Case Name: Swagman Hotels and Travels, Inc. v.

CA
Topic: Extinguishment of Obligation by Novation
Date: April 8, 2005
Ponente: C.J. Davide
Doctrine: Alterations of the terms and conditions of the obligation would generally result only in
modificatory novation unless such terms and conditions are considered to be the
essence of the obligation itself.
Case Summary: Swagman Hotels, Inc. obtained three loans from Neal Christian. Each loans is payable at
15% monthly interest per annum payable every three months. After a year, instead of
paying 15% per annum, Swagman paid only 6%. Swagman contended that Christian
waived the interest and accepted the payment of principal loans only in instalment basis.
Ruling: The court granted the petition. The court did not agree that the reduction of the interest from
15% to 6% per annum and that the monthly payments of US$750 made by the petitioner were
for the reduced interests.

OBLIGATIONS
Obligor/Debtor: Creditors/Obligee:
Swagman Hotels and Travels, Inc. Neal B. Christian

Who failed to do their obligation? Swagman Hotels and Travels, Inc.

What was not done? Payment of the capital and interest of the loan

FACTS

 Swagman Hotels and Travels, Inc. obtained from Neal B. Christian loans evidenced by promissory notes
dated August 7, 1996, March 14, 1997, and July 14, 1997. Each promissory note is in the amount of
$50,000.00 payable after three years with an interest of 15% per annum payable every three months.
 However, starting January 1998 to December 1998, Swagman only paid 6% per annum interest instead of
15%. With that, Christian informed Swagman that he was terminating the loan and demanded for payment
of the capital $150,000 and the interest amounting to $13,500.
 On the other hand, Swagman contended that Christian has no causes of action because the promissory
notes are not yet due and demandable. Also, since Swagman experienced losses due to Asian Financial crisis,
Christian waived the interest of 15% per annum and accepted the payment of the principal loans in the
amount depending on the state of business of Swagman. Accordingly, Swagman paid $750 per month from
January 1998 until February 1999 where in Christian filed a civil case.

ISSUE

Whether or not the original contract will still prevail where there is a valid novation?

RULING

 The court granted the petition. The court did not agree that the reduction of the interest from 15% to 6%
per annum and that the monthly payments of US$750 made by the petitioner were for the reduced
interests.
 The cash voucher dated January 1998 states that the payment of US$750 represents "INVESTMENT
PAYMENT." Also, all the succeeding cash vouchers describe the payments from February 1998 to September
1999 as "CAPITAL REPAYMENT. As such vouchers served as receipts evidencing private respondent's
acknowledgment of the payments made by the petitioner: two of which were signed by the private
respondent himself and all the others were signed by his representatives. Christian even identified and
confirmed the existence of these receipts during the hearing. Significantly, having cognizant of these
 receipts, the Christian applied these payments to the three consolidated principal loans in the summary of
payments.
 Under Article 1253 of the Civil Code, if the debt produces interest, payment of the principal shall not be
deemed to have been made until the interest has been covered. In this case, the private respondent would
not have signed the receipts describing the payments made by the petitioner as "capital repayment" if the
obligation to pay the interest was still subsisting. The receipts, as well as private respondent's summary of
payments, lend credence to petitioner's claim that the payments were for the principal loans and that the
interests on the three consolidated loans were waived by the private respondent during the undisputed
renegotiation of the loans on account of the business reverses suffered by the petitioner at the time.
 There was therefore a novation of the terms of the three promissory notes in that the interest was waived
and the principal was payable in monthly installments of US$750. Alterations of the terms and conditions of
the obligation would generally result only in modificatory novation unless such terms and conditions are
considered to be the essence of the obligation itself. The resulting novation in this case was, therefore, of
the modificatory type, not the extinctive type, since the obligation to pay a sum of money remains in force.
 Thus, since Swagman did not renege on its obligation to pay the monthly installments conformably with
their new agreement and even continued paying during the pendency of the case, the Christian had no
cause of action to file the complaint. It is only upon Swagman's default in the payment of the monthly
amortizations that a cause of action would arise and give Christian a right to maintain an action against
Swagman.