NOVATION Articles 1291 - 1304

Group #5

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What is Novation?

defined as “the SUBSTITUTION or CHANGE of an obligation by another, which EXTINGUISHES or MODIFIES the first.“

Dual purpose/functions of Novation: to extinguish or modify an existing obligation

substitute a new one in its place

When at the time it EXTINGUISHES an obligation, it CREATES a new one in lieu of the old one. (Gov’t of the P.I. v. Bautista, [CA] 37 O.G. No. 97, p. 1880) Group #5

Article 1291

NOVATION

Article 1291 Obligations may be modified by: Changing their OBJECT or PRINICIPAL CONDITIONS Substituting the PERSON OF THE DEBTOR Subrogating a THIRD PERSON in the right of the creditor

NOVATION

CHANGING THEIR OBJECT OR PRINCIPAL CONDITIONS

Simon agreed to deliver to Ben a car. Later, they entered into another contract whereby, instead of Simon delivering a car, he would deliver 10 air conditioners. The obligation to deliver a car is extinguished by the obligation to deliver the 10 air conditioners. The change may involve the principal terms of the obligation.

SIMON

BEN

NOVATION

SUBSTITUTING THE PERSON OF THE DEBTOR If after the constitution of the obligation, both parties agreed that Cath will substitute for Simon or that Dan will be subrogated in the rights of Ben, there is a personal novation. In this case, Cath becomes the new debtor or Dan, the new creditor as the case may be.

SIMON

CATH

BEN

DAN

KINDS OF NOVATION

NOVATION

According to its Object or Purpose Real or Objective (Changing the Object or Principal Conditions) Personal or Subjective (Change of Persons) Mixed (Change of Object and Parties)

Substituting the person of the debtor Subrogating a third person in the rights of the creditor (conventional or legal subrogation)

NOVATION

KINDS OF NOVATION According to how it is Constituted (Article 1292)

According to its Extent or Effect

EXPRESS

TOTAL or EXTINCTIVE

when it is declared in unequivocal terms

old obligation is totally extinguished

IMPRESS when two obligations are incompatible with each other

2021 - 2022

PARTIAL or MODIFICATORY also termed imperfect or improper novation

NOVATION

Requisites for Novation Existence of an old VALID obligation Intention or agreement of both parties to extinguish or modify the obligation or agreement of new contract Extinguishment or modification of the obligation Creation or birth of a VALID new obligation

NOVATION

Contract

CREDITOR

DEBTOR

X

Y Without Consent

NO NOVATION

t c ra t n o C

DEBTOR

Z

Article 1292 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.

How it is Constituted Express - when it is declared in unequivocal terms Implied - when two obligations are incompatible with each

NOVATION

Issue: Is there novation here? Held: Yes, in view of the changes made.

EXAMPLE: "A"owed P500 and P3,000 evidenced by two promisory notes. New loan was obtained P300 Three debts consolidated to one promisory note (Total of P3,800)

NOVATION

Issue: Is "X" relieved of his obligation to pay for said shares? Held: YES, one who subscribes for stock of a proposed corporation is relieved of his obligation, IF, WITHOUT

EXAMPLE:

HIS CONSENT.

A corporation was being established. "X" subscribed to some shares of stock in a proposed corporation. Authorized capital of the corporation was increased without X’s consent.

Personal or Subjective Novation 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 the rights mentioned in articles 1236 and 1237.

NOVATION

Kinds of Substitution Expromission which, when a third person initiatively takes place the obligation even without the consent or against the will of the original debtor but with the consent of the creditor. Debbie owes Celia P400,000.00. Mika, friend of Debbie, approaches Celia and tells her: “I will pay you what Debbie owes you. From this moment, consider me your debtor, not Debbie. Debbie is to be excused. Do you agree?” Celia agrees. Is there expromision here?

NOVATION

Kinds of Substitution Delegacion is when the debtor offers, and the creditor accepts a third person to take place for the satisfaction of the original debtor's obligation. Here, the three parties concerned— the old debtor, the new debtor, and the creditor—must agree. Debbie owes Celia P400,000.00. Debbie proposed to Celia that Mika, friend of Debbie would substitute her as debtor. Celia agreed to the proposal.

NOVATION

Effect of New Debtor’s Insolvency in Expromision Art. 1294 If the substitution is without the knowledge or against the will of the debtor, the new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor.

NOVATION

Art. 1295 The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when he delegated his debt.

NOVATION

Effect of Insolvency by New Debtor in Delegacion Note that the Article deals only with insolvency, and not with other causes of non-fulfillment. (In said other causes, the old debtor is not liable.) The general rule is that the old debtor is not liable to the creditor in case of the insolvency of the new debtor.

NOVATION

Requisites to Hold Hold Old Debtor Liable Liable

For the old debtor to be liable if the new debtor is insolvent, it is required that either of the following must be present:

a The insolvency was already existing and of PUBLIC KNOWLEDGE at the time of delegation;

b OR the insolvency was already existed and KNOWN TO THE DEBTOR at the time of delegation.

(Note that if the insolvency occurred only AFTER the delegation, the old debtor is not liable.)

It is understood that Art. 1295 does NOT apply if there really was NO EXTINCTIVE NOVATION, such as: 01

When the third person was only an agent, messenger, or employee of the debtor

02 When the third person acted only as guarantor or surety

03

When the new debtor merely agreed to make himself solidarily liable for the obligation

04

When the new debtor merely agreed to make himself jointly or partly responsible for the obligation

The exceptions are intended to prevent fraud on the part of the old debtor

Art. 1296 When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent.

NOVATION

Effects of Accessory Obligation Extinguishment of the principal obligation carries with it the extinguishment of the accessory obligations (such as pledges, mortgages, guaranties). (8 Manresa 441)

NOTE: Article 1296 does not apply in cases of novation by subrogation of the creditor. (See Art. 1303, Civil Code)

NOVATION

Modificatory Novation Article 1296 applies in particular to extinctive novation. If the novation is merely modificatory, are guarantors and sureties released, if the novation is made WITHOUT their consent?

Answer:

If the modified obligation is now MORE ONEROUS, they are liable only for the original obligation. (See Art. 2054,Civil Code)

If the modified obligation is now LESS ONEROUS, the guarantors and sureties are still responsible.

NOVATION

Stipulation Contrary to Article 1296 May it be agreed that despite the extinguishment of the old obligation, the accessory obligations would still remain as accessory to the new obligation?

Answer: Yes, provided that the debtors of said accessory obligations give their consent.

NOVATION

Effect on Stipulation Pour Autrui The rule given in Art. 1296 referring to the automatic extinction of all the accessory obligations speaks of one exception.

Reason:

Accessory obligations or stipulations made in favor of third persons (stipulations pour autrui) remain unless said third persons have their consent to the novation.

Their rights to accessory obligations (which for them is really a distinct one) should not be prejudiced without their consent. (See Art. 1311 of the Civil Code for examples of stipulations pour autrui)

NOVATION

In spite of the novation, the accessory obligation to pay the interest of P2,400 to C still subsists unless C gives his consent to the novation.

EXAMPLE: A owes B P20,000 with interest at 12%. B owes C P2,400. It was agreed among the parties that A would pay the interest of P2,400 to C. In this case, besides the principal obligation of A, there is a stipulation in favor of C, a third person. (see Art. 1311, par. 2.) Later on, A and B executed another contract whereby they agreed that A would deliver to B a television set in payment of the loan.

NOVATION

Art. 1297

If the new obligation is void, the original one shall subsist unless the parties intended that the former relation should be extinguished in any event.

Requisites for Novation The Existence of a VALID old obligation

The validity of New Obligations

Capacity and Consent of all the parties

The Intent to Extinguish or to modify the old obligation by a substantial difference

General Rule If the new obligation is VOID, old obligation subsist

Exception: When the parties intend that the former relation or old obligation should extinguished in any event.

1

If the obligation is subject to a condition and said condition does not materialize, the old obligation subsists.

2

If a new obligation was intended, but the new contract was never perfected for lack of consent of the principal parties, the old obligation continues.

3

If new obligation is VOIDABLE, the old obligation is novated because a voidable obligation is VALID UNTIL ANNULLED.

4

If the new obligation is Annuled and therefore VOID, the old obligation subsist and whatever novation has taken place will be set aside.

NOVATION

ARTICLE 1298 The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor or when ratification validates acts which are voidable.

NOVATION

Effect if the Old Obligation Was Void One of the requisites of a valid novation is that the obligation be valid. THEREFORE — If the old obligation is VOID, there is no valid novation.

If the old obligation was VOIDABLE and has already been annulled, there is no more obligation. Therefore, the novation is also void.

NOVATION

Rule if the Old Obligation Was Voidable Suppose the old obligation was VOIDABLE and has not yet been annulled, may there be a valid novation? Annulment may be claimed only by the debtor Example: A was forced to sign a promissory note to give B P500,000. Later the parties agreed voluntarily to let the subject matter be a precious stone. Although the first contract was voidable, the second one is all right because in the first contract, annulment could be claimed only by the debtor.

NOVATION

Rule if the Old Obligation Was Voidable Suppose the old obligation was VOIDABLE and has not yet been annulled, may there be a valid novation? When ratification validates acts which are voidable. Example:

An agent, acting without authority from his principal, bought merchandise from a company. Shortly after he had learned of his agent’s act, the principal told the seller to deliver another kind of merchandise, completely different from the first. The seller agreed. Although the first contract here was unauthorized, ratification by the principal has cured its defects, and therefore the second contract is valid.

NOVATION

Rule if the Old Obligation Was Voidable Suppose the old obligation was VOIDABLE and has not yet been annulled, may there be a valid novation? When ratification validates acts which are voidable. NOTE: Although Art. 1298 speaks of a “void” original obligation, it evidently refers to a “VOIDABLE” one, where annulment or ratification may exist. A void contract does not have to be annulled nor can it be ratified. (Art. 1409, Civil Code).

NOVATION

Rule if the Old Obligation Was Extinguished by Loss May an old obligation that has been extinguished by LOSS of the subject matter be novated?

: r e w s If the loss was purely because of a fortuitous event n A without liability on the part of the debtor, the novation is VOID for there would be NO obligation to novate.

If the loss made the debtor liable, there is still an existing monetary obligation that may be the subject of novation. (See 8 Manresa 397-398).

NOVATION

May a Prescribed Obligation Be the Subject of Novation?

: r e w s Yes, because unless the defense of prescription is set up by n A the debtor, the obligation continues, since this failure amounts to a WAIVER. (Estrada v. Villareal, [C.A.] 40 O.G. [5th Supp.] p. 201). [NOTE: A prescribed debt, constituting as it does a moral or natural obligation, may be the cause or consideration of a new obligation to pay therefore. (Villareal v. Estrada, 71 Phil. 140).]

NOVATION

Effect on a VOIDABLE Obligation of Novation by EX PROMISION Here the debtor is no doubt released from his obligation to the creditor, for the substitution was not done thru his initiative. BUT when the new debtor, after payment, sues the old debtor for BENEFICIAL REIMBURSEMENT, the old debtor can set up whatever defenses he could have set against the creditor.

NOVATION

ARTICLE 1299 If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated.

A suspensive condition is a future or uncertain event, the happening of which give birth to the obligation.

Resolutory condition is an event the passing of which extinguishes the obligation

NOVATION

Effect If Old Obligation Is Conditional If Resolutory and it occurred: old obligation already extinguished; no new obligation since nothing to novate (replace) If Suspensive and it never occurred: as if no obligation; also nothing to novate If old obligation has condition: must be compatible with the new obligation If new obligation is w/o condition: deemed attached to new If new obligation has condition resolutory: valid suspensive and did not materialize: old obligation is enforced

NOVATION

ARTICLE 1300 Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect. Subrogation – transfer to a third person if all the rights appertaining to the creditor, including the right to proceed against guarantors, or possessors of mortgages, subject to any legal provision or any modification that may be agreed upon.

NOVATION

Kinds of Subrogation Conventional

Legal

this requires an agreement and the consent of the original parties and of the creditor (Art. 1301)

this takes place by operation of law (Art. 1302)

NOTE:

NOTE:

Conventional subrogation must be clearly established, otherwise, it is as if no subrogation has taken place.

Legal subrogation is not presumed, except in the case expressly mentioned in the law.

Article 1301 Conventional subrogation of a third person requires the consent of the original parties and of the third person.

NOVATION 1 million (secured by mortgage)

DEBTOR

X

Y 1 million (secured by mortgage)

DEBTOR

X

Y 1 million (secured by mortgage)

DEBTOR

X

Z

OLD CREDITOR

OLD CREDITOR

NEW CREDITOR

NOVATION

Consent of ALL the parties required:

X

Y

Z

DEBTOR

OLD CREDITOR

NEW CREDITOR

liable under the new obligation;

his old obligation ends

his credit is affected

his right against the debtor is extinguished

becomes a party to the obligation

NOVATION

ASSIGNMENT OF CREDIT

CONVENTIONAL SUBROGATION

(a) mere transfer of credit

(a) extinguishes the obligation, and creates a new one

(b) does NOT require the debtor’s consent

(b) requires the debtor’s consent

(c) debtor still has the right to present against the new creditor any defense available as against old creditor

(c) NO right to present against the new creditor any defense which he, the debtor, could have set up against the old creditor.

NOVATION

Article 1302 It is presumed that there is legal subrogation: When a creditor pays another creditor who is preferred, even without the debtor’s knowledge When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share. (Article 1210)

NOVATION

First Instance: When a creditor pays another creditor who is preferred, even without the debtor’s knowledge 1 million (secured by mortgage)

DEBTOR

X

Y 500k (unsecured)

DEBTOR

X

Z

PREFERRED CREDITOR

ORDINARY CREDITOR

NOVATION

1 million (secured by mortgage)

X

500K (ordinary credit)

Z

NOVATION

Second Instance: When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor 1 million (secured by mortgage)

DEBTOR

X

Y 1 million (secured by mortgage)

DEBTOR

X X

Z Z

NOVATION

Third Instance: When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share.

1 million (guaranteed by Z)

X

X X

Y

1 million

Z Z

PERSON INTERESTED

NOVATION

ARTICLE 1303 Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. The effect of legal subrogation is to transfer to the new creditor the credit and all the rights and actions that could have been exercised by the former creditor either against the debtor or against third persons, be they guarantors or mortgagor.

NOVATION

Rights which the new creditor may acquire by reason of subrogation:

Payment of the principal debt

Right to exercise accessory rights like: right to mortgage or pledge

Right to proceed against guarantors and sureties or against solidary debtors

NOVATION

Article 1304

A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit.

Subrogation transfers to the third person who is subrogated the credit with all of the rights which the original creditor had against the debtor or against third persons. Hence, unlike the other forms of novation, accessory obligations are not extinguished because in such obligations the person subrogated also acquires all of the rights that the original creditor had against third persons. The application of this rule is absolute with respect to legal subrogations; however, with respect to conventional subrogations, such accessory obligations may be increased or reduced depending upon the agreement of the parties.

NOVATION

Partial Subrogation Here, there are two creditors:

1

2

the old creditor, who still remains a creditor as to balance (because only a partial payment has been made to him)

the new creditor who is a creditor to the extent of what he had paid the creditor

NOVATION

Effects of Partial Subrogation Thus, if P, a third person, pays two-thirds of the indebtedness of D to C, such payment shall result in the partial subrogation of P in the rights of the creditor, C. C’s rights with respect to the remainder are not affected by the subrogation. In other words, both rights shall co-exist. In case of a conflict between the two, however, the right of C shall be preferred.

NOVATION

Suppose A has only P250,000, who should be preferred?

EXAMPLE: A owes B P500,000. With the consent of both, C pays B P250,000. Now B and C are the creditors of A to the amount of P250,000.

Thank you! Novation Article 1291 - 1304