University of San Agustin

College of Law

Novation
A term paper in Obligations and Contracts

Submitted by:

Famela Jane P. Elmedorial

Juris Doctor, section 1B

Submitted to:

Atty. Anfred P. Panes

Professor

April 28, 2020

 Novation is the substitution of a new contract for an old one. The new
agreement extinguishes the rights and obligations that were in effect under the old
agreement. A novation ordinarily arises when a new individual assumes an obligation to
pay that was incurred by the original party to the contract. It is distinguishable from the
situation that occurs when another individual makes a guarantee that a debtor will pay
what he or she owes to a creditor. I the case of novation, the original debtor is totally
released from the obligation, which is transferred to someone else. The nature of the
transaction is dependent upon the agreement between the parties. A novation also
takes place when the original parties continue their obligation to one another, but a new
agreement is substituted for the old one. (West’s Encyclopedia of American Law,
edition 2. Copyright 2008 The Gale Group, Inc. http://legal-
dictionary.thefreedictionary.com)

Novation is another way of extinguishing an obligation that changes the following

conditions as provided in Article 1291; novation extinguishes an obligation by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor; and

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

To thoroughly discuss, novation has three different kinds as they are classified
relatively. The different kinds of novation are discussed as follows:

1. Novation as to its Object or Purpose – in this kind of novation, an obligation

may extinguish by either:
(a) Real or Objective – extinguishment of an obligation through changing the
object or the principal conditions of the obligation, (Art. 1291, par 1).
(b) Personal or Subjective – extinguishment of an obligation by changing the
persons of their parties either Expromision or Delegacion or thru
substituting the person of the debtor. Another one is thru subrogating a
third person in the rights of the creditor or it could be done mixed by
changing both of the objects of the obligation and the parties involved in it.
2. In order that novation of an obligation or a contract to be constituted according
to the form of its constitution, the novation must either be express or implied.
Express novation means that the contracting parties incontrovertibly disclose
that their object in executing the new contract is to extinguish the old one.
While on the other hand, there is no specific form is required for an implied
novation, and that all that is prescribed by law would be a complete or
substantial incompatibility between the two contracts. Implied novation may be
made by making substantial changes in the object or subject matter of the
contract (Example of this is the delivery of a Milk Tea instead of the Ube
Cheese Pandesal), in the cause or consideration of the contract (Example is
the inflation); and changes in the principal terms or conditions of the contract.
3. According to its Extent of Effect – it is when the old obligation is completely
extinguished where total or extinctive novation is constituted.

The effect of novation is that it modifies an obligation by changing its object or

principal conditions. It may either be extinctive or modificatory. However, in
extinctive novation, it requires four essential requisites to be constituted and all
these four requisites must be present in order that the novation may be
considered as extinctive. The following are the four essential requisites as
follows:

(1) There must be the existence of a previous valid obligation;

(2) There must be the agreement of all parties to the new contract;

(3) The extinguishment of the old contract or obligation and,

(4) The validity of the new contract.

Unlike other modes of extinguishment of an obligation, extinctive novation is a

juridical act with dual function, namely, it extinguishes an obligation and creates a new
one in lieu of the old. In order for the extinctive novation to be valid; all four essential
requisites must be present. Absence of one of the four essential requisites cannot be
considered a valid extinctive novation. In the case of Michael G. Say and Josephine G.
Say vs. Security Bank & Trust Company, it was averred by one of the private
complainants that his obligation had already been extinguished by novation when the
Bank restructured the trust receipts agreement between them. It was further discussed
that:

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.

In order that an obligation may be extinguished by another which substitutes the

same, it is imperative that it be so declared in unequivocal terms, or that the old and
new obligations be in every point incompatible with each other. In order for novation to
take place, the four essential requisites are indispensable. (Article 1292 of the Civil
Code)

“Novation is never presumed, and the animus novandi, whether totally or

partially, must appear by express agreement of the parties, or by their acts that
are too clear and unmistakable. The extinguishment of the old obligation by the
new one is a necessary element of novation, which may be effected either
expressly or impliedly. The contracting parties must incontrovertibly disclose that
their object in executing the new contract is to extinguish the old one. Upon the
other hand, no specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts.

The test of incompatibility is whether the two obligations can stand together,
each one having its independent existence. If they cannot, they are incompatible
and the latter obligation novates the first. Corollarily, changes that breed
incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the obligation,
such as its object, cause of principal conditions thereof; otherwise the change
would be merely modificatory in nature and sufficient o extinguish the original
obligation.

The Supreme Court held that there is no express novation since the restructuring
agreement does not state in clear terms and that the obligation under the trust
receipts is extinguished and in lieu thereof the restructuring agreement will be
substituted. Neither is there an implied novation since the restructuring
agreement is not incompatible with the trust receipts transactions.”
Consequently, the respondent bank obtained a favorable judgment on the basis
of the lacking elements of extinctive novation”.

Therefore, based on the above-discussed case, for an extinctive novation to be

effected, a new contract must extinguish an earlier one between the parties. It must be
proven as a fact either by express stipulation of the parties or by implication derived
from an irreconcilable incompatibility between old and new obligations or contract and
that the four essential elements must be present, otherwise extinctive novation cannot
be perfected.

However, in partial or modificatory novation, the obligation is merely modified,

thus the original obligation remains in force subject only to the slight modifications.

In a case of Iloilo Traders Finance, Inc. v. Heirs of Oscar Soriano, Jr., et.al (GR
149683, June 16, 2003), where the parties for collection of a loan, increased the
indebtedness due to accruing interest from 290,691.00 to 341, 200.00. The compromise
agreement extended the period of payment and provided for a new term of payment,
and provided for a waiver of claims, counterclaims, attorney’s fees, or damages that the
debtors might have against their creditors. However, the settled neither cancelled, nor
materially altered the usual clauses in the real estate mortgages, e.g., the foreclosure of
the mortgaged property in of default.

The issue in this case is whether the novation that took place is an extinctive or
modificatory novation. And if modificatory novation had taken place, it is whether
expressly or impliedly made. The Supreme held that:

Novation is merely modificatory where the change brought about by any

subsequent agreement is merely incidental to the main obligation. (e.g., a change of
interest rates). (Bank of Philippine Islands v. Abaladejo, 53 Phil.14) or an extension of
time to pay. (Kabankalan Sugar Co. v. Pachero, 55 Phil. 555). Novation of a contract
may either be extinctive or modificatory, much being dependent on the nature of the
change and the intention of the parties. Extinctive novation is never presumed; there
must be an express intention to novate. In cases where it is implied, the acts of the
parties must clearly demonstrate their intent to dissolve the old obligations as the
moving consideration for the emergence of the new one. Implied novation necessitates
that the old obligation is completely superseded by the new one. The test of
incompatibility is whether they can stand together, each one having an independent
existence, if they cannot and are irreconcilable, the subsequent obligation would also
extinguish the first. An extinctive novation would, thus, have the twin effects of, first,
extinguishing an existing obligation and, second, creating a new one in its stead.

Whether extinctive or modificatory, novation is made either by changing the

object or the principal conditions, referred to as objective or real novation. In extinctive
novation the four essential requisites are necessary while in modificatory, the change in
the obligation can be brought about by any subsequent agreement which can be merely
incidental to the main obligation. Should there be any doubt as to whether the novation
is total or partial, it shall be as a presumed to be merely modificatory.

As earlier stated, novation is a mode of extinguishment of an obligation which

is modified by the three essential conditions - (As provided for in Article 1291 of the Civil
Code) which are the subjects matters of the extinguishment of an obligation. To further
converse The first requisite, there must be a valid old obligation. It is required that the
old or previous obligation must be valid because if the old obligation is void or non-
existent, there is nothing to novate and the supposed novation is also considered non-
existent. However, if the previous or old obligation is only voidable, it can possibly be
novated provided that the said obligation has not yet annulled. The second requisite is
that there must be intent to extinguish or to modify the obligation by substantial
difference; the intent to extinguish the obligation will result to novation and the intent
must come from the parties involved in the obligation and agreed upon by them. Lastly,
there must be the capacity and the consent of all the parties except in the case of
expromision, where the old debtor does not participate. Consent is agreed upon by the
parties that the old obligation will be extinguish or be modified by the new one. Thse
consent for the extinguishment of the obligation will depend on the conditions stipulated.

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. (Art. 1293, Civil Code)

Expromision occurs when the initiative comes from the third person. However, if
the old debtor is substituted without the knowledge or consent of the old debtor and the
obligation is extinguished, it is also considered expromision. The following are the
requisites for expromision to be valid:

1.) The initiative must come from a third person who will be the new debtor;
2.) The debtor and the creditor must consent to the substitution;
3.) The old debtor must be excused or released from the obligation.

It is clear that in expromision, even without the knowledge and consent of the old
debtor, the new debtor can take over the obligation as long the new debtor is the one
who took the initiative of substituting to the obligation. Consequently, with or without the
knowledge of the old debtor, he/she is released from the obligation from the time that
the new debtor has already substituted thee obligation.

Example:

AAA owed BBB a certain amount of money.CCC wrote BBB a letter stating that
CCC would be the one to take care of AAA’s debt as soon as AAA has made a
purchase of goods from United States of America before he moth of March 2020 ends.
Unfortunately, AAA has never made such purchase from the United States of America
because of the travel ban and security policies implemented by almost all of the
countries all over the world because of the Covid-19 pandemic. Hence, CCC did not
pay BBB for the debt of AAA.

The issue that can be raised I this example in relation to the constitution of
expromision is whether CCC is liable to BBB for not paying AAA’s debt despite sending
a letter to BBB to take care the debt of AAA with certain condition?

Though it was clearly stated that even unaware and without the consent of the
old debtor, when the new debtor initiated to substitute for the obligation it is well stated
that the old debtor will be release from the obligation. However, in this case, CCC will
not be held liable to BBB for not paying AAA’s debt. Though the initiative comes from
the third person, who is CCC who wrote the letter that states that he will take care of
AAA’s debt, does not constitute CCC’s indebtedness. Merely stating that CCC will take
care of the debt does not necessarily assume AAA’s debt. Granting that there was an
assumption of CCC’s indebtedness to BBB for taking initiative in substituting as the new
debtor, still the condition- the purchase from United States of America that has been
imposed by CCC has not yet been fulfilled. Thus, CCC cannot be held liable for the said
obligation.

On the other hand, Delegacion is a method of novation caused by the

replacement of the old debtor by a new debtor, who ( the old debtor) has proposed him
to the creditor, and which replacement has been agreed to by said creditor and by said
new debtor. In delegacion, unlike in expromision, the initiative of substituting the
obligation comes from the old debtor to introduce the new debtor to the creditor and the
creditor and the new debtor must agree with the replacement. The consent of the
creditor to a novation by change of debtor is as indispensable as the creditors consent.

Novation which consists in substituting a new debtor in 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. (Article 1293)

“Novation extinguishes an obligation between two parties when there is a

 substitution of objects or debtors or when there is subrogation of the creditor. It
will only occurs when the new contract declares so “in unequivocal terms” or that
“the old and the new obligations be on every point incompatible with each other”

In the case of Garcia v. Llams, (G.R. No. 154127) novation was extensively
discussed that:

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. Article 1293 of the Civil
Code defines novation as follows:

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 consist of a third person’s assumption of the obligation. As such,
logically requires the consent of the third person and the creditor. In delegacion,
the debtors offers, and the creditor accepts, the third person who 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. 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. For novation to take place, the following requisites must concur.

(1) There must be the existence of a previous valid obligation;

(2) There must be the agreement of all parties to the new contract;

(3) The extinguishment of the old contract or obligation and,

(4) The validity of the new contract.

Novation may also be express or implied. It is 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. The test of
incompatibility is whether the two obligations can stand together, each one with
its own independent existence.

Because novation requires that it be clear and unequivocal, it is never presumed,

thus:

In the civil law setting, novatio is literally construed as to make new. So it is

deeply rooted in the Roman Law jurisprudence, the principle-novatio non
praesumitur—that novation is never presumed. At bottom, for novation to be a
jural reality, its animus must be ever present, debitum pro debito --- basically
extinguishing the old obligation for the new one. There is nothing in the in the
memorandum of agreement that states that with its execution, the obligation of
the petitioner Arco Pulp and Paper to respondent would be extinguished. It also
does not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper
opted to deliver the finished products to a third person instead.

The consent of the creditor must also be secured for the novation to be valid,
consent of the creditor once again is essential. Novation must expressly consented to.
Moreover, the conflicting intention and acts of the parties underscore the absence of
any express disclosure or circumstances with which to deduce a clear and unequivocal
intent by the parties to novate the old agreement.

In this case, respondent was not privy to the memorandum of agreement, thus,
his conformity to the contract need not t be secured. This is clear from the first line of
the memorandum, which states:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between
Mrs. Candida A. Santos and Mr. Eric Sy. . .

If the memorandum of agreement was intended to novate the original agreement

was intended to novate the original agreement between the parties, must have first
agreed to the substitution of Eric Sy as his new debtor. The memorandum of agreement
must also state in clear and unequivocal terms that it has replaced the original
obligation of petitioner Arco Pulp and Paper to respondent. Neither of these
circumstances is present in this case.

Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent
also conflicts with their alleged intent to pass on their obligation to Eric Sy. When
respondent sent his letter of demand to petitioner Arco Pulp and Paper, and not to Eric
Sy, it is showed that the former neither acknowledge nor consented to the latter as his
new debtor. These acts, when taken together, clearly show that novation did not take
place. Since there was no novation, petitioner Arco Pulp and Paper’s obligation to
respondent remains valid and existing.

Therefore, in the absence of the consent of the creditor which in this case the
creditor is the petitioner, no novation has validly constituted between them. (Arco Pulp
and Paper Co., Inc. and Candida A. Santos vs Dan T. Lim, G.R. No. 206806)

It is well settled that no novation took place because the parties did not
unequivocally declare that the old obligation had been extinguished by the issuance and
the acceptance of the check, or that the check or the check would take the place of the
note. The Supreme Court further states that there is no incompatibility between the
promissory note and the check because the check had been issued precisely to answer
for the obligation. On the other hand, the note evidences the loan obligation; and on the
other, the check answers for it. Verily, the two can stand together.

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

In this article, it states that “if the substitution is without the knowledge or against
the will of the debtor” then the old debtor will not be liable because after all, the initiative
did not come from him. Like for instance, supposed that it was with the knowledge or
consent of the old debtor, Article 1294 will not apply hence, the old debtor will be held
liable of the obligation.

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 already existed and of public knowledge, or known
to the debtor, when he delegated his debt. (Art. 1295)

This is the effect of insolvency by the new debtor in delegacion. In order to hold
the old debtor liable if the new debtor is insolvent, it is required that either of the
following must be present:
 1. The insolvency was already existing and of public knowledge at the time of the
delegacion;
2. Or the insolvency was already existing and known to the debtor at the time of the
delegacion.

Example:

Apple owes Banana an amount of Five Hundred Thousand Pesos. Apple

proposed to Banana that Carrot will pay Apple’s debt, and that Apple will be released
from all liabilities. Banana and Carrot agreed to the said proposal of Apple. When
Banana tries to collect the said amount from Carrot, she discovered that Carrot is
insolvent. However, it was proved that at the time of delegacion, Carrot was already
insolvent but the insolvency of Carrot was not known to Apple. Neither was the
insolvency was of public knowledge. Nevertheless, Banana still sues Apple on the
ground that it was Apple who is the original debtor and that she is the one who
introduced Carrot to Banana to make the proposal. Carrot further contends that through
Apple’s proposal, she guaranteed Carrot’s insolvency.

In this case, Apple cannot be held liable for Carrot’s insolvency. As stated in
Article 1295 and in the above-mentioned requisites, the only way that the original debtor
will be held liable for the new debtor’s insolvency is when the insolvency must be
already existing and known to the old debtor or the insolvency is of public knowledge.
Hence, neither of the two is present in this case. The insolvency of Carrot though it
already existed during the delegacion was not known to Apple when she delegated her
debt. Carrot’s insolvency was not even known to the public. The law did not even
require Apple to give blanket of guarantee granting that the requisites are not preset in
this case. Therefore, in the given example, Apple cannot be held liable for the
insolvency of Carrot.

To further understand the scope of Article 1295, there are other possible
situations where it is not applicable. The old debtor will be held liable for the insolvency
of the new debtor if there is no extinctive novation and when under the following
conditions:

(a) When the third person was only an agent, messenger, or employee of the debtor.
(b) When the third person acted only as guarantor or surety.
(c) When the new debtor merely agreed to make himself solidarily liable for the
obligation.
(d) When the new debtor merely agreed to make himself jointly or partly responsible
for the obligation.

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. (Article 1296)

Generally, accessory obligations always follow the principal obligation. Hence,

when the principal obligation is extinguished, the accessory obligations like contract of a
mortgage, guarantee, and pledge, goes with it. However, in this Article, accessory
obligations may only subsist only insofar as they may benefit the third persons who do
not give their consent.

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. (Article 1297)

This article highlights one of the essential requisites of a valid novation that a
new obligation must be valid and effective. For this reason, if the new obligation is void
or ineffective, it means that no novation was constituted and that the old obligation
generally will subsist. However, if the new obligation is subject to a certain condition and
the said condition did not materialize, still the old obligation will subsist. In addition to
this, if new obligation was intended, but the new contract was never perfected for lack of
necessary consent, the old obligation continues. (Vaca v. Koca, 26 Phil 388).

If a subsequent void obligation intended to novate an old one has no legal effect
and will be considered as not having been agreed upon in the first place. Hence, the
original obligation shall subsist. However, if in coming up with the new but void
obligation, the parties agree that it shall in any event extinguish the old obligation, and
then such obligation will not be revived. Hence, if X is bound to give Y a car and this is
novated by binding X to give instead his future inheritance to Y, which he will get upon
the death of his father, the latter new obligation is void because, according to the law,
future inheritance cannot be the object of a contract. This new void obligation will not be
deemed to have been entered into and the old obligation will be revived. However, if the
parties agree that the act of entering into the new but void obligation will in any event
extinguish the old one, then the latter will not be revived.

Example:

Juan De la Cruz and Cardo Dalisay entered into contract that they will buy a
house and lot to be registered under their names which they agreed to novate it to
include the names of their girlfriends provided that the signatures of their girlfriends
could be obtained. However, before they finally decided to novate such contract both of
them broke up with their girlfriends and consequently, the said signatures was never
procured.

In this given example, the supposed new contract was not materialized
therefore, no novated was constituted. Hence, the old obligation will still subsist that the
house and lot will only be registered to the name of Juan De la Cruz and Cardo Dalisay
only because their condition of including the names of their girlfriends is not possible
anymore.

What about if the New Obligation is merely voidable?

If the new obligation is merely voidable, the old obligation is novated because a
voidable obligation is considered valid until it is annulled.

If the new obligation is annulled, the old obligation subsists, and whatever
novation has taken place will naturally have to be set aside. (Encomienda v. Mendiata,
[CA] 8 A.C.R. 438)

Even if the new obligation becomes valid if it is extinguished through a fortuitous

event, the old obligation cannot subsist. For instance, AAA and BBB entered into
contract whereby AAA was to give BBB an amount of One Million Pesos (P1, 500.00) in
cash. Later, they novated the contract by stipulating that instead of the One Million
Pesos cash, AAA would give a particular car. Subsequently, the car was destroyed by a
fortuitous event. In this case, AAA does not have the responsibility to give BBB the
amount of One Million Pesos because the obligation has been validly extinguish by a
valid novation. Moreover, the extinguishment of the new obligation was because of the
fortuitous event thus, it will not held AAA liable.

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. (Article 1298)

One of the requisites of a valid novation is that the old obligation must be valid.
Consequently, if the old obligation is void, there is no valid novation because there is no
obligation in the first place knowing that a void obligation is as good a no obligation at
all. However, if the old obligation is only voidable, but has been annulled prior to the
novation, meaning there is o more obligation and the novation is also void.

When the old obligation was voidable and has not yet been annulled, there is a
valid novation constituted because a voidable obligation is a valid obligation until it is
annulled which may only be claim by the debtor or when the voidable obligation was
ratified the it becomes valid.

Example:

If ABC who through forced and intimidation was made by DEF to sign a contract
stating that ABC will give DEF an amount of One Hundred Thousand Pesos
(100,000.00). later, the obligation was novated again through still through force and
intimidation, in such a way that ABC will give DEF an amount of Five Hundred
Thousand ( P500,000.00) instead of 100,000.00. ABC can file for annulment of the
obligation and if he failed to annul the same, then the new obligation may be given
effect. Novation of a principal obligation definitely presupposes a previously existing
obligation which is valid. If the previously existing obligation is void, a subsequent
obligation intending to novate it shall likewise be void unless it is clear that such
subsequent one can stand on itself and without any reference to the old one. If the
original obligation is merely annullable or voidable, it means that it is valid up to the time
it is annulled. Hence, it can be novated before it is annulled.

If the original obligation was subject to a suspensive or resolutory condition, the

new obligation shall ne under the same condition, unless it is otherwise stipulated.
(Article 1299.)

If the original obligation is with condition, generally the condition attached to the
old obligation is also attached to the new obligation except if the contrary is provided. If,
for example Orange is bound to give Grape a parcel of land only if he passes his Bar
Examination and thereafter the obligation is novated such that Orange is obligatory to
give Grape a parcel of land without any statements to the suspensive condition, it shall
be deemed that the giving of the parcel of land is likewise subject to Grape in passing
his Bar Examination. If the suspensive condition attached to the obligation is not
fulfilled, the old obligation is never arose. Therefore, there would be nothing to novate,
since novation requires the existence of a previous valid and effective obligation.

In the case of (Governmet v. Bautista (CA) 37 O.G. No. 97, p 1880), where Pilar
T. Bautista mortgaged certain property to the Postal Savings Bank. It was stipulated in
the contract that Bautista could transfer the mortgage to anybody provided she
complied with certain conditions and requirements ( for example, the payment of the
interest due, the transfer of the title to the property to the assignee, a deposit of a
certain amount, etc.). Thereupon, Bautista transferred a mortgage to Ocampo, without
however fulfilling the requirements although repeated demands for their compliance had
been made. The Bank made the same demands on Ocampo but still the requirements
were not fulfilled.

It was held by the Supreme Court in this case that there has been no
substitution of debtor here and therefore, no novation because the conditions were not
fulfilled. Therefore also, Bautista remains the debtor, and the Bank can still proceed to
foreclose the mortgage against her. This is true despite the unquestioned transfer of the
mortgage properties to Ocampo, because the letters of demand did not by themselves
constitute sufficient reasons to release Pilar Bautista from her obligation.

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

conventional. The former is not presumed, except in cases expressly mentioned in this
code; the latter must be clearly established in order that I may take effect. (Article 1300)
 Subrogation (extinctive subjective novation by change of the creditor) is the
transfer to a third person of all the rights appertaining to the creditor, including the right
to proceed against guarantors, or possessors of mortgages, subject to any legal
provision or any modification that may be agreed upon. (8 Masera 44).

Legal subrogation is that which takes effect by mandate of law and does not
proceed from an agreement of the parties. Hence, the law which forms the basis of the
subrogation must be clearly identified and invoked to enforce the rights pertinent
thereto. Conventional subrogation, which in the first place is never lightly inferred, 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. Both kinds of
subrogation principally involve the change in the person of the creditor.

There are different kinds of subrogation that may basically affect its nature
whether it is conventional or voluntary, it requires that an agreement and the consent of
the original parties re expressly given (Art, 1301); another is legal subrogation wherein it
takes place by the operation of the law. Subrogation can also either be total subrogation
in which the entire obligation is being subrogated by the new and only creditor or it can
also be partial subrogation in which there are two or more creditors.

For instance, if Koko Cruch is indebted to Vicc Ko the amount of One Million
Pesos (1,000,000.00) which is secured by a mortgage on Koko’s Mercedes –Benz car,
and for that consideration, Rodrigo, with the consent of Koko Crunch, assumes the
entire obligation of Koko Crunch with the stipulation that Koko Crunch will be relieve
from the liabilities or obligations appertaining to him. In short the obligation between
Koko Crunch and Vicc Ko is extinguished such that Vicc Ko can no longer collect from
Koko Crunch and Rodrigo becomes the new creditor who can enforce the obligation,
and if in case that Koko Crunch cannot pay, Rodrigo can foreclose on the mortgage.

Conventional subrogation of a third person requires the consent of the original

parties and of the third person. (Article 1301)

Under this Article, the consent of all parties is required. It must be agreed upon
by the debtor because he becomes liable under the new obligation; and his old
obligation is extinguished; the old creditor his credit is affected; and lastly, the new
creditor because he becomes a party to the obligation. It is therefore contractual. The
replacement or substitution of the creditor to be legally complete in all aspects, all
parties must agree to the same. For this reason, if the debtor does not agree and the
third-party makes payment to the creditor, such third party can demand payment from
the debtor up to the extend the latter has been benefited, but cannot compel the creditor
to subrogate him (third party) in his rights, such as those arising from mortgage,
guaranty, or penalty. Generally, the debtor loses the right to present against the new
creditor any defense which he, the debtor, could have set up against the old creditor.

As between conventional subrogation and assignment of the credit, the latter,

insofar as the creditor is concerned, should be preferred, for it has advantages, without
the corresponding disadvantages of conventional subrogation. Upon the other hand,
conventional subrogation cannot present any advantage over assignment of credit.

Article 1302. it is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without debtors
knowledge;
(2) When a third person, not interested in the obligation, pays with the express or
tacit approval of he debtor;
(3) 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. (1210a)

There are three cases when legal subrogation is presumed. The first case in
when a creditor pays another creditor who is preferred, even without the debtor’s
knowledge. Under the law, claims for the unpaid price of movables sold, on said
movables, so long as they are in the possession of the debtor, up to the value of the
same is a preferred credit. Hence, any creditor who owns such credit is a preferred
creditor and if another creditor pays off the unpaid purchase price of the movable, such
paying creditor will be presumed to have been subrogated to the rights off the creditor
who originally owned the credit.

The second case s when a third person, not interested in the obligation, pays
with the express or tacit approval of the debtor. In this case, the debtor, in effect, agrees
to the payment and hence there exist something similar to a conventional subrogation.
The presumption of legal subrogation will arise from this situation.

The third case is 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. A person interested in the fulfillment o the obligation is
one who will be affected by payment of the debtor. Hence, a guarantor will be released
if the principal obligation of the debtor is paid. This case is also relevant with respect to
a surety or a solidary debtor. It is when a creditor pays another creditor, who is
preferred even without the debtor’s knowledge.

For instance, Apolinario is indebted to Mabini for the amount of Ten Thousand
Pesos (10,000.00). The debt was secured by a real estate mortgage constituted by
Rizal on his own properties for the benefit of Apolinario’s debt because they were best
friends. In the event that Rizal pays Mabini for the debt of Apolinario, the presumption of
legal subrogation will arise in favor of X even such payment was made without the
consent of Apolinario. The act of Mabini of paying the debt of Apolinario constitutes a
merger or confusion of the characters of the creditors and the mortgagor, therefore, the
obligation (mortgage) is extinguished.

Subrogation transfers to the person subrogated the credit with all the rights
thereto appertaining, either against the debtor or against third persons, be they
guarantors or possessors of mortgages, subject to stipulation in a conventional
subrogation.(Article 1303)

In this provision, it states the general effect of subrogation wherein the third
person steps into the shoes of the creditor and becomes the new creditor. In other
words, whatever is in the contract between the debtor and the creditor is what will the
new creditors assumes. On the other hand, in conventional subrogation, the parties
may stipulate the nature, limits, extent and scope of the subrogation provided that
whatever changes or limits to the new stipulation is not contrary to law, morals, good
customs, public order, or public policy. In this article, the effect of the subrogation is that
the credit, including all the rights that are entitled either against the debtor or against the
third persons are transferred. Hence, the obligation between the original parties subsists
as it cannot be extinguished out of the said subrogation.

For instance, Alpha owes Bravo an amount of Thirty Five Pesos and Seventy
Centavos. Charlie takes his place as the guarantor for the said obligation. A stranger,
Echo, who got in love to Alpha in the first sight, paid the debt of Alpha to Bravo with the
consent of both Bravo and Alpha. Echo is now subrogated in the place of Bravo as the
creditor. If Alpha cannot pay the amount of Thirty Five Pesos and Seventy Centavos,
Echo can proceed against Charlie who is the guarantor of the said obligation.

In case that the obligation is subject to a suspensive condition, the creditor

cannot collect the obligation from the debtor unless the said condition is fulfilled.

A creditor, to whom partial payment has been made, may exercise his right for
the remainder, and shall be preferred to the person who has been subrogated in his
place in virtue of the partial payment of the same credit. (Article 1304)

In partial subrogation, it creates two creditors. First creditor is the old creditor
who remains to have the right to claim for the existing obligation owe by the debtor
because only a partial payment has been made in his favor. The second creditor is the
new creditor, who subrogated a share of the old creditors’ claim.

In summary, novation is understood to be the substitution or change of an

obligation by another, which extinguishes or modifies the old obligation by either
changing its object or principal condition, or substituting another in place of the debtor,
or subrogating a third person in the right of the creditor.