VICTORIA MIALHE et. al. v. RUFINO HALILI and Hon. Conrado Vasquez
REPUBLIC OF THE PHILIPPINES v. MAMBULAO LUMBER et. al.
Topic: Compensa on; nova on
February 28, 1962 | Barrera, J.
RECIT-READY/SUMMARY:  Mambulao Lumber owes the government a total of P4, 802.37 for
forest charges and the government didn’t u lize such payment yet. Mambulao Lumber’s defense
of compensa on weighed on the fact that they previously paid the government a total of P9,
127.50 thereby suppor ng their claim that such amount should be compensated to their previous
tax payments of P9, 127.50. The CFI of Manila later on ordered Mambulao Lumber to pay P4,
802.37 on the basis that no obliga on exists between the government and Mambulao Lumber.
Hence this case was elevated to the Supreme Court, which held that according to NCC 1278,
compensa on should only take place between par es who are debtors and creditors to each
other. In this case, such argument is not tenable on the basis that such tax is a duty and not an
obliga on to the government. Lastly, it is according to the general rule for which the Supreme
Court enunciated that taxes should be construed as a duty since if such case were to be
permi ed, it would cause a great confusion in the financial affairs of the government.  
 
DOCTRINE: Taxes are not considered as an obligation since it is a duty of a citizen to do so  Above pe oners obtained judgment for the sum of P74,400.00 against above respondent
  
FACTS:  Mambulao Lumber Company owes the government an amount of P4,802.37 for forest
charges. They refused to pay on the basis that they previously paid a total of P9,127.50 as
reforesta on charges from the year 1947 to 1956. Moreso, it was proven that the amount of
P9,127.50 has not yet been used by the government and such amount should be used to
compensate the current tax liability of Mambulao Lumber Company.
CFI of Manila ordered Mambulao Lumber Company to pay the current tax liability (P4,802.37) on
the basis that there exists no law that states that such prior reforesta on taxes that were paid
already which weren’t u lized yet can offset as a compensa on for any current tax liabili es.
Hence, this pe on
  
ISSUE:  Whether or not such previous tax payments can be used to compensate Mambulao’s
current tax liability
HELD: NO.  Halili moved for the return of the sums of money. Pe oner submits the following conten ons:
The Supreme Court held that there exists no law that such previous tax payments can be used as
a basis for compensa on because in the first place, the government and Mambulao Lumber
Company is not a creditor and debtor to each other. Furthermore, it is already stated in Ar cle
1287 of the NCC that compensa on can only occur between two par es who are debtors and
creditors to each other. Lastly, it has already been stated that taxes are not in the nature of
contracts but it is more of a duty to do so and that if such case were to be permi ed. It would
cause a great confusion in the financial affairs of the government since every taxpayer will be
claiming the defense of compensa on and that it will burden the judicial body on the
mul plici es of cases.
Topic: When compensa on takes place
March 27, 1908 | Bengzon, CJ.
RECIT-READY: Dalawa kasi Civil Case dito yung pagbayad ng (1) Publica on Fees and Sheriffs fee
and yung (2) Pending hearing case na may cost. So yung pe oner contend na sa una dapat sila
Halili magbayad ng fees nito and pangalawa dapat daw may magkaroon ng compensa on kasi
pe oners are creditors of the amont of P 2,004.28 just as they are debtors of respondent
amount s ll due. Sabi ng SC na dun sa first ( Pub Fees and Sherriffs Fee) na dapat bayaran ni Halili
ito kasi nasa Rules of Court na rules.D Dun sa second issue (Under our topic) yung compensa on
sabi ng court hindi dapat kasi under li ga on pa siya eh requirement ng compensa on diba is
dapat certain and liquidated.
DOCTRINE:  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 
 
FACTS: Case No. 22152 of CFI 
Halili.Pending appeal of the first case, pe oners applied for the issuance of a writ of execu on.
As respondent did not furnish a supersedes bond, the trial court issued the writ. Consequently,
the Manila Sheriff levied on certain proper es of said respondent, and sold them in due course by
auc on. 

The court, on appeal, the trial  court  modified  the  said  judgment  by reducing the amount from
P74,400.00 to P46,800.00. This  was  the  modified  decision.  
Pursuant to such modified decision,
pe oners returned to respondent Halili the difference between the sum already collected. It
returned the ff: 

● Sheriff’s fees – P 297.00
● Cost of Publica on in two newspapers of the Sheriffs No ce of Sale – P 1,440.00
● Amount retained by pe oners for having secured another judgment against Halili – P
2,004.28
● TOTAL AMOUNT TO BE RETURNED – P 3,741.28
● Case  No.  22152  (Items of P 297 and P 1,440) – The writ of execu on Commanded the 
sheriff  to  collect  from  responded  the  amount of judgement this is pursuant to Rule 39 
of Rules of Court Sec 14,16 and 18 
● Civil  Case  No.  28062  (Item  of  P2,004.28)  :  Between the same par es, pe oners
secured a judgment against respondent Halili for the sum of P2,004.28. This judgement
is now on appeal because PET  are  creditors  of  this  amount  of  P2,004.28  just  as  they 
are  debtors  of  respondent  in the amount still due the latter compensation should take 
place 
Pe oners opposed by alleging that: Compensation  had already taken place and Sheriff’s fees
and the cost of the publica on of the Sheriff’s no ce of sale must  be  borne  by  the  judgment 
debtor, the respondent Halili.
ISSUE: Whether or not there was compensa on? NO! ( Sa B. Civil Case 28062 under our topic) 
HELD: NO (sa Civil Case 28062 under our topic) 
Obligations and Contracts | Week 6 Cases | Page 1 
Civil Case 22152 (NOT IN OUR TOPIC)  DOCTRINE/S: 
Sheriffs  Fees- Respondent Halili in the decision modified by this court, remained in the very same ● Art. 1279: In order that compensation may be proper it is necessary: 
posi on he  was  in  the  original  decision  of  the  trial  court  he  was  still  the  judgment  debtor  1. That  each  of  the  obligors  be  bound  principally,  and  that  he  be  at  the  same  time  a 
therefore he should pay the sheriffs fee. principal creditor of the other; 
2. That  both  debts consist in a sum of money, or if the things due are consumable, they 
Publication Fees  be of the same kind, and also of the same quality if the latter has been stated; 
● Sec 14 of Rule 39 - that a er the judgments has been sa sfied any excess in the 3. That the two debts be due; 
proceeds of the sale over the judgment and accruing cost must be delivered to the 4. That they be liquidated and demandable; 
judgment debtor unless otherwise directed by judgement of the court 5. That  over  neither  of  them  there  be  any  retention  or  controversy,  commenced  by 
● Sec 16 of Rule 39 – Sheriff duty to publish in a newspaper, the no ce of sale of the third persons and communicated in due time to the debtor 
property levied upon. Publica on is requirement ● Art.  1283:  If  one  of  the  parties to a suit over an obligation has a claim for damages against the 
● Sec 18 of Rule 39 – Allows judgment debtor to prevent the sale provided he pays the other, the former may set if off by proving his right to said damages and the amount thereof 
amount required by the execu on.  
FACTS:  Fermin claims he borrowed from his cousin, Mariano Ong, the amount of P160,000.00
Pe oners may charge respondents Halili the sheriffs fees and costs of publica on of his no ce and secured it with 3 post-dated checks. On Jan 23, 1979, he issued a 4th check of P40,000.00
of sale thereby reducing it to P120,000.00. Pe oner stored a quan ty of zippers valued at P180,000.00
in the warehouse owned by Mariano. He denies they were intended to guarantee payment of
Civil Case 28062 - UNDER OUR TOPIC -  loan. When he tried to get them back, Mariano refused to return them un l total payment of the
Pe oners are creditors  of this amount of P2,004.28. They are also debtors of respondent in the loan. Fermin claims he asked Mariano not to encash the checks on maturity due to lack of
amount s ll due the la er through the modified decision of the Supreme Court in Civil Case No. amount.
22152, compensation hould take place as regards this amount.  However, it must be noted that in
this case the decision of the trial court was affirmed with only a modification as to the amount of  Mariano sued for the amount of P160,000.00. Fermin claims it had been reduced to P120,000.00
recovery. due to par al payment and that had been offset by the zippers due from Mariano. Mariano claims
that P40,000.00 check was for another obliga on; but later on abandoned this tes mony that the
In  other  words,  here,  respondent  Halili  was  still  adjudged  liable  for  his  lease  obligations.  Pe oners original loan was P200,000.00 and reduced by payment of the said check, leaving P160,000.00
contend that they have a right to retain the sum of P2,004.28 on the theory of compensa on.
Compensation  cannot take place in this case because petitioners’ claim against Halili is still being  Fermin claims compensa on for zippers Mariano unjustly retained. RTC in favor of Fermin, CA
the  subject  of  court  litigation.  It  is  a  requirement,  for  compensation  to  take  place,  that  the  ruled in favor of Mariano. Fermin invokes Art. 1283 claiming damages.
amount involved be certain and liquidated.  
  ISSUES: 
Mialhe  (petitioner)  won  as  regards  the  sheriff  and  publication  fees  for  the  auction  because  expenses  1. Whether the debt is deemed offset (Art. 1279)
should  be borne by the judgment debtor, Halili. Halili (respondent) won as regards the P2, 004.28 which  2. Whether Art. 1283 is applicable
redirected petitioner to pay to Halili.   
HELD: NO (TO BOTH ISSUES)
The part of the order of December 2, 1959 that directed the return of the amounts of P297.00 The instant case does not certainly sa sfy Art. 1279 because (1) appellant is not a debtor of
and P1,440.00 represen ng the sheriff’s fees and costs of publica on, respec vely, is revoked; appellee, it is only the la er who is indebted to appellant; (2) the debts, even admi ng that the
and that part of the said order direc ng the repayment of the amount of P2,004.28 is affirmed. delivery of the zippers to plain ff is a debt do not both consist in a sum of money nor are they of
  the same quality and kind.
FERMIN ONG v. COURT OF APPEALS and Mariano Ong Fermin claims he will use the zippers as payment. However, he later claims he will pay if the
Topic: Compensa on; nova on zippers be returned to him, and adds they should s ll be working and valuable quality. This
September 8, 1989 | Cruz, J. negates his first memorandum where he claims that due to the refusal to return the zippers, they
RECIT-READY:  Fermin borrowed money from Mariano (his cousin) the amount of P160,000 and have devalued. The trouble is that Fermin has not proved the right to any damage as a result of
secured its payment with three post-dated checks. Fermin issued a fourth check amoun ng the claimed reten on of the zippers by Mariano. There was also no proof of the amount of such
P40,000 in par al se lement of the loan. Fermin stored in Mariano’s warehouse a quan ty of damages as he could not even say how many of the zippers had been earlier withdrawn by him.
zipper valuing P181,000. Fermin claims that Mariano is denying access to the zippers because of
the non-payment of the loan. Mariano sued Fermin but Fermin denied the liability and contested We find that the respondent court has not commi ed any reversible error in holding that the
that the debt was reduced to P120,000 because of the par al payment and that the remaining original amount of the pe oner's indebtedness to the private respondent was P200,000.00; that
balance of P120,000 is offset by the P200,000 due from Mariano. RTC ruled in favor of Fermin, this was subsequently reduced to P160,000.00 with the par al payment of P40,000.00 made
CA in favor of Mariano. SC held CA decision is correct because 1st: Fermin failed to sa sfy the with the China Banking Corpora on check; and that the outstanding loan has not been canceled
requisites of Art. 1279, 2nd: Art. 1283 is not applicable because he failed to prove right to any by offset or compensa on under the per nent provisions of the Civil Code. WHEREFORE, the
damage. pe on is DENIED, with costs against the pe oner. It is so ordered.
 
 
Obligations and Contracts | Week 6 Cases | Page 2 
 MINDANAO PORTLAND CEMENT CORPORATION v. COURT OF APPEALS,  PIONEER INSURANCE & SURETY CORPORATION v. COURT OF APPEALS, 
Pacweld Steel Corpora on, and A y. Casiano Laquihon Wearever Tex le Mills Inc., and Vicente Lim
Topic: Compensa on Topic: Compensa on; nova on
February 28, 1983 | Teehankee, J. December 15, 1989 | Gu errez Jr., J.
RECIT-READY/SUMMARY:  In one case, CFI ordered Pacweld to pay MPCC P10K for a orney's RECIT-READY/SUMMARY:  PISC, on behalf of WTM, issued bonds in favor of BOC. WTM failed
fees. In another case, the same CFI also ordered MPCC to pay Pacweld P10K for a orney's fees. to comply with their commitment to pay BOC. BOC demanded payment from PISC instead but
The counsel of Pacweld filed a Mo on claiming the a orney's fees. CA granted said mo on. WTM promised the former that they will be the ones to pay instead. WTM defaulted again and a
MPCC argued that it should be compensated since Pacweld owes MPCC the same amount. The fire happened. WTM demanded payment from the insurance policy of PISC. PISC refused since
SC sustained MPCC's argument and ruled there is an automa c legal compensa on. par al compensa on must take place. Court ruled that PISC can invoke compensa on.

DOCTRINE:  When  all  the  requisites  provided  under  NCC  1279  are  present,  the  obligations  are  DOCTRINE:  Compensation  is  not  proper  where  the  claim  of  the  person  asserting  the  set-off  against  the 
extinguished by way of automatic legal compensation.  other  is  not  clear nor liquidated; compensation cannot extend to unliquidated, disputed claim arising from 
   breach of contract. 
FACTS:  In a CFI decision, MPCC was adjudged to pay Pacweld the sum of P10K as a orney's   
fees. A y. Laquihon, counsel of Pacweld, then filed a Mo on to Direct Payment of A orney’s Fee FACTS:  PISC issued general warehousing bonds in favor of the Bureau of Customs (BOC) for
to Counsel with the CA. importa on of raw materials in the total amount of P6.5M. The bonds were issued on behalf of
the private respondents, WTM and its president, Lim.
MPCC filed an opposi on sta ng that said amount is set-off by a like sum of P10K which MPCC
has collec ble in its favor from Pacweld also by way of a orney's fees which MPCC recovered To secure PISC from and against any and all harm that it may incur as a consequence of becoming
from the same court. (So basically, Pacweld also owes MPCC the same amount.) The CA favored its surety, WTM executed jointly and severally in favor of PISC indemnity agreements for the said
Pacweld and denied the set-off argued by MPCC. MPCC then appealed to the SC. bonds, which contained s pula ons for indemnity and maturity of the contracted obliga ons.
  
ISSUE: Whether the two obliga ons are ex nguished reciprocally by opera on of law? WTM, however, failed to comply with their commitment under the warehousing bonds due to the
   BOC demanding from PISC payment of the value of the said bonds in the amount of
HELD: YES.  P6,390,259.00. The amount escalated to P9M eventually.
The  two  obligations  offset  each  other.  Compensation  having  taken  effect  by  operation  of  law 
extinguishes  both  debts.  Both corpora ons were creditors and debtors of each other, and their PISC demanded from WTM. WTM replied, promising that they will se le their obliga ons with
debts to each other consis ng in final and executory judgments of the CFI in two separate cases, BOC. BOC granted the request of WTM for staggered monthly installment payments of their
ordering the payment to each other of the sum of P10K by way of a orney's fees. All the obliga on on the condi on that they will make an ini al payment of P500k and amor ze the
requisites under NCC 1279 are present, and even though they are not aware of the balance of P400k monthly un l fully paid. The P500k ini al payment was paid but WTM did not
compensa on, it is automa cally compensated. under NCC 1290. make any other payments a er, thus, viola ng the agreement.

NOTES:  As a result, BOC demanded from PISC again. A fire eventually destroyed WTM’s factory, taking
Article 1279. In order that compensation may be proper, it is necessary:  with it materials insured in the amount of P1M. WTM demanded from PISC payment of the
1. That  each  one  of  the  obligors  be bound principally, and that he be at the same time a principal  proceeds of the insurance policy but the la er refused, claiming that the proceeds must be
creditor of the other;  applied by way of par al compensa on or set-off against its liability with the BOC.
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;  RTC: Judgment in favor of WTM. PISC must pay the insurance proceeds in the amount of P1M
3. That the two debts be due;  plust legal interest. CA affirmed RTC. Legal compensa on cannot take place because the
4. That they be liquidated and demandable;  requisites are not present, specifically, PISC is not the creditor of WTM and that their claim
5. That  over  neither  of  them  there  be  any  retention  or  controversy, commenced by third persons  against the la er is not yet due, demandable, and liquidated. Liability on the warehousing bonds
and communicated in due time to the debtor  was ex nguished when the tex le goods covered were destroyed by the fire. Therefore, the law
  on compensa on is inapplicable.
    
  ISSUE:  Whether PISC can successfully invoke compensa on based on the amount proceeding
  from the fire insurance policy and the debt claimed by BOC?
 
  HELD: YES. 
  The court rules for PISC. PISC owes WTM the amount represen ng the proceeds of the insurance
  policy. WTM, however, tries to negate their own liability by ques oning the claims of BOC and
  alleging that they have no liability because of the fortuitous event. At the same me, they admit
liability when they argued that PISC was released from the same upon their agreement with BOC

Obligations and Contracts | Week 6 Cases | Page 3 

to make staggered payments. WTM also argued that since PISC has not made any payment
regarding the amount demanded by BOC, there is nothing to reimburse.
It is clear that WTM tried to avoid their liability with the BOC. Therefore, as far as the amount of
P9M is concerned, both PISC and WTM are liable for its payment when the con ngency for
compensa on was sought.
PISC can demand reimbursements from WTM even before it has actually paid its obliga on to the
BOC. It can be held liable under the warehouse bonds even before actual payment to the BOC.
The liability has been fixed. What remains simply is liquida on. WTM defaulted on the agreement
to make staggered payments thereby causing PISC’s liability to the BOC.
Legal compensa on can take place between PISC and WTM, that is, PISC can par ally set-off the
insurance proceeds in the amount of P1M against its liability under the warehousing bonds, which
has been computed in the amount of P9M. WHEREFORE, pe on is granted.
 
TIU SIUCO v. SIMEON HABANA
Topic: Nova on
February 21, 1924 | Johns, J.
RECIT-READY:  Tiu Siuco entered into contract with Simeon Habana, where Siuco would
construct a building for Habana. In the process of the construc on, many wri en altera ons were
agreed upon and really made, but it was proved that essen ally, the plans were in the original
contract. Later, when the building was finished, Tiu Siuco wanted to abandon the original price on
the ground that the altera ons had caused an abandonment or nova on. The TC ruled in favor of
the plain ff and must absolve him from liability. The SC reversed and modified the decision but
s ll in favor of the plain ff for the recovery of such, in this case, however, there was no nova on
because there were no substan al changes in the obliga on which leads to a nova on. Thus, the
plain ff here, must not absolved to such obliga on.
DOCTRINE:  In  order  that  an  obligation  may  be  extinguished  by  another which substitutes the same; it is  made with the understanding and agreement that the defendant would pay the reasonable value
imperative  that  it  be  so  declared  in  unequivocal terms, or that the old or new obligation be on every point  of all of such changes and altera ons.
incompatible with each other. 
  
FACTS:  Tiu Siuco entered into contract with Simeon Habana, where Suico would construct a
building for Simeon Habana on a lot of the cadaster of Jaro. The contract contains the ff:
● Contract is specific as to the plans, specifica ons and materials to be used.
● The plain ff, Tiu Siuco, shall furnish all the labor and materials to be used in the
building at HIS OWN EXPENSE.
● The tearing down of “the house of strong materials now exis ng on said lot shall also
be for the account of the contractor”
● All materials of the house to be demolished shall be used in the new building except
the ro en or deteriorated materials.
● Original contract price was P54k for completed building.  SUMMARY:  Si Daniel and NPC entered into a contract. Ngayon si NPC nertminate niya nalang
● Shall be completed within 8 months from the date of the contract with penalty of P10 a
day if it’s uncompleted a er the 8 months.
In the process of the construc on, many wri en altera ons were agreed upon and really made,
but it was proved that essen ally, the plans were the original plans. The defendant already paid
P54k and P4k for the penalty. A er the defendant took possession, the plain ff presented his
claim and par es undertook to mutually se le the ma er bet. Themselves. However, they failed
to agree, which the ac on was brought the plain ff to seek recover of P67k.
Upon mo on, a third party was subs tuted as the real party in interest. (Note that the contract
was made bet. Tiu Siuco and Simeon Habana). Thus, when the building was finished, the
contractor Tiu Siuco wanted to abandon the original price (P54k) on the ground that the
altera ons on the building had caused an abandonment or nova on of the old contract.
Tiu Siuco claims that there is nova on on account of the numerous changes and altera ons in the
construc on of the building. Tiu Siuco therefor wanted to be paid, not on the basis of the
contract, but on the basis of quantum meruit (on the work done). Simeon Habana did not consent
to this.
Trial court  rendered judgment for the plain ff for the sum of the complaint, with costs, and that
he be ABSOLVED FROM ALL LIABILITY on defendant’s counterclaim.
  
ISSUE: Whether there was nova on?
HELD: NO. 
The SC reversed and modified the decision of the Trial Court and in favor the plain ff for
recovery, however, there was no nova on. The SC here cited numerous jurisprudence regarding
the defini on of nova on and its requirements. But simply speaking, there is nova on when there
is old valid obliga on crea ng or subs tutes a new obliga on which the former and the la er are
incompa ble to each other.
Thus, in order that an obliga on may be ex nguished by another which subs tutes the same; it is
impera ve that it be so declared in unequivocal terms, or that the old or new obliga on be on
every point incompa ble with each other. In the case at hand, although numerous changes were
made, and there was a material increase in the cost of the building, there was no material change
in its size or dimensions.
In other words, the original contract was used as a basis for the construc on of the building, and
any changes or altera ons which were made were founded upon the original contract, and were
The old contract was not abandoned, as the original plans were followed. Therefore, without the
consent of the owner, the contractor Tiu Siuco cannot treat the old contract as abandoned. Tiu
Siuco, without the consent of the owner Simeon Habana, cannot recover on the basis of quantum
meruit (on the work done). Rather, the contract price will form the basis of payment, plus cost of
the altera ons.
 
NATIONAL POWER CORPORATION v. Judge ABELARDO DAYRIT and Daniel Roxas
Topic: Nova on
November 25, 1983 | Abad Santos, J.
yung contract nang walang rason. Si Daniel nag demand na irestore. Nag karoon tuloy ng
compromise na ibabalik si Daniel sa trabaho. Pero hindi naman siya binalik instead ang ginawa ng
NPC, inemploy nila si Jose e sa da ng trabaho ni Daniel. Ngayon si Daniel nag reklamo kasi nga si
NPC di ginawa yung compromise. Ang argument ng NPC is na novate na raw kasi inemploy na
daw nila si Jose e. Sabi ng SC walang nova on since dapat pag may nova on, “it must be
explicitly stated” or “incompa bility on every point b/w the old and the new agreements.”
DOCTRINE: “Novation is never presumed but must be explicitly stated” 
Obligations and Contracts | Week 6 Cases | Page 4 
FACTS:  DANIEL E. ROXAS, doing business under the name of United Veterans Security Agency
and Foreign Boats Watchmen, sued the NATIONAL POWER CORPORATION (NPC) and two of
its officers in Iligan City to compel NPC to restore the contract of Roxas for security services
which the former had terminated.
Both par es entered into a compromise agreement and was subsequently approved by the court.
However, it was not implemented for reasons not discussed in the case because of its irrelevancy.
Thus, on May 14, 1982, NPC executed another contract for security services with Jose e L.
Roxas whose rela onship to Daniel is not shown.
The NPC refused to implement the new contract for which reason Daniel filed a Mo on for
Execu on. Roxas assailed par. 3 of the compromise agreement:
The  parties  shall  continue  with  the  contract  of  security  services  under  the  same  terms  and 
conditions as the previous contract effective upon the signing thereof;’  Macondray filed complaint to collect said amount. RTC absolved the defendants from the
However, more than about eight (8) months has passed since the decision of this Court, that
defendant Na onal Power Corpora on, through bad faith has made reasons and excuses one
a er another, and has yet to comply with the aforesaid terms of the decision. Court granted the
mo on for execu on. The NPC assails the Order on the ground that it directs execu on of a
contract which had been novated by the new contract it executed with Jose e L. Roxas.
ISSUE: Whether the 2nd contract executed with Jose e L. Roxas cons tutes nova on.
HELD: NO.  Act  No.  4122 - where the plain ff cannot maintain the ac on for the recovery of the
Nova on is never presumed. It must be explicitly stated or there must be manifest incompa bility
between the old and the new obliga ons in every aspect.
Art. 1292. In order that an obliga on may be ex nguished by another which
subs tutes the same, it is impera ve that it be so declared in unequivocal terms, or that
the old and the new obliga ons be on every point incompa ble with each other
There is nothing in the 2nd contract for security services with Jose e which supports the
pe oner’s conten on that it cons tutes a nova on because there is neither explicit nova on
nor incompa bility on every point between the “old” and the “new” agreements.
 
MACONDRAY AND CO. Inc. v. ANTONIO RUIZ and Ernesto Cuisia
November 26, 1938 | Imperial, J.
SUMMARY:  Macondray sold a car to Ruiz on Jan. 21, 1932 where Ruiz delivered via promissory
notes having Borromeo as co-debtor, having the car as a mortgage. A er a while, they removed
Borromoe and sent new promissory notes this me having Cuisia as the co-debtor which
happened on March 14, 1934, and was s pulated in a new contract. Ruiz and Cuisia was declared
in default so the car was foreclosed and sold in a public auc on in favor of Macondray as well.
A er liquida on of the sale of the car, Macondray claims that Ruiz and Cuisia s ll owe them a
balance since balance was not fully compensated of the mortgage. But the SC held that under Act
4122, Macondray cannot collect from the defendants anymore since said Act was implemented
even before the novated contract was entered into.
  
DOCTRINE:  When a contract is substan ally altered by other s pula ons, it would be deemed
that it would be subs tuted and novated by a new contract and the old contract is ex nguished.
  
FACTS:  Macondray sold to Ruiz an automobile (P3,572). They agreed that Ruiz would pay in cash
(P302) and would execute promissory notes for the balance (diff amounts, diff dates). Ruiz
executed jointly with one Ramon Borromeo 27 PNs, to pay jointly and severally. Also, Ruiz
mortgaged the automobile.
Years later, Macondray and Ruiz agreed to execute another contract excluding Borromeo in where
Ruiz and a 3rd person (Ernesto Cuisia) would sign the PNs for the balance (P2.2k nalang). Cuisia
and Ruiz signed the PNs for said balance with interest of 12% p.a.  and that the mortgaged
automobile be le at stand.
Defendants failed to pay; mortgage was foreclosed by Macondray. Sheriff sold the automobile at
public auc on and was awarded to Macondray for P500. A er liquida on and the amount from
sale being deducted from the remaining balance, it appeared that the defendants s ll owe
Macondary P1,696.
obliga on in pursuant to Act 4122. Macondray appealed and contends that this law is
inapplicable since the contract of sale was done on January 21, 1932 and Act 4122 was only
implemented on Dec, 9, 1933.
  
ISSUE:  Whether or not Macondray has the right to collect the balance a er the liquida on of the
mortgage
HELD: NO. 
balance owing from the defendants (effec ve Dec. 9, 1933)
In this case, the first contract (Ruiz & Borromeo and Macondray) was held to be subs tuted and
novated by the deed executed by Ruiz and Cuisia which was on March 14, 1934, making the said
Act applicable to this case.
 
TIRSO GARCIA v. KYU HEK CHIONG etc.
Topic: Nova on
March 31, 1938 | Avanceña, J.
SUMMARY: Ito yung si reapondent Khu Yek Chiong umutang (applied for credits) from the
pe oner mercan le bank of china worth 100k+. Later on, si co respondent Ang Gioc Chim and
M Escolar (also known as “Chim M Escolar and Co”) also obtained credit from the pe oner bank
worth 18K+. Tapos si (1) Khu Yek Chiong and yung (2) Chim M Escolar and Co. they agreed to be
solidary guarantors of “Chim M Escolar and Co” para sa credits na inapplyan niya (yung18K+).
Later on nag ins tute ng ac on pe oner mercan le bank of china to recevover from (1) Khu Yek
Chiong the amount of 100k+ (yung inutang niya) and (2) from Khu Yek Chiong and Ang “Chim M
Escolar and Co” the amount of 18k+ (kasi nga diba they entered as guarantors nung utang ni Chim
M Escolar and Co). Ito ngayon yung kinocontend ni Ang Gioc Chim saying na dapat hindi na sila
liable kasi there was a nova on. Yung nova on daw ay nangyari via the le ers he (Ang Gioc Chim)
sent to the pe oner bank of china saying na siya na si Khu Yek Chiong na ang nag aassume ng
obliga ons ng “Chim M Escolar and Co” as guarantor. There was also another le er from the
pe oner bank asking Khu Yek Chiong if totoo bang pumayag siya and sabi niya oo payag daw
siya. Hence, the issue of WON THE LETTERS SENT BY RESPONDENT ANG GIOC CHIM TO
KHU YEK CHIONG WERE VALID TO NOVATE THE FORMER’s OBLIGATION AS GUARANTOR?
Sabi ng SC NO kasi “novation cannot be made without the consent of the creditor” and “In order that an 
obligation  may  be  extinguished  by  another  which  substitutes  it,  it  is  necessary  that  it  be  so  declared 
expressly,  or  that  the  old  and  new  obligations  be  incompatible in every respect”. (art. 1205 of CC). In the
case, the le ers do not prove the alleged nova on. The consent of the Mercan le Bank of China
to this nova on is not shown, nor is it proven. Hence, talo si respondent Ang Gioc Chim.
Obligations and Contracts | Week 6 Cases | Page 5 
 On June 19, 1961, Boysaw fought and defeated Louis Avila in Nevada. Ketchum, the manager of
DOCTRINE:   Novation  which  consists  in substituting a new debtor in the place of the original one, may be  Boysaw, assigned to Amado Araneta his managerial rights, who later transferred the rights to
made  even  without  the  knowledge  or  against  the  will  of  the  latter,  but  not  without  the  consent  of  the  Alfredo Yulo.
creditor. 
   On September 5, 1961, Alfredo Yulo, Jr. wrote to Sarreal informing him of his acquisi on of the
FACTS:  Defendant Khu Yek Chiong obtained a credit from the Mercan le Bank of China managerial rights over Boysaw and indica ng his and Boysaw's readiness to comply with the
(Mercan le Bank). (P115,294. 41). The co-partnership of Ang Gioc Chim-M. Escolar & Co. (Ang boxing contract of May 1, 1961. Sarreal wrote to Games and Amusement Board (GAB) regarding
Gioc & Co.) formed by Ang Gioc Chim and M. Escolar also obtained a credit from the same this switch of managers because they weren’t no fied. Which they requested Boysaw to clarify
Mercan le Bank of China (P18, 805.08) the situa on.

Khu Yek Chiong guaranteed solidarily with Ang Gioc & Co. the obliga ons which the la er might
contract by virtue of its credit. The Mercan le Bank ins tuted the case to recover from Khu Yek
Chiong P115, 294. 41 and from Khu Yek Chiong and Ang Gioc & Co. P18, 805.
The trial court ordered the par es to pay the Plain ff Mercan le Bank their obliga ons, with an
interest of 10 cents per annum and that the stock cer ficates placed as security would be sold at
an auc on where the proceeds would be applied to the payment of the judgment and if there be
a balance, it would be refunded to Khu Yek Chiong.
Ang Gioc Chim appealed alleging that the contract between the Mercan le Bank and Ang Gioc &
Co. was novated and Khu Yek Chiong assumed all obliga ons and took charge of the proper es of
the co-partnership, thus being the sole debtor. This conten on, however, was contradicted by the
fact that Ang Gioc & Co. drew checks against the Mercan le Bank in the name of the
co-partnership.
ISSUE: Whether the le ers proved that nova on between the par es occurred
  
HELD: NO.  A  viola on of the contract in ques on was the assignment and transfer, first to J. Amado Araneta,
The consent of the Mercan le Bank of China to this nova on is not shown, nor is it proven by
Exhibits 1, 2, and 3. Moreover, these le ers merely state that Khu Yek Chiong was willing to
assume the obliga ons of Ang Gioc ChimM. Escolar & Co., which does not, in the least, alter the
extent of the obliga on which he, as solidary surety, had already assumed. These le ers do not
say that Khu Yek Chiong assumed this obliga on as sole debtor, relieving therefrom Ang Gioc
Chim—M. Escolar & Co. In order that an obliga on may be ex nguished by another which
subs tutes it, it is necessary that it be so declared expressly, or that the old and new obliga ons
be incompa ble in every respect. In view of the foregoing, the appealed judgment is affirmed with
costs against the appellant. (Ang Gioc Chim lost)
SOLOMON BOYSAW and Alfredo Yulo Jr. v. INTERPHIL PROMOTION Inc.,  of the managerial rights over Boysaw cannot change the fact that such acquisi on, and the prior
Lope Sarreal Sr., and Manuel Nieto Jr.
Topic: Nova on; change of debtor
March 20, 1987 | Fernan, J.
DOCTRINE:  When  a  contract  is  unlawfully  novated  by  an  applicable  and  unilateral  substitution  of  the  Interphil's le er to the GAB expressing concern over reported managerial changes and reques ng
obligor by another, the aggrieved creditor is not bound to deal with the substitute.  for clarifica on on the ma er, the appellees were not reliably informed of the changes of
  
FACTS:  On May 1, 1961, Boysaw and manager Ketchum signed with Interphil (represented
by Sarreal) a contract to engage Flash Elorde in a boxing match at Rizal Memorial Stadium on Sept
30, 1961 or not later than 30 days shld a postponement be mutually agreed upon. Boysaw, accdg
to contract, shld not engage in other bouts prior to the contest. In the same way, Interphil signed
Elorde to a similar agreement.
GAB called for conferences and decided to schedule the Elorde-Boysaw bout on Nov 4, 1961
which the USA Na onal Boxing Assoc approved. Sarreal offered to move the fight to Oct 28 for it
to be w/in the 30 day allowable postponement in the contract. However, Yulo refused. He was
willing to approve the fight on Nov 4 provided it will be promoted by a certain Mamerto Besa.
While an Elorde-Boysaw fight was eventually staged, the fight contemplated in the May 1, 1961
boxing contract never materialized. Boysaw and Yulo, Jr. sued Interphil, Sarreal, Sr. and Manuel
Nieto, Jr. for damages allegedly occasioned by the refusal of Interphil and Sarreal to honor their
commitments under the boxing contract of May 1,1961.
The lower court rendered its judgment dismissing the plain ffs' complaint, the plain ffs moved
for a new trial. The mo on was denied, hence, this appeal taken directly to this Court by reason of
the amount involved.
ISSUE: Whether there was a valid nova on?
HELD: NO. 
and subsequently, to appellant Yulo, Jr., of the managerial rights over Boysaw without the
knowledge or consent of Interphil.
The  assignments,  from  Ketchum  to  Araneta,  and from Araneta to Yulo, were in fact novations of 
the original contract which, to be valid, should have been consented to by Interphil. 
 
Nova on which consists in subs tu ng a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the la er, but  not  without  the  consent of 
the creditor.[Art. 1293, Civil Code]
That appellant Yulo, Jr., through a le er, advised Interphil on September 5, 1961 of his acquisi on
acquisi on of such rights by Araneta were done without the consent of Interphil. There is no
showing that Interphil, upon receipt of Yulo's le er, acceded to the "subs tu on" by Yulo of the
original principal obligor, who is Ketchum. The logical presump on can only be that, with
managers. Not being reliably informed, appellees cannot be deemed to have consented to such
changes.
Under the law when a contract is unlawfully novated by an applicable and unilateral subs tu on
of the obligor by another, the aggrieved creditor is not bound to deal with the subs tute.
The consent of the creditor to the change of debtors, whether in expromision  or delegacion is an,
indispensable requirement . . . Subs tu on of one debtor for another may delay or prevent the

Obligations and Contracts | Week 6 Cases | Page 6 

fulfillment of the obliga on by reason of the inability or insolvency of the new debtor, hence, the
creditor should agree to accept the subs tu on in order that it may be binding on him.
Thus, in a contract where x is the creditor and y is the debtor, if y enters into a contract with z,
under which he transfers to z all his rights under the first contract, together with the obliga ons
thereunder, but such transfer is not consented to or approved by x, there is no nova on. X can
s ll bring his ac on against y for performance of their contract or damages in case of breach.
WHEREFORE, except for the award of moral damages which is herein deleted, the decision of the
lower court is hereby affirmed.
 
AJAX MARKETING & DEVELOPMENT CORP. v. COURT OF APPEALS  debtor, or by subroga ng a third person in the rights of the creditor.
Topic: Compensa on; nova on
September 14, 1995 | Francisco, J.
RECIT-READY/SUMMARY:  Pe oner corpora on obtained three loans all secured by a property
of Spouses See and Tan - (1) as partnership, P250K, (2) as company, P150K; and (3) as
corpora on, P600K. The bank consolidated all the three loans into one, amoun ng to P1M. The
pe oner executed a PN in favor of the bank. It failed to pay so the TC ordered the extrajudicial
foreclosure of the property of aforemen oned spouses. CA affirmed. Pe oners appealed to the
SC arguing that their obliga ons were ex nguished since there was nova on when their loans
were consolidated into one. SC said nope. Nova on is never presumed and must be shown
through express agreement or acts of equal import. In the case at bar, the a endant facts did not
make a case of nova on. There was no change in the object nor change in the persons of the
par es. There was only a conversion from partnership to corpora on and not a crea on of a new
corporate personality.
DOCTRINE:   Novation  is  never  presumed,  and  thus,  it  must  be shown by express agreement or by acts of  point incompa ble with the new one. In the same vein, to effect a subjec ve nova on
equal import.  by a change in the person of the debtor it is necessary that the old debtor be released
  
FACTS:  Ylang-Ylang Merchandising Company, a partnership between Angelita Rodriguez and
Antonio Tan, obtained a loan amoun ng to P250K from Metropolitan Bank and to secure
payment, *Sps. Marcial Lee and Lilian Tan cons tuted a real estate mortgage over their property in
Paco, Manila in favor of said bank.
Subsequently, the partnership changed its name to Ajax Marke ng Company, without changing
its composi on, and obtained a loan amoun ng to P150K from the same bank secured by the
*same spouses through the same mortgaged property. The partnership was eventually converted
to a corpora on denominated as Ajax Marke ng and Development Corpora on.  It obtained
another loan of P600K secured by the *same mortgaged property of the same spouses.
The three loans amounted to P1M were restructured and consolidated into one loan, and the
corpora on executed a Promissory Note. Upon failure to pay, TC ordered the extrajudicial
foreclosure of the real estate property of Spouses See and Tan. CA affirmed. Hence, this pe on.
Pe oners argued that nova on occurred when their three loans were consolidated into a single
loan, thus ex nguishing their monetary obliga ons and releasing the mortgaged property from
liability. (wow sinuswerte????????)
  
ISSUE: Whether the monetary obliga ons were ex nguished by nova on
HELD: NO.  AC, Wonderland, and respondent bank, RSLB, executed an addendum to their previous
The a endant facts herein do not make a case of nova on. There is no intent to novate the three
loan agreements through the PN. The PN merely restructured and renewed the three previous
loans. There was no change in the object of the said obliga ons.
The consolida on of the three loans did not release the mortgaged real estate property from any
liability since the mortgage annota ons at the back of its TCT all remained uncancelled, thus
indica ng subsistence of mortgage. There was no change or subs tu ons in the persons of the
par es. The pe oner herein merely converted from partnership to corpora on. It did not make
Ajax a NEW corporate personality.
NOTES: First part of the ruling
● Nova on is the ex nguishment of an obliga on by the subs tu on or change of the
obliga on by a subsequent one which ex nguishes or modifies the first, either by
changing the object or principal condi ons, or by subs tu ng another in place of the
● Novation, unlike other modes of ex nc on of obliga ons,  is  a juridical act with a dual
func on, namely, it ex nguishes an obliga on and creates a new one in lieu of the old
● It can be objec ve, subjec ve, or mixed.
○ Objec ve nova on occurs when there is a change of the object or principal
condi ons of an exis ng obliga on.
○ Subjec ve nova on occurs when there is a change of either the person of
the debtor, or of the creditor in an exis ng obliga on.
○ When the change of the object or principal condi ons of an obliga on
occurs at the same me with the change of either in the person of the debtor
or creditor a mixed nova on occurs.
● The  well  settled  rule  is  that  novation  is  never presumed. Nova on will not be allowed
unless it is clearly shown by express agreement, or by acts of equal import. Thus, to
effect an objec ve nova on it is impera ve that the new obliga on expressly declare
that the old obliga on is thereby ex nguished, or that the new obliga on be on every
expressly from the obliga on, and the third person or new debtor assumes his place in
the rela on. There is no nova on without such release as the third person who has
assumed the debtor's obliga on becomes merely a co-debtor or surety.
 
AGRO CONGLOMERATES Inc. and Mario Soriano v.
COURT OF APPEALS & Regent Savings and Loan Bank Inc.
Topic: Compensa on; nova on
December 18, 2000 | Quisumbing, J.
RECIT-READY/SUMMARY:  Pe oner sold a land to Wonderland. Before the contract was
executed, the respondent bank was added into the rela onship. Pe oner will receive a loan from
respondent bank and Wonderland will pay the loan. However, the contract of sale between
pe oner and Wonderland was rescinded. Pe oner also received the loan from the bank.
Pe oner claims that Wonderland should s ll pay the loan based on the concept of nova on.
However, the first requisite of nova on is meaning, hence, pe oner is s ll liable for the loan.
DOCTRINE: Novation must never be presumed. It must be clearly and unequivocally shown. 
FACTS:  This case springs from three complaints for sums of money filed by respondent bank
against pe oners. AC, as vendor, sold two parcels of land to Wonderland Food. In their
agreement, the par es agreed to the purchase price of P5M, which would be paid in installments.
agreement. The new arrangement pertained to the revision of se lement of ini al payments of
P1M and prepaid interest of P360K. Par es agreed but the addendum was not notarized.
Obligations and Contracts | Week 6 Cases | Page 7 
Pe oner Mario Soriano signed as maker for several promissory notes, payable to the respondent
bank. The bank released the proceeds of the loan to pe oners but the la er failed to meet their
obliga ons. During their failure, the bank was experiencing financial turmoil and was under the
supervision of the Central Bank.
Central Bank endorsed the subject promissory notes to the bank’s counsel for collec on. Soriano
showed his intent to re-structure the loan but did not show up nor submit his formal request.
Hence, RSLB filed three separate complaints before the RTC.
Pe oners raised the defense of nova on and insisted that there was a valid substa on of debtor,
which is Wonderland. RTC held the pe oners are liable, and the CA affirmed RTC.
ISSUE:  Whether the pe oners successfully invoked nova on and subs tuted Wonderland as the
new debtor to the credit?
HELD: NO. 
The conflict started from a contract of sale of a farmland between pe oners and Wonderland.
However, no such sale materialized. A contract of sale is a reciprocal transac on. In this case, the
original plan was that the ini al payments would be paid in cash. Subsequently, the par es
executed an addendum with respondent bank, wherein pe oners would secure a loan in the
name of AC while the se lement of the loan would be assumed by Wonderland. Therea er,
pe oner signed several promissory notes and received the proceeds in behalf of AC. The Court,
however, rules that the facts herein do not make a case of nova on.
Nova on is the ex nguishment of an obliga on by the subs tu on or change of the obliga on by
a subsequent one, which ex nguishes or modifies the first. The following requisites are
indispensible:
1. previous valid obliga on;
2. agreement of the par es concerned to a new contract;
3. ex nguishment of old contract;
4. validity of new contract.
In this case, the first requisite is lacking. No nova on by subs tu on because there was no prior
obliga on which was subs tuted by a new contract. The promissory notes, which bound
pe oners to pay, were executed a er the addendum. The addendum modified the contract of
sale, not the s pula ons in the promissory notes, which pertain to the surety contract. Nova on
must never be presumed. It must be clearly and unequivocally shown.
The contract of surety between Wonderland and the pe oners was ex nguished by the
rescission of the contract of sale of the farmland. With the rescission, there was confusion or
merger in the persons of the obligor and the surety. The addendum dependent on it was likewise
lost.
The contract between pe oners and Wonderland did not materialize but the former s ll
received the proceeds of the promissory notes obtained from respondent bank. WHEREFORE,
pe on is denied for lack of merit.
TOLOMEO LIGUTAN and Leonidas Dela Llana v. COURT OF APPEALS and SBTC
Topic: Ex nc ve nova on; requisites
February 12, 2002 | Vitug, J.
RECIT-READY:  Pe oner obtained a loan from the respondent bank. Upon failure to pay, the
pe oner must pay the penalty. When the pe oner didn’t able to pay, the respondent sued him
for the amount due. The pe oners didn’t reply, however, a er two years when the case was
submi ed for decision, the pe oners filed for mo on for reconsidera on. The TC and CA denied
such appeal. Upon filing a second MR, the pe oners admi ed newly discovered evidence that
the REM they executed, novated the contract of the loan. However, there was no express
s pula on that the par es intending to supersede the exis ng agreement but was an accessory
contract to secure the loan. The CA denied the same. The SC denied the pe on sta ng that: (1)
penalty clause is an accessory; (2) issue of reasonableness of interest cannot be raised for the first
on appeal; and (3)  an  obligation  to  pay  a  sum  of  money  is  not  extinctively  novated  by  a  new 
instrument which merely supplements the old contract.  
 
DOCTRINE:  Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the 
parties  to  the  new  contract; third, the extinguishment of the obligation; and fourth, the validity of the new 
one.  In  order  that  an  obligation  may  be  extinguished  by  another  which  substitutes  the  same,  it  is 
imperative  that  it  be  so  declared  in  unequivocal  terms, or that the old and the new obligation be on every 
point incompatible with each other. 
  
FACTS:  Pe oners obtained a loan from respondent bank in the amount of P120,000.00 at
15.189% interest per annum with a 5% penalty per month in case of default and 10% a orney's
fees if a suit were ins tuted for collec on. When pe oners defaulted in payment, respondent
bank sued for recovery of the amount due.
Two years a er the case was submi ed for decision without pe oners presen ng their
evidence, pe oners filed a mo on for reconsidera on of the order declaring them as having
waived their right to present evidence and prayed that they be allowed to prove their case.
TC:  The mo on was denied by the trial court which eventually rendered a decision in favor of
respondent bank ordering pe oners to pay the amount due with the agreed interest rate of
15.189%, 5% penalty charge and 10% a orney's fees.
CA: The decision was affirmed on appeal by the Court of Appeals. On reconsidera on, the
appellate court reduced the penalty interest from 5% to 3%.
Pe oners filed a second mo on for reconsidera on and to admit newly discovered evidence
that the real estate mortgage they executed novated the contract of loan. The mortgage,
however, did not contain an express s pula on that the par es intended to supersede the
exis ng loan agreement but was an accessory contract to secure the loan. The Court of Appeals
denied the same.
  
ISSUE: Whether the original obliga on was novated by the execu on of the REM.
  
HELD: NO. 
The SC denied the pe on, in favor of the respondent. Accdg. to SC, ex nc ve nova on requires,
first, a previous valid obliga on; second, the agreement of all the par es to the new contract;
third, the ex nguishment of the obliga on; and fourth, the validity of the new one. In order that
an obliga on may be ex nguished by another which subs tutes the same, it is impera ve that it
be so declared in unequivocal terms, or that the old and the new obliga on be on every point
incompa ble with each other.
Obligations and Contracts | Week 6 Cases | Page 8 
In the case at hand, Pe oners acknowledge that the real estate mortgage contract does not
contain any express s pula on by the par es intending it to supersede the exis ng loan
agreement between the pe oners and the bank. Respondent bank has correctly postulated that  spouses, merely due to accruing interest, from P290,691.00 to P431,200.00; (2) it extended the
the mortgage is but an accessory contract to secure the loan in the promissory note.  period of payment and provided for new terms of payment; and (3) it provided for a waiver of
Therefore, an obliga on to pay a sum of money is not ex nc vely novated by a new instrument
which merely changes the terms of payment or adding compa ble covenants or where the old
contract is merely supplemented by the new one.
 
ILOILO TRADERS FINANCE Inc. v. HEIRS OF OSCAR SORIANO and Marta Soriano
Topic: Nova on
June 16, 2003 | Vitug, J.
SUMMARY:  Si ITF and Sps may 2 promissory notes. Di nag comply si Sps kaya nag karoon ng
Amicable Se lement yung dalawang par es. Pero di inaccept ng court yung AS kasi si Sps.
inignore nya lang yung order ng court na iverify raw yung terms ng AS. Ngayon a er 7 years si
Sps. mag fifile sana ng bagong AS pero sabi ng TC no need na kasi na novate na raw yung original
obliga on ng AS. So si Sps. nag file nalang siya ng mo on for nova on kasi argument nya na
novated na raw ng AS yung mga promissory notes. Sabi ng SC hindi. Although yung terms ng AS
is pwede mag novate, the fact na hindi mo na obey yung order ng TC which is to verify yung
terms ng AS, meaning, parang ayaw mo naman ng nova on. Kaya walang nova on.
DOCTRINE:  “Novation  may  be  extinctive  or  merely  modificatory, much being dependent on the nature of 
the change and the intention of the parties.” 
FACTS:  Spouses Oscar and Marta Soriano (Sps. Soriano) executed two P/N secured by Real
Property Mortgages in favor of the Pe oner Iloilo Traders Finance (ITF). When the Sorianos
defaulted on the promissory notes, ITF, moved for the extrajudicial foreclosure of the mortgages.
and P80,000.00, both secured by real estate mortgages, impliedly modified. The amicable
se lement contained modificatory changes. Thus, (1) it increased the indebtedness of the Soriano
claims, counterclaims, a orney’s fees or damages that the debtor-spouses might have against
their creditor, but the se lement neither cancelled, nor materially altered the usual clauses in, the
real estate mortgages.
The terms of the Agreement would’ve been beneficial to the spouses if they obeyed the RTC
when it ordered them to clarify some of the terms of the AS. Instead, they went to ignore the
order of the trial court and virtually failed to make any further appearance in court. This conduct
on the part of respondent spouses gave pe oner the correct impression that the Sorianos did
not intend to be bound by the compromise se lement, and its non-materializa on negated the
very purpose for which it was executed.
As stated in Diongzon v. CA, a supposed new agreement is deemed not to have taken effect
where a debtor never complied with his undertaking. In such a case, the other party is given the
op on to enforce the provisions of the amicable se lement or to rescind it and may insist upon
the original demand without the necessity for a prior judicial declara on of rescission.
DECISION: ITF won.

Evidently, in order to forestall the foreclosure, respondent spouses filed a complaint for
Declara on of a Void Contract, Injunc on and Damages. Par es entered into an Amicable
Se lement and submi ed it to the Court. The Court asked for clarifica ons of the Se lement, but
because neither party complied with the verifica ons, the Court disproved the AS and set the
case for trial.

A er 7 years, Sps. Soriano opted to file a new AS. ITF opposed. TC also denied the mo on sta ng
that “the  Amicable  Settlement  had  novated  the  original  agreement  of  that  parties  as  embodied  in  the 
promissory  note.  The  rights  and  obligations  of  the  parties,  therefore,  at  this  time  should  be based on the 
provisions  of  the  amicable  settlement.” Sps. Soriano then withdrew the Mo on fo file a new AS, and
instead, filed a case for nova on and specific performance. TC ruled in favor of Sps. CA affirmed.

ISSUE: Whether the AS novated the original obliga on (Promissory Notes)

HELD: NO. 
Nova on is merely modificatory where the change brought about by any subsequent agreement
is merely incidental to the main obliga on (e.g., a change in interest rates or an extension of me
to pay) in this instance, the new agreement will not have the effect of ex nguishing the first but
would merely supplement it or supplant some but not all of its provisions.

An amicable se lement or a compromise is a contract whereby the par es, by making reciprocal
concessions, avoid a li ga on or put an end to one already commenced.

It would appear that the arrangement reached by the Soriano spouses and ITF would have the
original obliga on of respondent spouses on two promissory notes for the sums of P150,000.00
Obligations and Contracts | Week 6 Cases | Page 9