BPI v.

CA

Doctrine: A contract cannot be novated in the absence of a new contract executed between the parties.
Novation cannot therefore result from legal compensation because the latter occurs by operation of law, and
not a new contract executed by the parties.

Facts: BPI (which was then Far East Bank) granted 8 loans to Noahs Arc Merchandising (Noah's Ark),
secured by REM over a land. The loans were evidenced by several P/N. Noah's Ark defaulted so BPI
extrajudicially foreclosed the mortgage. The auction sale was set on a certain date but Noah's Ark filed and
was granted TRO and/or preliminary injunction. BPI appealed arguing that Noah's Ark was not entitled to
such

Some of the arguments of Noah's Ark to prove entitlement to the TRO and injunction were: (1) no demand
was made (2) 4 of the 8 loans were not yet due so foreclosure was premature (3) Noah's Ark owned and
leased a certain space for BPI. BPI withheld lease payments and applied it to the outstanding
obligations of Noah's with BPI. This therefore resulted to BPI waiving Noah's default in payment of
its loan and novated the contract of loan, estopping them from their right to foreclose the mortgage.

Issue : W/N there was novation.

Held: NO. BPI's act of withholding the lease payments and applying them to the outstanding obligation of
Noahs Ark is merely an acknowledgement of the legal compensation that occurred by operation of
law between the parties. Following the requisites for legal compensation to apply:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other; - BPI and Noahs Ark are both principal obligors and creditors of each 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; - Their debts to each other both consist in a
sum of money.

(3) That the two debts be due; - Careful reading of Noah's Ark's P/ N would show that it waived the need for
demand. The P/N also provided for an acceleration clause where the whole loan + all interests and charges
shall accelerate in maturity in case of default of payment. On the other hand, BPI's debt of lease payments is
due every month.

(4) That they be liquidated and demandable; - Noahs debt is liquidated and demandable; and BPI's lease
payments are liquidated and are demandable every month as they fall due.

(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor. - there was no retention or controversy commenced by third
persons over either of the debts.

A contract cannot be novated in the absence of a new contract executed between the parties. The
legal compensation occurred by operation of law, as discussed above. As a consequence, it cannot
be considered a new contract between the parties. Hence, the loan agreement, as embodied in the
promissory notes and the real estate mortgage, subsists.

Since the compensation between the parties occurred by operation of law, BPI did not waive Noahs Arks
default. As a result of the absence of novation or waiver of default, BPI is therefore not estopped from
proceeding with the foreclosure. Noah's ark is therefore not entitled to the TRO and injunction of the auction
sale.