Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 206806               June 25, 2014

ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners,

vs.
DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES, Respondent.

DECISION

LEONEN, J.:

Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be
presumed and may be implied only if the old and new contracts are incompatible on every point.

Before us is a petition for review on certiorari  assailing the Court of Appeals’ decision  in CA-G.R.
1 2

CV No. 95709, which stemmed from a complaint  filed in the Regional Trial Court of Valenzuela City,
3

Branch 171, for collection of sum of money.

The facts are as follows:

Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under
the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill
business.  From February 2007 to March 2007, he delivered scrap papers worth 7,220,968.31 to
4

Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and
President, Candida A. Santos.  The parties allegedly agreed that Arco Pulp and Paper would either
5

pay Dan T. Lim the value of the raw materials or deliver to him their finished products of equivalent
value.6

Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-
dated check dated April 18, 2007  in the amount of 1,487,766.68 as partial payment, with the
7

assurance that the check would not bounce.  When he deposited the check on April 18, 2007, it was
8

dishonored for being drawn against a closed account. 9

On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of
agreement  where Arco Pulp and Paper bound themselves to deliver their finished products to
10

Megapack Container Corporation, owned by Eric Sy, for his account. According to the
memorandum, the raw materials would be supplied by Dan T. Lim, through his company, Quality
Paper and Plastic Products. The memorandum of agreement reads as follows:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches
at the price of ₱18.50 per kg. to Megapack Container for Mr. Eric Sy’s account. Schedule of
deliveries are as follows:

It has been agreed further that the Local OCC materials to be used for the production of the above
Test Liners will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at
₱6.50 per kg. (price subject to change per advance notice). Quantity of Local OCC delivery will be
based on the quantity of Test Liner delivered to Megapack Container Corp. based on the above
production schedule. 11

On May 5, 2007, Dan T.Lim sent a letter  to Arco Pulp and Paper demanding payment of the
12

amount of 7,220,968.31, but no payment was made to him. 13

Dan T. Lim filed a complaint  for collection of sum of money with prayer for attachment with the
14

Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its
answer  but failed to have its representatives attend the pre-trial hearing. Hence, the trial court
15

allowed Dan T. Lim to present his evidence ex parte. 16

On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and
dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the
memorandum of agreement, novation took place, which extinguished Arco Pulp and Paper’s
obligation to Dan T. Lim. 17
Dan T. Lim appealed  the judgment with the Court of Appeals. According to him, novation did not
18

take place since the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an
exclusive and private agreement between them. He argued that if his name was mentioned in the
contract, it was only for supplying the parties their required scrap papers, where his conformity
through a separate contract was indispensable. 19

On January 11, 2013, the Court of Appeals  rendered a decision  reversing and setting aside the
20 21

judgment dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay
Dan T. Lim the amount of ₱7,220,968.31 with interest at 12% per annum from the time of demand;
₱50,000.00 moral damages; ₱50,000.00 exemplary damages; and ₱50,000.00 attorney’s fees. 22

The appellate court ruled that the facts and circumstances in this case clearly showed the existence
of an alternative obligation.  It also ruled that Dan T. Lim was entitled to damages and attorney’s
23

fees due to the bad faith exhibited by Arco Pulp and Paper in not honoring its undertaking. 24

Its motion for reconsideration  having been denied,  Arco Pulp and Paper and its President and
25 26

Chief Executive Officer, Candida A. Santos, bring this petition for review on certiorari.

On one hand, petitioners argue that the execution of the memorandum of agreement constituted a
novation of the original obligation since Eric Sy became the new debtor of respondent. They also
argue that there is no legal basis to hold petitioner Candida A. Santos personally liable for the
transaction that petitioner corporation entered into with respondent. The Court of Appeals, they
allege, also erred in awarding moral and exemplary damages and attorney’s fees to respondent who
did not show proof that he was entitled to damages. 27

Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was
no proper novation in this case. He argues that the Court of Appeals was correct in ordering the
payment of 7,220,968.31 with damages since the debt of petitioners remains unpaid.  He also28

argues that the Court of Appeals was correct in holding petitioners solidarily liable since petitioner
Candida A. Santos was "the prime mover for such outstanding corporate liability."  In their reply,
29

petitioners reiterate that novation took place since there was nothing in the memorandum of
agreement showing that the obligation was alternative. They also argue that when respondent
allowed them to deliver the finished products to Eric Sy, the original obligation was novated. 30

A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-
04-SC dated November 21, 2000. 31

The issues to be resolved by this court are as follows:

1. Whether the obligation between the parties was extinguished by novation

2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.

3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded

The petition is denied.

The obligation between the

parties was an alternative
obligation

The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states:

Article 1199. A person alternatively bound by different prestations shall completely perform one of
them.

The creditor cannot be compelled to receive part of one and part of the other undertaking.

"In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who generally has the right of election."  The right of election
32

is extinguished when the party who may exercise that option categorically and unequivocally makes
his or her choice known. 33

The choice of the debtor must also be communicated to the creditor who must receive notice of it
since: The object of this notice is to give the creditor . . . opportunity to express his consent, or to
impugn the election made by the debtor, and only after said notice shall the election take legal effect
when consented by the creditor, or if impugned by the latter, when declared proper by a competent
court.
34
According to the factual findings of the trial court and the appellate court, the original contract
between the parties was for respondent to deliver scrap papers worth ₱7,220,968.31 to petitioner
Arco Pulp and Paper. The payment for this delivery became petitioner Arco Pulp and Paper’s
obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor, had the option to either (1)
pay the price or(2) deliver the finished products of equivalent value to respondent. 35

The appellate court, therefore, correctly identified the obligation between the parties as an
alternative obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials from
respondent, would either pay him the price of the raw materials or, in the alternative, deliver to him
the finished products of equivalent value.

When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the
scrap papers, they exercised their option to pay the price. Respondent’s receipt of the check and his
subsequent act of depositing it constituted his notice of petitioner Arco Pulp and Paper’s option to
pay.

This choice was also shown by the terms of the memorandum of agreement, which was executed on
the same day. The memorandum declared in clear terms that the delivery of petitioner Arco Pulp and
Paper’s finished products would be to a third person, thereby extinguishing the option to deliver the
finished products of equivalent value to respondent.

The memorandum of
agreement did not constitute
a novation of the original
contract

The trial court erroneously ruled that the execution of the memorandum of agreement constituted a
novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to
deliver the finished products to a third person, it did not novate the original obligation between the
parties.

The rules on novation are outlined in the Civil Code, thus:

Article 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor. (1203)

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)

Article 1293. Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not without the consent
of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237.
(1205a)

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."36

Novation was extensively discussed by this court in Garcia v. Llamas: 37

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. Article 1293 of the Civil Code defines novation as follows:

"Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may
be made even without the knowledge or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237."

In general, there are two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from — and may even be
made without the knowledge of — the debtor, since it consists of a third person’s assumption of the
obligation. As such, it logically requires the consent of the third person and the creditor. In
delegacion, the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation; thus, the consent of these three persons are necessary.
Both modes of substitution by the debtor require the consent of the creditor.

Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated
by the creation of a new one that takes the place of the former. It is merely modificatory when the old
obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether
extinctive or modificatory, novation is made either by changing the object or the principal conditions,
referred to as objective or real novation; or by substituting the person of the debtor or subrogating a
third person to the rights of the creditor, an act known as subjective or personal novation. For
novation to take place, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.

3) The old contract must be extinguished.

4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares in
unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is
incompatible with the old one on every point. The test of incompatibility is whether the two
obligations can stand together, each one with its own independent existence.  (Emphasis supplied)
38

Because novation requires that it be clear and unequivocal, it is never presumed, thus:

In the civil law setting, novatio is literally construed as to make new. So it is deeply rooted in the
Roman Law jurisprudence, the principle — novatio non praesumitur —that novation is never
presumed.At bottom, for novation tobe a jural reality, its animus must be ever present, debitum pro
debito — basically extinguishing the old obligation for the new one.  (Emphasis supplied) There is
39

nothing in the memorandum of agreement that states that with its execution, the obligation of
petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state that Eric
Sy somehow substituted petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows
that petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead.

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.  (Emphasis supplied)
40

In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the
contract need not be secured. This is clear from the first line of the memorandum, which states:

Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A.
Santos and Mr. Eric Sy. . . .41

If the memorandum of agreement was intended to novate the original agreement between the
parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The
memorandum of agreement must also state in clear and unequivocal terms that it has replaced the
original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is
present in this case.

Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with
their alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand
to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither
acknowledged nor consented to the latter as his new debtor. These acts, when taken together,
clearly show that novation did not take place. Since there was no novation, petitioner Arco Pulp and
Paper’s obligation to respondent remains valid and existing. Petitioner Arco Pulp and Paper,
therefore, must still pay respondent the full amount of ₱7,220,968.31.

Petitioners are liable for

damages

Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract
where the breach is due to fraud or bad faith:
Art. 2220. Willfull injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad faith. (Emphasis supplied)

Moral damages are not awarded as a matter of right but only after the party claiming it proved that
the breach was due to fraud or bad faith. As this court stated:

Moral damages are not recoverable simply because a contract has been breached. They are
recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton
disregard of his contractual obligations. The breach must be wanton, reckless, malicious or in bad
faith, and oppressive or abusive. 42

Further, the following requisites must be proven for the recovery of moral damages:

An award of moral damages would require certain conditions to be met, to wit: (1)first, there must be
an injury, whether physical, mental or psychological, clearly sustained by the claimant; (2) second,
there must be culpable act or omission factually established; (3) third, the wrongful act or omission of
the defendant is the proximate cause of the injury sustained by the claimant; and (4) fourth, the
award of damages is predicated on any of the cases stated in Article 2219 of the Civil Code. 43

Here, the injury suffered by respondent is the loss of ₱7,220,968.31 from his business. This has
remained unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and
Paper’s act of refusing to pay its obligations.

When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued
an unfunded check but also entered into a contract with a third person in an effort to evade its
liability. This proves the third requirement.

As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be
awarded in the following instances:

Article 2219. Moral damages may be recovered in the following and analogous cases:

(1) A criminal offense resulting in physical injuries;

(2) Quasi-delicts causing physical injuries;

(3) Seduction, abduction, rape, or other lascivious acts;

(4) Adultery or concubinage;

(5) Illegal or arbitrary detention or arrest;

(6) Illegal search;

(7) Libel, slander or any other form of defamation;

(8) Malicious prosecution;

(9) Acts mentioned in Article 309;

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Breaches of contract done in bad faith, however, are not specified within this enumeration. When a
party breaches a contract, he or she goes against Article 19 of the Civil Code, which states: Article
19. Every person must, in the exercise of his rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty and good faith.

Persons who have the right to enter into contractual relations must exercise that right with honesty
and good faith. Failure to do so results in an abuse of that right, which may become the basis of an
action for damages. Article 19, however, cannot be its sole basis:

Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the
basis of an actionable tort. Article 19 describes the degree of care required so that an actionable tort
may arise when it is alleged together with Article 20 or Article 21.44
Article 20 and 21 of the Civil Code are as follows:

Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall
indemnify the latter for the same.

Article 21.Any person who wilfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.

To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts
that are contrary to morals, good customs, and public policy:

Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act
have been willful or negligent. Willful may refer to the intention to do the act and the desire to
achieve the outcome which is considered by the plaintiff in tort action as injurious. Negligence may
refer to a situation where the act was consciously done but without intending the result which the
plaintiff considers as injurious.

Article 21, on the other hand, concerns injuries that may be caused by acts which are not
necessarily proscribed by law. This article requires that the act be willful, that is, that there was an
intention to do the act and a desire to achieve the outcome. In cases under Article 21, the legal
issues revolve around whether such outcome should be considered a legal injury on the part of the
plaintiff or whether the commission of the act was done in violation of the standards of care required
in Article 19.
45

When parties act in bad faith and do not faithfully comply with their obligations under contract, they
run the risk of violating Article 1159 of the Civil Code:

Article 1159. Obligations arising from contracts have the force of law between the contracting parties
and should be complied with in good faith.

Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be
recovered since it only specifies, among others, Article 21. When a party reneges on his or her
obligations arising from contracts in bad faith, the act is not only contrary to morals, good customs,
and public policy; it is also a violation of Article 1159. Breaches of contract become the basis of
moral damages, not only under Article 2220, but also under Articles 19 and 20 in relation to Article
1159.

Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220
requires that the breach be done fraudulently or in bad faith. In Adriano v. Lasala: 46

To recover moral damages in an action for breach of contract, the breach must be palpably wanton,
reckless and malicious, in bad faith, oppressive, or abusive. Hence, the person claiming bad faith
must prove its existence by clear and convincing evidence for the law always presumes good faith.

Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, a breach of known duty through some motive
or interest or ill will that partakes of the nature of fraud. It is, therefore, a question of intention, which
can be inferred from one’s conduct and/or contemporaneous statements.  (Emphasis supplied)
47

Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination
of the circumstances in each case.

When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to
respondent, it was presumably with the knowledge that it was being drawn against a closed account.
Worse, it attempted to shift their obligations to a third person without the consent of respondent.

Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of known duty through some motive or interest or ill will
that partakes of the nature of fraud."  Moral damages may, therefore, be awarded.
48

Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in
the following circumstances:

Article 2232. In contracts and quasi-contracts, the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

Article 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide
whether or not they should be adjudicated.
Article 2234. While the amount of the exemplary damages need not be proven, the plaintiff must
show that he is entitled to moral, temperate or compensatory damages before the court may
consider the question of whether or not exemplary damages should be awarded.

In Tankeh v. Development Bank of the Philippines,  we stated that:

49

The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from
the commission of a similar offense. The case of People v. Ranteciting People v. Dalisay held that:

Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are intended to
serve as a deterrent to serious wrong doings, and as a vindication of undue sufferings and wanton
invasion of the rights of an injured or a punishment for those guilty of outrageous conduct. These
terms are generally, but not always, used interchangeably. In common law, there is preference in the
use of exemplary damages when the award is to account for injury to feelings and for the sense of
indignity and humiliation suffered by a person as a result of an injury that has been maliciously and
wantonly inflicted, the theory being that there should be compensation for the hurt caused by the
highly reprehensible conduct of the defendant—associated with such circumstances as willfulness,
wantonness, malice, gross negligence or recklessness, oppression, insult or fraud or gross fraud—
that intensifies the injury. The terms punitive or vindictive damages are often used to refer to those
species of damages that may be awarded against a person to punish him for his outrageous
conduct. In either case, these damages are intended in good measure to deter the wrongdoer and
others like him from similar conduct in the future.  (Emphasis supplied; citations omitted)
50

The requisites for the award of exemplary damages are as follows:

(1) they may be imposed by way of example in addition to compensatory damages, and only
after the claimant's right to them has been established;

(2) that they cannot be recovered as a matter of right, their determination depending upon
the amount of compensatory damages that may be awarded to the claimant; and

(3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or
malevolent manner. 51

Business owners must always be forthright in their dealings. They cannot be allowed to renege on
their obligations, considering that these obligations were freely entered into by them. Exemplary
damages may also be awarded in this case to serve as a deterrent to those who use fraudulent
means to evade their liabilities.

Since the award of exemplary damages is proper, attorney’s fees and cost of the suit may also be
recovered.

Article 2208 of the Civil Code states:

Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than
judicial costs, cannot be recovered, except:

(1) When exemplary damages are awarded[.]

Petitioner Candida A. Santos
is solidarily liable with
petitioner corporation

Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced
to prove that the transaction was also a personal undertaking of petitioner Santos. We disagree.

In Heirs of Fe Tan Uy v. International Exchange Bank,  we stated that:

52

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the
people comprising it. Following this principle, obligations incurred by the corporation, acting through
its directors, officers and employees, are its sole liabilities. A director, officer or employee of a
corporation is generally not held personally liable for obligations incurred by the corporation.
Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an
illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or
to confuse legitimate issues.

....
Before a director or officer of a corporation can be held personally liable for corporate obligations,
however, the following requisites must concur: (1) the complainant must allege in the complaint that
the director or officer assented to patently unlawful acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith.

While it is true that the determination of the existence of any of the circumstances that would warrant
the piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a
petition for review on certiorari under Rule 45, this Court can take cognizance of factual issues if the
findings of the lower court are not supported by the evidence on record or are based on a
misapprehension of facts.  (Emphasis supplied)
53

As a general rule, directors, officers, or employees of a corporation cannot be held personally liable
for obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if
complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith,
and (2) such negligence or bad faith was clearly and convincingly proven.

Here, petitioner Santos entered into a contract with respondent in her capacity as the President and
Chief Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of
petitioner corporation’s obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is
clear on the face of the check bearing the account name, "Arco Pulp & Paper, Co., Inc."  Any54

obligation arising from these acts would not, ordinarily, be petitioner Santos’ personal undertaking for
which she would be solidarily liable with petitioner Arco Pulp and Paper.

We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines: 55

Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where
the separate corporate personality of a corporation is abused or used for wrongful purposes. Under
the doctrine, the corporate existence may be disregarded where the entity is formed or used for non-
legitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or
perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or
intentions, in which case, the fiction will be disregarded and the individuals composing it and the two
corporations will be treated as identical.  (Emphasis supplied)
56

According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp
and Paper, stating that:

In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused
to honor their undertaking in favor of the [respondent]. After the check in the amount of 1,487,766.68
issued by [petitioner] Santos was dishonored for being drawn against a closed account, [petitioner]
corporation denied any privity with [respondent]. These acts prompted the [respondent] to avail of
the remedies provided by law in order to protect his rights. 57

We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the
corporate veil.  When petitioner Arco Pulp and Paper’s obligation to respondent became due and
1âwphi1

demandable, she not only issued an unfunded check but also contracted with a third party in an
effort to shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner
corporation’s obligations to respondent. These acts clearly amount to bad faith. In this instance, the
corporate veil may be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco
Pulp and Paper.

The rate of interest due on

the obligation must be
reduced in view of Nacar v.
Gallery Frames 58

In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v.
Gallery Frames,  the rate of interest due on the obligation must be modified from 12% per annum to
59

6% per annum from the time of demand.

Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,  and we 60

have laid down the following guidelines with regard to the rate of legal interest:

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping
Linesare accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held liable for damages. The provisions under Title XVIII
on "Damages" of the Civil Code govern in determining the measure of recoverable damages.
II. With regard particularly t o an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the rate of interest shall be 6% per
annum to be computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
damages, except when or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code), but when such certainty cannot be so reasonably established at the time the demand
is made, the interest shall begin to run only from the date the judgment of the court is made
(at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on
the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory,
the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above,
shall be 6% per annum from such finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of credit.

And, in addition to the above, judgments that have become final and executory prior to July 1, 2013,
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed
therein.  (Emphasis supplied; citations omitted.)
61

According to these guidelines, the interest due on the obligation of ₱7,220,968.31 should now be at
6% per annum, computed from May 5, 2007, when respondent sent his letter of demand to
petitioners. This interest shall continue to be due from the finality of this decision until its full
satisfaction.

WHEREFORE, the petition is DENIED in part. The decision in CA-G.R. CV No. 95709 is
AFFIRMED.

Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay
respondent Dan T. Lim the amount of ₱7,220,968.31 with interest of 6% per annum at the time of
demand until finality of judgment and its full satisfaction, with moral damages in the amount of
₱50,000.00, exemplary damages in the amount of ₱50,000.00, and attorney's fees in the amount of
₱50,000.00.

SO ORDERED.

MARVIC MARIO VICTOR F. LEONEN

Associate Justice

WE CONCUR:
 EN BANC

[G.R. No. L-29981. April 30, 1971.]

EUSEBIO S. MILLAR, Petitioner, v. THE HON. COURT OF APPEALS and ANTONIO

P. GABRIEL, Respondents.

Fernandez Law Office and Millar & Esguerra for Petitioner.

Francisco de la Fuente for Respondents.

SYLLABUS

1. CIVIL LAW; EXTINGUISHMENT OF OBLIGATIONS; IMPLIED NOVATION; DOES NOT

TAKE PLACE IF THE TWO OBLIGATIONS ARE NOT INCOMPATIBLE. — The defense of
implied novation requires clear and convincing proof of complete incompatibility
between the two obligations. (Magda Estates, Inc. v. Rodriguez and Rodriguez, L-
18411, Dec. 17, 1966, 18 SCRA 967.) 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.

2. ID.; ID.; ID.; NOT PRESENT IN CASE AT BAR — We see no substantial

incompatibility between the mortgage obligation and the judgment liability of the
respondent sufficient to justify a conclusion of implied novation. The stipulation for the
payment of the obligation under the terms of the deed of chanel mortgage serves only
to provide an express and specific method for its extinguishment — payment in two
equal installments. The chattel mortgage simply gave the respondent a method and
more time to enable him to fully satisfy the judgment indebtedness. (Zapanta v. De
Rotaeche, 21 Phil. 154) The chattel mortgage agreement in no manner introduced any
substantial modification or alteration of the judgment. Instead of extinguishing the
obligation of the respondent arising from the judgment, the deed of chattel mortgage
expressly ratified and confirmed the existence of the same, amplify only the mode and
period for compliance by the Respondent.

BARREDO, J., concurring: chanrob1es virtual 1aw library

1. REMEDIAL LAW; CIVIL PROCEDURE; EXECUTION OF JUDGMENT; WHEN THE

PARTIES CONTEMPLATED THE CHATTEL MORTGAGE TO BE SECURITY FOR PAYMENT OF
JUDGMENT. — By their explicit covenant, the parties contemplated the chattel
mortgage to be a security for the payment of the judgment and not the payment itself
thereof. Such being the case, and it appearing that respondent Gabriel has not paid the
judgment as stipulated in the chattel mortgage, the said judgment remains unimpaired
in its full existence and vigor, and the resort to the execution thereof thru the ordinary
procedure of a writ of execution by the petitioner ,is an election to which every
mortgage creditor is, entitled when he decides to abandon his security.
 DECISION

CASTRO, J.:

On February 11, 1956, Eusebio S. Millar (hereinafter referred to as the petitioner)

obtained a favorable judgment from the Court of First Instance of Manila, in civil case
27116, condemning Antonio P. Gabriel (hereinafter referred to as the respondent) to
pay him the sum of P1,746.98 with interest at 12% per annum from the date of the
filing of the complaint, the sum of P400 as attorney’s fees, and the costs of suit. From
the said judgment, the respondent appealed to the Court of Appeals which, however,
dismissed the appeal on January 11, 1957.

Subsequently, on February 15, 1957, after remand by the Court of Appeals of the case,
the petitioner moved ex parte in the court of origin for the issuance of the
corresponding writ of execution to enforce the judgment. Acting upon the motion, the
lower court issued the writ of execution applied for, on the basis of which the sheriff of
Manila seized the respondent’s Willy’s Ford jeep (with motor no. B-192297 and plate
no. 7225, Manila, 1956).

The respondent, however, pleaded with the petitioner to release the jeep under an
arrangement whereby the respondent, to secure the payment of the judgement debt,
agreed to mortgage the vehicle in favor of the petitioner. The petitioner agreed to the
arrangement; thus, the parties, on February 22, 1957, executed a chattel mortgage on
the jeep, stipulating, inter alia, that

"This mortgage is given as security for the payment to said EUSEBIO S. MILLAR,
mortgagee, of the judgment other incidental expenses in Civil Case No. 27116 of the
Court of First Instance of Manila against Antonio P. Gabriel, MORTGAGOR, in the
amount of ONE THOUSAND SEVEN HUNDRED (P1,700.00) PESOS, Philippine currency,
which MORTGAGOR agrees to pay as follows: jgc:chanrobles.com.ph

"March 31, 1957 — EIGHT HUNDRED FIFTY (P850.00) PESOS;

"April 30, 1957 — EIGHT HUNDRED FIFTY (P850.00) PESOS." cralaw virtua1aw library

Upon failure of the respondent to pay the first installment due on March 31, 1957, the
petitioner obtained an alias writ of execution. This writ which the sheriff served on the
respondent only on May 30, 1957 — after the lapse of the entire period stipulated in the
chattel mortgage for the respondent to comply with his obligation — was returned
unsatisfied.

So on July 17, 1957 and on various dates thereafter, the lower court, at the instance of
the petitioner, issued several alias writs, which writs the sheriff also returned
unsatisfied. On September 20, 1961, the petitioner obtained a fifth alias writ of
execution. Pursuant to this last writ, the sheriff levied on certain personal properties
belonging to the respondent, and then scheduled them for execution sale.

However, on November 10, 1961, the respondent filed an urgent motion for the
suspension of the execution sale on the ground of payment of the judgment obligation.
The lower court, on November 11, 1961, ordered the suspension of the execution sale
to afford the respondent the opportunity to prove his allegation of payment of the
judgment debt, and set the matter for hearing on November 25, 1961. After hearing,
the lower court, on January 25, 1962, issued an order the dispositive portion of which
reads:jgc:chanrobles.com.ph

"IN VIEW WHEREOF, execution reiterated for P1,700.00 plus costs of execution." cralaw virtua1aw library

The lower court ruled that novation had taken place, and that the parties had executed
the chattel mortgage only "to secure or get better security for the judgment." cralaw virtua1aw library

The respondent duly appealed the aforesaid order to the Court of Appeals, which set
aside the order of execution in a decision rendered on October 17, 1968, holding that
the subsequent agreement of the parties impliedly novated the judgment obligation in
civil case 27116.
The appellate court stated that the following circumstances sufficiently demonstrate the
incompatibility between the judgment debt and the obligation embodied in the deed of
chattel mortgage, warranting a conclusion of implied novation: chanrob1es virtual 1aw library

1. Whereas the judgment orders the respondent to pay the petitioner the sum of
P1,746.98 with interest at 12% per annum from the filing of the complaint, plus the
amount of P400 and the costs of suit, the deed of chattel mortgage limits the principal
obligation of the respondent to P1,700;

2. Whereas the judgment mentions no specific mode of payment of the amount due to
the petitioner, the deed of chattel mortgage stipulates payment of the sum of P1,700 in
two equal installments;

3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage
obligates the respondent to pay liquidated damages in the amount of P300 in case of
default on his part; and

4. Whereas the judgment debt was unsecured, the chattel mortgage, which may be
foreclosed extrajudicially in case of default, secured the obligation.

On November 26, 1968, the petitioner moved for reconsideration of the appellate
court’s decision, which motion the Court of Appeals denied in its resolution of December
7, 1968. Hence, the present petition for certiorari to review the decision of the Court of
Appeals, seeking reversal of the appellate court’s decision and affirmance of the order
of the lower court.

Resolution of the controversy posed by the petition at bar hinges entirely on a

determination of whether or not the subsequent agreement of the parties as embodied
in the deed of chattel mortgage impliedly novated the judgment obligation in civil case
27116. The Court of Appeals, in arriving at the conclusion that implied novation has
taken place, took into account the four circumstances heretofore already adverted to as
indicative of the incompatibility between the judgment debt and the principal obligation
under the deed of chattel mortgage.

1. Anent the first circumstance, the petitioner argues that this does not constitute a
circumstance in implying novation of the judgment debt, stating that in the interim —
from the time of the rendition of the judgment in civil case 27116 to the time of the
execution of the deed of chattel mortgage — the respondent made partial payments,
necessarily resulting in the lesser sum stated in the deed of chattel mortgage. He adds
that on record appears the admission by both parties of the partial payments made
before the execution of the deed of chattel mortgage. The erroneous conclusion arrived
at by the Court of Appeals, the petitioner argues, creates the wrong impression that the
execution of the deed of chattel mortgage provided the consideration or the reason for
the reduced judgment indebtedness.

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.

At best, the deed of chattel mortgage simply specified exactly how much the
respondent still owed the petitioner by virtue of the judgment in civil case 27116. The
parties, apparently in their desire to avoid any future confusion as to the amounts
already paid and as to the sum still due, decided to state with specificity in the deed of
chattel mortgage only the balance of the judgment debt properly collectible from
the Respondent. All told, therefore, the first circumstance fails to satisfy the test of
substantial and complete incompatibility between the judgment debt and the pecuniary
liability of the respondent under the chattel mortgage agreement.

2. The petitioner also alleges that the third circumstance, considered by the Court of
appeals as indicative of incompatibility, is directly contrary to the admissions of the
respondent and is without any factual basis. The appellate court pointed out that while
the judgment made no mention of payment of damages, the deed of chattel mortgage
stipulated the payment of liquidated damages in the amount of P300 in case of default
on the part of the Respondent.

However, the petitioner contends that the respondent himself in his brief filed with the
Court of Appeals admitted his obligation, under the deed of chattel mortgage, to pay
the amount of P800 by way of attorney’s fees and not as liquidated damages. Similarly,
the judgment makes mention of the payment of the sum of P400 as attorney’s fees and
omits any reference to liquidated damages.

The discrepancy between the amount of P400 and the sum of P300 fixed as attorney’s
fees in the judgment and the deed of chattel mortgage, respectively, is explained by
the petitioner, thus: the partial payments made by the respondent before the execution
of the chattel mortgage agreement were applied in satisfaction of part of the judgment
debt and of part of the attorney’s fees fixed in the judgment, thereby reducing both
amounts.

At all events, in the absence of clear and convincing proof showing that the parties, in
stipulating the payment of P300 as attorney’s fees in the deed of chattel mortgage
intended the same as an obligation for the payment of liquidated damages in case of
default on the part of the respondent, we find it difficult to agree with the conclusion
reached by the Court of Appeals.

3. As to the second and fourth circumstances relied upon by the Court of Appeals in
holding that the mortgage obligation superseded, through implied novation, the
judgment debt, the petitioner points out that the appellate court considered said
circumstances in a way not in accordance with law or accepted jurisprudence. The
appellate court stated that while the judgment specified no mode for the payment of
the judgment debt, the deed of chattel mortgage provided for the payment of the
amount fixed therein in two equal installments.

On this point, we see no substantial incompatibility between the mortgage obligation

and the judgment liability of the respondent sufficient to justify a conclusion of implied
novation. The stipulation for the payment of the obligation under the terms of the deed
of chattel mortgage serves only to provide an express and specific method for its
extinguishment — payment in two equal installments. The chattel mortgage simply
gave the respondent a method and more time to enable him to fully satisfy the
judgment indebtedness. 1 The chattel mortgage agreement in no manner introduced
any substantial modification or alteration of the judgment. Instead of extinguishing the
obligation of the respondent arising from the judgment, the deed of chattel mortgage
expressly ratified and confirmed the existence of the same, amplifying only the mode
and period for compliance by the Respondent.

The Court of Appeals also considered the terms of the deed of chattel mortgage
incompatible with the judgment because the chattel mortgage secured the obligation
under the deed, whereas the obligation under the judgment was unsecured. The
petitioner argues that the deed of chattel agreement clearly shows that the parties
agreed upon the chattel mortgage solely to secure, not the payment of the reduced
amount as fixed in the aforesaid deed, but the payment of the judgment obligation and
other incidental expenses in civil case 27116.

The unmistakable terms of the deed of chattel mortgage reveal that the parties
constituted the chattel mortgage purposely to secure the satisfaction of the then
existing liability of the respondent arising from the judgment against him in civil case
27116. As a security for the payment of the judgment obligation, the chattel mortgage
agreement effectuated no substantial alteration in the liability of the Respondent.

The defense of implied novation requires clear and convincing proof of complete
incompatibility between the two obligations. 2 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.

We do not see any substantial incompatibility between the two obligations as to warrant
a finding of an implied novation. Nor do we find satisfactory proof showing that the
parties, by explicit terms, intended the full discharge of the respondent’s liability under
the judgment by the obligation assumed under the terms of the deed of chattel
mortgage so as to justify a finding of express novation.

ACCORDINGLY, the decision of the Court of Appeals of October 17, 1968 is set aside,
and the order of the Court of First Instance of Manila of January 25, 1962 is affirmed, at
respondent Antonio Gabriel’s cost.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Fernando and Makasiar, JJ.,

concur.

Villamor, J., abstains.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-7663             October 20, 1913

PEDRO MARTINEZ, plaintiff-appellant,
vs.
MATIAS CAVIRES, ET AL., defendants-appellees.
ROBERT LINEAU, admr., intervener-appellant.

Fermin Mariano for appellant.

Buencamino and Lontok for appellees.
Wolfson and Wolfson for intervener.

TRENT, J.:

Pedro Martinez, the plaintiff in this case, seeks to recover from Matias Cavives and Severino
Cavives, the defendants, on some promissory notes executed by them in 196. The first note, in the
sum of $4,317.15 Mexican currency, was executed on April 8 of that year, and was jointly signed by
them and their brother Carlos Cavives, now deceased. The note calls for interest at ten per cent per
annum. Matias Cavives obtained $300 on April 30, $200 on May 30, and $200 on June 7 of that
year, and Severino Cavives, $600 on June 9 (all Mexican currency), each of which stipulated that
the sums mentioned therein had been borrowed under the same terms and conditions as were
expressed in the joint obligation of the three brothers above mentioned. The due execution of all
these notes is admitted. None of these notes were ever paid by any of the three brothers. On June
14, 1898, the deceased brother Carlos entered into an agreement with the plaintiff whereby all the
obligations contracted by the three brothers during the year 1896 were liquidated and a new note
was executed and signed by these two parties (Exhibit 4), its amount, $9,483, 5 reales, 17 cuartos,
purporting to include the principal and interest at the specified rate up to the date of its execution.
The evidence of record shows that Carlos Cavives, in executing this note, agreed to obtain the
signature of his brothers to it, but this was never done. During the settlement of the estate of the
deceased Carlos, an agreement was entered into by his widow and Pedro Martinez, whereby the
later agreed to accept P3,00 in full satisfaction of his claim against her husband's estate, a sum
considerably less than the principal and accumulated interest of the original notes. A note (Exhibit
5)was executed under these conditions, whereby the widow was to pay its face value in annual
installments.

The contention of the defendants, sustained by the court below, was that the original obligations had
been novated by the agreement made in 1898 between Carlos Cavives and Pedro Martinez. It was
held that as neither party to this agreement exercised proper diligence in securing the signatures of
the other brothers, there was a tacit consent to permit the obligation to stand as a debt against
Carlos Cavives alone. The fact that the compromise settlement made between the plaintiff and the
widow of Carlos Cavives made no mention of the amounts borrowed by Matias and Severino
Cavives was deemed by the court further proof of the intention of the plaintiff to novate the debts of
the three brothers and hold only Carlos liable for their payment. 1awphil.net

Article 1205 of the Civil Code reads as follows: "Novation, consisting in the substitution of a debtor in
the place of the original one, may be made without the knowledge of the latter, but not without the
consent of the creditor."

So far as Exhibit 4 is concerned, it cannot be presumed that the plaintiff considered the liability of
Carlos, alone as better than the liability of all the of the brothers, since Carlos promised, at his
request, to secure the signatures of his brothers to this document. Nor can it be presumed, in the
absence of evidence, that there was any consideration present to induce Carlos to assume what
was theretofore strictly a liability of his brother. So that to construe Exhibit 4 to the effect that by its
term Carlos was substituted as the sole debtor of the plaintiff would mean that the latter accepted
less security for his loans than he originally had, and that the former assumed liabilities which he
was under no obligation to assume and for which there was no valid consideration. At the time this
instrument was executed, then, it was not the intention of either of the signers to release these
defendants as debtors of the plaintiff. As to the subsequent silence of both parties to this agreement,
we do not consider that it was, at least as far as the plaintiff was concerned, of any significance. He
signed Exhibit 4 at the time Carlos Cavives signed it on the condition that the latter would secure the
signatures of his two brothers to it, thereby creating a joint obligation against the three. Carlos
Cavives never secured the signatures of his brothers. The contract in question contained mutual
obligations which were to be fulfilled by each of the signers, i.e., on the part of Carlos to secure the
signatures of his brothers to the instrument, and then on the part of the plaintiff to recognize it as a
joint obligation of the three brothers covering their indebtedness to him.

The last paragraph of article 1100 of the Civil Code reads as follows: "In mutual obligations, none of
the persons bound shall incur default if the other does not fulfill or does not submit to properly fulfill
what is incumbent upon him. From the time one of the persons obligated fulfills his obligation, the
default begins for the other party."

Until Carlos obtained the signatures of his brothers to this instrument we cannot say that the plaintiff
was in any way bound to acknowledge it as anything more than an executory contract containing a
condition precedent which was to be performed by Carlos Cavives before his (the plaintiff's)
obligation was due. Mere continued silence on his part could signify nothing until the signatures of
the two brothers had been secured. As further indication that this contract (Exhibit 4) was not
considered as discharging the original obligation of the defendants in this case, it may be noted that
the plaintiff has never surrendered, nor was he ever called upon to surrender so far as this record
shows, the original promissory notes executed by these defendants. They are still in his possession.
Up to the time of the compromise settlement between the plaintiff and the widow of Carlos, at least,
there is not a scintilla of evidence to show that either party to the contract of 1898 considered it as a
discharge of the original debtors, Severino and Matias Cavives. The compromise settlement with the
widow of Carlos, Exhibit 5, is relied upon to show novation. In this document, plaintiff makes the
statement, in effect, that the whole sum of the liquidated obligation of the brothers set forth in Exhibit
4 was a liability against the estate of Carlos. It ids urged that this shows the plaintiff's intention to
novate the debt by substituting Carlos as his sole debtor in lieu of the defendants. There is one fact
which points strongly against this conclusion. That is, that the present action against these
defendants was instituted some months previous to the date of the compromise settlement and has
been prosecuted by the plaintiff with due diligence ever since its institution. But admitting, for the
moment, that by this compromise settlement he was desirous of so substituting Carlos as his sole
debtor in lieu of the defendants, it does not by any means follow that he could do so without the
consent of Carlos. The consent of the new debtor is as essential to the novation as is that of the
creditor. As we have seen, there is nothing to show that Carlos ever consented to such an
arrangement. Indeed, the evidence is all the other way. A mere recital that he had so consented to
accept full liability for the debts of his brothers, especially after his death, would not be sufficient to
establish the fact. But we cannot believe that this statement was intended to have any such meaning
by the plaintiff in view of the fact that at the time it was made he was actively prosecuting a suit
against the brothers who were originally liable as his debtors, and the further fact that the total
amount due him, including interest, was greatly in excess of the sum due him in 1898.

Furthermore, the position taken by these defendants in their amended answer is diametrically
opposed to the defense of novation. In that amended answer they say: "That these defendants have
never refused to pay the proportion of the total amount borrowed which they justly owe, that is, one-
third of it, to Don Francisco Martinez, or his executor or administrator, or to all of his heirs, but they
do refuse to pay to one of the heirs what belong to all of them."

Article 1204 of the Civil Code reads: "In order that an obligation may be extinguished by another
which substituted, it, it is necessary that it should be so expressly declared, or that the old and new
be incompatible in all points."

In its decision of December 31, 1904, the supreme court of Spain said: "Novation of contracts cannot
be presumed in any case unless it is a necessary result of the express will of the parties, or that the
old and new obligations are incompatible in all points."

To the same effect is its decision of January 25, 1898. In its decision of March 14, 1908, that high
court said (quoting from the syllabus): "It is not proper to consider an obligation novated by
unimportant modifications which do not alter its essence and when it is not extinguished by another
which takes its place or substitute the person of the debtor." To the effect are the decisions of April
15, 11909, and July 8, 1910.

In Latiolais, admrx. vs. Citizens' Bank of Louisiana (33 La. Ann., 1444), one Duclozel mortgaged
property to the defendant bank of the triple purpose of obtaining shares in the capital stock of the
bank, bonds which the bank was authorized to issue, and loans and to him as a stockholder.
Duclozel subsequently sold this mortgaged property to on Sproule, who, as one of the terms of the
sale, assumed the liabilities of his vendor to the bank. Sproule sold part of the property to Graft and
Chalfant. The debt becoming due, the bank brought suit against the last two named persons and
Sproule as owners. Duclozel was not made a party. The bank discontinued these proceedings and
subsequently brought suit against Latiolais, administratrix of Duclozel, who had died.

The court said: "But the plaintiff insists that in its petition in the proceeding first brought the bank
ratified the sale made by Duclozel to Sproule, and by the latter to other parties, in treating them
as owners. Be that so, but it does not follow, in the absence of either a formal and express or on an
implied consent to novate, which should be irresistibly inferred from surrounding circumstances, that
it has discharged Duclozel unconditionally, and has accepted those parties as new delegated
debtors in his place. Nemo presumitur donare. 1awphil.net

Novation is a contract the object of which is: either to extinguished an existing obligation and
to substitute a new one in its place; or to discharge an old debtor and substitute a new one to
him; or to substitute a new creditor to an old creditor with regard to whom the debtor is
discharged.

It is never presumed. The intention must clearly result from the terms of the agreement or by
a full discharge of the original debt. Novation by the substitution of a new debtor can take
place without the consent of the debtor, but the delegation does not operate a novation,
unless the creditor has expressly declared that he intends to discharge with delegating
debtor, and the delegating debtor was not in open failure or insolvency at the time. The mere
indication by a debtor of a person who is to pay in his place does not operate a
novation. Delegates debtor est odious is lege.

The most that could be inferred would be that the bank in the exercise of a sound discretion,
proposed to better its condition by accepting an additional debtor to be and remain bound
with the original one.

In Fidelity L. & T. Co. vs. Engleby (99 Va., 168), the court said: "Whether or not a debt has been
novated is a question of fact and depends entirely upon the intention of the parties to the particular
transaction claimed to be novated. In the absence of satisfactory proof of the contrary, the
presumption is that the debt has not been extinguished by taking the new evidence of indebtedness;
such new evidence, in the absence of an intention expressed or implied, being treated as a
conditional payment merely."

In Hamlin vs. Drummond (91 Me., 175; 39 A., 551), it was said that novation is never presumed but
must always be proven. In Netterstorn vs. Gallistel (110 Ill., A.., 352), it was said that the burden of
establishing a novation is on the party who asserts its existence; that novation is not easily
presumed; and that it must clearly appear before the court will recognize it.

There is no express stipulation in any of the documents or record that the obligation of the
defendants was novated, and the parol evidence tending to show that it was novated is not sufficient
in law to establish that fact.

During the progress of this case, Robert Lineau, administrator of the estate of Francisco Martinez,
father of the plaintiff, intervened claiming that the obligations of the defendants were justly due to the
estate of the said Francisco Martinez. The notes themselves (Exhibit G) make no mention whatever
of Francisco Martinez, nor is there any evidence upon which the relation of principal and agent
between Francisco Martinez and Pedro Martinez could be predicated. The notes must therefore be
declared the sole property of the plaintiff, and the intervener's claim must be denied.

For the foregoing reasons, it is hereby ordered that the defendants Severino Cavives and Matias
Cavives, comply with their obligations as set forth in Exhibit G, by the payment of the principal and
interest thereon at the rate of ten per cent per annum as called for in the said notes, from the date of
their execution up to the full satisfaction of the judgment in this case. It is understood that as to the
first note signed by the three brothers, these defendants are each liable for one-third of its principal
and accumulated interest; That Matias Cavives is alone liable for the notes executed by him of April
30th, May 30th, and June 7th, 1896, whose amounts are $300, $200, and $200, respectively; and
that Severino Cavives is alone liable for the note of June 9, 1896, signed by him, amounting to $600.

The judgment appealed from is reversed and in accordance with sections 3, 4, and 5 of Act No.
1045, and the decisions of this court in Urbano vs. Ramirez (15 Phil. Rep., 371), the record will be
returned to the court below and a new trial will be had for the sole purpose of ascertaining, after due
hearing, the present actual value of Mexican money as compared with Philippine currency, in order
to reduce the debt to Philippine currency. Final judgment will then be entered against the defendants
in accordance with this decision. Without costs.

Arellano, C.J., Torres, Johnson, Carson and Moreland, JJ., concur.