NOVATION

2.

Personal/subjective change of persons o o Substituting the person of debtor. Subrogating a 3rd person in the rights of creditor by agreement or by law

Art. 1291. Obligations may be modified by: 1. 2. 3. Changing their object or principal conditions; Substituting the person of the debtor; Subrogating a third person in the rights of the creditor. NOVATION substitution or change of an obligation by another w/c extinguishes/modifies the 1st either by 1. 2. changing its object or principal condition substituting another in place of debtor 3. Expromision Delegacion 2. 1. 2. 3. Mixed

change of object and parties

According to Form of its Constitution Express Implied incompatibility of 2 obligations

According to its Extent/Effect 1. Total or extinctive old obligation is totally extinguished

Partial or modificatory imperfect or improper

subrogating a 3rd person in the rights of creditor

PURPOSE OF EXTINCTIVE NOVATION Extinguishes an obligation Creates a new one in lieu of the old

REQUISITES OF NOVATION The existence of a valid old obligation 1. If valid 2. nothing to novate

KINDS OF NOVATION According to its Object/Purpose 1. Real/objective changing the object/principal conditions of obligation ways: o o Express Implied

If voidable possible novation before annulment

Intent to extinguish or to modify the old obligation by substantial difference The capacity and consent of all the parties except in case of expromision 1. old debtor does not participate

Validity of new obligation

Notes by Stephanie Dawn Sibi Gok-ong

OBLICON

Atty. Daryl Bretch Largo

USC

QUESTIONS Is there novation if the amount in the new obligation is increased? 1. No. NOTE Obligations to pay a sum of money is not novated by a new instrument which merely changes the terms of payment. Novation however is proper in case of change of juridical relation, example would be from commodatum to lease of thing. 1. Even if that is merely an implied novation, are there incompatibilities in all material points? 2. Yes. In commodatum, it is a free use of thing while in lease, you have to pay.

But if the new obligation is increased but if separate from the old obligation? There is an increase in the old but it is found in a separate document. 1. There is because the prior promissory notes are extinguished and superseded by the new promissory notes.

If the period is increased, is there novation or lengthened or shortened? 1. No.

Why? 1. It merely affects the performance of the obligation. 3.

It also says from negotiorum gestio to contract of agency, because it is from a non-contractual relation to a contractual relation. From mortgage to antichrisis. Yes, there is a novation. There is a novation if there is a change in the nature of the prestation.

If the evidence of credit from promissory note payable to order to payable to bearer? 1. There is no novation.

Take note that novation is never presumed. 1. 2. In order that there is implied novation, the agreements must be incompatible with each other. Otherwise, if the change is merely accessory or accidental, it does not affect either the principal object, condition, person of the creditor or debtor, there is no novation.

Renunciation of security? 1. None, it merely becomes a simple debt.

From alternative to simple or simple to alternative? 1. Yes.

Surrender of the evidence of credit? 1. No. (remission) There is no novation there because the obligation is extinguished.

In order that there shall be novation, four requisites must be complied with: 1. 2. 3. 4. There must be a previous valid obligation The consent of the parties to extinguish the prior obligation A valid new obligation The extinguishment of the old obligation

From contract of donation to contract of sale? 1. Yes, the change is the juridical tie. But there is no novation in a subsequent execution of a real estate mortgage as security, why? The mortgage being merely an accessory obligation to secure the loan or promissory note.

Absent any, there is no novation Novation arising from a purported change in the person of the debtor must be clear and express because it is never presumed

Notes by Stephanie Dawn Sibi Gok-ong

OBLICON

Atty. Daryl Bretch Largo

USC

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Art. 1292.

EXPRESS/IMPLIED NOVATION 3.

Must be established that the old and new contracts are incompatible in all points, or that the will to novate appears by express agreement of the parties or in acts of equivalent import Must be clearly proved

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.

INSTANCES WHEN COURT HELD: NO EXTINCTIVE NOVATION Slight alterations or modifications in construction plans of buildings New contract merely contains supplementary agreement When additional interest is agreed upon When additional security is given When after a final judgment, a contract was entered into precisely to provide a method of payment other than that stated in judgment When a guarantor enters into an agreement with creditor that he (guarantor) will also be a principal debtor When creditor in the meantime refrains from suing debtor or even when creditor merely extends the term of payment for here the period merely affects performance, not the creation of the obligation Place of payment is changed or there is variation in amount of partial payments When a public instrument is executed to confirm a valid contract\When payment of purchase price for certain trucks is made by execution of promissory note for said price.

Express Novation declared in unequivocal terms that their object in making the new contract is to extinguish the old contract, otherwise the old contract remains in force and the new contract is added to it, and each gives rise to an obligation still in force.

incompatibility between old and new

Implied Novation complete/substantial obligation substantial changes 1. 2. 3. 4. 5. In object/subject matter of contract In cause or consideration of contract In principal terms or conditions of contract If debt subject to condition is made an absolute one w/out a condition Reduction of term/period stipulated without consent of subscribers Art. 1293.

Incompatibility Test 1. Whether or not the two obligations can stand together, each one having its independent existence

EXPROMISION

NOTE Novation is never presumed 1. No novation in the absences of a new contract executed by the parties

Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237.

2 Kinds of Personal/Subjective Novation Change of debtor

Notes by Stephanie Dawn Sibi Gok-ong

OBLICON

Atty. Daryl Bretch Largo

USC

1.

passive

Old debtor is released from his obligation with creditors consent o o o Implied/express Before/after new debtor has given consent Maybe conditional has to be fulfilled

Change of Creditor = subrogation actually 1. Active

FORMS OF PASSIVE NOVATION Expromision 1. 2. 3. initiative comes from 3rd person it is essential that old debtor be released from his obligation Requisites Delegacion 1. 2. 3. initiative from debtor for it is he who delegates another to pay 3 parties (old, new debtor and creditor) must agree Requisites The substitution is upon the initiative or proposal of the old debtor by proposing to the creditor the entry of another person as the new debtor who will replace him in the payment of the obligation All parties concerned must consent and agree to the proposal made by old debtor XPN RULES FOR DELEGACION GR 1. The creditor is estopped from going after the old debtor because the obligation of the latter to the creditor had already been extinguished by Novation Initiative from 3rd person who will step into debtors shoes and assume his role New debtor and creditor must consent to the rd proposal made by 3 person Old debtor must be released from his obligation with creditors consent QUESTION What happens if the obligation is one with an accessory obligation or contract and the principal obligation is extinguished? Would that carry the extinguishment of the accessory obligation? 1. Yes. Exception if there is a stipulation pour autrui an example is being named as a beneficiary of an insurance policy review PNB vs. CA compensation case 4. 3 Parties Delegante o original debtor

Delegatario o creditor

Delegado o new debtor

Notes by Stephanie Dawn Sibi Gok-ong

OBLICON

Atty. Daryl Bretch Largo

USC

1. 2.

When the insolvency of the new debtor was already existing and of public knowledge If the old debtor knew that the new debtor is insolvent when he delegated his debt

NOTE FOR DELEGACION Who proposes the new debtor? 1. The old debtor. So in both cases the consent of the creditor is always necessary

Now what happens if the new debtor is insolvent. Will that revive the old obligation?

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

1.

RULES FOR DELEGACION GR o The creditor is estopped from going after the old debtor because the obligation of the latter to the creditor had already been extinguished by Novation

NOTE FOR EXPROMISION In expromission, the original debtor's consent is not necessary What happens if the new debtor is insolvent? Is the old debtor liable for the new debtor? 1. No, precisely because he did not consent or it was made without his knowledge. He cannot be held liable by reason of insolvency of the new debtor XPN o

When the insolvency of the new debtor was already existing and of public knowledge If the old debtor knew that the new debtor is insolvent when he delegated his debt

Legislative intent to exempt the old debtor from future liability when he did not propose the new debtor. Requisites to Hold Old debtor Liable

Insolvency was already existing and of public knowledge at time of Delegation Or the insolvency was already existing and known to the debtor at the time of delegation

Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when the delegated his debt.

When Art. 1295 does not apply OLD DEBTOR IS STILL LIABLE 3rd person is only an agent, messenger or employee of debtor 3rd person action only as guarantor/ surety

Notes by Stephanie Dawn Sibi Gok-ong

OBLICON

Atty. Daryl Bretch Largo

USC

New debtor merely agreed to make himself solidarily liable for the obligation New debtor merely agreed to make himself jointly or partly liable for the obligation

If in coming up with the new but void obligation, the parties agree that it shall in any event extinguish the old, obligation, then such old obligation will not be revived

QUESTIONS Now, what happens if the new oblilgation is void? Would that extinguish the old obligation? 1. It does not. This is 1297.

Now what if the old obligation is void, would that extinguish the new obligation? 1. Yes.

Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent.

Art. 1298. The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor or when ratification validates acts which are voidable.

NOTE The accessory always follow the principal. All accessory obligations such as those arising from a contract of mortgage, guarantee, and pledge are likewise extinguished The law states that 1. the accessory obligation may subsist only insofar as they may benefit third persons who do not give their consent

RULES If old obligation is void 1. no valid novation

If old obligation is voidable and annulled 1. no more obligation; novation is also void

If old obligation is voidable 1. 2. Novation may be possible is made before annulment Even if there has been no previous ratification at the time of Novation, if the nullity can be claimed only by the debtor, the consent of the debtor to the Novation will render the Novation effective because such consent is impliedly a waiver of the action for nullity If annulled, Novation is also void

Applies to novation by substitution of debtor

Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event.

NOTES Voidable new obligation 1. the novation becomes effective but if action to annul was brought the old obligation shall be revived unless it was otherwise agreed by the parties

3. QUESTIONS

When can a debtor claim annulment? What would be an instance wherein a debtor can claim annulment? 1. A very common defense would be prescription of debt.

Notes by Stephanie Dawn Sibi Gok-ong

OBLICON

Atty. Daryl Bretch Largo

USC

But can a prescribed debt be the subject of novation? prescribed debt be an object of a contract? 1.

Can a

conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect.

Yes. So a prescribed debt can be the subject of novation in as much as the prescribed debt can be the subject of a contract.

QUESTION Now what if the original obligation has a suspensive or resolutory condition? Would the new obligation that novates the old obligation carry with it the condition? 1. Yes. 1299 says the new obligation shall be under the same condition, unless it is otherwise stipulated

But can it be a defense of the obligor? The prescription of the debt? 1. Yes.

Can minority be a defense? 1. Yes.

But can it also be subject to ratification? 1. Yes.

SUBROGATION transfer to a 3rd person all the rights appertaining to creditor 1. right to proceed against guarantors, possessors of mortgages and etc.

Art. 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. ASSIGNMENT OF CREDIT Mere transfer of same right or credit transfer does not extinguish credit RULES GR 1. XPN 1. NOTE In order not to subject the obligation to the previous suspensive condition, there must be an express statement to that effect in the new obligation as novated If there is a contrary stipulation Art. 1301. CONVENTIONAL SUBROGATION The conditions attached to the old obligation are also attached to the new obligation Does not require consent of debtor Defect in credit/right is not cured by assigning the same CONVENTIONAL SUBROGATION Extinguishes obligation and creates a new one Requires debtors consent Defect in old obligation may be cured in such a way that the new obligation becomes entirely valid

Conventional subrogation of a third person requires the consent of the original parties and of the third person.

Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or

NOTE Subrogation is different from ex promission or delegacion

Notes by Stephanie Dawn Sibi Gok-ong

OBLICON

Atty. Daryl Bretch Largo

USC

1.

the latter involves a change in the person of the debtor, while subrogation involves change in the person of the creditor.

the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share.

CLASSIFICATION OF SUBROGATION Conventional 1. must be clearly established by the unequivocal terms of the substituting obligation or by the evident incompatibility of the new and old obligations on every point takes effect by mandate of law and does not proceed from an agreement of the parties

PRESUMPTION OF LEGAL SUBROGATION when the creditor pays another creditor who is preferred, even without the debtor's knowledge 1. Who is the creditor who is preferred? A, whose credit of 100,000 has an interest of 12% per annum, or B, whose credit of 100,000 is secured by a chattel mortgage? B is preferred, because in the event of default by the debtor, need not go to court to file an action for the collection of the 100,000. All he has to do is to foreclose the mortgage and his credit is extinguished by reason of the foreclosure. So, in this case, if A pays B, even without the knowledge of the debtor, A now steps into the shoes of creditor B and is entitled to the security of B.

2.

QUESTION May a legal subrogation be changed into conventional subrogation? 1. Yes, Autonomy of will.

PARTIES THAT MUST AGREE FOR CONVENTIONAL SUBROGATION TO TAKE PLACE The debtor The old creditor The new creditor

When a third person, not interested in the obligation, pays with the tacit or express approval of the debtor When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share.

NOTE If debtor does not agree, he shall be liable only to the extent it has been beneficial to him Art. 1303.

Art. 1302.

LEGAL SUBROGATION

Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation.

It is presumed that there is legal subrogation: 1. 2. 3. When a creditor pays another creditor who is preferred, even without the debtor's knowledge; When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; When, even without the knowledge of the debtor, a person interested in GENERAL EFFECT OF SUBROGATION NOTES the 3rd person, steps into the shoes of the creditor and becomes the new creditor

Notes by Stephanie Dawn Sibi Gok-ong

OBLICON

Atty. Daryl Bretch Largo

USC

In conventional subrogation, the parties may stipulate the nature, limits, extent and scope of the subrogation provided these are not contrary to law, morals, good customs, public order or public policy If transferred credit is subject to suspensive condition 1. new creditor cannot collect until after such condition is fulfilled

For as long as the original credit has not been fully satisfied, then he has a right of preference over the new creditor

In the event partial payment is made by a third person, creditor can still demand from the debtor the balance of the obligation

So despite the fact that there is legal subrogation, the parties may still enter into a conventional subrogation

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.

NOTE Applies where 1. A debt has been partially paid by a third person, with the consent of the debtor.

In the event that the creditor and the 3rd party demands from the debtor at the same time the payment of what is due them, the creditor will be preferred. He will be paid first as the law states that he is preferred 1. Speaks of two creditors 2. The old creditor whose debt has been partially performed The new creditor whose debt has also been partially performed

As between the two, who is preferred? The old creditor

Notes by Stephanie Dawn Sibi Gok-ong

OBLICON

Atty. Daryl Bretch Largo

USC