Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-6910             January 9, 1912

ANDRES ZAPANTA, plaintiff-appellee, 
vs.
EDUARDO DE ROTAECHE, attorney in fact of Angel Ortiz, defendant-appellant.

Chicote & Miranda for appellant.

Federico Olbes for appellee.

JOHNSON, J.:

On the 4th of august, 1909, the plaintiff commenced the present action in the Court of First Instance
of the Province of Sorsogon, for the purpose of recovering the sum of P9,687.86, as damages
occasioned by the defendant to the plaintiff, caused by an illegal execution and sale of the property
of the plaintiff by the defendant.

On the 24th of August, 1909, the defendant filed a demurrer to said complaint, alleging that the facts
therein stated were insufficient to constitute a cause of action and were vague and unintelligible,
which demurrer was, on the 6th of November, 1090, overruled; whereupon the defendant filed a
general denial.

After hearing the evidence, the Honorable Jose C. Abreu, judge, on the 22d of April, 1910, rendered
a judgment in favor of the plaintiff and against the defendant, for the sum of P3,707.26, with legal
interest from the date of the commencement of the present action.

From the judgment the defendant appealed and made the following assignments of error:

I. The court erred in declaring that the agreement of November 29, 1904, entered into
between Andres Zapanta as one party and Ramon Echevarria, attorney in fact for F. Suarez,
as the other party, which is attached hereto as Exhibit A of the complaint, has reduced null
and void the judgment pronounced in civil case No. 56 of the Court of First Instance of
Sorsogon, wherein the commercial firm "Viuda e Hijos de F. Suarez" was the plaintiff and
Andres Zapanta the defendant, and that by virtue of said agreement the said firm renounced
execution by legal means of the judgment rendered in its favor, stipulating that in case of
non-fulfillment of said agreement on the part of Andres Zapanta, said commercial firm would
have to proceed again to a new civil trial in order to inforce payment of the said judgment.

II. The court erred in rendering judgment against Don Angel Ortiz.

III. The court erred in not granting the new trial requested by the attorney for Angel Ortiz, in
accordance with law, and especially for the reason that the facts held in judgment were not
sufficiently justified by the evidence.

With reference to the first assignment of error above noted, the following facts appear to be
undisputed:
First. That on the 22d of August, 1904, Ramon Echevarria, as legal representative of the firm, "Viuda
e Hijos de F. Suarez," commenced an action in the Court of First Instance of the Province of
Sorsogon, against the plaintiff herein (Andres Zapanta) for the purpose of recovering the sum of
7,179.48 pesos Mexican currency.

Second. That on the 25th of October, 1904, after the trial of said cause, the court rendered a
judgment in favor of the plaintiff and against the said defendant (Andres Zapanta), for the said sum
of 7,179.48 pesos Mexican currency; that said sum of 7,179.48 pesos Mexican currency reduced to
Conant equaled the sum of P6,353.52.

Third. That on the 29th of November, 1904, the plaintiff herein and the defendant entered into the
following agreement or contract with reference to the said judgment for the sum of 7,179.48 pesos
Mexican currency (P6,353.52):

I, Andres Zapanta, married, of legal age, and resident of Sorsogon, capital of the Province of
Sorsogon, Philippine Islands, make known by these presents:

First. That I am indebted, and so acknowledge, to the commercial firm "Viuda e Hijos
de F. Suarez," in the sum of six thousand three hundred and fifty-three pesos and
fifty-two centavos (P6,353.52), as declared in the judgment rendered in civil suit No.
56, fled in the Court of First Instance in this province by the representative of said
firm.

Second. That as I am unable to pay said amount now in a lump sum, I promise to
pay at the end of each month to the said commercial firm "Viuda e Hilos de F.
Suarez," the sum of one hundred fifty pesos (P150), which payment shall be made
for the first time at the end of the present month.

Third. That the sum owed and acknowledge shall bear interest at the rate of three
percent per annum, which shall diminish in relative portion with the amount that will
each month be paid by me on account.

I. Ramon Echevarria, as representative of the firm called "Viuda e Hijo de F. Suarez,"

of Sorsogon, accept the propositions above set forth by Andres Zapanta, with the
proviso that in case of nonfulfillment of his promise, said commercial firm shall be at
liberty to enter suit against him.

In witness whereof, we sign the present instrument in Sorsogon, this 29th of

November, 1904.

VIUDA E HIJOS DE F. SUAREZ.

(Sgd. by power of attorney.)
R. ECHEVARRIA.
(Sgd.) ANDRES ZAPANTA")

Fourth. That under by virtue of said agreement mentioned in the foregoing

paragraph, the plaintiff (Zapanta), continued to make payments until he had paid the
sum of P3,699.37, leaving a balance due on the 31st of March, 1909, of the sum of
P2,939.79. (See Exhibit No. 1.)
 Fifth. That by reason of the failure of the plaintiff to punctually comply with the
provisions of said agreement, the defendant herein, on the 31st of March, 1909, sued
out a writ of execution for the purpose of recovering the balance due upon said
judgement of 7,179.48 pesos Mexican currency; that by virtue of said execution, the
sheriff of the Province of Sorsogon attached and sold practically all of the property
which the plaintiff had in said province, amounting to P3,707.26.

Under these facts, in relation with the said first assignment of error, we have the questions
presented:

(a) What was the effect of said agreement mentioned in said paragraph 3, upon the
judgement of the court rendered on the 25th of October, 1904, for the sum of 7,179.48 pesos
Mexican currency?

(b) Did said agreement have the effect of merging the said judgment? and

(c) Did the defendant, for a failure to comply with the said agreement, have a right to an
execution under said judgment?

The contention of the plaintiff, which was sustained by the lower court is, that provision of the
agreement quoted in paragraph 3 above, "said commercial firm shall be at liberty to enter suit
against him," had the effect of extinguishing the rights of the defendant in the said judgment of the
25th of October, 1904; in other words, that by virtue of said agreement, all of the rights and
obligations of the respective parties to said judgment had been merged in said agreement; that if the
plaintiff should fail to comply with the conditions of said agreement, the only remedy of the defendant
was to commence an action against him upon said contact; that the defendant, by virtue of said
agreement, had lost his right to the writ of the execution under said judgment (October 25, 1904).

A final judgment is one of the most solemn obligations incurred by parties known to the law. The
Civil Code, in article 1156, provides the method by which all civil obligations may be extinguished.
One of the methods recognized by said code for the extinguishment of obligation is that by novation.
(Civil Code, arts. 1156, 1203 to 1213.) In order, however, that an obligation shall be extinguished by
another obligation (by novation) which substitutes it, the law requires that the novation or
extinguishment shall be expressly declared or that the old and new obligations shall be absolutely
incompatible. (Civil Code, art. 1204.) In the present case, the contract referred to does not expressly
extinguish the obligations existing in said judgment. Upon the contrary it expressly recognizes the
obligations existing between the parties in said judgement and expressly provides a method by
which the same shall be extinguished, which method is, as is expressly indicated in said contract, by
monthly payment. The contract, instead of containing provisions "absolutely incompatible" with the
obligations of the judgment, expressly ratifies such obligations and contains provisions for satisfying
them. The said agreement simply gave the plaintiff a method and more time for the satisfaction of
judgment. It did not extinguish the obligations contained in the judgment, until the terms of said
contract had been fully complied with. Had the plaintiff continued to comply with the conditions of
said contract, he might have successfully invoked its provisions against the issuance of an execution
upon the said judgment. The contract and the punctual compliance with its terms only delayed the
right of the defendant to an execution upon the judgment. The judgment was not satisfied and the
obligation existing thereunder still subsisted until the terms of the agreement had been fully complied
with. The plaintiff was bound to perform the conditions mentioned in said contract punctually and
fully, in default of which the defendant was remitted to the original rights under his judgment.

The contract was not a new and independent obligation expressly extinguishing the judgment;
neither were its terms incompatible with the obligations of the judgment. It was simply another
method of satisfying the judgment. The judgment was not extinguished. Its enforcement by the
methods provided for by law was only delayed during a strict compliance with the terms of the
contract. (Ives vs. Phelps, 16 Minn., 407; Brown vs. Feeter, 7 Wendell (N. Y.), 301;
Plunkett vs. Block, 117 Ind., 14; Terret vs. Brooklyn Improvement Co., 87 N. Y., 92; Maute vs. Gross,
56 Pa. St., 250; 94 Am. Dec., 62.)

Between the civil and the common law, with reference to the extinguishing of one obligation by the
creation of another, there seems to be no difference. Under both systems of imprudence, in order to
extinguish one obligation by the creation of another, the extinguishment must be made to clearly
appear. In our opinion, in the present case the new contract did not expressly extinguish the
obligations of the judgment, neither are the terms of said contract "absolutely incompatible" with the
obligations of said judgment.

Under the view which we have taken of the first assignment of error, we deem it unnecessary to
discuss the second and third assignment of error.

Our conclusion is, therefore, that when the plaintiff failed to comply with the conditions of said
contact, the defendant had a right to resort the methods provides by law for the satisfaction of the
obligations created by said judgment.

The judgment of the lower court is therefore hereby reversed, and the defendant is hereby released
from any obligation under the complaint, and without any finding as to costs, it is so ordered.

Arellano, C.J., Torres, Moreland and Trent, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 115158 September 5, 1997

EMILLA M. URACA, CONCORDIA D. CHING and ONG SENG, represented by ENEDINO H.

FERRER, petitioners, 
vs.
COURT OF APPEALS, JACINTO VELEZ, JR., CARMEN VELEZ TING, AVENUE
MERCHANDISING, INC., FELIX TING AND ALFREDO GO, respondents.

PANGANIBAN, J.:

Novation is never presumed; it must be sufficiently established that a valid new agreement or
obligation has extinguished or changed an existing one. The registration of a later sale must be done
in good faith to entitle the registrant to priority in ownership over the vendee in an earlier sale.

Statement of the Case

These doctrines are stressed by this Court as it resolves the instant petition challenging the
December 28, 1993 Decision 1 of Respondent Court of Appeals 2 in CA-G.R. SP No. 33307, which
reversed and set aside the judgment of the Regional Trial Court of Cebu City, Branch 19, and entered a
new one dismissing the petitioners' complaint. The dispositive portion of the RTC decision reads:  3

WHEREFORE, judgment is hereby rendered:

1) declaring as null and void the three (3) deeds of sale executed by the Velezes to
Felix C. Ting, Manuel Ting and Alfredo Go;

2) ordering Carmen Velez Ting and Jacinto M. Velez, Jr. to execute a deed of
absolute sale in favor of Concordia D. Ching and Emilia M. Uraca for the properties
in question for P1,400,000.00, which sum must be delivered by the plaintiffs to the
Velezes immediately after the execution of said contract;

3) ordering Carmen Velez Ting and Jacinto M. Velez, Jr. to reimburse Felix C. Ting,
Manuel C. Ting and Alfredo Go whatever amount the latter had paid to the former;

4) ordering Felix C. Ting, Manuel C. Ting and Alfredo Go to deliver the properties in
question to the plaintiffs within fifteen (15) days from receipt of a copy of this
decision;

5) ordering all the defendants to pay, jointly and severally, the plaintiffs the sum of
P20,000.00 as attorney's fees.

SO ORDERED.

The Antecedent Facts

The facts narrated by the Court of Appeals are as follows:  4

The Velezes (herein private respondents) were the owners of the lot and commercial
building in question located at Progreso and M.C. Briones Streets in Cebu City.

Herein (petitioners) were the lessees of said commercial building.  5

On July 8, 1985, the Velezes through Carmen Velez Ting wrote a letter to herein
(petitioners) offering to sell the subject property for P1,050,000.00 and at the same time
requesting (herein petitioners) to reply in three days.

On July 10, 1985, (herein petitioners) through Atty. Escolastico Daitol sent a reply-
letter to the Velezes accepting the aforesaid offer to sell.

On July 11, 1985, (herein petitioner) Emilia Uraca went to see Carmen Ting about
the offer to sell but she was told by the latter that the price was P1,400,000.00 in
cash or manager's check and not P1,050,000.00 as erroneously stated in their letter-
offer after some haggling. Emilia Uraca agreed to the price of P1,400,000.00 but
counter-proposed that payment be paid in installments with a down payment of
P1,000,000.00 and the balance of P400,000 to be paid in 30 days. Carmen Velez
Ting did not accept the said counter-offer of Emilia Uraca although this fact is
disputed by Uraca.
 No payment was made by (herein petitioners) to the Velezes on July 12, 1985 and
July 13, 1985.

On July 13, 1985, the Velezes sold the subject lot and commercial building to the
Avenue Group (Private Respondent Avenue Merchandising Inc.) for P1,050,000.00
net of taxes, registration fees, and expenses of the sale.

At the time the Avenue Group purchased subject property on July 13, 1985 from the
Velezes, the certificate of title of the said property was clean and free of any
annotation of adverse claims or lis pendens.

On July 31, 1985 as aforestated, herein (petitioners) filed the instant complaint
against the Velezes.

On August 1, 1985, (herein petitioners) registered a notice of lis pendens over the

property in question with the Office of the Register of Deeds.  6

On October 30, 1985, the Avenue Group filed an ejectment case against (herein
petitioners) ordering the latter to vacate the commercial building standing on the lot in
question.

Thereafter, herein (petitioners) filed an amended complaint impleading the Avenue

Group as new defendants (after about 4 years after the filing of the original
complaint).

The trial court found two perfected contracts of sale between the Velezes and the petitioners
involving the real property in question. The first sale was for P1,050,000.00 and the second was for
P1,400,000.00. In respect to the first sale, the trial court held that "[d]ue to the unqualified
acceptance by the plaintiffs within the period set by the Velezes, there consequently came about a
meeting of the minds of the parties not only as to the object certain but also as to the definite
consideration or cause of the contract." 7 And even assuming arguendo that the second sale was not
perfected, the trial court ruled that the same still constituted a mere modificatory novation which did not
extinguish the first sale. Hence, the trial court held that "the Velezes were not free to sell the properties to
the Avenue Group." 8 It also found that the Avenue Group purchased the property in bad faith.  9

Private respondents appealed to the Court of Appeals. As noted earlier, the CA found the appeal
meritorious. Like the trial court, the public respondent held that there was a perfected contract of
sale of the property for P1,050,000.00 between the Velezes and herein petitioners. It added,
however, that such perfected contract of sale was subsequently novated. Thus, it ruled: "Evidence
shows that that was the original contract. However, the same was mutually withdrawn, cancelled and
rescinded by novation, and was therefore abandoned by the parties when Carmen Velez Ting raised
the consideration of the contract [by] P350,000.00, thus making the price P1,400,000.00 instead of
the original price of P1,050,000.00. Since there was no agreement as to the 'second' price offered,
there was likewise no meeting of minds between the parties, hence, no contract of sale was
perfected." 10 The Court of Appeals added that, assuming there was agreement as to the price and a
second contract was perfected, the later contract would be unenforceable under the Statute of Frauds. It
further held that such second agreement, if there was one, constituted a mere promise to sell which was
not binding for lack of acceptance or a separate consideration. 11

The Issues

Petitioners allege the following "errors" in the Decision of Respondent Court:

 I

Since it ruled in its decision that there was no meeting of the minds on the "second"
price offered (P1,400,000.00), hence no contract of sale was perfected, the Court of
Appeals erred in not holding that the original written contract to buy and sell for
P1,050,000.00 the Velezes property continued to be valid and enforceable pursuant
to Art. 1279 in relation with Art. 1479, first paragraph, and Art. 1403, subparagraph 2
(e) of the Civil Code.

II

The Court of Appeals erred in not ruling that petitioners have better rights to buy and
own the Velezes' property for registering their notice of lis pendens ahead of the
Avenue Group's registration of their deeds of sale taking into account Art. 1544, 2nd
paragraph, of the Civil Code. 12

The Court's Ruling

The petition is meritorious.

First Issue: No Extinctive Novation

The lynchpin of the assailed Decision is the public respondent's conclusion that the sale of the real
property in controversy, by the Velezes to petitioners for P1,050,000.00, was extinguished by
novation after the said parties negotiated to increase the price to P1,400,000.00. Since there was no
agreement on the sale at the increased price, then there was no perfected contract to enforce. We
disagree.

The Court notes that the petitioners accepted in writing and without qualification the Velezes' written
offer to sell at P1,050,000.00 within the three-day period stipulated therein. Hence, from the moment
of acceptance on July 10, 1985, a contract of sale was perfected since undisputedly the contractual
elements of consent, object certain and cause concurred. 13 Thus, this question is posed for our
resolution: Was there a novation of this perfected contract?

Article 1600 of the Civil Code provides that "(s)ales are extinguished by the same causes as all other
obligations, . . . ." Article 1231 of the same Code states that novation is one of the ways to wipe out
an obligation. Extinctive novation requires: (1) the existence of a previous valid obligation; (2) the
agreement of all the parties to the new contract; (3) the extinguishment of the old obligation or
contract; and (4) the validity of the new one. 14 The foregoing clearly show that novation is effected only
when a new contract has extinguished an earlier contract between the same parties. In this light, novation
is never presumed; 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 contracts. 15 After a
thorough review of the records, we find this element lacking in the case at bar.

As aptly found by the Court of Appeals, the petitioners and the Velezes did not reach an agreement
on the new price of P1,400,000.00 demanded by the latter. In this case, the petitioners and the
Velezes clearly did not perfect a new contract because the essential requisite of consent was
absent, the parties having failed to agree on the terms of the payment. True, petitioners made a
qualified acceptance of this offer by proposing that the payment of this higher sale price be made by
installment, with P1,000,000.00 as down payment and the balance of P400,000.00 payable thirty
days thereafter. Under Article 1319 of the Civil Code, 16 such qualified acceptance constitutes a
counter-offer and has the ineludible effect of rejecting the Velezes' offer. 17 Indeed, petitioners' counter-
offer was not accepted by the Velezes. It is well-settled that "(a)n offer must be clear and definite, while
an acceptance must be unconditional and unbounded, in order that their concurrence can give rise to a
perfected contract." 18 In line with this basic postulate of contract law, "a definite agreement on the manner
of payment of the price is an essential element in the formation of a binding and enforceable contract of
sale." 19 Since the parties failed to enter into a new contract that could have extinguished their previously
perfected contract of sale, there can be no novation of the latter. Consequently, the first sale of the
property in controversy, by the Velezes to petitioners for P1,050,000.00, remained valid and existing.

In view of the validity and subsistence of their original contract of sale as previously discussed, it is
unnecessary to discuss public respondent's theses that the second agreement is unenforceable
under the Statute of Frauds and that the agreement constitutes a mere promise to sell.

Second Issue: Double Sale of an Immovable

The foregoing holding would have been simple and straightforward. But Respondent Velezes
complicated the matter by selling the same property to the other private respondents who were
referred to in the assailed Decision as the Avenue Group.

Before us therefore is a classic case of a double sale — first, to the petitioner; second, to the Avenue
Group. Thus, the Court is now called upon to determine which of the two groups of buyers has a
better right to said property.

Article 1544 of the Civil Code provides the statutory solution:

xxx xxx xxx

Should it be immovable property, the ownership shall belong to the person acquiring
it who in good faith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good
faith was first in the possession; and, in the absence thereof, to the person who
presents the oldest title, provided there is good faith.

Under the foregoing, the prior registration of the disputed property by the second buyer does not by
itself confer ownership or a better right over the property. Article 1544 requires that such registration
must be coupled with good faith. Jurisprudence teaches us that "(t)he governing principle is primus
tempore, potior jure (first in time, stronger in right). Knowledge gained by the first buyer of the
second sale cannot defeat the first buyer's rights except where the second buyer registers in good
faith the second sale ahead of the first, as provided by the Civil Code. Such knowledge of the first
buyer does not bar her from availing of her rights under the law, among them, to register first her
purchase as against the second buyer. But in converso, knowledge gained by the second buyer of
the first sale defeats his rights even if he is first to register the second sale, since such knowledge
taints his prior registration with bad faith. This is the price exacted by Article 1544 of the Civil Code
for the second buyer being able to displace the first buyer; that before the second buyer can obtain
priority over the first, he must show that he acted in good faith throughout (i.e, in ignorance of the
first sale and of the first buyer's rights) — from the time of acquisition until the title is transferred to
him by registration or failing registration, by delivery of possession." 20 (Emphasis supplied)

After a thorough scrutiny of the records of the instant case, the Court finds that bad faith tainted the
Avenue Group's purchase on July 13, 1985 of the Velezes' real property subject of this case, and the
subsequent registration thereof on August 1, 1995. The Avenue Group had actual knowledge of the
Velezes' prior sale of the same property to the petitioners, a fact antithetical to good faith. For a
second buyer like the Avenue Group to successfully invoke the second paragraph, Article 1544 of
the Civil Code, it must possess good faith from the time of the sale in its favor until the registration of
the same. This requirement of good faith the Avenue Group sorely failed to meet. That it had
knowledge of the prior sale, a fact undisputed by the Court of Appeals, is explained by the trial court
thus:

The Avenue Group, whose store is close to the properties in question, had known the
plaintiffs to be the lessee-occupants thereof for quite a time. Felix Ting admitted to
have a talk with Ong Seng in 1983 or 1984 about the properties. In the cross-
examination, Manuel Ting also admitted that about a month after Ester Borromeo
allegedly offered the sale of the properties Felix Ting went to see Ong Seng again. If
these were so, it can be safely assumed that Ong Seng had consequently told Felix
about plaintiffs' offer on January 11, 1985 to buy the properties for P1,000,000.00
and of their timely acceptance on July 10, 1985 to buy the same at P1,050,000.00.

The two aforesaid admissions by the Tings, considered together with Uraca's
positive assertion that Felix Ting met with her on July 11th and who was told by her
that the plaintiffs had transmitted already to the Velezes their decision to buy the
properties at P1,050,000.00, clinches the proof that the Avenue Group had prior
knowledge of plaintiffs' interest. Hence, the Avenue Group defendants, earlier
forewarned of the plaintiffs' prior contract with the Velezes, were guilty of bad faith
when they proceeded to buy the properties to the prejudice of the plaintiffs. 21

The testimony of Petitioner Emilia Uraca supports this finding of the trial court. The salient portions
of her testimony follow:

BY ATTY. BORROMEO: (To witness)

Q According to Manuel Ting in his testimony, even if they know,

referring to the Avenue Group, that you were tenants of the property
in question and they were neighbors to you, he did not inquire from
you whether you were interested in buying the property, what can you
say about that?

A It was Felix Ting who approached me and asked whether I will buy
the property, both the house and the land and that was on July 10,
1985.

ATTY BORROMEO: (To witness)

Q What was your reply, if any?

A Yes, sir, I said we are going to buy this property because we have
stayed for a long time there already and we have a letter from
Carmen Ting asking us whether we are going to buy the property and
we have already given our answer that we are willing to buy.

COURT: (To witness)

Q What do you mean by that, you mean you told Felix Ting and you
showed him that letter of Carmen Ting?
 WITNESS:

A We have a letter of Carmen Ting where she offered to us for sale

the house and lot and I told him that I have already agreed with
Concordia Ching, Ong Seng and my self that we buy the land. We
want to buy the land and the building. 22

We see no reason to disturb the factual finding of the trial court that the Avenue Group, prior to the
registration of the property in the Registry of Property, already knew of the first sale to petitioners. It
is hornbook doctrine that "findings of facts of the trial court, particularly when affirmed by the Court of
Appeals, are binding upon this Court" 23 save for exceptional
circumstances 24 which we do not find in the factual milieu of the present case. True, this doctrine does
not apply where there is a variance in the factual findings of the trial court and the Court of Appeals. In the
present case, the Court of Appeals did not explicitly sustain this particular holding of the trial court, but
neither did it controvert the same. Therefore, because the registration by the Avenue Group was in bad
faith, it amounted to no "inscription" at all. Hence, the third and not the second paragraph of Article 1544
should be applied to this case. Under this provision, petitioners are entitled to the ownership of the
property because they were first in actual possession, having been the property's lessees and possessors
for decades prior to the sale.

Having already ruled that petitioners' actual knowledge of the first sale tainted their registration, we
find no more reason to pass upon the issue of whether the annotation of lis pendens automatically
negated good faith in such registration.

WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is hereby
SET ASIDE and the dispositive portion of the trial court's decision dated October 19, 1990 is
REVIVED with the following MODIFICATION — the consideration to be paid under par. 2 of the
disposition is P1,050,000.00 and not P1,400,000.00. No Costs.

SO ORDERED.

Narvasa, C.J., Melo and Francisco, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 120817 November 4, 1996

ELSA B. REYES, petitioner, 
vs.
COURT OF APPEALS, SECRETARY OF JUSTICE, AFP-MUTUAL BENEFIT ASSOCIATION,
INC., and GRACIELA ELEAZAR, respondents.

TORRES, JR., J.:
Petitioner assails the respondent court's decision  1 dated May 12, 1995 which sustained the two
resolutions of the respondent Secretary of Justice, namely: 1) the Resolution dated January 23, 1992
affirming the resolution of the Provincial Prosecutor of Rizal dismissing the complaints of petitioner
against private respondent Eleazar in I.S. Nos. 91-2853, 91-4328 to 29, 91-4585 to 91 and 91-4738 to 39
for violations of B.P. Blg. 22 and estafa under Article 315, par. 4, no. 2 (d) of the Revised Penal Code,
and 2) the Resolution dated January 12, 1993 affirming the resolution of the City Prosecutor of Quezon
City finding a prima facie case in I.S. No. 92-926 for violation of B.P. Blg. 22 and estafa filed by
respondent AFP-Mutual Benefit Association, Inc. (AFP-MBAI, for brevity) against petitioner Reyes.

The facts as summarized by the respondent court are as follows:

Elsa Reyes is the president of Eurotrust Capital Corporation (EUROTRUST), a

domestic corporation engaged in credit financing. Graciela Eleazar, private
respondent, is the president of B.E. Ritz Mansion International Corporation
(BERMIC), a domestic enterprise engaged in real estate development. The other
respondent, Armed Forces of the Philippines Mutual Benefit Asso., Inc. (AFP-MBAI),
is a corporation duly organized primarily to perform welfare services for the Armed
Forces of the Philippines.

A. Re: Resolution dated January 23, 1992.

In her various affidavits-complaint with the Office of the Provincial Prosecutor of

Rizal, Elsa Reyes alleges that Eurotrust and Bermic entered into a loan agreement.
Pursuant to the said contract, Eurotrust extended to Bermic P216.053,126.80 to
finance the construction of the latter's Ritz Condominium and Gold Business Park.
The loan was without collateral but with higher interest rates than those allowed by
the banks. In turn, Bermic issued 21 postdated checks to cover payments of the loan
packages. However, when those checks were presented for payment, the same were
dishonored by the drawee bank, Rizal Commercial Banking Corporation (RCBC),
due to stop payment order made by Graciela Eleazar. Despite Eurotrust's notices
and repeated demands to pay, Eleazar failed to make good the dishonored checks,
prompting Reyes to file against her several criminal complaints for violation of B.P.
22 and estafa under Article 315, 4th paragraph, No. 2 (d) of the Revised Penal Code.

Graciela Eleazar, in her counter-affidavits, asserts that beginning December 1989,

Eurotrust extended to Bermic several loan packages amounting to P190,336,388.86.
For its part, Bermic issued several postdated checks to cover payments of the
principal and interest of every a loan packages involved.

Subsequently, Elsa Reyes was investigated by the Senate Blue Ribbon Committee.
She was involved in a large scale scam amounting to millions of pesos belonging to
Instructional Material Corporation (IMC), an agency under the Department of
Education, Culture and Sports.

Meanwhile, respondent AFP-MBAI which invested its funds with Eurotrust, by buying
from it government securities, conducted its own investigation and found that after
Eurotrust delivered to AFP-MBAI the securities it purchased, the former borrowed the
same securities but failed to return them to AFP-MBAI; and that the amounts paid by
AFP-MBAI to Eurotrust for those securities were in turn lent by Elsa Reyes to Bermic
and others.
 When Eleazar came to know that the funds originally loaned by Eurotrust to Bermic
belonged to AFP-MBAI, she, as President of Bermic, requested a meeting with
Eurotrust representatives. Thus, on February 15, 1991, the representatives of
Eurotrust and Bermic agreed that Bermic would directly settle its obligations with the
real owners of the fund-AFP-MBAI and DECS-IMC. This agreement was formalized
in two letters dated March 19, 1991. Pursuant to this understanding, Bermic
negotiated with AFP-MBAI and DECS-IMC and made payments to the latter. In fact,
Bermic paid AFP-MBAI P31,711.11 and a check of P1-million.

However, Graciela Eleazar later learned that Elsa Reyes continued to collect on the
postdated checks issued by her (Eleazar) contrary to their agreement. So, Bermic
wrote to Eurotrust to hold the amounts "in constructive trust" for the real owners. But
Reyes continued to collect on the other postdated checks dated April 17 to June 28,
1991. Upon her counsel's advise, Eleazar had the payment stopped. Hence, her
checks issued in favor of Eurotrust were dishonored.

After investigation, the Office of the Provincial Prosecutor of Rizal issued a resolution
dismissing the complaints filed by Elsa Reyes against Graciela Eleazar on the
ground that when the latter assumed the obligation of Reyes to AFP-MBAI, it
constituted novation, extinguishing any criminal liability on the part of Eleazar.

Reyes filed a petition for review of the said resolution with respondent Secretary of
Justice contending that novation did not take place.

The Secretary of Justice dismissed the petition holding that "the novation of the loan
agreement prevents the rise of any incipient criminal liability since the novation had
the effect of canceling the checks and rendering without effect the subsequent
dishonor of the already cancelled checks."

B. Re: Resolution dated January 12, 1993

At the time of the pendency of the cases filed by Elsa Reyes against Graciela
Eleazar, AFP-MBAI lodged a separate complaint for estafa and a violation of BP 22
against Elsa Reyes with the office of the city prosecutor of Quezon City docketed as
I.S. 92-926. The affidavit of Gudelia Dinapo a member of the investigating committee
formed by AFP-MBAI to investigate the anomalies committed by Eurotrust/Reyes,
shows that between August 1989 and September 1990, Eurotrust offered to sell to
AFP-MBAI various marketable securities, including government securities, such as
but not limited to treasury notes, treasury bills, Land Bank of the Philippines Bonds
and Asset Participation Certificates.

Relying on a canvass conducted by one of its employees, Cristina Cornista, AFP-

MBAI decided to purchase several securities amounting to P120,000,000.00 from
Eurotrust. From February 1990 to September 1990, a total of 21 transactions were
entered into between Eurotrust and AFP-MBAI. Eurotrust delivered to AFP-MBAI
treasury notes amounting to P73 million. However, Eurotrust fraudulently borrowed
all those treasury notes from the AFP-MBAI for purposes of verification with the
Central Bank. Despite AFP-MBAI's repeated demands, Eurotrust failed to return the
said treasury notes. Instead it delivered 21 postdated checks in favor of AFP-MBAI
which were dishonored upon presentment for payment. Eurotrust nonetheless made
partial payment to AFP-MBAI amounting to P35,151,637.72. However, after
deducting this partial payment, the amounts of P73 million treasury notes with
 interest and P35,151,637.72 have remained unpaid. Consequently, AFP-MBAI filed
with the Office of the City Prosecutor of Quezon City a complaint for violation of BP
22 and estafa against Elsa Reyes.

Reyes interposed the defense of novation and insisted that AFP-MBAI's claim of
unreturned P73 million worth of government securities has been satisfied upon her
payment of P30 million. With respect to the remaining P43 million, the same was
paid when Eurotrust assigned its Participation Certificates to AFP-MBAI.

Eventually, the Office of the City Prosecutor of Quezon City issued a resolution
recommending the filing of an information against Reyes for violation of BP 22 and
estafa.

Whereupon, Reyes filed a petition for review with respondent Secretary of Justice.
The latter dismissed the petition on the ground that only resolutions of the
prosecutors dismissing criminal complaints are cognizable for review by the
Department of Justice. 2

On February 2, 1994, petitioner seeking the nullification of either of the two resolutions of the
respondent Secretary of Justice filed a petition for certiorari, prohibition and mandamus  3 with the
respondent court which, however, denied and dismissed her petition. Her motion for reconsideration  4 was
likewise denied in a Resolution 5 dated June 27, 1995. Hence, this present petition.

The first Department of Justice Resolution dated January 23, 1992 which sustained the Provincial
Prosecutor's decision dismissing petitioner's complaints against respondent Eleazar for violation of
B.P. 22 and estafa ruled that the contract of loan between petitioner and respondent Eleazar had
been novated when they agreed that respondent Eleazar should settle her firm's (BERMIC) loan
obligations directly with AFP-MBAI and DECS-IMC instead of settling it with petitioner Reyes. This
finding was affirmed by the respondent court which pointed out that "the first contract was novated in
the sense that there was a substitution of creditor"  6 when respondent Eleazar, with the agreement of
Reyes, directly paid her obligations to AFP-MBAI.

We cannot see how novation can take place considering the surrounding circumstances which
negate the same. The principle of novation by substitution of creditor was erroneously applied in the
first questioned resolution involving the contract of loan between petitioner and respondent Eleazar.

Admittedly, in order that a novation can take place, the concurrence of the following requisites  7 is
indispensable:

1. there must be a previous valid obligation,

2 there must be an agreement of the parties concerned to a new contract,

3. there must be the extinguishment of the old contract, and

4. there must be the validity of the new contract.

Upon the facts shown in the record, there is no doubt that the last three essential requisites of
novation are wanting in the instant case. No new agreement for substitution of creditor war forged
among the parties concerned which would take the place of the preceding contract. The absence of
a new contract extinguishing the old one destroys any possibility of novation by conventional
subrogation, In concluding that a novation took place, the respondent court relied on the two letters
dated March 19, 1991, 8 which, according to it, formalized petitioner's and respondent Eleazar's
agreement that BERMIC would directly settle its obligation with the real owners of the funds - the AFP
MBAI and DECS IMC. 9 Be that as it may, a cursory reading of these letters, however clearly and
unmistakably shows that there was nothing therein that would evince that respondent AFP-MBAI agreed
to substitute for the petitioner as the new creditor of respondent Eleazar in the contract of loan. It is
evident that the two letters merely gave respondent Eleazar an authority to directly settle the obligation of
petitioner to AFP-MBAI and DECS-IMC. It is essentially an agreement between petitioner and respondent
Eleazar only. There was no mention whatsoever of AFP-MBAI's consent to the new agreement between
petitioner and respondent Eleazar much less an indication of AFP-MBAI's intention to be the substitute
creditor in the loan contract. Well settled is the rule that novation by substitution of creditor requires an
agreement among the three parties concerned — the original creditor, the debtor and the new
creditor. 10 It is a new contractual relation based on the mutual agreement among all the necessary
parties, Hence, there is no novation if no new contract was executed by the parties. Article 1301 of the
Civil Code is explicit, thus:

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

parties and of the third person.

The fact that respondent Eleazar made payments to AFP-MBAI and the latter accepted them does
not ipso facto result in novation. There must be an express intention to novate — animus
novandi. 11 Novation is never
presumed. 12 Article 1300 of the Civil Code provides inter alia that conventional subrogation must be
clearly established in order that it may take effect.

Notwithstanding our disagreement with the decision of the respondent court and the ruling of the
Secretary of Justice that a novation by substitution of creditor has taken place, we opt not to disturb
the Resolution of the respondent Secretary of Justice dated January 23, 1992 finding a prima
facie case against the petitioner in as much as it had already become final. It appears that petitioner
filed two motions for reconsideration to the said resolution, the first one on February 6, 1992 and the
second one in June 2, 1992. These two motions were, however, denied by the respondent Secretary
of Justice, the last denial was contained in a Resolution dated June 25, 1992 which was received by
petitioner on July 9, 1992. Petitioner made no prompt attempt to question the said resolutions before
the proper forum. It took her almost seventeen months (from July 9, 1992 to February 2, 1994) to
challenge the January 23, 1992 Resolution when she filed the petition for certiorari with the
respondent court on February 3, 1994,  13 which resolved to affirm the aforesaid resolution of the
Secretary of Justice.

Petitioner who chose her forum but unfortunately lost her claim is bound by such adverse judgment
on account of finality of judgment, otherwise, there would be no end to litigation. Litigation must end
and terminate sometime and somewhere, and it is essential to an effective administration of justice
that once a judgment has become final, the issue or cause therein should be laid at rest.  14 While the
respondent Secretary of Justice was in error in applying the rule on novation in the January 23, 1992
Resolution, such irregularity, however, does not affect the validity of the proceedings in the Department of
Justice. Erroneous application of a legal principle cannot bring a judgment that has already attained the
status of finality to an absolute nullity under the well entrenched rule of finality of judgment. The basic rule
of finality of judgment is grounded on the fundamental principle of public policy and sound practice that at
the risk of occasional error, the judgment of court and award of quasi-judicial agencies must become final
at some definite date fixed by law. 15

We find no plausible explanation nor justifiable reason offered by petitioner for the obvious delay or
omission to take a timely action against the questioned resolution. She is apparently guilty of laches
which bars her from seeking relief in a court of law after she intentionally and unreasonably fails to
guard of her rights. Laches is the failure or neglect for an unreasonable and unexplained length of
time to do that which by exerting due diligence could/should have been done earlier.  16 Petitioner's
omission to assert her right to avail of the remedies in law within a reasonable time warrants a
presumption that she abandoned it or declined to assert it. The law serves those who are vigilant and
diligent and no those who sleep when the law requires to act.  17

Its bears emphasis that the above pronouncement we laid down applies only pro hac vice. This
Court in affirming the questioned resolution despite the erroneous application of a legal principle
acted according to what the peculiar circumstances of the instant case demand. Its factual setting
led us to consider that to sustain the resolution is but the proper action to take in this particular case.

Regarding the second Resolution of respondent Secretary of Justice dated January 12, 1993 which
affirms the City Prosecutor's finding of a prima facie case against petitioner for violation of B.P. Blg.
22 and estafa involving the contract of sale of securities, petitioner avers that she could not be held
criminally liable for the crime charged because the contract of sale of securities between her and
respondent AFP-MBAI was novated by substitution of debtor. According to petitioner, the obligation
assumed by respondent Eleazar pursuant to the authority given by her to respondent Eleazar in a
letter dated March 19, 1991 was precisely her (petitioner's) obligation to respondent AFP-MBAI
under the contract of sale of securities. She claims that private respondent Eleazar, instead of
fulfilling her obligation under the contract of loan to pay petitioner the amount of debts, assumed
petitioner's obligation under the contract of sale to make payments to respondent AFP-MBAI
directly. 18

This contention is bereft of any legal and factual basis. Just like in the first questioned resolution, no
novation took place in this case. A thorough examination of the records shows that no hard evidence
was presented which would expressly and unequivocably demonstrate the intention of respondent
AFP-MBAI to release petitioner from her obligation to pay under the contract of sale of securities. It
is a rule that novation by substitution of debtor must always be made with the consent of the
creditor. 19 Article 1293 of the Civil Code is explicit, thus:

Novation which consists in substituting a new debtor in the place of the original one,
may be made even without 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.

The consent of the creditor to a novation by change of debtor is as indispensable as the

creditor's consent in conventional subrogation in order that a novation shall legally take
place. The mere circumstance of AFP-MBAI receiving payments from respondent Eleazar
who acquiesced to assume the obligation of petitioner under the contract of sale of
securities, when there is clearly no agreement to release petitioner from her responsibility,
does not constitute novation, at most, it only creates a juridical relation of co-debtorship or
suretyship on the part of respondent Eleazar to the contractual obligation of petitioner to
AFP-MBAI and the latter can still enforce the obligation against the petitioner. In Ajax
Marketing and Development Corporation vs. Court of Appeals. 20 which is relevant in the
instant case, we stated that—

In the same vein, to effect a subjective novation by a change in the person of the
debtor, it is necessary that the old debtor be released expressly from the obligation,
and the third person or new debtor assumes his place in the relation. There is no
novation without such release as the third person who has assumed the debtor's
obligation becomes merely a co-debtor or surety. . . Novation arising from a
purported change in the person of the debtor must be clear and express. . .
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.

The foregoing elements are found wanting in the case at bar.

ACCORDINGLY, finding no reversible error in the decision appealed from dated May 12, 1995, the
same is hereby AFFIRMED in all respects.

SO ORDERED.