I.

Payment or Performance

Civil Law; Bad Faith; A finding of bad faith usually assumes the presence of two (2) elements: first, that
the actor knew or should have known that a particular course of action is wrong or illegal, and second,
that despite such actual or imputable knowledge, the actor, voluntarily, consciously and out of his own
free will, proceeds with such course of action.—Verily, the clear denominator in all of the foregoing
judicial pronouncements is that the essence of bad faith consists in the deliberate commission of a
wrong. Indeed, the concept has often been equated with malicious or fraudulent motives, yet
distinguished from the mere unintentional wrongs resulting from mere simple negligence or oversight. A
finding of bad faith, thus, usually assumes the presence of two (2) elements: first, that the actor knew or
should have known that a particular course of action is wrong or illegal, and second, that despite such
actual or imputable knowledge, the actor, voluntarily, consciously and out of his own free will, proceeds
with such course of action. Only with the concurrence of these two elements can we begin to consider
that the wrong committed had been done deliberately and, thus, in bad faith. National Power
Corporation vs. Ibrahim, 750 SCRA 711, G.R. No. 175863 February 18, 2015

Civil Law; Obligations and Contracts; Novation; Novation, in its broad concept, may either be extinctive
or modificatory; Essential Requisites of Novation.—On the matter of novation, Spouses Benjamin and
Agrifina Lim v. M.B. Finance Corporation, 508 SCRA 556 (2006), provides the following discussion:
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old
obligation is terminated by the creation of a new obligation that takes the place of the former; it is
merely modificatory when the old obligation subsists to the extent it remains compatible with the
amendatory agreement. An extinctive novation results either by changing the object or principal
conditions (objective or real), or by substituting the person of the debtor or subrogating a third person
in the rights of the creditor (subjective or personal). Under this mode, novation would have dual
functions—one to extinguish an existing obligation, the other to substitute a new one in its place—
requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an agreement of all
parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a
valid new obligation. x x x Land Bank of the Philippines vs. Ong, 636 SCRA 266, G.R. No. 190755
November 24, 2010

Civil Law; Obligation; Fact that the private respondent had sufficient available funds on or before the
grace period for the payment of its obligation does not constitute proof of tender of payment by the
latter for its obligation within the said period.—With respect to the first issue, we agree with the
petitioner that a finding that the private respondent had sufficient available funds on or before the
grace period for the payment of its obligation does not constitute proof of tender of payment by the
latter for its obligation within the said period. Tender of payment involves a positive and unconditional
act by the obligor of offering legal tender currency as payment to the obligee for the former’s obligation
and demanding that the latter accept the same. Roman Catholic Bishop of Malolos, Inc. vs. Intermediate
Appellate Court, 191 SCRA 411, G.R. No. 72110 November 16, 1990
Civil Law; Republic Act No. 529; Central Bank Act; Payment; A check is not legal tender and that a
creditor may validly refuse payment by check, whether it be a manager’s, cashier’s or personal check.—
From the aforequoted provisions of law, it is clear that this petition must fail. In the recent cases of
Philippine Airlines, Inc. vs. Court of Appeals and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate
Appellate Court, this Court held that—“A check, whether a manager’s check or ordinary check, is not
legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be
refused receipt by the obligee or creditor.” The ruling in these two (2) cases merely applies the statutory
provisions which lay down the rule that a check is not legal tender and that a creditor may validly refuse
payment by check, whether it be a manager’s, cashier’s or personal check. Tibajia, Jr. vs. Court of
Appeals, 223 SCRA 163, G.R. No. 100290 June 4, 1993

Civil Law; Obligations; Novation; Words and Phrases; 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.—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. Bognot vs. RRI Lending
Corporation, 736 SCRA 357, G.R. No. 180144 September 24, 2014

Extinguishment of Obligations; Transactions; Dacion en Pago; Dation in payment extinguishes the

obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as
may be proved, unless the parties by agreement — express or implied, or by their silence — consider
the thing as equivalent to the obligation, in which case the obligation is totally extinguished.—Dacion en
pago or dation in payment is the delivery and transmission of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of the obligation. It is a mode of extinguishing an
existing obligation and partakes the nature of sale as the creditor is really buying the thing or property
of the debtor, the payment for which is to be charged against the debtor’s debt. Dation in payment
extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by
the parties or as may be proved, unless the parties by agreement — express or implied, or by their
silence — consider the thing as equivalent to the obligation, in which case the obligation is totally
extinguished. Philippine National Bank vs. Dee, 717 SCRA 14, G.R. No. 182128 February 19, 2014

Civil Law; Obligations; Payment; Consignation; Words and Phrases; Consignation is the act of depositing
the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to
accept payment, and it generally requires a prior tender of payment.—At the outset, the Court quotes
with approval the discussion of the CA regarding the definition and nature of consignation, to wit: …
consignation [is] the act of depositing the thing due with the court or judicial authorities whenever the
creditor cannot accept or refuses to accept payment, and it generally requires a prior tender of
payment. It should be distinguished from tender of payment which is the manifestation by the debtor to
the creditor of his desire to comply with his obligation, with the offer of immediate performance.
Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which is the
principal, and from which are derived the immediate consequences which the debtor desires or seeks to
obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the
priority of the first is the attempt to make a private settlement before proceeding to the solemnities of
consignation. Tender and consignation, where validly made, produces the effect of payment and
extinguishes the obligation. It is settled that compliance with the requisites of a valid consignation is
mandatory. Failure to comply strictly with any of the requisites will render the consignation void. One of
these requisites is a valid prior tender of payment. Under Article 1256, the only instances where prior
tender of payment is excused are: (1) when the creditor is absent or unknown, or does not appear at the
place of payment; (2) when the creditor is incapacitated to receive the payment at the time it is due; (3)
when, without just cause, the creditor refuses to give a receipt; (4) when two or more persons claim the
same right to collect; and (5) when the title of the obligation has been lost. None of these instances are
present in the instant case. Hence, the fact that the subject lots are in danger of being foreclosed does
not excuse petitioner and her coheirs from tendering payment to respondents, as directed by the court.
Del Carmen vs. Sabordo, 732 SCRA 531, G.R. No. 181723 August 11, 2014

II. Loss of the thing due or Impossibility of Performance

Bail bond; Article 1266, New Civil Code, does not apply to a, surety upon a, bail bond.—Art. 1266, New
Civil Code, does not apply to a surety upon a bail bond, as said Article speaks of a relation between a
debtor and creditor, which does not exist in the case of a surety upon a bail bond, on one hand, and the
State, on the other. For while sureties upon a bail bond (or recognizance) can discharge themselves from
liability by surrendering their principal, sureties on ordinary bonds or commercial contracts, as a general
rule, can only be released by payment of the debt or performance of the act stipulated. People vs.
Franklin, 39 SCRA 363, No. L-21507 June 7, 1971

Same; Contracts; Unforeseen difficulties are not grounds for reneging upon a contract.—Performance is
not excused by subsequent inability to perform, by unforeseen difficulties, by unusual or unexpected
expenses, by danger, by inevitable accident, by the breaking of machinery, by strikes, by sickness, by
failure to a party to avail himself of the benefits to be had under the contract, by weather conditions, by
financial stringency, or by stagnation of business. Neither is performance excused by the fact that the
contract turns out to be hard and improvident, unprofitable or impracticable, ill-advised, or even foolish,
or less profitable, or unexpectedly burdensome. Laguna Tayabas Bus Company vs. Manabat, 58 SCRA
650, No. L-23546 August 29, 1974

Obligations and contracts; Extinguishment of; Difficulty of service; Difficulty of service authorizes release
of obligor but does not authorizes courts to modify or revise contract between the parties.—
Respondent’s complaint seeks not release form the subdivision contract but that the court “render
judgment modifying the terms and conditions of the contract. . . by fixing the proper shares that should
pertain to the herein parties out of the gross proceeds from the sales of subdivided lots of subject
subdivision.” Article 1267 of the Civil Code does not grant the courts this authority to remake, modify or
revise the contract or to fix the division of shares between the parties as contractually stipulated with
the force of law between the parties, so as to substitute its own terms for those covenant by the parties
themselves. Without article 1267, respondent would remain bound by its contract under the therefore
prevailing doctrine that performance therewith is not excused “by the fact that the contract turns out to
be hard and improvident, profitable or unexpectedly burdensome,” since in case a party desires to be
excused from performance in the event of such contingencies arising, it is his duty to provide therefore
in the contract. Occena vs. Jabson, 73 SCRA 637, No. L-443349 October 29, 1976

V. Compensation

Civil law; Obligations; Extinguishment of obligations; Compensation; Award for attorney's fees as subject
of legal compensation.—An award for attorney's fees is a proper subject of legal compensation. Gan
Tion vs. Court of Appeals, 28 SCRA 235, No. L-22490 May 21, 1969

Civil Law; Compensation; There is no compensation where the parties are not creditors and debtors of
each other.—The insuperable obstacle to the success of PNB's cause is the factual finding of the IAC, by
which upon firmly established rules even this Court is bound, that it has not proven by competent
evidence that it is a creditor of ISABELA. The only evidence presented by PNB towards this end consists
of two (2) documents marked in its behalf as Exhibits 1 and 2. But as the IAC has cogently observed,
these documents do not prove any indebtedness of ISABELA to PNB. All they do prove is that a letter of
credit might have been opened for ISABELA by PNB, but not that the credit was ever availed of (by
ISABELA's foreign correspondent (MAN), or that the goods thereby covered were in fact shipped, and
received by ISABELA. Philippine National Bank vs. Vda. de Ong Acero, 148 SCRA 166, No. L-69255
February 27, 1987

Taxation; Obligations; Requisites of Legal Compensation under Arts. 1278 and 1279 of Civil Code; Case at
bar.—Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land was
expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as of
October 15, 1977. There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished
(Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article
1279, to wit: “(1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other; xxx xxx xxx “(3) that the two debts be due. xxx xxx xxx. Francia vs.
Intermediate Appellate Court, 162 SCRA 753, No. L-67649 June 28, 1988

Civil Law; Compensation; Compensation of debts arise even without proof of liquidation of claim, where
the claim is undisputed.—Proof of the liquidation of a claim, in order that there be compensation of
debts, is proper if such claim is disputed. But, if the claim is undisputed, as in the case at bar, the
statement is sufficient and no other proof may be required. In the instant case, the claim of the RCA that
Petra R. Farin has an outstanding obligation to the RCA in the amount of P263,062.40 which should be
compensated against the rents already due or may be due, was raised by the RCA in its motion for the
reconsideration of the order of December 23, 1967. A copy of said motion was duly furnished counsel
for Petra R. Farin and although the said Petra R. Farin subsequently filed a similar motion for the
reconsideration of the order of December 23, 1967, she did not dispute nor deny such claim. Neither did
the Marcelo Steel Corporation dispute such claim of compensation in its opposition to the motion for
the reconsideration of the order of December 23, 1967. The silence of Petra R. Farin, although the
declaration is such as naturally one to call for action or comment if not true, could be taken as an
admission of the existence and validity of such a claim. Therefore, since the claim of the RCA is
undisputed, proof of its liquidation is not necessary. At any rate, if the record is bereft of the proof
mentioned by the respondent Judge of first instance, it is because the respondent Judge did not call for
the submission of such proof. Had the respondent Judge issued an order calling for proof, the RCA would
have presented sufficient evidence to the satisfaction of the court. Republic vs. De los Angeles, 98 SCRA
103, No. L-30187 June 25, 1980

Civil Law; Obligations; Compensation, not a case of; For compensation to take place, both obligations
must be certain and liquidated; Mutual obligations of parties, not extinguished.—Petitioner contends
that respondent judge gravely abused her discretion in not declaring the mutual obligations of the
parties extinguished to the extent of their respective amounts. He relies on Article 1278 of the Civil Code
to the effect that compensation shall take place when two persons, in their own right, are creditors and
debtors of each other. The argument fails to consider Article 1279 of the Civil Code which provides that
compensation can take place only if both obligations are liquidated. In the case at bar, the petitioner’s
claim against the respondent Luteros in Civil Case No. 12379 is still pending determination by the court.
While it is not for Us to pass upon the merits of the plaintiffs’ cause of action in that case, it appears that
the claim asserted therein is disputed by the Luteros on both factual and legal grounds. More, the
counterclaim interposed by them, if ultimately found to be meritorious, can defeat petitioner’s demand.
Upon this premise, his claim in that case cannot be categorized as liquidated credit which may properly
be set-off against his obligation. As this Court ruled in Mialhe vs. Halili, “compensation cannot take place
where one’s claim against the other is still the subject of court litigation. It is a requirement, for
compensation to take place, that the amount involved be certain and liquidated.” Solinap vs. Del
Rosario, 123 SCRA 640, No. L-50638 July 25, 1983

Same; Obligations and Contracts; Criminal Law; Compensation cannot take place where, with respect to
the money involved in the estafa case, the complainant was merely acting as agent of another. In set-off
the two persons must in their own right be creditor and debtor of each other.—In this third and fourth
assigned errors, petitioner contends that respondent Court of Appeals erred in not applying the
provisions on compensation or setting-off debts under Articles 1278 and 1279 of the New Civil Code,
despite evidence showing that Jose K. Lapuz still owed him an amount of more than P5,000.00 and in
not dismissing the appeal considering that the latter is not legally the aggrieved party. This contention is
untenable. Compensation cannot take place in this case since the evidence shows that Jose K. Lapuz is
only an agent of Albert Smith and/or Dr. Dwight Dill. Compensation takes place only when two persons
in their own right are creditors and debtors of each other, and that each one of the obligors is bound
principally and is at the same time a principal creditor of the other. Moreover, as correctly pointed out
by the trial court, Lapuz did not consent to the off-setting of his obligation with petitioner’s obligation to
pay for the 500 shares. Sycip vs. Court of Appeals, 134 SCRA 317, No. L-38711 January 31, 1985

Obligations; Compensation cannot take place where one of the debts is not liquidated as when there is a
running interest still to be paid thereon.—More, the legal interest payable from February 3, 1951 on the
sum of P40,797.54, representing useful expenses incurred by PAN-ORIENTAL, is also still unliquidated
since interest does not stop accruing “until the expenses are fully paid.” Thus, we find without basis
REPUBLlC’s allegation that PAN-ORIENTAL’s claim in the amount of P40,797.54 was extinguished by
compensation since the rentals payable by PAN-ORIENTAL amount to P59,500.00 while the expenses
reach only P40,797.54. Deducting the latter amount from the former, REPUBLIC claims that P 18, 702.46
would still be owing by PAN-ORIENTAL to REPUBLIC. That argument loses sight of the fact that to the
sum of P40,797.54 will still have to be added the legal rate of interest “from February 3, 1951 until fully
paid.” Compañia Maritima vs. Court of Appeals, 135 SCRA 593, No. L-50900, No. L-51438, No. L-51463
April 9, 1985

Obligations and Contracts; Foreclosure of Mortgage; Requisites of Legal Compensation under Art. 1279
of Ciuil Code.—Petitioner contends that after foreclosing the mortgage, there is still due from private
respondent as deficiency the amount of P6.81 million against which it has the right to apply or set off
private respondent's money market claim ofPl,062,063.83. The argument is without merit. As correctly
pointed out by the respondent Court of Appeals—"Compensation shall take place when two persons, in
their own right, are creditors and debtors of each other. (Art. 1278, Civil Code). 'When all the requisites
mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by operation of law,
even without the consent or knowledge of the debtors.' (Art. 1290, Civil Code). Article 1279 of the Civil
Code requires among others, that in order that legal compensation shall take place, 'the two debts be
due' and 'they be liquidated and demandable.' Compensation is not proper where the claim of the
person asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to
unliquidated, disputed claim arising from breach of contract. (Compania General de Tabacos vs. French
and Unson, 39 Phil. 34; Lorenzo & Martinez vs. Herrero, 17 Phil. 29). "There can be no doubt that
petitioner is indebted to private respondent in the amount ofPl,062,063.83 representing the proceeds of
her money market investment. This is admitted. But whether private respondent is indebted to
petitioner in the amount of P6.81 million representing th$ deficiency balance after the foreclosure of
the mortgage executed to secure the loan extended to her, is vigorously disputed. This circumstance
prevents legal compensation from taking place." (CA Decision, Rollo, pp. 112-113). International
Corporate Bank, Inc. vs. IAC, 163 SCRA 296, No. L-69560 June 30, 1988

Civil Law; Obligations; Compensation; Automatic compensation, requisites of, present; Extinguishment
of two debts arising from final and executory judgments due to compensation by operation of law; Case
at bar.—It is clear from the record that both corporations, petitioner Mindanao Portland Cement
Corporation (appellant) and respondent Pacweld Steel Corporation (appellee), were creditors and
debtors of each other, their debts to each other consisting in final and executory judgments of the Court
of First Instance in two (2) separate cases, ordering the payment to each other of the sum of P10,000.00
by way of attorney’s fees. The two (2) obligations, therefore, respectively offset each other,
compensation having taken effect by operation of law and extinguished both debts to the concurrent
amount of P10,000.00, pursuant to the provisions of Arts. 1278, 1279 and 1290 of the Civil Code, since
all the requisites provided in Art. 1279 of the said Code for automatic compensation “even though the
creditors and debtors are not aware of the compensation” were duly present. Mindanao Portland
Cement Corp. vs. Court of Appeals, 120 SCRA 930, No. L-62169 February 28, 1983

Same; Banks and Banking; Checks; A bank generally has a right of set-off over the deposits therein for
the payment of any withdrawals on the part of a depositor—the right of a collecting bank to debit a
client’s account for the value of a dishonored check that has previously been credited has fairly been
established by jurisprudence.—The right of set-off was explained in Associated Bank v. Tan, 446 SCRA
282 (2004): A bank generally has a right of set-off over the deposits therein for the payment of any
withdrawals on the part of a depositor. The right of a collecting bank to debit a client’s account for the
value of a dishonored check that has previously been credited has fairly been established by
jurisprudence. To begin with, Article 1980 of the Civil Code provides that “[f]ixed, savings, and current
deposits of money in banks and similar institutions shall be governed by the provisions concerning
simple loan.” Hence, the relationship between banks and depositors has been held to be that of creditor
and debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place “when all the
requisites mentioned in Article 1279 are present,” as follows: (1) That each one of the obligors be bound
principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist
in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same
quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and
demandable; (5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor. Bank of the Philippine Islands vs. Court of
Appeals, 512 SCRA 620, G.R. No. 136202 January 25, 2007

Civil Law; Obligations; Compensation; Words and Phrases; Compensation is defined as a mode of
extinguishing obligations whereby two persons in their capacity as principals are mutual debtors and
creditors of each other with respect to equally liquidated and demandable obligations to which no
retention or controversy has been timely commenced and communicated by third parties.—
Compen-sation is defined as a mode of extinguishing obligations whereby two persons in their capacity
as principals are mutual debtors and creditors of each other with respect to equally liquidated and
demandable obligations to which no retention or controversy has been timely commenced and
communicated by third parties. The requisites therefor are provided under Article 1279 of the Civil Code
which reads as follows: Art. 1279. In order that compensation may be proper, it is necessary: (1) That
each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4)
That they be liquidated and demandable; (5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in due time to the debtor. Union Bank of
the Philippines vs. Development Bank of the Philippines, 714 SCRA 306, G.R. No. 191555 January 20,
2014
VI. Novation

Novation; Since novation implies a waiver of the right the creditor had before the novation, such waiver
must be express.—Considering that respondent was forced to get out of the plane and left behind
against his will, he could not have freely consented to be rebooked the next day. In short, he did not
agree to the alleged novation. Since novation implies a waiver of the right the creditor had before the
novation, such waiver must be express. It cannot be supposed, without clear proof, that respondent had
willingly done away with his right to fly on July 29, 1992. Moreover, the reason behind the bumping off
incident, as found by the RTC and CA, was that JAL personnel imputed that respondent would only use
the trip to the United States as a pretext to stay and work in Japan. Japan Airlines vs. Simangan, 552
SCRA 341, G.R. No. 170141 April 22, 2008

Obligations and Contracts; Novation; Checks; Novation is never presumed, there must be an express
intention to novate; The creditor’s acceptance of another check, which replaced an earlier dishonored
check, does not result in novation where there was no express agreement to establish that the debtor
was already discharged from his liability.—In this case, respondent’s acceptance of the Solid Bank check,
which replaced the dishonored Prudential Bank check, did not result to novation as there was no
express agreement to establish that petitioner was already discharged from his liability to pay
respondent the amount of P214,000.00 as payment for the 300 bags of rice. As we said, novation is
never presumed, there must be an express intention to novate. In fact, when the Solid Bank check was
delivered to respondent, the same was also indorsed by petitioner which shows petitioner’s recognition
of the existing obligation to respondent to pay P214,000.00 subject of the replaced Prudential Bank
check. Salazar vs. J.Y. Brothers Marketing Corporation, 634 SCRA 95, G.R. No. 171998 October 20, 2010

Subrogation; As the entity against which the collection was enforced, Metrobank was subrogated to the
rights of Central Bank and has a cause of action to recover from the defendant-bank the amounts it paid
to the Central Bank, plus 14% per annum interest.—Article 1303 of the Civil Code states that
subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either
against the debtor or against third persons. As the entity against which the collection was enforced,
Metrobank was subrogated to the rights of Central Bank and has a cause of action to recover from RBG
the amounts it paid to the Central Bank, plus 14% per annum interest. Under this situation, impleading
the Central Bank as a party is completely unnecessary. We note that the CA erroneously believed that
the Central Bank’s presence is necessary “in order x x x to shed light on the matter of reversals made by
it concerning the loan applications of the end users and to have a complete determination or settlement
of the claim.” In so far as Metrobank is concerned, however, the Central Bank’s presence and the
reasons for its reversals of the IBRD loans are immaterial after subrogation has taken place; Metrobank’s
interest is simply to collect the amounts it paid the Central Bank. Whatever cause of action RBG may
have against the Central Bank for the unexplained reversals and any undue deductions is for RBG to
ventilate as a third-party claim; if it has not done so at this point, then the matter should be dealt with in
a separate case that should not in any way further delay the disposition of the present case that had
been pending before the courts since 1980. Metropollitan Bank and Trust Company vs. Rural Bank of
Gerona, Inc., 623 SCRA 69, G.R. No. 159097 July 5, 2010
Novation; Novation extinguishes an obligation between two parties when there is a substitution of
objects or debtors or when there is subrogation of the creditor.—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 occurs only 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.” The consent of the creditor
must also be secured for the novation to be valid.—The consent of the creditor must also be secured for
the novation to be valid: Novation must be 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. Arco Pulp and Paper
Co., Inc. vs. Lim, 727 SCRA 275, G.R. No. 206806 June 25, 2014

Civil Law; Obligations; Novation; In S.C. Megaworld Construction and Development Corporation v.
Parada, 705 SCRA 584 (2013), the Supreme Court (SC) held that to constitute novation by substitution of
debtor, the former debtor must be expressly released from the obligation and the third person or new
debtor must assume the former’s place in the contractual relations.—In S.C. Megaworld Construction
and Development Corporation v. Parada, 705 SCRA 584 (2013), the Court held that to constitute
novation by substitution of debtor, the former debtor must be expressly released from the obligation
and the third person or new debtor must assume the former’s place in the contractual relations.
Moreover, the Court ruled that the “fact that the creditor accepts payments from a third person, who
has assumed the obligation, will result merely in the addition of debtors and not novation.” At its core,
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 unequivocal to be mistaken.
Here, the intent to novate was not satisfactorily proven by respondent. At best, petitioner only
manifested her desire to shoulder the debt of her parents, which, as above discussed, does not amount
to novation. Thus, the courts a quo erred in holding petitioner liable for the debts obtained by her
deceased parents on account of novation by substitution of the debtor. Odiamar vs. Valencia, 795 SCRA
18, G.R. No. 213582 June 28, 2016

Same; Obligations and contracts; Novation; Buyer cannot obligate himself to replace the debtor in
principal obligation nor do so in law without creditor’s consent.—By buying the property covered by TCT
No. 48979 with notice that it was mortgaged, respondent Dualan only undertook either to pay or else
allow the land’s being sold if the mortgage creditor could not or did not obtain payment from the
principal debt when the debt matured. Nothing else. Certainly the buyer did not obligate himself to
replace the debtor in the principal obligation, and he could not do so in law without the creditor’s
consent. Article 1293 of the Civil Code governs. Rodriguez vs. Reyes, 37 SCRA 195, No. L-22958 January
30, 1971

Civil Law; Obligations; Novation; When does novation take place; Novation is never presumed.—
Novation takes place when the object or principal condition of an obligation is changed or altered. It is
elementary that novation is never presumed; it must be explicitly stated or there must be manifest
incompatibility between the old and the new obligations in every aspect. Absence of existence of an
explicit novation nor incompatibility between the old and the new agreements.—In the case at bar,
there is nothing in the Real Estate Mortgage which supports appellants’ submission. The contract on its
face does not show the existence of an explicit novation nor incompatibility on every point between the
“old” and the “new agreements as the second contract evidently indicates that the same was executed
as new additional security to the chattel mortgage previously entered into by the parties. Novation was
not intended in the case at bar as the real estate mortgage was taken as additional security for the
performance of the contract.—It is clear, therefore, that a novation was not intended. The real estate
mortgage was evidently taken as additional security for the performance of the contract (Bank of P.I. v.
Herrige, 47 Phil. 57). People’s Bank and Trust Co. vs. Syvel’s Incorporated, 164 SCRA 247, No. L-29280
August 11, 1988

Civil Law; Obligations and Contracts; Novation defined.—Novation is the extinguishment of an obligation
by the substitution or change of the obligation by a subsequent one which terminates it, either by
changing its object or principal conditions, or by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. Novation through a change of the object or
principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by
the change of either the person of the debtor or of the creditor is described as subjective (or personal)
novation. Novation may also be both objective and subjective (mixed) at the same time. In both
objective and subjective novation, a dual purpose is achieved—an obligation is extinguished and a new
one is created in lieu thereof.

Same; Same; Same; Novation is never presumed.—If objective novation is to take place, it is imperative
that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new
obligation be on every point incompatible with the old one. Novation is never presumed: it must be
established either by the discharge of the old debt by the express terms of the new agreement, or by
the acts of the parties whose intention to dissolve the old obligation as a consideration of the
emergence of the new one must be clearly discernible. If old debtor is not released, no novation occurs
and the third person who assumed the obligation becomes a codebtor or surety or a co-surety.—Again,
if subjective novation by a change in the person of the debtor is to occur, it is not enough that the
juridical relation between the parties to the original contract is extended to a third person. It is essential
that the old debtor be released from the obligation, and the third person or new debtor take his place in
the new relation. If the old debtor is not released, no novation occurs and the third person who has
assumed the obligation of the debtor becomes merely a co-debtor or surety or a co-surety. Novation is
not implied when the parties to the new obligation expressly negated the lapsing of the old obligation.—
Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal
declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility
between the old and the new obligation (and nothing else) would sustain a finding of novation by
implication. But where, as in this case, the parties to the new obligation expressly recognize the
continuing existence and validity of the old one, where, in other words, the parties expressly negated
the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached
at all. Cochingyan, Jr. vs. R&B Surety and Insurance Co., Inc., 151 SCRA 339, No. L-47369 June 30, 1987
Civil Law; Novation; While the tenor of the subsequent letteragreement in a sense novates the judgment
award there being a shortening of the period within which to pay, the failure of a party to comply with
the suspensive and conditional nature of the agreement, were remitted the parties to their original
rights under the judgment award.—While the tenor of the subsequent letter-agreement in a sense
novates the judgment award there being a shortening of the period within which to pay (Kabangkalan
Sugar Co. vs. Pacheco, 55 Phil. 555), the suspensive and conditional nature of the said agreement
(making the novation conditional) is expressly acknowledged and stipulated in the 14th whereas clause
of MWSS' Resolution No. 132-72. MWSS' failure to pay within the stipulated period removed the very
cause and reason for the agreement, rendering some ineffective. Petitioners, therefore, were remitted
to their original rights under the judgment award. Integrated Construction Services, Inc. vs. Relova, 146
SCRA 360, No. L-41117 December 29, 1986

Civil Law; Novation; Novation is never presumed but must be explicitly stated; No novation in the
absence of explicit novation or incompatibility on every point between the old and the new agreements
of the parties; Case at bar.—It is elementary that novation is never presumed; it must be explicitly
stated or there must be manifest incompatibility between the old and the new obligations in every
aspect. x x x In the case at bar there is nothing in the May 14, 1982, agreement which supports the
petitioner’s contention. There is neither explicit novation nor incompatibility on every point between
the “old” and the “new” agreements. National Power Corp. vs. Dayrit, 125 SCRA 849, Nos. L-62845-46
November 25, 1983

Civil law; Obligations and contracts; Novation.—Novation results in two stipulations—one to extinguish
an existing obligation, the other to substitute a new one in its place. Fundamental it is that novation
effects a substitution or modification of an obligation by another or an extinguishment of one obligation
by the creation of another. Additionally, to sustain novation necessitates that the same be so declared in
unequivocal terms—– clearly and unmistakably shown by the express agreement of the parties or by
acts of equivalent import—– or that there is complete and substantial incompatibility between the two
obligations. Sandico, Sr. vs. Piguing, 42 SCRA 322, No. L-26115 November 29, 1971

Civil law; Obligations and contracts; Compromises; Novation; Defense of implied novation requires clear
and convincing proof of incompatibility between the two obligations.—The defense of implied novation
requires clear and convincing proof of complete incompatibility between the two obligations. The law
requires no specific form for an effective novation by implication. The test is whether the two
obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates
the first. If they can stand together, no incompatibility results and novation does not take place. Where
new obligation merely reiterates or ratifies old obligation.—Where the new obligation merely reiterates
or ratifies the old obligation, although the former effects but minor alterations or slight modifications
with respect to the cause or object or conditions of the latter, such changes do not effectuate any
substantial incompatibility between the two obligations. Only those essential and principal changes
introduced by the new obligation producing an alteration or modification of the essence of the old
obligation result in implied novation. In the case at bar, the mere reduction of the amount due in no
sense constitutes a sufficient indicium of incompatibility, especially in the light of (a) the explanation by
the petitioner that the reduced indebtedness was the result of the partial payments made by the
respondent before the execution of the chattel mortgage agreement and (b) the latter’s admissions
bearing thereon. Millar vs. Court of Appeals, 38 SCRA 642, No. L-29981 April 30, 1971