CONTRACTS: NOVATION

Case Name: Heirs of Servando Franco vs. Spouses Veronica and Danilo Gonzales
G.R. No.: G.R. No. 159709
Date: June 27, 2012
Petitioner: Heirs of Servando Franco
Respondents: Spouses Veronica and Danilo Gonzales
FACTS:
Defendants Servando Franco and Leticia Mendel obtained loans from Veronica Gonza
les
for the latter was engaged in the business of financing under the company Gonzal
es Credit
Enterprises. There were three loans which the Servando and Leticia secured with
the respondent,
which was not paid on maturity. The third loan was secured by a property was own
ed by one
Leticia Makalintal Yapintchay, who issued a special power of attorney in favor o
f Leticia Medel,
authorizing her to execute the mortgage. The fourth loan was engaged with Dr. Ra
fael Mendel,
the husband of Leticia Mendel of P 60,000 by executing a promissory note which c
onsolidates
the other previous loans which totals to P 500,000.
Upon maturity of the new promissory note, the defendants failed to pay their obl
igation.
So, the plaintiffs filed a complaint for the collection of the full amount of th
e loan, plus interests
and other charges. Servando contended that he did not obtain any loan from the r
espondents, he
was not benefited from its proceed and he signed the promissory note as a witnes
s.
With the various appeals and motion for reconsideration with the RTC and CA, it
was
decided that the parties should be liable for the loans. Servando opposed that h
e and the
respondents had agreed to fix the entire obligation at P775,000.00. According to
Servando, their
agreement, which was allegedly embodied in a receipt dated February 5, 1992, whe
reby he made
an initial payment of P400,000.00 and promised to pay the balance of P375,000.00
on February
29, 1992, superseded the July 23, 1986 promissory note. But the RTC ruled over S
ervando s
opposition and moved to the execution of the judgment for it is final and execut
ory. Then,
Servando s heirs, on account of his intervening death, appealed that there was novat
ion is the
judgment that transpired upon the decision of the court on December 9, 1991 and
February 5,
1992.
ISSUE: Whether or not there is novation between the judgments rendered by the co
urts?
HELD:
No, the court rule that there is no novation when there is no irreconcilable inc
ompatibility
between the old and the new obligations. There is no novation in case of only sl
ight
modifications; hence, the old obligation prevails. Extinguishment of the old obl
igation is an
necessary element for novation and the new one will arise from such.

Novation arises when there is a substitution of an obligation by a subsequent on

e that
extinguishes the first, either by changing the object or the principal condition
s, or by substituting
the person of the debtor, or by subrogating a third person in the rights of the
creditor. For a valid
novation to take place, there must be, therefore: (a) a previous valid obligatio
n; (b) an agreement
of the parties to make a new contract; (c) an extinguishment of the old contract
; and (d) a valid
new contract. In short, the new obligation extinguishes the prior agreement only
when the
substitution is unequivocally declared, or the old and the new obligations are i
ncompatible on
every point. A compromise of a final judgment operates as a novation of the judg
ment obligation
upon compliance with either of these two conditions.

On the receipt of February 5, 1992 did not create a new obligation incompatible
with the
old one under the promissory note that was issued. It was only a payment of the
obligation of
Servando and did not establish a new obligation. The Court ruled that the paymen
t of the
obligation does not novate the instrument that only expressly recognize the old
obligation, or
changes only the terms of the payment, or adds other obligation that is not inco
mpatible with the
old ones, or the new contract merely supplements the old one. The new contract t
hat is a mere
reiteration, acknowledgement or ratification of the old contract with slight mod
ifications or
alterations as to the cause or object or principal conditions can stand together
with the former
one, and there can be no incompatibility between them. Moreover, a creditor s accept
ance of
payment after demand does not operate as a modification of the original contract
.
Novation is not presumed by the parties, there should be an expressed agreement
that
would abrogate the old one in favor of the new one. In the absence of the expres
s agreement, the
old and the new obligation should be incompatible on every point. The incompatib
ility of the
obligation is that the two obligations cannot stand together, each one having in
dependence from
each other.
Thus, the court affirms the decision of the CA promulgated on March 19, 2003.