Fortune Motors v.

CA
Facts:

On or about August 4, 1981, Joseph L. G. Chua and Petitioner Edgar Lee Rodrigueza ("Petitioner
Rodrigueza") each executed an undated "Surety Undertaking" 5 whereunder they "absolutely,
unconditionally and solidarily guarantee(d)" to Respondent Filinvest Credit Corporation
("Respondent Filinvest") and its affiliated and subsidiary companies the "full, faithful and
prompt performance, payment and discharge of any and all obligations and agreements" of
Fortune Motors (Phils.) Corporation ("Petitioner Fortune") "under or with respect to any and all
such contracts and any and all other agreements (whether by way of guaranty or otherwise)" of
the latter with Filinvest and its affiliated and subsidiary companies "now in force or hereafter
made."
The following year or on April 6 5, 1982, Petitioner Fortune, Respondent Filinvest and Canlubang
Automotive Resources Corporation ("CARCO") entered into an "Automotive Wholesale
Financing Agreement" 7 ("Financing Agreement") under which CARCO will deliver motor vehicles
to Fortune for the purpose of resale in the latter's ordinary course of business; Fortune, in turn,
will execute trust receipts over said vehicles and accept drafts drawn by CARCO, which will
discount the same together with the trust receipts and invoices and assign them in favor of
Respondent Filinvest, which will pay the motor vehicles for Fortune. Under the same agreement,
Petitioner Fortune, as trustee of the motor vehicles, was to report and remit proceeds of any
sale for cash or on terms to Respondent Filinvest immediately without necessity of demand.
Subsequently, several motor vehicles were delivered by CARCO to Fortune, and trust receipts
covered by demand drafts and deeds of assignment were executed in favor of Respondent
Filinvest. However, when the demand drafts matured, not all the proceeds of the vehicles which
Petitioner Fortune had sold were remitted to Respondent Filinvest. Fortune likewise failed to
turn over to Filinvest several unsold motor vehicles covered by the trust receipts. Thus, Filinvest
through counsel, sent a demand letter
ilinvest sent similar demand letters 9 separately to Chua and Rodrigueza as sureties. Despite said
demands, the amount was not paid. Hence, Filinvest filed in the Regional Trial Court of Manila a
complaint for a sum of money with preliminary attachment against Fortune, Chua and
Rodrigueza.
the trial court rendered its decision earlier cited ordering Fortune, Chua and Rodrigueza to pay
Filinvest, jointly and severally, the sum of P1,348,033.83 plus interest at the rate of P922.53 per
day from April 1, 1985 until fully paid, P50,000.00 in attorney's fees, another P50,000.00 in
liquidated damages and costs of suit.

Issue: W/N there was novation

Held: no novation

Petitioners further aver that the Financing Agreement would effect a novation of the surety
contracts since it changed the principal terms of the surety contracts and imposed additional
and onerous obligations upon the sureties.
On the matter of novation, this has already been ruled upon when this Court denied defendants'
Motion to dismiss on the argument that what happened was really an assignment of credit, and
not a novation of contract, which does not require the consent of the debtors. The fact of
knowledge is enough. Besides, as explained by the plaintiff, the mother or the principal contract
was the Financing Agreement, whereas the trust receipts, the sight drafts, as well as the Deeds
of assignment were only collaterals or accidental modifications which do not extinguish the
original contract by way of novation. This proposition holds true even if the subsequent
agreement would provide for more onerous terms for, at any rate, it is the principal or mother
contract that is to be followed. When the changes refer to secondary agreements and not to the
object or principal conditions of the contract, there is no novation; such changes will produce
modifications of incidental facts, but will not extinguish the original obligation (Tolentino,
Commentaries on Jurisprudence of the Civil Code of the Philippines,
Neither do we find merit in the averment of petitioners that the Financing Agreement contained
onerous obligations not contemplated in the surety undertakings, thus changing the principal
terms thereof and effecting a novation.
We have ruled previously that there are only two ways to effect novation and thereby
extinguish an obligation. First, novation must be explicitly stated and declared in unequivocal
terms. Novation is never presumed. Second, the old and new obligations must be incompatible
on every point. The test of incompatibility is whether the two obligations can stand together,
each one having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first. 24 Novation must be established either by the express terms of the
new agreement or by the acts of the parties clearly demonstrating the intent to dissolve the old
obligation as a consideration for the emergence of the new one. The will to novate, whether
totally or partially, must appear by express agreement of the parties, or by their acts which are
too clear and unequivocal to be mistaken. 25
Under the surety undertakings however, the obligation of the sureties referred to absolutely,
unconditionally and solidarily guaranteeing the full, faithful and prompt performance, payment
and discharge of all obligations of Petitioner Fortune with respect to any and all contracts and
other agreements with Respondent Filinvest in force at that time or thereafter made. There
were to qualifications, conditions or reservations stated therein as to the extent of the
suretyship. The Financing Agreement, on the other hand, merely detailed the obligations of
Fortune to CARCO (succeeded by Filinvest as assignee). The allegation of novation by petitioners
is, therefore, misplaced. There is no incompatibility of obligations to speak of in the two
contracts. They can stand together without conflict.
Furthermore, the parties have not performed any explicit and unequivocal act to manifest their
agreement or intention to novate their contract. Neither did the sureties object to the Financing
Agreement nor try to avoid liability thereunder at the time of its execution. As aptly discussed
by the Court of Appeals:
. . . For another, if Chua and Rodrigueza truly believed that the surety undertakings they
executed should not cover Fortune's obligations under the AWFA (Financing Agreement), then
why did they not inform Filinvest of such fact when the latter sent them the aforementioned

demand letters (Exhs. "K" and "L") urging them to pay Fortune's liability under the AWFA.
Instead, quite uncharacteristic of persons who have just been asked to pay an obligation to
which they are not liable, Chua and Rodrigueza elected or chose not to answer said demand
letters. Then, too, considering that appellant Chua is the corporate president of Fortune and a
signatory to the AWFA, he should have simply had it stated in the AWFA or in a separate
document that the 'Surety Undertakings' do not cover Fortune's obligations in the
aforementioned AWFA, trust receipts or demand drafts.
EXTRA:
As to the alleged non-existence of a principal obligation when the surety agreement was signed,
it is enought (sic) to state that a guaranty may also be given as security for future debts, the
amount of which is not known (Art. 2053, New Civil Code).
On the evidence adduced by the plaintiff to show the status of defendants' accounts, which took
into consideration payments by defendants made after the filing of the case, it is enough to
state that a statement was carefully prepared showing a balance of the principal obligation plus
interest totalling P1,348,033.89 as of March 31, 1985 (Exh. M). This accounting has not been
traversed nor contradicted by defendants although they had the opportunity to do so. Likewise,
there was absolute silence on the part of defendants as to the correctness of the previous
statement of account made as of December 16, 1983 (referring to Exh. I), but more important,
however, is that defendants received demand letters from the plaintiff stating that, as of
December 1983 (Exhs. J, K and L), this total amount of obligation was P1,302,811,00, and yet
defendants were not heard to have responded to said demand letters, let alone have taken any
exception thereto. There is such a thing as evidence by silence (Sec. 23, Rule 130, Revised Rules
of Court).
. In the case at bar, the surety undertakings in question unequivocally state that Chua and
Rodrigueza "absolutely, unconditionally and solidarily guarantee" to Filinvest the "full, faithful
and prompt performance, payment and discharge of any and all obligations and agreements" of
Fortune "under or with respect to any and all such contracts and any and all other agreements
(whether by way of guaranty or otherwise)" of the latter with Filinvest in force at the time of the
execution of the "Surety Undertakings" or made thereafter. Indeed, if Chua and Rodrigueza did
not intend to guarantee all of Fortune's future obligation with Filinvest, then they should have
expressly stated in their respective surety undertakings exactly what said surety agreements
guaranteed or to which obligations of Fortune the same were intended to apply. For another, if
Chua and Rodrigueza truly believed that the surety undertakings they executed should not cover
Fortune's obligations under the AWFA, then why did they not inform Filinvest of such fact when
the latter sent them the aforementioned demand letters (Exhs. 'K' and 'L') urging them to pay
Fortune's liability under the AWFA. Instead, quite uncharacteristic of persons who have just
been asked to pay an obligation to which they believe they are not liable, Chua and Rodrigueza
elected or chose not to answer said demand letters. Then, too, considering that appellant Chua
is the corporate president of Fortune and a signatory to the AWFA, he should have simply had it
stated in the AWFA or in a separate document that the "Surety Undertakings" do not cover
Fortune's obligations in the aforementioned AWFA, trust receipts or demand drafts.

Rillo v. CA
Facts:

On June 18, 1985, petitioner Rillo signed a "Contract To Sell of Condominium Unit" with private
respondent Corb Realty Investment Corporation. Under the contract, CORB REALTY agreed to
sell to RILLO a 61.5 square meter condominium unit located in Mandaluyong, Metro Manila. The
contract price was P150,000.00, one half of which was paid upon its execution, while the
balance of P75,000.00 was to be paid in twelve (12) equal monthly installments of P7,092.00
beginning July 18, 1985. It was also stipulated that all outstanding balance would bear an
interest of 24% per annum; the installment in arrears would be subject to liquidated penalty of
1.5% for every month of default from due date. It was further agreed that should petitioner
default in the payment of three (3) or four (4) monthly installments, forfeiture proceedings
would be governed by existing laws, particularly the Condominium Act.
On July 18, 1985, RILLO failed to pay the initial monthly amortization/ defaulted in his payment.
Was able to pay the second installment then paid 3rd but kulang
On July 20, 1987 or seventeen (17) months after RILLO's last payment, CORB REALTY informed
him by letter that it is cancelling their contract due to his failure to settle his accounts on time.
CORB REALTY also expressed its willingness to refund RILLO's money.
CORB REALTY, however, did not cancel the contract for on September 28, 1987, it received
P60,000.00 from petitioner.
RILLO defaulted again in his monthly installment payment. Consequently, CORB REALTY
informed RILLO through letter that it was proceeding to rescind their contract.
In a letter dated August 29, 1988, it requested RILLO to come to its office and withdraw
P102,459.35 less the rentals of the unit from July 1, 1985 to February 28, 1989. 7 Again the
threatened rescission did not materialize. A "compromise" was entered into by the parties on
March 12, 1989, which stipulated the following:
o 1. Restructure Outstanding Balance Down to P50,000.00
o 2. Payment @ P2,000.00/Month @
18% (Eighteen Percent)
Monthly To Compute No. of
Installments
On April 3, 1990, CORB REALTY sent RILLO a statement of accounts which fixed his total arrears,
including interests and penalties, to P155,129.00. When RILLO failed to pay this amount, CORE
REALTY filed a complaint10 for cancellation of the contract to sell with the Regional Trial Court of
Pasig. RES LOST THEN APPEALED THEN WON. THUS PETITION

Issue: W/N THE OLD CONSUMMATED CONTRACT HAS BEEN SUPERSEDED BY A NEW, SEPARATE,
INDEPENDENT AND SUBSEQUENT CONTRACT BY NOVATION.
Held: NO

Petitioner further contends that the contract to sell has been novated by the parties agreement
of March 12, 1989. The contention cannot be sustained. Article 1292 of the Civil Code provides
that "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 obligations
be on every point incompatible with each other." Novation is never presumed. Parties to a
contract must expressly agree that they are abrogating their old contract in favor of a new
one. In the absence of an express agreement, novation takes place only when the old and the
new obligations are incompatible on every point. In the case at bar, the parties executed their
May 12, 1989 "compromise agreement" precisely to give life to their "Contract to Sell". It merely
clarified the total sum owed by petitioner RILLO to private respondent CORB REALTY with the
view that the former would find it easier to comply with his obligations under the Contract to
Sell. In fine, the "compromise agreement" can stand together with the Contract to Sell.
EXTRA:
The respondent court did not err when it did not apply Articles 1191 and 1592 of the Civil Code
on rescission to the case at bar. The contract between the parties is not an absolute conveyance
of real property but a contract to sell. In a contract to sell real property on installments, the full
payment of the purchase price is a positive suspensive condition, the failure of which is not
considered a breach, casual or serious, but simply an event which prevented the obligation of
the vendor to convey title from acquiring any obligatory force."
Given the nature of the contract of the parties, the respondent court correctly applied Republic
Act No. 6552. Known as the Maceda Law, R.A. No. 6552 recognizes in conditional sales of all
kinds of real estate (industrial, commercial, residential) the right of the seller to cancel the
contract upon non-payment of an installment by the buyer, which is simply an event that
prevents the obligation of the vendor to convey title from acquiring binding force.
o Petitioner RILLO paid less than two years in installment payments, hence, he is only
entitled to a grace period of not less than sixty (60) days from the due date within which
to make his installment payment. CORB REALTY, on the otherhand, has the right to
cancel the contract after thirty (30) days from receipt by RILLO of the notice of
cancellation. Hence, the respondent court did not err when it upheld CORB REALTY's
right to cancel the subject contract upon repeated defaults in payment by RILLO.

Espina v. CA
Facts:

PET Espina is the registered owner of a Condominium Unit No. 403, Victoria Valley
Condominium, Valley Golf Subdivision, Antipolo, Rizal.
PET and RES Diaz executed a Provisional Deed of Sale, whereby the former sold to the latter the
aforesaid condominium unit for the amount of P100,000.00 to be paid upon the execution of
the contract and the balance to be paid through PCI Bank postdated checks
RES informed PET that his checking account with PCI Bank has been closed

RES paid PET Mario Espina P200,000.00, acknowledged by him as partial payment for the
condominium unit subject of this controversy
PET sent RES a "Notice of Cancellation" of the Provisional Deed of Sale
despite the Notice of Cancellation from PET, the latter accepted payment from RES in the form
of 100k
PET filed a complaint for Unlawful Detainer against RES before the Municipal Trial Court of
Antipolo. WON. reversed ata???

Issue: whether the Court of Appeals erred in ruling that the provisional deed of sale novated the existing
contract of lease and that petitioner had no cause of action for ejectment against respondent Diaz.
Held: yes, it erred

According to respondent Diaz, the provisional deed of sale that was subsequently executed by
the parties novated the original existing contract of lease. The contention cannot be
sustained. Respondent originally occupied the condominium unit in question in 1987 as a
lessee.[8] While he occupied the premises as lessee, petitioner agreed to sell the condominium
unit to respondent by installments.[9] The agreement to sell was provisional as the consideration
was payable in installments.
The question is, did the provisional deed of sale novate the existing lease contract? The answer
is no. The novation must be clearly proved since its existence is not presumed.[10] "In this light,
novation is never presumed; it must be proven as a fact either by express stipulation of the
parties or by implication derived from an irreconcilable incompatibility between old and new
obligations or contracts."[11] Novation takes place only if the parties expressly so provide,
otherwise, the original contract remains in force. In other words, the parties to a contract must
expressly agree that they are abrogating their old contract in favor of a new one.[12] Where there
is no clear agreement to create a new contract in place of the existing one, novation cannot be
presumed to take place, unless the terms of the new contract are fully incompatible with the
former agreement on every point.[13] Thus, a deed of cession of the right to repurchase a piece
of land does not supersede a contract of lease over the same property.[14] In the provisional
deed of sale in this case, after the initial down payment, respondent's checks in payment of six
installments all bounced and were dishonored upon presentment for the reason that the bank
account was closed.[15] Consequently, on July 26, 1992, petitioner terminated the provisional
deed of sale by a notarial notice of cancellation.[16] Nonetheless, respondent Diaz continued to
occupy the premises, as lessee, but failed to pay the rentals due. On October 28, 1992,
respondent made a payment of P100,000.00 that may be applied either to the back rentals or
for the purchase of the condominium unit. On February 13, 1993, petitioner gave respondent a
notice to vacate the premises and to pay his back rentals.[17] Failing to do so, respondent's
possession became unlawful and his eviction was proper. Hence, on February 24, 1993,
petitioner filed with the Municipal Trial Court, Antipolo, Rizal, Branch 01 an action for unlawful
detainer against respondent Diaz.

Now respondent contends that the petitioner's subsequent acceptance of such payment
effectively withdrew the cancellation of the provisional sale. We do not agree. Unless the
application of payment is expressly indicated, the payment shall be applied to the obligation
most onerous to the debtor.[19] In this case, the unpaid rentals constituted the more onerous
obligation of the respondent to petitioner. As the payment did not fully settle the unpaid
rentals, petitioner's cause of action for ejectment survives. Thus, the Court of Appeals erred in
ruling that the payment was "additional payment" for the purchase of the property.
WHEREFORE, the Court GRANTS the petition for review on certiorari, and REVERSES the decision
of the Court of Appeals.

Servicewide Specialists, Inc. v .IAC

Facts:

The private respondent Galicano Siton purchased from Car Traders Philippines, Inc. a vehicle
described as Mitsubishi Celeste two-door with air-conditioning and paid P 25,000.00 as
downpayment of the price. The remaining balance of P 68,400.00, includes not only the
remaining principal obligation but also advance interests and premiums for motor vehicle
insurance policies.
On August 14, 1979, Siton executed a promissory note in favor of Car Traders Philippines, Inc.
expressly stipulating that the face value of the note which is P 68,400. 00, shall "be payable,
without need of notice of demand, in installments of the amounts following and at the dates
hereinafter set forth, to wit: P 1,900.00 monthly for 36 months due and payable on the 14th day
of each month starting September 14, 1979, thru and inclusive of August 14, 1982"
As further security, Siton executed a Chattel Mortgage over the subject motor vehicle in favor of
Car Traders Philippines, Inc.
The credit covered by the promissory note and chattel mortgage executed by respondent
Galicano Siton was first assigned by Car Traders Philippines, Inc. in favor of Filinvest Credit
Corporation. Subsequently, Filinvest Credit Corporation likewise reassigned said credit in favor
of petitioner Servicewide Specialists, Inc. and respondent Siton was advised of this second
assignment.
Alleging that Siton failed to pay the part of the installment which fell due on November 2, 1981
as well as the subsequent installments which fell due on December 2, 1981 and January 2, 1982,
respectively, the petitioner filed this action against Galicano Siton and "John Doe."
After the service of summons, Justiniano de Dumo, identifying himself as the "John Doe" in the
Complaint, inasmuch as he is in possession of the subject vehicle, filed his Answer with
Counterclaim and with Opposition to the prayer for a Writ of Replevin. Said defendant, alleged
the fact that he has bought the motor vehicle from Galicano Siton on November 24, 1979; that
as such successor, he stepped into the rights and obligations of the seller; that he has religiously
paid the installments as stipulated upon in the promissory note. He also manifested that the
Answer he has filed in his behalf should likewise serve as a responsive pleading for his codefendant Galicano Siton.
RTC rendered decision

Issue: W/N there was novation by substitution of debtors

Held:

In view of the foregoing, We find it correct to hold both the respondents Galicano Siton and
Justiniano de Dumo liable for their obligations to petitioner herein. In the case at bar, the
purchase of the car by respondent de Dumo from respondent Siton does not necessarily imply
the extinguishment of the liability of the latter. Since it was neither established nor shown that
Siton was released from responsibility under the promissory note, the same does not constitute

novation by substitution of debtors under Article 1293 of the Civil Code. Likewise, the fact that
petitioner company accepts payments from a third person like respondent de Dumo, who has
assumed the obligation, will result merely to the addition of debtors and not novation. Hence,
the creditor may therefore enforce the obligation against both debtors. (Straight vs. Hashell, 49
Phil. 614; Mata vs. Serra, 47 Phil. 464; McCullough vs. Veloso, 46 Phil. 1; Pacific Commercial vs.
Sotto, 34 Phil. 237). If there is no agreement as to solidarity, the first and new debtors are
considered obligated jointly.
ACCORDINGLY, the petition is GRANTED and the assailed decision of the Court of Appeals dated
April 25, 1986 is hereby REVERSED and SET ASIDE, and a new one entered, ordering the private
respondents Galicano Siton and Justiniano de Dumo, jointly to pay to petitioner Servicewide
Specialists, Incorporated, the total sum of the remaining unpaid balance on the promissory note
with interest thereon at fourteen percent per annum from January 25, 1982 until fully paid, as
well as stipulated attorney's fees and liquidated damages; and to reimburse to petitioner the
sum of P 3,859.90 for the premium payments on the insurance policies over the subject vehicle.
Costs against private respondents.
Finally, the petitioner argues that the judgment of the appellate court was not in accordance
with its own findings and those of the trial court showing private respondents' default in the
payment of three monthly installments as a result of the dishonor of three checks issued as
payments; and that as a consequence thereof, the full amount of the unpaid balance under the
promissory note became due and demandable pursuant to the terms of the promissory note.
This contention is impressed with merit. The findings of the trial court on this issue, which were
affirmed by the appellate court, state, as follows:
The second point of issue is whether or not defendants were in arrears when the complaint was
filed on January 25, 1982. Plaintiff claims that there were three payments by checks made by
defendants, which are ineffective (Art. 1249, Civil Code) as said checks bounced for insufficient
finding. .... The debtor/obligor is allegedly obliged, as per the Chattel Mortgage Contract, to
have the motor vehicle insured and, failing which, the creditor may insure the same for the
account of the debtor. Such payments, therefore, together with the value of the three checks
that had been dishonored, are the reasons for defendants' delinquency. On defendant's part,
more particularly Atty. de Dumo's, they submit that there was no delinquency as, in fact,
defendants have receipts to evidence payment for the months of November 1981 (Exhibit 18
dated November 3, 1981), December 1981 (Exhibit 17 dated December 2, 1981), and January,
1982 (Exhibit 30, dated January 5, 1982).
On cross-examination, Atty. de Dumo admitted that really one of his checks (Exhibit J) was
dishonored. There is no evidence on way [or] the other whether said check was replaced
subsequently with a good one. Likewise, there is no clarification in the record as to whether the
two other dishonored checks had been replaced. As to the insurance policies, defendants
claimed on the witness stand that they were the ones who had the vehicle insured, for,
otherwise, defendant de Dumo could not have registered the motor vehicle for the years 1980
up to 1982. Defendants further contend that they complied with their undertaking by notifying
verbally the creditor of that fact. There is no denying the fact however, that the insurance
policies obtained were not endorsed, much less surrendered, to the plaintiff; in fact such
policies were not shown in court to evidence the proper indorsement of the policies in favor of
the creditor. (pp. 93-94, Rollo). (Emphasis supplied)

It is evident from the foregoing findings that the checks issued by the defendants as payment for
the installments for November and December, 1981 and January, 1982 were dishonored and
were not shown to have been replaced. The delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall produce the effect of payment only when
they have been cashed. (Art. 1249, Civil Code). When the existence of the debt is fully
established by the evidence contained in the record, the burden of proving that it has been
extinguished by payment devolves upon the debtor who offers such a defense to the claim of
the creditor. (Chua Chienco vs. Vargas, 11 Phil. 219). In the absence of any showing that the
aforestated checks were replaced and subsequently cashed, We can only infer that the monthly
installments for November, 1981, December, 1981 and January, 1982 have not been paid. In
view of the above, it is not correct for the appellate court to ignore the evidence on record
showing the default of private respondents in their obligations. The fact that Siton and de Dumo
were not advised or notified of their failure to comply with their obligations under the note and
under the Deed of Chattel Mortgage is of no importance. Article 1169 of the Civil Code provides:
Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
1. When the obligation or the law expressly so declares;
The promissory note executed by Siton in favor of Car Traders Philippines, Inc. expressly
stipulates that the unpaid balance shall be payable, without need of notice or demand, in fixed
monthly installments; and that if default be made in the payment of any of the installments or
interest thereon as and when the same becomes due and payable as specified above, the total
principal sum then remaining unpaid, together with accrued interest thereon, shall at once
become due and payable (p. 84, Rollo). The parties are bound by this agreement.
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