Garcia vs. Llamas G.R. no.

154127 12/8/2003

Facts:
Petitioner and Eduardo De Jesus borrowed P400,000.00 from respondent. Both executed a promissory note
wherein they bound themselves jointly and severally to pay the loan on or before 23 January 1997 with a 5%
interest per month. The loan has long been overdue and, despite repeated demands, both have failed and
refused to pay it. Hence, a complaint was filed against both.
Resisting the complaint, Garcia averred that he assumed no liability because he signed merely as an
accommodation party for De Jesus; and that he is relieved from any liability arising from the note inasmuch as
the loan had been paid by De Jesus by means of a check dated 17 April 1997; and that, in any event, the
issuance of the check and respondent’s acceptance thereof novated or superseded the note.
Respondent answered that there was no novation to speak of because the check bounced.

Issues:
1. Whether or not there was novation in the obligation
2. Whether or not the defense that petitioner was only an accommodation party had any basis

Held:
1. No. In order to change the person of the debtor, the old one must be expressly released from the obligation,
and the third person or new debtor must assume the former’s place in the relation (Reyes v. CA). Well-settled
is the rule that novation is never presumed (Security Bank v. Cuenca). Consequently, that which arises from a
purported change in the person of the debtor must be clear and express. It is thus incumbent on petitioner to
show clearly and unequivocally that novation has indeed taken place. Petitioner failed to do this. In the present
case, petitioner has not shown that he was expressly released from the obligation, that a third person was
substituted in his place, or that the joint and solidary obligation was cancelled and substituted by the solitary
undertaking of De Jesus.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by
substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor
(Idolor v. CA, February 7, 2001). Article 1293 of the Civil Code defines novation as follows:
“Art. 1293. 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 rights mentioned in articles 1236 and 1237.”
In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion.
In expromision, the initiative for the change does not come from — and may even be made without the
knowledge of — the debtor, since it consists of a third person’s assumption of the obligation. As such, it
logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the
creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent
of these three persons are necessary. Both modes of substitution by the debtor require the consent of the
creditor.
Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the
creation of a new one that takes the place of the former. It is merely modificatory when the old obligation
subsists to the extent that it remains compatible with the amendatory agreement (Babst v. CA). Whether
extinctive or modificatory, novation is made either by changing the object or the principal conditions, referred
to as objective or real novation; or by substituting the person of the debtor or subrogating a third person to the
rights of the creditor, an act known as subjective or personal novation (Spouses Bautista v. Pilar Development
Corporation, 371 Phil. 533, August 17, 1999). For novation to take place, the following requisites must concur:
1) There must be a previous valid obligation.
2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract (Security Bank v Cuenca, October 3, 2000)
Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms
that the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one
on every point (Article 1292, NCC). The test of incompatibility is whether the two obligations can stand
together, each one with its own independent existence (Molino v. Security Diners International Corporation,
August 16, 2001).

2. No. The note was made payable to a specific person rather than to bearer or to order — a requisite for
negotiability under the Negotiable Instruments Law (NIL). Hence, petitioner cannot avail himself of the NIL’s
provisions on the liabilities and defenses of an accommodation party.
Even granting arguendo that the NIL was applicable, still, petitioner would be liable for the promissory note.
Under Article 29 of the NIL, an accommodation party is liable for the instrument to a holder for value even if,
at the time of its taking, the latter knew the former to be only an accommodation party. The relation between an
accommodation party and the party accommodated is, in effect, one of principal and surety — the
accommodation party being the surety. It is a settled rule that a surety is bound equally and absolutely with the
principal and is deemed an original promissor and debtor from the beginning.

CCC Insurance vs. Kawasaki Steel Corp. G.R. No. 156162 6/22/15 Leonardo-De Castro (recitation)

FACTS:

Kawasaki and F.F. Mañacop Construction Company, Inc. (FFMCCI) executed an agreement (Consortium
Agreement) to form a consortium (Kawasaki-FFMCCI Consortium), for the purpose of contracting with the
Philippine Government for the construction of a fishing port network in Pangasinan (Project). Indeed, the
Project was awarded to the Kawasaki-FFMCCI Consortium. The Republic of the Philippines, as owner, and
the Kawasaki-FFMCCI Consortium, as contractor, entered into a Contract Agreement entitled Stage I-A
Construction of Pangasinan Fishing Port Network (Construction Contract). In accordance with Article 10 of
the Consortium Agreement, "Consortium Leader" Kawasaki secured from the Philippine Commercial
International Bank (PCIB) a Letter of Credit in favor of DPWH. Said Letter of Credit guaranteed the faithful
performance by Kawasaki-FFMCCI Consortium of its obligation under the Construction Contract. Notably, the
Republic made an advance payment for the Project to the Kawasaki-FFMCCI Consortium. For the release of
its share in the advance payment made by the Republic, and also pursuant to Article 10 of the Consortium
Agreement, FFMCCI secured from CCCIC the following bonds in favor of Kawasaki: (a) Surety Bond, to
counter guarantee the amount of advance payment FFMCCI would receive from Kawasaki; and (b)
Performance Bond, to guarantee completion by FFMCCI of its scope of work in the Project. The Project
commenced. However, several months thereafter, FFMCCI ceased performing its work in the Project after
suffering business reverses. After discussions, Kawasaki and FFMCCI then executed a new Agreement
wherein Kawasaki recognized the "Completed Portion of Work" of FFMCCI, and agreed to take over the
unfinished portion of work of FFMCCI, referred to as "Transferred Portion of Work." Kawasaki informed
CCCIC about the cessation of operations of FFMCCI, and the failure of FFMCCI to perform its obligations in
the Project and repay the advance payment made by Kawasaki. Consequently, Kawasaki formally demanded
that CCCIC, as surety, pay Kawasaki the amounts covered by the Surety and Performance Bonds. Because
CCCIC did not act upon its demand, Kawasaki filed before the RTC a Complaint against CCCIC to collect on
the Surety Bond and the Performance Bond. CCCIC filed its Answer. After trial, the RTC agreed with CCCIC
that the Surety and Performance Bonds issued by the insurance company were mere counter-guarantees and
the cause of action of Kawasaki based on said Bonds had not yet accrued. Since the Republic did not exercise
its right to claim against the PCIB Letter of Credit, nor compelled Kawasaki to perform the unfinished work of
FFMCCI, Kawasaki could not claim indemnification from CCCIC. Moreover, the RTC, citing Article 2079 of
the Civil Code, ruled that the obligations of CCCIC under the Surety and Performance Bonds were
extinguished when the Republic granted the Kawasaki-FFMCCI Consortium a 43-day extension to finish the
Project, absent the consent of CCCIC. On appeal by Kawasaki to the Court of Appeals, the appellate court
reversed the impugned RTC Decision.

ISSUE:
Whether or not CCCIC may be lawfully ordered to pay Kawasaki under the Surety and Performance Bonds
(YES)

RULING:
CCCIC avers that its liabilities under the Surety and Performance Bonds are directly linked with the obligation
of the Kawasaki-FFMCCI Consortium to finish the Project for the Republic, so that its liability as surety of
FFMCCI will only arise if the Republic made a claim on the PCIB Letter of Credit furnished by Kawasaki, on
behalf of the Consortium. Since the Republic has not exercised its right against said Letter of Credit, Kawasaki
does not have a cause of action against CCCIC. CCCIC also maintains that its obligations under the Surety and
Performance Bonds had been extinguished when (a) the Republic extended the completion period for the
Project upon the request of Kawasaki but without the knowledge or consent of CCCIC, based on Article 2079
of the Civil Code; and (b) when Kawasaki and FFMCCI executed the Agreement dated August 24, 1989,
without the consent of CCCIC, there being a novation of the Consortium Agreement. The statutory definition
of suretyship is found in Article 2047 of the Civil Code: x x x If a person binds himself solidarily with the
principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship. Specifically, suretyship is a contractual relation resulting from an agreement
whereby one person, the surety, engages to be answerable for the debt, default or miscarriage of another,
known as the principal." The Court expounds that "a surety's liability is joint and several, limited to the amount
of the bond, and determined strictly by the terms of contract of suretyship in relation to the principal contract
between the obligor and the obligee. It bears stressing, however, that although the contract of suretyship is
secondary to the principal contract, the surety's liability to the obligee is nevertheless direct, primary, and
absolute." There are two principal contracts in this case: (1) the Consortium Agreement wherein Kawasaki and
FFMCCI agreed to jointly enter into a contract with the Republic for the Project, each assuming the
performance of specific scopes of work in said Project; and (2) the Construction Contract whereby the
Republic awards the Project to the Kawasaki-FFMCCI Consortium. While there is a connection between these
two contracts, they are each distinguishable from and enforceable independently of one another: the first
governs the rights and obligations between Kawasaki and FFMCCI, while the second covers contractual
relations between the Republic and the Kawasaki FFMCCI Consortium. The Surety and Performance Bonds
from CCCIC guaranteed the performance by FFMCCI of its obligations under the Consortium Agreement;
whereas the Letter of Credit from PCIB warranted the completion of the Project by the Kawasaki FFMCCI
Consortium. According to the principle of relativity of contracts in Article 1311 of the Civil Code, a contract
takes effect only between the parties, their assigns, and heirs; except when the contract contains a stipulation in
favor of a third person, which gives said person the right to demand fulfillment of said stipulation. In this case,
the Surety and Performance Bonds are enforceable by and against the parties FFMCCI (the obligor) and
CCCIC (the surety), as well as the third person Kawasaki (the obligee) in whose favor said bonds had been
explicitly constituted; while the related Consortium Agreement binds the parties Kawasaki and FFMCCI. Since
the Republic is neither a party to the Surety and Performance Bonds nor the Consortium Agreement, any action
or omission on its part has no effect on the liability of CCCIC under said bonds. The Surety and Performance
Bonds state that their purpose was "to secure the full and faithful performance on [FFMCCI' s] part of said
undertaking," particularly, the repayment by FFMCCI of the down payment advanced to it by Kawasaki (in the
case of the Surety Bond) and the full and faithful performance by FFMCCI of its portion of work in the Project
(in the case of the Performance Bond).These are the only undertakings expressly guaranteed by the bonds, the
fulfillment of which by FFMCCI would release CCCIC from its obligations as surety; or conversely, the non-
performance of which would give rise to the liabilities of CCCIC as a surety. The Surety and Performance
Bonds do not contain any condition that CCCIC would be liable only if, in addition to the default on its
undertakings by FFMCCI, the Republic also made a claim against the PCIB Letter of Credit furnished by
Kawasaki, on behalf of the Kawasaki-FFMCCI Consortium. The Court agrees with the observation of the
Court of Appeals that "it is not provided, neither in the Consortium Agreement nor in the subject bonds
themselves that before KAWASAKI may proceed against the bonds posted by [FFMCCI] and CCCIC, the
Philippine government as employer must first exercise its rights against the bond issued in its favor by the
consortium." The Court cannot give any additional meaning to the plain language of the undertakings in the
Surety and Performance Bonds. The extent of a surety's liability is determined by the language of the
suretyship contract or bond itself. Article 1370 of the Civil Code provides that "[i]f the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations
shall control." It is not disputed that FFMCCI, due to financial difficulties, was unable to repay the advance
payment it received from Kawasaki and to finish its scope of work in the Project, thus, FFMCCI defaulted on
its obligations to Kawasaki. Given the default of FFMCCI, CCCIC as surety became directly, primarily, and
absolutely liable to Kawasaki as the obligee under the Surety and Performance Bonds. The following
pronouncements of the Court in Asset Builders Corporation v. Stronghold Insurance Company, Inc. are
relevant herein: As provided in Article 2047, the surety undertakes to be bound solidarily with the principal
obligor. That undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a
principal contract. Although the contract of a surety is in essence secondary only to a valid principal obligation,
the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest
over the obligations nor does it receive any benefit therefrom. Let it be stressed that notwithstanding the fact
that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to
the undertaking. To free itself from its liabilities under the Surety and Performance Bonds, CCCIC also cites
Article 2079 of the Civil Code, which reads: Art. 2079. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the creditor to
demand payment after the debt has become due does not of itself constitute any extension of time referred to
herein. The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor
without the surety's consent would deprive the surety of his right to pay the creditor and to be immediately
subrogated to the creditor's remedies against the principal debtor upon the maturity date. The surety is said to
be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming
insolvent during the extended period. Again, there are two sets of transactions in the present case covered by
two different contracts: the Consortium Agreement between Kawasaki and FFMCCI and the Construction
Contract between the Republic and the Kawasaki-FFMCCI Consortium. The Surety and Performance Bonds
guaranteed the performance of the obligations of FFMCCI to Kawasaki under the Consortium Agreement. The
Republic was not a party in either the Surety and Performance Bonds or the Consortium Agreement. Under
these circumstances, there was no creditor-debtor relationship between the Republic and FFMCCI and Article
2079 of the Civil Code did not apply. The extension granted by the Republic to Kawasaki modified the
deadline for the completion of the Project under the Construction Contract, but had no effect on the obligations
of FFMCCI to Kawasaki under the Consortium Agreement, much less, on the liabilities of CCCIC under the
Surety and Performance Bonds
S.C. Megaworld Construction vs. Engr. Parada G.R. No. 183804 9/11/2013 reyes,

FACTS
S.C. Megaworld Construction and Development Corporation (Megaworld) bought electrical lighting materials
from Gentile Industries, a sole proprietorship owned by Engineer Luis U. Parada. Megaworld was unable to
pay for the above purchase on due date, but blamed it on its failure to collect under its sub-contract with the
Enviro KleenTechnologies, Inc. (Enviro Kleen). It was however able to persuade Enviro Kleen to agree to
settle its above purchase, but after paying the respondent P250,000.00 once, Enviro Kleen stopped making
further payments, leaving an outstanding balance of P816,627.00. It also ignored the various demands of the
Parada, who then filed a suit in the RTC, to collect from the petitioner the said balance, plus damages, costs
and expenses.

Megaworld denied liability by saying that it was released from its indebtedness to the Parada due to the
novation of their contract, which. There was allegedly novation when the Parada accepted the partial payment
of Enviro Kleen in its behalf, and thereby acquiesced to the substitution of Enviro Kleen as the new debtor in
Megaworld’s place.

The Regional Trial Court ruled in favor of Parada.

On appeal, Megaworld argued that the trial court should have dismissed the complaint for failure of the
respondent to implead Genlite Industries as "a proper party in interest."
The sales invoices and receipts show that the respondent is the sole proprietor of Genlite Industries, and
therefore the real party.

On the issue of novation, the Court of Appeals ruled that by retaining his option to seek satisfaction from the
petitioner, any acquiescence which the respondent had made was limited to merely accepting Enviro Kleen as
an additional debtor from whom he could demand payment, but without releasing the petitioner as the principal
debtor from its debt to him.

ISSUE: W/N there is novation of the contract.

RULING: None.

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by

substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. It
is "the substitution of a new contract, debt, or obligation for an existing one between the same or different
parties."

The settled rule is that novation is never presumed, but must be clearly and unequivocally shown. In order for
a new agreement to supersede the old one, the parties to a contract must expressly agree that they are
abrogating their old contract in favor of a new one.

The trial court found that the respondent never agreed to release the petitioner from its obligation, and this
conclusion was upheld by the CA.
Heirs of Franco vs. Sps. Veronica Gonzales G.R. No. 159709 6/27/12 Bersamin (recitation)

Facts:
Franco and Medel obtained successive loans from Gonzales as evidence promissory notes. When theborrowers
failed to pay the indebtedness, hence, Gonzaes filed a complaint for collection money with the RTCwho
favoured the respondents. When the respondents moved for execution, it was opposed alleging that theparties
had an agreement which was embodied in a receipt whereby Franco paid P400,000.00 and promised topay the
balance of P375,000.00. Subsequently petitioners insist that the promissory note that had been
alreadynovated when the principal obligation of P500,000.00 had been fixed at P750,000.00, and the maturity
date hadbeen extended.

Issue:
WON, there was novation of the promissory Note?

Held:
No. There is novation when there is an irreconcilable incompatibility between the old and the newobligations.
There is no novation in case of only slight modifications; hence, the old obligation prevails.The new obligation
extinguishes the prior agreement only when the substitution is unequivocally declared, or the old and the new
obligations are incompatible on every point. A compromise of a final judgment operates as a novation of the
judgment obligation upon compliance with either of these two conditions