G.R. No. 190031, January 22, 2018


[ G.R. No. 190031, January 22, 2018 ]


Sirs and Mesdames:

Please take notice that the Court, First Division, issued a Resolution dated January 22, 2018 which reads as follows:

"G.R. No. 190031 (Cesar Francisco R. Perez, dba 'CFR Perez Trading' v. Jardine Davies, Inc.). - This is a petition for review on certiorari[1] assailing the Court of Appeals (CA) Decision[2] dated August 12, 2009 and the Resolution[3] dated October 13, 2009 in CA-G.R. CV. No. 84428. The CA affirmed the Decision[4] dated December 10, 2004 of Branch 149 of the Regional Trial Court (RTC) of Makati City in Civil Case No. 99-094 granting respondent Jardine Davies, Inc. (JDI)'s claim for sum of money.

JDI is a corporation engaged in the manufacture and sale of various goods and an authorized distributor of Republic Cement products.[5] In its amended complaint[6] for collection of sum of money, JDI claimed that Cesar Francisco R. Perez (Perez) was a dealer in Republic Cement products from June 1990 to January 1998 who ordered various cement products from JDI. As payment for his purchases, Perez issued several postdated checks[7] but these were subsequently dishonored. As a result, he incurred a total indebtedness in the amount of P14,100,580.00.[8] To partly answer for his obligation, Perez sent a letter[9] dated January 23, 1998 (first January 23, 1998 letter) where he assigned to JDI his Standby Letter of Credit (L/C No. BSBC 97/1004)[10] issued by the Banlc of the Philippine Islands (BPI) in the amount of P8,000,000.00. JDI applied the proceeds of L/C No. BSBC 97/1004 to Perez's credit, thereby reducing his outstanding debttoP6,100,580.00.[11]

JDI further alleged that Perez, in a second letter[12] dated January 23, 1998 (second January 23, 1998 letter); unconditionally assumed the outstanding liabilities of Smart Gravel & Sand (Smart), a cement dealership owned by his business associate Natalia San Diego.[13] At the time, Smart's outstanding purchases on credit from JDI amounted to P36,940,655.00.[14] When Smart's obligations became due and demandable, JDI, pursuant to the unconditional assumption of obligation, applied the following as partial payment: (1) Perez's cash bond[15] worth P9,815,000.00;[16] and (2) the proceeds of the sale on foreclosure of Perez's tractors and bulk carriers amounting to P5,073,754.00.[17] According to JDI, on January 28, 1998, Perez confirmed the sale of four (4) other bulk carriers amounting to P3,600,000.00 to be applied to Smart's remaining obligation.[18] Thereafter, and despite repeated demands, Perez refused to make further payments. At the time, the outstanding obligations amounted to P6,100,580.00 and F18,451,901.00, for Perez and Smart, respectively.[19]

In his answer,[20] Perez admitted that he was a dealer for JDI allowed to make purchases on credit on the strength of his cash bond and other securities, such as L/C No. BSBC 97/1004. Perez claimed that, in 1997, he wanted to reduce the volume of his purchases due to declining demand. JDI, however, allegedly wanted to maintain the purchase volume and allowed other dealers to make purchases under his account. These purchases were later credited as Perez's, making it appear that he incurred an outstanding debt without himself actually benefitting from said purchases. Perez further claimed that JDI tricked and manipulated him into believing that he has outstanding obligations, when in fact, he had already overpaid JDI in the amount of P7,314,420.00.[21]

In a Decision dated December 10, 2004, the RTC ruled in JDFs favor and granted its prayer to collect from Perez. The RTC found that Perez agreed, among others, to assume Smart's obligation with JDI. These agreements were reduced into writing in the letters both dated January 23, 1998. The RTC also gave credence to Perez's letter dated June 3, 1998 where he reiterated his assumption of Smart's obligation. It also found that based on Perez's testimony, he never took steps to nullify the letter of undertaking or revoke his acknowledgement of Smart's account.[22] The dispositive portion of the RTC's Decision reads as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants Cesar Francisco R. Perez doing business under the name and style "CFR Perez Trading" and Vilma Perez who are ordered to pay jointly and severally plaintiff the sum of [P6,100,5 80.00] representing unpaid purchases of CFR Perez Trading, and [PI 8,451,901.00] representing the outstanding obligation of Smart Gravel & Sand, or the total amount of [F24,552,481.00] with interest at 6% per annum from date hereof up to finality of this judgment and [12%] per annum from finality of this judgment until fully paid plus cost of suit.
Aggrieved, Perez filed an appeal with the CA.

In its Decision affirming the RTC's ruling, the CA found that the initiative to unconditionally assume Smart's obligation came from Perez as evidenced by his second January 23, 1998 letter to JDI. It found such assumption, which was accepted by JDI, to be a valid and legal form of novation under the Civil Code. The CA, however, held that Perez's wife, Vilma, could not be held jointly and severally liable as she did not transact directly with JDI. The dispositive portion of the CA Decision reads as follows:
WHEREFORE, premises considered, the Decision of the Regional Trial Court, Branch 149 of Makati City is AFFIRMED with MODIFICATION in that (1) defendant-appellant Cesar Francisco Perez is solely liable for the amount of [P]24,552,481.00 to plaintiff-appellee Jardine Davies, Inc.; (2) defendant-appellant Vilma Perez is relieved from any liability; and (3) defendant-appellant Cesar Perez's liability is without prejudice to the filing of any action against Smart Gravel & Sand in order to recover the payments he made or may make to plaintiff-appellee Jardine Davies, Inc. insofar as these benefited Smart Gravel & Sand.

SO ORDERED.[24] (Emphasis in the original.)
Perez filed a motion for reconsideration which was denied in the assailed Resolution[25] dated October 13, 2009. Hence, this petition.

Perez maintains that the CA erred in ruling that: 1) there was novation for him to assume Smart's obligations with JDI; and 2) assuming arguendo that there was novation, JDI was not able to prove the existence and extent of Smart's obligation that must be assumed by him. Perez also claims that he should be paid or reimbursed the excess payments collected by JDI on his securities and the proceeds of the assigned vehicles whose values were agreed upon by the parties.[26]

We grant the petition in part. While we agree with Perez that there was no novation, we nevertheless find that he has bound himself to answer for Smart's liabilities.



We find that the documentary evidence presented during trial clearly show that Perez unconditionally and unequivocally assumed Smart's obligation to JDI.

We quote Perez's second letter dated January 23, 1998 to JDI:

In consideration of JDI agreeing to provide the credit to Smart Gravel & Sand, we undertake to:

x x x

(c) assume any outstanding liabilities (including interests accruing thereon) in the event Smart Gravel & Sand fails to perform its obligations in connection with the Purchases and pay the Purchases on their due dates.

x x x

The undertakings referred to above (the "Undertakings") are made by us as primary obligor and not as guarantor. JDI will not be required to take any enforcement action against Smart Gravel & Sand prior to making a claim or otherwise enforcing its rights against us pursuant to the Undertakings.[27] x x x (Emphasis supplied.)
We also find in the records another letter from Perez dated June 3, 1998,[28] confirming his assumption of Smart's obligations to JDI. This letter reads in pertinent part:
Without you sending me a statement of my account and a demand letter for the five (5) pcs. Returned Check in the amount of ONE MILLION SEVEN HUNDRED THIRTY SEVEN THOUSAND SIX HUNDRED TWENTY FOUR (P 1,737,624.00) pesos [,] I have given Mr. Rufino Melo III my fullest and voluntary cooperation when I have verbally and in writing consented to the following acts:

x x x

5. sign an acknowledgement letter[,] assuming the obligation of Smart Gravel and Sand.[29] x x x
(Emphasis supplied.)
From the court a quo up to this Court, Perez has consistently raised the defense that he was manipulated and tricked by JDI into signing the January 23, 1998 letters. He claims that it was never his intention to assume Smart's obligations or to assign his standby letter of credit to answer for the same.

 Apart from his self-serving testimony and bare denial, however, Perez's allegation that he was manipulated into signing these letters was never substantiated by proof. As aptly put by the RTC, "[defendant's mere contentions that he was tricked x x x into signing the two letters, x x x, or that his signing of the same was a mere formality do (sic) not by itself constitute fraud that vitiates consent."[30] We further note that there is likewise no evidence on record to show that Perez was pressured or placed in any disadvantaged position when he signed the letters. He himself claimed that he is a renowned businessman and one of the top cement dealers at that time.[31] We thus find it hard to believe that a businessman of Perez's claimed stature and business acumen could have been unaware of the contents and implications of said letters.


Furthermore, there is nothing in JDFs complaint which states that Perez's Standby Letter of Credit worth P8,000,000.00 was applied to Smart's obligations. Contrary to Perez's claim, JDI's complaint plainly alleged that the Letter of Credit was applied to Perez's personal debt:
6. During the period of his dealership, defendant ordered/purchased various cement products from plaintiff corporation. These products were duly delivered to and received by defendant.

7. As and in payment of his purchases, defendant issued postdated checks to plaintiff. However, all the said checks of the defendant were, on presentment, dishonored by their respective drawee banks for insufficiency of funds or for the reason that the accounts against which they were drawn had been closed.

8. As a result of his aforesaid purchases and the dishonor of his postdated checks, defendant incurred a total indebtedness to plaintiff amounting to fourteen million one hundred thousand five hundred eighty pesos (P14,100,580.00).

9. To partly answer for his said obligation to plaintiff, defendant, by his letter to plaintiff dated January 23, 1998 (Annex "A"), made available to plaintiff his Standby Letter of Credit No. BSBC 97/1004 issued by the Bank of the Philippine Islands in the amount of eight million pesos (P8,000,000.00).

10. Plaintiff corporation claimed against the Standby Letter of Credit of defendant for its full amount of eight million pesos (P8,000,000.00).

11. With the application of the full amount of his Standby Letter of Credit to his indebtedness, defendant's outstanding obligation to plaintiff has been reduced to six million one hundred thousand five hundred eighty million pesos (P 6,100,580.00). x x x[32] (Emphasis supplied.)


Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first. This thus requires that:
  1. There must be a previous valid obligation;
  2. There must be an agreement of the parties concerned to a new contract;
  3. There must be the extinguishment of the old contract; and
  4. There must be the validity of the new contract.[33]
    (Citation omitted.)
The new obligation extinguishes the prior agreement only when the substitution is unequivocally declared, or the old and the new obligations are incompatible on every point.[34] This means that the parties to a contract should expressly agree to abrogate the old contract in favor of a new one. In the absence of the express agreement, the old and the new obligations must be incompatible on every point.[35]

Novation is effected by: (1) changing the object or principal conditions; (2) substituting the person of the debtor; or (3) subrogating a third person in the rights of the creditor.[36]

Here, the CA found that there was a valid novation by Perez of Smart's obligation to JDI under Article 1291[37] of the Civil Code:
In this case, it appears that the initiative to assume the obligation of Smart came from appellant Cesar Perez as evidenced by the January 23, 1998 letter addressed to appellee, who consented to it. In said letter, appellant Cesar Perez undertook to pay the outstanding obligation of Smart as if he was the primary obligor. Nothing on record shows that Smart offered to appellee that Cesar Perez would assume its obligation. Further, appellant's claim that he was defrauded or deceived by appellee into assuming Smart's obligation is belied by the different letters executed by Cesar Perez manifesting that he freely assumed said liabilities. In the absence of proof that his consent to said assumption of obligation was vitiated, it can be safely said that he voluntarily agreed thereto. Such assumption of Smart's liability and substitution of the person of the debtor is referred to as expromision, which is a valid and legal form of novation under Article 1291 of the new Civil Code. In fact, even if the substitution was made without the knowledge or against the will of Smart, it is still valid since the creditor [herein appellant] consented to it. x x x
x x x
x x x In here, the later obligation, i.e., to assume and pay Smart's obligation, was a perfect novation of the former debt of Cesar Perez to appellee in the sum of [P]6,100,580.00, both being merged into a new obligation with the increase of the obligation. In which case, the former obligation cannot legally exist at the same time as the latter, since they are incompatible; the latter undertaking extinguishes the obligation arising from the first one. The increase in the amount of a debt is a novation. An increase in amount creates a new obligation which includes, but is different from, the old one.[38] (Emphasis and citations omitted.)
We disagree.

Article 1293 of the Civil Code provides for the requirements for novation by substitution of the person of the debtor. This provision reads:
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.
In S. C Megaworld Construction and Development Corporation v. Parada,[39] we held that "to change the person of the debtor, the former debtor must be expressly released from the obligation, and the third person or new debtor must assume the former's place in the contractual relation."[40]

Here, the requirement that the old debtor be expressly released from the obligation is noticeably absent. A perusal of the second January 23, 1998 letter would show that: (1) Perez assumed any outstanding liabilities of Smart in the event the latter fails to perform its obligations to JDI;[41] (2) Perez assumed such undertaking as a primary obligor and not as a guarantor;[42] and (3) JDI, through a certain David C. Clymo, signified its consent to the assumption.[43] It was not clearly and expressly provided therein that Smart, by reason of the assumption, was freed of its obligations to JDI.

On the other hand, while there is really no hard and fast rule to determine what might constitute to be a sufficient change that can bring about an implied novation, the touchstone for contrariety, however, would be an irreconcilable incompatibility between the old and the new obligations.[44]

There is incompatibility when the two obligations cannot stand together, each one having its independent existence. If the two obligations cannot stand together, the latter obligation novates the first. Changes that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must affect any of the essential elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change is merely modificatory in nature and insufficient to extinguish the original obligation.[45]

There is no implied novation of the contract. Here, the two obligations, namely Smart's obligation to JDI and Perez's assumption of Smart's obligation to JDI, are not incompatible on every point. On the contrary, one can stand independent of the other. Furthermore, the mere fact that Perez bound himself to answer for Smart's obligation is insufficient to extinguish the original obligation.[46] The net effect of Perez's assumption is to merely make him an additional debtor. We again quote our ruling in S.C. Megaworld Construction and Development Corporation v. Parada:[47]
In order for a new agreement to supersede the old one, the parties to a contract must expressly agree that they are abrogating their old contract in favor of a new one. Thus, the mere substitution of debtors will not result in novation, and the fact that the creditor accepts payments from a third person, who has assumed the obligation, will result merely in the addition of debtors and not novation, and the creditor may enforce the obligation against both debtors. If there is no agreement as to solidarity, the first and new debtors are considered obligated jointly, x x x[48] (Emphasis and underscoring supplied; citations omitted.)

The settled rule is that when there is no agreement as to solidarity, the first and new debtors are considered to be jointly obligated.[49] This means that each of the debtors is liable only for a proportionate part of the debt. There is solidarity liability only when the obligation expressly so states, when the law so provides or when the nature of the obligation so requires.[50] This is because one who binds himself solidarity with the principal debtor acts as a surety and essentially "undertakes directly for the payment and is so responsible at once if the principal debtor makes default."[51]

From the terms of his second letter of January 23, 1998, we find that Perez bound himself as a solidary debtor with Smart. We quote:
In consideration of JDI agreeing to provide the credit to Smart Gravel & Sand, we undertake to:

x x x

(c) assume any outstanding liabilities (including interests accruing thereon) in the event Smart Gravel & Sand fails to perform its obligations in connection with the Purchases and pay the Purchases on their due dates.
x x x
The undertakings referred to above (the "Undertakings") are made by us as primary obligor and not as guarantor. JDI will not be required to take any enforcement action against Smart Gravel & Sand prior to making a claim or otherwise enforcing its rights against us pursuant to the Undertakings.[52] (Emphasis and underscoring supplied.)
Under Article 1216 of the Civil Code, a creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. Article 1217 further provides that payment by one of the solidary debtors extinguishes the obligation and he who made payment may claim from his co-debtors the share which corresponds to each. Thus, while we find that Perez is solidarity liable with Smart for the latter's liabilities to JDI, this is without prejudice to whatever legal remedies Perez may have against Smart.[53]

Finally, we find no merit in Perez's allegation that JDI was unable to prove the existence and extent of Smart's obligations that must be assumed by him.[54] The RTC, in fact, found that Perez is liable for Smart's obligation in the amount of P18,451,901.00.[55] This finding was affirmed by the CA on appeal.[56] The factual findings of the trial court, especially when affirmed by the CA, are generally binding and conclusive on this Court.[57] In any case the question as to the extent and existence of Smart's obligations is a question of fact which is beyond the ambit of a petition for review on certiorari under Rule 45, which, as a rule, should be limited to pure questions of law.[58] Neither does this case fall within the recognized exceptions.[59]

WHEREFORE, premises considered, the Decision dated August 12, 2009 of the Court of Appeals is hereby AFFIRMED.

SO ORDERED." (Del Castillo, J.,  no part;  Peralta, J., designated additional member per Raffle dated October 24, 2017.)

Very truly yours,

Deputy Division Clerk of Court

[1] Rollo, pp. 10-37.

[2] Id. at 40-56. Penned by Associate Justice Marlene Gonzales-Sison, with Associate Justices Bienvenido L. Reyes (a former member of this Court) and Isaias P. Dicdican, concurring.

[3] Id. at 58.

[4] Id. at 141-153.

[5] Id. at 316.

[6] Id. at 315-321. The original complaint is essentially the same as the amended complaint. The only significant difference is that in the amended complaint, the Sales Invoices and Delivery Orders were quoted in full.

[7] Records, Vol. Ill, pp. 8-15.

[8] Rollo, p. 316.

[9]Id. at 335.

[10] Does not form part of the records of the case.

[11] Id. at 317.

[12] Id. at 336-337.

[13] Id. at 317.

[14] Id. at 318.

[15] Records, Vol. IV, p. 62.

[16] Rollo, p. 318.

[17] Id.

[18] Rollo, p. 319.

[19] Id.

[20] Rollo, pp. 67-75.

[21] Id. at 70-72.

[22] Id at 150-151.

[23] Id. at 152.

[27] Id. at 336.

[28]Id. at 338.

[29] Id.

[30] Rollo, p. 150.
[31] Id.at 14.

[32] Id. at 316-317.

[33] Transpacific Battery Corporation v. Security Bank & Trust Co., G.R. No. 173565, May 8, 2009, 587 SCRA 536, 545-546.

[34] Heirs ofServando Franco v. Gonzales, G.R. No. 159709, June 27, 2012, 675 SCRA 96, 107.

[35] Id. at 107-108. Emphasis supplied.

[36] Bank of the Philippine Islands v. Domingo, G.R. No. 169407, March 25, 2015, 754 SCRA 245,260-261.

[37] Art. 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.
[38] Rollo, pp. 52-53.

[39] G.R. No. 183804, September 11, 2013, 705 SCRA 584.

[40] Id. at 599-600. Citation omitted.

[41] Rollo, p. 336.

[42] Id.

[43] Rollo, p. 337.

[44] California Bus Lines, Inc. v. State Investment House, Inc., G.R. No. 147950, December 11, 2003, 418 SCRA 297, 310.

[45] Id. See also Valenzuela v. Kalayacm Development & Industrial Corporation, G.R. No. 163244, June 22, 2009, 590 SCRA 380, 391 and Transpacific Battery Corporation v. Security Bank & Trust Co., G.R. No. 173565, May 8, 2009, 587 SCRA 536, 546.

[46] See Ajax Marketing & Development Corporation v. Court of Appeals, G.R. No. 118585, September 14, 1995, 248 SCRA 222.

[47] Supra note 39.

[48] Id. at 602.

[49] See Spouses Ibanez v. Harper, G.R. No. 194272, February 15, 2017.

[50] Carodan v. China Banking Corporation, G.R. No. 210542, February 24, 2016, 785 SCRA 179, 192.

[51] Id

[52] Rollo, p. 336.

[53] See Escaño v. Ortigas, Jr., G.R. No. 151953, June 29, 2007, 526 SCRA 26.

[54] Rollo, p. 24.

[55] Id. at 152.

[56] Id. at 54.

[57] Torres v. People, G.R. No. 206627, January 18,2017.

[58] Land Bank of the Philippines v. Yatco Agricultural Enterprises, G.R. No. 172551, January 15,
2014, 713 SCRA 370, 378.

[59] See Cirtek Employees Labor Union-Federation of Free Workers v. Cirtek Electronics, Inc., G.R. No. 190515, June 6, 2011, 650 SCRA 656, 660.

Popular Posts