorynote 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 tothe 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 Servando’s payment of hisobligation as confirmed by the decision of the RTC. It did not establish the novation ofhis agreement with the respondents. Indeed, the Court has ruled that an obligation topay 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 withthe old ones, or the new contract merely supplements the old one.24 A new contract thatis a mere reiteration, acknowledgment or ratification of the old contract with slightmodifications or alterations as to the cause or object or principal conditions can stand

together with the former one, and there can be no incompatibility betweenthem.25Moreover, a creditor’s acceptance of payment after demand does not operate asa modification of the original contract.26

Worth noting is that Servando’s liability was joint and solidary with his co-debtors. In asolidary obligation, the creditor may proceed against any one of the solidary debtors orsome or all of them simultaneously.27 The choice to determine against whom thecollection is enforced belongs to the creditor until the obligation is fully satisfied.28Thus,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 cancelledby the new obligation or that another debtor had assumed his place. In case of changein 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, provingprecisely that Servando remained a solidary debtor against whom the entire or part ofthe obligation might be enforced.

Lastly, the extension of the maturity date did not constitute a novation of the previousagreement. It is settled that an extension of the term or period of the maturity datedoes not result in novation.31

II

Total liability to be reduced by P400,000.00

The petitioners argue that Servando’s remaining liability amounted to only P375,000.00,the balance indicated in the February 5, 1992 receipt. Accordingly, the balance was not

yet due because the respondents did not yet make a demand for payment.

The petitioners cannot be upheld.

The balance of P375,000.00 was premised on the taking place of a novation. However,as found now, novation did not take place. Accordingly, Servando’s obligation, being

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solidary, remained to be that decreed in the December 9, 1991 decision of the RTC,inclusive of interests, less the amount of P400,000.00 that was meanwhile paid by him.

WHEREFORE, the Court AFFIRMS the decision of the Court of Appeals promulgated on

March 19, 2003; ORDERS the Regional Trial Court, Branch 16, in Malolos, Bulacan toproceed with the execution based on its decision rendered on December 9, 1991,deducting the amount of P400,000.00 already paid by the late Servando Franco; andDIRECTS the petitioners to pay the costs of suit.

SO ORDERED.


Manila

THIRD DIVISION

G.R. No. 177936 January 18, 2012

STARBRIGHT SALES ENTERPRISES, INC., Petitioner,vs.PHILIPPINE REALTY CORPORATION, MSGR. DOMINGO A. CIRILOS, TROPICANAPROPERTIES AND DEVELOPMENT CORPORATION and STANDARD REALTYCORPORATION, Respondents.

D E C I S I O N

ABAD, J.:

The present case involves a determination of the perfection of contract of sale.

The Facts and the Case

On April 17, 1988 Ramon Licup wrote Msgr. Domingo A. Cirilos, offering to buy threecontiguous parcels of land in Parañaque that The Holy See and Philippine RealtyCorporation (PRC) owned for P1,240.00 per square meter. Licup accepted theresponsibility for removing the illegal settlers on the land and enclosed a checkforP100,000.00 to "close the transaction."1 He undertook to pay the balance of thepurchase price upon presentation of the title for transfer and once the property has

been cleared of its occupants.

Msgr. Cirilos, representing The Holy See and PRC, signed his name on the conformeportion of the letter and accepted the check. But the check could not be encashed due toLicup’s stop-order payment. Licup wrote Msgr. Cirilos on April 26, 1988, requesting thatthe titles to the land be instead transferred to petitioner Starbright Sales Enterprises,Inc. (SSE). He enclosed a new check for the same amount. SSE’s representatives, Mr.and Mrs. Cu, did not sign the letter.

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On November 29, 1988 Msgr. Cirilos wrote SSE, requesting it to remove the occupantson the property and, should it decide not to do this, Msgr. Cirilos would return to itthe P100,000.00 that he received. On January 24, 1989 SSE replied with an "updatedproposal."2 It would be willing to comply with Msgr. Cirilos’ condition provided the

purchase price is lowered to P1,150.00 per square meter.

On January 26, 1989 Msgr. Cirilos wrote back, rejecting the "updated proposal." He saidthat other buyers were willing to acquire the property on an "as is, where is" basisat P1,400.00 per square meter. He gave SSE seven days within which to buy theproperty at P1,400.00 per square meter, otherwise, Msgr. Cirilos would take it that SSEhas lost interest in the same. He enclosed a check for P100,000.00 in his letter as refundof what he earlier received.

On February 4, 1989 SSE wrote Msgr. Cirilos that they already had a perfected contractof sale in the April 17, 1988 letter which he signed and that, consequently, he could nolonger impose amendments such as the removal of the informal settlers at the buyer’sexpense and the increase in the purchase price.

SSE claimed that it got no reply from Msgr. Cirilos and that the next thing they knew,the land had been sold to Tropicana Properties on March 30, 1989. On May 15, 1989 SSEdemanded rescission of that sale. Meanwhile, on August 4, 1989 Tropicana Propertiessold the three parcels of land to Standard Realty.

Its demand for rescission unheeded, SSE filed a complaint for annulment of sale andreconveyance with damages before the Regional Trial Court (RTC) of Makati, Branch 61,against The Holy See, PRC, Msgr. Cirilos, and Tropicana Properties in Civil Case 90-183.SSE amended its complaint on February 24, 1992, impleading Standard Realty asadditional defendant.

The Holy See sought dismissal of the case against it, claiming that as a foreigngovernment, it cannot be sued without its consent. The RTC held otherwise but, onDecember 1, 1994 ,3 the Court reversed the ruling of the RTC and ordered the caseagainst The Holy See dismissed. By Order of January 26, 1996 the case was transferredto the Parañaque RTC, Branch 258.

SSE alleged that Licup’s original letter of April 17, 1988 to Msgr. Cirilos constituted aperfected contract. Licup even gave an earnest money of P100,000.00 to "close thetransaction." His offer to rid the land of its occupants was a "mere gesture ofaccommodation if only to expedite the transfer of its title."4 Further, SSE claimed that, in

representing The Holy See and PRC, Msgr. Cirilos acted in bad faith when he set theprice of the property atP1,400.00 per square meter when in truth, the property was soldto Tropicana Properties for only P760.68 per square meter.

Msgr. Cirilos maintained, on the other hand, that based on their exchange of letters, nocontract of sale was perfected between SSE and the parties he represented. And, onlyafter the negotiations between them fell through did he sell the land to TropicanaProperties.

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In its Decision of February 14, 2000, the Parañaque RTC treated the April 17, 1988 letterbetween Licum and Msgr. Cirilos as a perfected contract of sale between the parties.Msgr. Cirilos attempted to change the terms of contract and return SSE’s initial depositbut the parties reached no agreement regarding such change. Since such agreement

was wanting, the original terms provided in the April 17, 1988 letter continued to bindthe parties.

On appeal to the Court of Appeals (CA), the latter rendered judgment on November 10,2006 ,5 reversing the Parañaque RTC decision. The CA held that no perfected contractcan be gleaned from the April 17, 1988 letter that SSE had relied on. Indeed, thesubsequent exchange of letters between SSE and Msgr. Cirilos show that the partieswere grappling with the terms of the sale. Msgr. Cirilos made no unconditionalacceptance that would give rise to a perfected contract.

As to the P100,000.00 given to Msgr. Cirilos, the CA considered it an option money thatsecured for SSE only the privilege to buy the property even if Licup called it a "deposit."

The CA denied SSE’s motion for reconsideration on May 2, 2007.

The Issue Presented

The only issue in this case is whether or not the CA erred in holding that no perfectedcontract of sale existed between SSE and the land owners, represented by Msgr. Cirilos.

The Court’s Ruling

Three elements are needed to create a perfected contract: 1) the consent of thecontracting parties; (2) an object certain which is the subject matter of the contract;

and (3) the cause of the obligation which is established.6

Under the law on sales, acontract of sale is perfected when the seller, obligates himself, for a price certain, todeliver and to transfer ownership of a thing or right to the buyer, over which the latteragrees.7 From that moment, the parties may demand reciprocal performance.

The Court believes that the April 17, 1988 letter between Licup and Msgr. Cirilos, therepresentative of the property’s owners, constituted a perfected contract. When Msgr.Cirilos affixed his signature on that letter, he expressed his conformity to the terms ofLicup’s offer appearing on it. There was meeting of the minds as to the object andconsideration of the contract.

But when Licup ordered a stop-payment on his deposit and proposed in his April 26,

1988 letter to Msgr. Cirilos that the property be instead transferred to SSE, a subjectivenovation took place.

A subjective novation results through substitution of the person of the debtor orthrough subrogation of a third person to the rights of the creditor. To accomplish asubjective novation through change in the person of the debtor, the old debtor needs tobe expressly released from the obligation and the third person or new debtor needs toassume his place in the relation.8

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Novation serves two functions – one is to extinguish an existing obligation, the other tosubstitute a new one in its place – requiring concurrence of four requisites: 1) aprevious 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 valid new obligation.9

Notably, Licup and Msgr. Cirilos affixed their signatures on the original agreementembodied in Licup’s letter of April 26, 1988. No similar letter agreement can be foundbetween SSE and Msgr. Cirilos.

The proposed substitution of Licup by SSE opened the negotiation stage for a newcontract of sale as between SSE and the owners. The succeeding exchange of lettersbetween Mr. Stephen Cu, SSE’s representative, and Msgr. Cirilos attests to an unfinishednegotiation. Msgr. Cirilos referred to his discussion with SSE regarding the purchase as a"pending transaction."10

Cu, on the other hand, regarded SSE’s first letter to Msgr. Cirilos as an "updatedproposal."11 This proposal took up two issues: which party would undertake to evict theoccupants on the property and how much must the consideration be for the property.These are clear indications that there was no meeting of the minds between theparties.1avvphi1 As it turned out, the parties reached no consensus regarding these issues, thusproducing no perfected sale between them.

Parenthetically, Msgr. Cirilos did not act in bad faith when he sold the property toTropicana even if it was for a lesser consideration. More than a month had passed sincethe last communication between the parties on February 4, 1989. It is not improbablefor prospective buyers to offer to buy the property during that time.

The P100,000.00 that was given to Msgr. Cirilos as "deposit" cannot be considered asearnest money. Where the parties merely exchanged offers and counter-offers, nocontract is perfected since they did not yet give their consent to such offers .12 Earnestmoney applies to a perfected sale.

SSE cannot revert to the original terms stated in Licup’s letter to Msgr. Cirilos dated April 17, 1988 since it was not privy to such contract. The parties to it were Licup andMsgr. Cirilos. Under the principle of relativity of contracts, contracts can only bind theparties who entered into it. It cannot favor or prejudice a third person.13 Petitioner SSEcannot, therefore, impose the terms Licup stated in his April 17, 1988 letter upon theowners.

WHEREFORE, the Court DISMISSES the petition and AFFIRMS the Court of AppealsDecision dated November 10, 2006 in CA-G.R. CV 67366.

SO ORDERED.


Manila

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THIRD DIVISION

G.R. No. 149040 July 4, 2007

EDGAR LEDONIO, petitioner,vs.CAPITOL DEVELOPMENT CORPORATION, respondent.

D E C I S I O N

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorar i 1 under Rule 45 of the RevisedRules of Court praying that (1) the Decision ,2 dated 20 March 2001, of the Court of

Appeals in CA-G.R. CV No. 43604, affirming in toto the Decision ,3 dated 6 August 1993,

of the Quezon City Regional Trial Court (RTC), Branch 91, in Civil Case No. Q-90-5247,be set aside; and (2) the Complaint4 in Civil Case No. Q-90-5247 be dismissed.

Herein respondent Capitol Development Corporation instituted Civil Case No. Q-90-5247by filing a Complaint for the collection of a sum of money against herein petitionerEdgar Ledonio.

In its Complaint, respondent alleged that petitioner obtained from a Ms. Patrocinio S.Picache two loans, with the aggregate principal amount of P60,000.00, and covered bypromissory notes duly signed by petitioner. In the first promissory note ,5 dated 9November 1988, petitioner promised to pay to the order of Ms. Picache the principalamount of P30,000.00, in monthly installments of P3,000.00, with the first monthly

installment due on 9 January 1989. In the second promissory note ,6

dated 10 November1988, petitioner again promised to pay to the order of Ms. Picache the principal amountof P30,000.00, with 36% interest per annum, on 1 December 1988. In case of default inpayment, both promissory notes provide that (a) petitioner shall be liable for a penaltyequivalent to 20% of the total outstanding balance; (b) unpaid interest shall becompounded or added to the balance of the principal amount and shall bear the samerate of interest as the latter; and (c) in case the creditor, Ms. Picache, shall engage theservices of counsel to enforce her rights and powers under the promissory notes,petitioner shall pay as attorney's fees and liquidated damages the sum equivalent to20% of the total amount sought to be recovered, but in no case shall the said sum beless that P10,000.00, exclusive of costs of suit.

On 1 April 1989, Ms. Picache executed an Assignment of Credit7

in favor of respondent,which reads –

KNOW ALL MEN BY THESE PRESENTS:

That I, PAT S. PICACHE of legal age and with postal address at 373 Quezon Avenue, Quezon City for and in consideration of SIXTY THOUSAND PESOS(P60,000.00) Philippine Currency, to me paid by [herein respondent] CAPITOLDEVELOPMENT CORPORATION, a corporation organized and existing under the

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