The Supreme Court held that novation, the substitution of a new debtor for an old one, requires the creditor’s clear and unequivocal consent. In this case, the Court found no such consent when a supplier accepted partial payment from a third party on behalf of the original debtor, emphasizing that mere acceptance of payment does not release the original debtor from their obligation. This decision underscores the importance of express agreement in novation and protects creditors’ rights to pursue original debtors unless explicitly released.

Debt Delegation or Duplication: Unraveling Novation’s Nuances

S.C. Megaworld Construction and Development Corporation (Megaworld) purchased electrical lighting materials from Engr. Luis U. Parada’s Genlite Industries for a project. Unable to pay on time, Megaworld arranged for Enviro Kleen Technologies, Inc. to settle the debt. Enviro Kleen made a partial payment, then ceased further payments, leaving a substantial balance. Parada sued Megaworld to recover the outstanding amount. Megaworld argued that novation had occurred when Parada accepted partial payment from Enviro Kleen, effectively substituting Enviro Kleen as the new debtor. The Regional Trial Court (RTC) ruled in favor of Parada, and the Court of Appeals (CA) affirmed this decision. The core legal question was whether Parada’s acceptance of partial payment from Enviro Kleen constituted a valid novation, releasing Megaworld from its debt.

The Supreme Court (SC) addressed several key issues. First, it clarified that objections to the verification and certification of non-forum shopping must be raised in the lower court. The Court cited KILUSAN-OLALIA v. CA, emphasizing that verification is a formal, not a jurisdictional, requirement. The SC noted that Megaworld raised this issue for the first time on appeal, which is not permissible. Furthermore, the Court highlighted that Leonardo A. Parada’s verification was based on authentic records, fulfilling the verification requirement.

We have emphasized, time and again, that verification is a formal, not a jurisdictional requisite, as it is mainly intended to secure an assurance that the allegations therein made are done in good faith or are true and correct and not mere speculation.

Second, the SC addressed Megaworld’s argument that Genlite Industries should have been impleaded as a party-plaintiff. The Court explained that Genlite Industries, as a sole proprietorship, has no juridical personality separate from its owner, Engr. Luis U. Parada. Therefore, Parada, as the sole proprietor, was the real party in interest and could properly bring the suit. The Court cited Article 44 of the New Civil Code, which enumerates juridical persons, and clarified that a sole proprietorship does not fall under this enumeration.

The most significant issue was whether a valid novation had occurred. The Court reiterated that novation is never presumed and must be clearly and unequivocally established. The SC explained that under Article 1293 of the Civil Code, substituting a new debtor requires the creditor’s consent. This consent must be express; the old debtor must be expressly released from the obligation. The Court referenced Garcia v. Llamas, detailing the modes of substituting debtors: expromision and delegacion, both requiring creditor consent.

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.

In this case, the SC found no clear and unequivocal consent from Parada to release Megaworld from its obligation. Parada’s letters to Enviro Kleen indicated that he retained the option to pursue Megaworld if Enviro Kleen failed to settle the debt. The Court agreed with the lower courts that Parada’s actions merely added Enviro Kleen as an additional debtor, without releasing Megaworld. This aligns with the principle that the mere substitution of debtors does not result in novation unless the creditor expressly agrees to release the original debtor.

The Court also addressed the interest rate applied by the RTC. It noted a clerical error in the RTC’s decision, which incorrectly stated a 20% monthly interest rate. The SC clarified that absent a stipulation, the legal interest rate applies. Citing Article 2209 of the Civil Code and Eastern Shipping Lines v. Court of Appeals, the Court outlined the proper application of interest rates. The applicable rate was determined to be 12% per annum from judicial demand until June 30, 2013, and 6% per annum from July 1, 2013, until finality, aligning with Bangko Sentral ng Pilipinas Circular No. 799.

Finally, the SC addressed the award of attorney’s fees. The Court emphasized that under Article 2208 of the New Civil Code, an award of attorney’s fees must be based on stated factual or legal grounds. Since the RTC failed to provide such grounds, the SC deleted the award of attorney’s fees. This aligns with the principle that attorney’s fees are an exception rather than the general rule and require specific justification.

The Supreme Court’s decision clarified the essential elements of novation, particularly the requirement of express creditor consent when substituting debtors. The Court underscored that accepting payments from a third party does not automatically release the original debtor. This ruling protects creditors by ensuring they are not unintentionally deprived of their right to pursue the original debtor. Additionally, the Court clarified the application of legal interest rates and the need for specific justification when awarding attorney’s fees, providing valuable guidance for future cases.

This decision serves as a reminder to businesses and creditors to ensure clarity and express agreement when modifying contractual obligations. In situations involving debt substitution, it is crucial to obtain explicit consent from the creditor to release the original debtor, thereby avoiding potential disputes and ensuring the enforceability of agreements.

FAQs

What was the key issue in this case?	The central issue was whether the creditor’s acceptance of partial payment from a third party constituted a valid novation, releasing the original debtor from their obligation. The Supreme Court ruled that it did not, emphasizing the need for express consent.
What is novation, and what are its requirements?	Novation is the substitution of a new obligation or debtor for an existing one. It requires the consent of all parties involved, including the creditor’s express agreement to release the original debtor.
Does a sole proprietorship have a separate legal personality?	No, a sole proprietorship does not have a separate legal personality from its owner. Therefore, the owner is the real party in interest and can sue or be sued in their own name.
What interest rate applies when there is no agreement between the parties?	In the absence of a written agreement, the legal interest rate, as determined by the Bangko Sentral ng Pilipinas, applies. The rate was 12% per annum until June 30, 2013, and subsequently reduced to 6% per annum.
When can a court award attorney’s fees?	A court can award attorney’s fees only when there is a specific legal basis or factual justification. The reasons for the award must be stated in the body of the court’s decision.
What is the difference between expromision and delegacion?	Both are modes of substituting debtors. In expromision, the initiative comes from a third party, while in delegacion, the debtor offers a third party for substitution. Both require the creditor’s consent.
Why was the award of attorney’s fees deleted in this case?	The Supreme Court deleted the award of attorney’s fees because the trial court failed to provide any factual or legal basis for the award in its decision. This is a requirement under Article 2208 of the New Civil Code.
What happens if a debtor makes a partial payment?	Partial payment does not automatically constitute novation. Unless there is an express agreement to release the original debtor, the creditor can still pursue the original debtor for the remaining balance.

This case highlights the necessity of clear and explicit agreements in contractual modifications, especially in novation. The Supreme Court’s decision reinforces the protection of creditors’ rights and provides a clear framework for determining the validity of debt substitutions. Ensuring that all parties consent and understand the implications of such changes is crucial for avoiding future disputes.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: S.C. MEGAWORLD CONSTRUCTION AND DEVELOPMENT CORPORATION vs. ENGR. LUIS U. PARADA, G.R. No. 183804, September 11, 2013