NOVATION 4.

According to its nature/subject:

ARTICLE 1291 REAL/ PERSONAL/ MIXED
Obligations may be modified by: OBJECTIVE
OBJECTIVE
(1) Changing their object or principal conditions; When the When the When the
(2) Substituting the person of the debtor; object (or person of the object and/or
cause) or debtor is principal
(3) Subrogating a third person in the rights of the principal substituted conditions of
creditor. (1203) conditions of and/or when a the obligation
the obligation third person is and the debtor
or the creditor,
are changed. subrogated in
or both the
Novation- is the total or partial extinction of an the rights of parties, are
obligation through the creation of a new one which the creditor. changed. It is a
substitutes it. combination of
- The extinguishment of obligation by the real and
substitution or change of the obligation by a personal
novations.
subsequent one which extinguishes or modifies the
first, either by changing the object or principal
conditions, or by substituting the person of the Iloilo Traders vs. Heirs of Soriano (404 SCRA
debtor, or by subrogating a third person in the rights 133)
of the creditor.
Novation may either be extinctive or
Classifications of Novation: modificatory, much being dependent on the nature of
the change and the intention of the parties. Extinctive
1. According to origin:
novation is never presumed; there must be an express
LEGAL CONVENTIONAL intention to novate; in cases where it is implied, the
That which takes place That which takes place acts of the parties must clearly demonstrate their
by operation of law. by agreement of the intent to dissolve the old obligation as the moving
parties. consideration for the emergence of the new one.
2. According to its form:
Implied novation necessitates that the
EXPRESS IMPLIED incompatibility between the old and new obligation
When the parties When there is such an be total on every point such that the old obligation is
declare that the old incompatibility completely superseded by the new one. The test of
obligation is between the old and the incompatibility is whether they can stand together,
extinguished and new obligations that
each one having an independent existence; if they
substituted. they cannot stand
cannot and are irreconcilable, the subsequent
together.
3. According to extent or effect: obligation would also extinguish the first.
An extinctive novation would thus have the
PARTIAL TOTAL
twin effects of, first, extinguishing an existing
When there is only When the old obligation obligation and, second, creating a new one in its
modification or change is completely stead.
in some principal extinguished.
Novation is merely modificatory where the
conditions of the
change brought about by any subsequent agreement
obligation.
is merely incidental to the main obligation (e.g., a
change in interest rates or an extension of time to
pay); in this instance, the new agreement will not
have the effect of extinguishing the first but would
merely supplement it or supplant some but not all of
its provisions.
California Bus Lines vs. State Investment House
(418 SCRA 297)
Novation has been defined as the
extinguishment of an obligation by the substitution
or change of the obligation by a subsequent one
which terminates the first, either by changing the
object or principal conditions, or by substituting the
person of the debtor, or subrogating a third person in
the rights of the creditor.
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).
Novation has two functions: one to
extinguish an existing obligation, the other to
substitute a new one in its place.
For novation to take place, four essential
requisites have to be met, namely, (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
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.
The extinguishment of the old obligation by
the new one is a necessary element
of novation which may be effected either expressly
or impliedly. The term "expressly" means that the
contracting parties incontrovertibly disclose that
their object in executing the new contract is to
extinguish the old one. Upon the other hand, no
specific form is required for an implied novation, and
all that is prescribed by law would be an
incompatibility between the two contracts. While
there is really no hard and fast rule to determine what
might constitute to be a sufficient change that can
bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility
between the old and the new obligations.
There are two ways which could indicate, in
fine, the presence of novation and thereby produce
the effect of extinguishing an obligation by another
which substitutes the same.
The first is when novation has been
explicitly stated and declared in unequivocal
terms. The second is when the old and the new
obligations are incompatible on every point. The test
of incompatibility is whether the two obligations can
stand together, each one having its independent
existence. If they cannot, they are incompatible and
the latter obligation novates the first. Corollarily,
changes that breed incompatibility must be essential
in nature and not merely accidental. The
incompatibility must take place in any of the
essential elements of the obligation, such as its
object, cause or principal conditions thereof;
otherwise, the change would be
merely modificatory in nature and insufficient to
extinguish the original obligation.
The necessity to prove the foregoing by clear
and convincing evidence is accentuated where the
obligation of the debtor invoking the defense
of novation has already matured.
With respect to obligations to pay a sum of
money, this Court has consistently applied the well-
settled rule that the obligation is not novated by an
instrument that expressly recognizes the old, changes
only the terms of payment, and adds other
obligations not incompatible with the old ones, or
where the new contract merely supplements the old
one.
Ajax marketing & Development Corp. vs. Court
of Appeals (248 SCRA 228)
Novation will not be allowed unless it is
clearly shown by express agreement, or by acts of
equal import. Thus, to effect an objective novation 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 new one. 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
because, to repeat, it is never presumed.
ARTICLE 1292
In order that an obligation may be extinguished
by another which substitute the same, it is
imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be
on every point incompatible with each other.
(1204)
REQUISITES:
1. Previous existing valid obligation- there must be
an original existing obligation at the time of the
novation. This means that the obligation must not
only be valid, but also that it has not been
extinguished by any cause.
2. Agreement of all the parties to the new
obligation- Novation requires the creation of a new
contractual obligation, as well as the extinguishment
of the old. There must be consent of all the parties to
the substitution, resulting in the extinction of the old
obligation and the creation of a valid obligation.
3. Extinguishment of the old contract- This
extinguishment may take place by express
stipulation in the new agreement, or by implication
from the incompatibility between the old and new
contracts.
4. Validity of the new one
NOVATION IS NOT PRESUMED
Novation is never presumed. There is no
novation in the absence of a new contract executed
by the parties. It must be established that the old and
new contracts are incompatible in all points, or that
the will to novate appear by express agreement of the
parties or in acts of equivalent import. The novation
must be clearly proved since its existence is not
presumed.
Novation takes place only when the
contracting parties expressly disclose that their
object in making the new contract is to extinguish the
old contract, otherwise the old contract remains in
force and the new contract is added to it, and each
gives rise to an obligation still in force.
The burden of showing novation is on the
party who claims it.
TEST OF INCOMPATIBILITY BETWEEN
TWO OBLIGATIONS OR CONTRACTS
No specific form is required for an implied
novation. All that is required is incompatibility
between the original and the subsequent contracts.
The test of incompatibility between two
obligations or contracts is whether they can stand
together, each ne having an independent existence. If
they cannot, they are incompatible, and the
subsequent obligation novates the first. Upon such
novation, the former obligation loses all its force and
effect, and only the new obligation can be the basis
of an action.
In order that there may be an implied
novation arising from incompatibility of the old and
new obligation, the change must REFER to the
object, the cause, or the principal conditions of the
obligation. In other words, there must be an essential
change.
Accidental modifications in an existing
obligation do not extinguish it by novation, mere
modifications of the debt, agreed upon between the
parties, do not constitute novation. When the changes the knowledge or instance of the latter. The
refer to the secondary agreements, and not to the against the will of the creditor may withhold
object or principal conditions of the contract, there is original debtor approval.
no novation; such changes will produce assumes the latter’s
modifications of incidental facts, but will not obligation with the
extinguish the original obligation consent of the
creditor. It logically
It is not proper to consider an obligation requires the consent
novated by unimportant modifications which do not of the third person and
alter its essence. the creditor.
The initiative for the The debtor offers and the
Ultimately, the determination of whether the change does not creditor accepts a third
changes in any given contract or obligation are emanate from the person who consents to
sufficient to bring about novation, must depend upon debtor and may be the substitution, so that
the facts and circumstances of each case. The made even without his the consent of these three
distinction between a principal and an accidental knowledge, since it is necessary; they are
condition in the contract or obligation is relative. The consists in a third respectively known as
legal effect of any change made by the parties will person assuming the delegante, delegatario
depend upon a sound appreciation of their obligation. It logically and delegado.
requires the consent
importance. The court should consider, in each
of this third person
particular case, not only the nature of the clause that
and the creditor.
is modified, but also the intention of the parties and
the economic significance of the modification.
In this kind of novation, it is not enough to
extend the juridical relation to a third person; it is
ARTICLE 1293 necessary that the old debtor be released from the
obligation, and the third person or new debtor takes
Novation which consists in substituting a new his place in the relation. Without such release, there
debtor in the place of the original one, may be is no novation; the third person who has assumed the
made even without the knowledge or against the obligation of the debtor merely becomes a co-debtor
will of the latter, but not without the consent of or a surety. If there is no agreement as to solidarity,
the creditor. Payment by the new debtor gives the first and the new debtors are considered obligated
him the rights mentioned in Articles 1236 and jointly.
1237. (1205a)
CONSENT OFN CREDITOR NECESSARY
In either of the two modes of substitution, the
KINDS OF PERSONAL NOVATION consent of the creditor is an indispensable
1. Substitution- when the person of the debtor is requirement.
substituted. The reason for the rule is that the substitution
2. Subrogation- when a third person is subrogated in implies a waiver by the creditor of his credit and it
the rights of the creditor. may be prejudicial to him. The prejudice may take in
the form of delay in the fulfillment of the obligation
KINDS OF SUBSTITUTION or contravention of its tenor, or non-performance
EXPROMISSION DELEGACION thereof by the new debtor, by reason of his financial
That which takes That which takes place inability or insolvency
place when a third when the creditor accepts Substitution of one debtor for another may
person of his own a third person to take
delay or prevent the fulfillment of the obligation by
initiative and without place of the debtor at the
reason of the inability or insolvency of the new
debtor, hence, the creditor should agree to accept the RIGHT OF NEW DEBTOR WHO PAYS
substitution in order that it may be binding on him.
1. If the novation is by DELEGACION, and the new
The consent of the creditor to the substitution debtor pays the obligation, he could demand from the
may be express or implied. It need not be given old debtor what he has paid.
simultaneously with that of the debtor and of the
- Subrogation may take place by virtue of the
third party; nor is it required to be in any specific and
provisions of article 1302 (par.2) because the present
particular form, but it must be given by the creditor
article actually gives to the payment by the new
in one way or another. The creditor’s ratification of
debtor the same legal effect as payment by a third
the substitution may be tacit, and may be given at any
person, as far as his rights against the old debtor are
time, as long as the agreement between the old and
concerned.
new debtors still subsists. Once given, in whatever
form it may be, the novation takes place. 2. If the novation is by EXPROMISSION, and the
new debtor pays the debt without the knowledge and
Upon a creditor’s acceptance of the promise
consent of the old debtor, the former can recover only
of another person to pay a part of a debt, which
is so far as the payment has been beneficial to the old
payment is secured by a real estate mortgage, there is
debtor.
effected a substitution of debtors or a partial novation
of the contract. - Here, there can be no subrogation because of the
express provisions of article 1237.
When the original contract authorizes the
debtor to transfer his obligation to a third person, the
novation by substitution of debtor is effected when
the creditor is notified that such transfer has been ARTICLE 1294
made. If the substitution is without the knowledge or
The consent of the creditor, however, cannot against the will of the debtor, the new debtor's
be presumed from his acceptance of payments by the insolvency or non-fulfillment of the obligations
third party for the benefit of the debtor, without shall not give rise to any liability on the part of the
further acts; there can be no novation from such original debtor.
acceptance of payments, because there is no consent
to the transfer of the debt itself.
EFFECT OF NEW DEBTOR’S INSOLVENCY
Consent of debtors: OR NON-FULFILLMENT OF THE
OBLIGATION N EXPROMISSION
EXPROMISSION DELEGACION
The consent of the old The old debtor always If the novation was by expromission, no
debtor is not necessary, consents to the liability for the new debtor’s insolvency can be
and the substitution substitution, because enforced against the old debtor, because the latter did
may be made even the initiative comes not have the initiative in making the change, which
without his knowledge. from him.
might have been made even without his knowledge.
This article, however, seems to imply that if
In both cases, the consent of the new debtor
the old debtor had knowledge of the substitution, or
is necessary because he is to assume the obligation.
had consented thereto, the exemption from liability
This consent of the new debtor is as essential as that
provided in this article does not apply.
of the creditor for the novation to become effective.
The obvious intent of the Code is to generally
The novation has the effect of releasing the
release the old debtor from any further liability in
original debtor from the obligation, and of making
passive subjective novation, except in exceptional
the new debtor liable therefor.
cases contemplated in article 1295 which are limited Other exceptions (notes)
to delegacion.
1. If the new debtor is only secondarily liable
The literal wording of the law should yield
2. If the third person is only an agent of the debtor.
to its obvious intention, which is to exempt the old
debtor from future liability when he did not propose 3. Where the new debtor is bound solidarily with the
the new debtor. old debtor.
- It is obvious that the old debtor is liable in these
cases, because there is no novation, he debtor has not
ARTICLE 1295
been released from the obligation.
The insolvency of the new debtor, who has been
proposed by the original debtor and accepted by
the creditor, shall not revive the action of the
latter against the original obligor, except when
said insolvency was already existing and of public
knowledge, or known to the debtor, when the
delegated his debt. (1206a)

EFFECT OF NEW DEBTOR’S INSOLBENCY

OR NON-FULFILLMENT OF THE
OBLIGATION IN DELEGACION
This article speaks of delegacion. It must be
noted that this article speaks only of insolvency. If
the non-fulfillment of the obligation is due to other
causes, the old debtor is not liable.
GR: The old debtor is not liable to the creditor in
case of insolvency of the new debtor.
XPNS:
1. The said insolvency was already existing and of
public knowledge (although it was not known to the
old debtor) at the time of the delegacion.
2. The insolvency was already existing and known to
the debtor (although it was not of public knowledge)
at the time of the delegacion.
- The exceptions are intended to prevent fraud on the
part of the debtor.
NOTE: The knowledge of the creditor that the new
debtor was insolvent at the time of delegation, will
bar him from recovering from the old debtor. He
must bear the consequences of his acts knowingly
done.