Topic: Civil Law > V. Obligations and Contracts > A. Obligations > 5. Extinguishment of Obligations > f. Novation > ii. Express and Implied Novation

Novation is a mode of extinguishing an obligation by creating a new one that substitutes the old obligation. It involves a modification in the terms, conditions, or the parties involved, resulting in the creation of a new legal relationship that replaces the original one. In Philippine law, novation is governed by the Civil Code, specifically in Articles 1291 to 1304.

Novation is classified into two types based on how it is manifested:

Express Novation
Implied Novation

Each has specific requirements and legal implications.

I. Novation in General

Definition: Novation is the extinguishment of an obligation by the substitution of a new one. It replaces the original obligation with a new one, requiring that both the old and new obligations are legally incompatible to ensure a genuine substitution.

Legal Basis: Article 1291 of the Civil Code of the Philippines outlines the conditions under which obligations are extinguished by novation, specifically stating:

"Obligations may be modified by changing their object or principal conditions, by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor."

Types of Novation:

Objective Novation: Involves changes in the object or principal conditions of the obligation.
Subjective Novation: Involves substitution of the person of the debtor or creditor.

Requisites of Novation:

Previous valid obligation: There must be an existing, valid obligation that is capable of being extinguished.
Agreement to extinguish the original obligation: This agreement may be either express or implied.
Creation of a new obligation: The new obligation must be valid and effective.
Incompatibility between the old and the new obligation: There should be a clear intent for the new obligation to replace the old one, with such incompatibility that both cannot coexist.

II. Express Novation

Definition: Express novation occurs when the parties explicitly state their intention to extinguish the original obligation and replace it with a new one. This intention must be clear and unequivocal.

Key Characteristics:

Clear Intent: There must be a specific agreement to replace the old obligation with a new one.
Formal Expression: The intent is often documented in writing, although Philippine law does not require a formal written agreement for novation unless the new obligation itself requires a specific form.

Examples of Express Novation:

A creditor and debtor agree to amend the terms of a loan, explicitly declaring in a written document that the new agreement supersedes the old one.
A lease contract is amended with a clause explicitly stating that the new terms replace the prior lease agreement.

III. Implied Novation

Definition: Implied novation takes place when the intention to extinguish the original obligation and replace it with a new one is not expressly stated but is inferred from the actions and terms of the new agreement.

Requirements:

Substantial Incompatibility: The new obligation must be so incompatible with the old one that they cannot both be in force at the same time.
Actions or Terms Suggesting Replacement: Courts analyze the nature, extent, and terms of the new obligation to determine if the old obligation is effectively replaced.

Legal Basis: Under Article 1292 of the Civil Code, for novation to be implied, it must be demonstrated that the old and new obligations are so inconsistent that they cannot stand together.

Examples of Implied Novation:

A loan agreement is revised with entirely new interest terms, repayment schedules, or principal changes, suggesting an intent to replace the prior agreement.
A sales contract is altered by changing the object of the sale, or by introducing new terms inconsistent with the previous agreement.

IV. Effects of Novation

Extinguishment of the Original Obligation: Upon novation, the original obligation ceases to exist and is replaced by the new one.
Accession and Guaranty: According to Article 1296, guarantees, mortgages, or pledges connected to the original obligation are generally extinguished unless there is a stipulation to the contrary.
Effect on Third Parties: If novation involves a third-party subrogation, it may affect third parties involved in the original contract, such as guarantors, who may be released from liability unless they consent to the novation.
Enforceability of the New Obligation: The validity and enforceability of the new obligation are essential for novation to have full legal effect. If the new obligation is invalid, the original obligation is not extinguished.

V. Specific Issues in Novation

Partial Novation: Partial novation occurs when only specific terms of the original obligation are modified, without fully extinguishing it. This does not result in a complete novation, but rather an amendment to the existing contract.
Novation by Substitution of Debtor:
- Involves replacing the debtor in the original obligation with a new one.
- Types:
  - Expromision: A third party assumes the obligation with the creditor's consent, relieving the original debtor.
  - Delegacion: The debtor finds a replacement with the creditor’s approval.
Novation by Subrogation of Creditor:
- Involves transferring the rights of the creditor to a third party.
- Types:
  - Conventional Subrogation: Agreement among all parties to substitute the creditor.
  - Legal Subrogation: Arises by operation of law, such as when a third party pays the obligation and is entitled to the creditor's rights.
Inconsistent Obligations:
- Substantial Difference: The change must be substantive enough that the obligations cannot coexist. Minor modifications (e.g., slight extensions of payment terms without replacing the obligation) typically do not constitute novation.
Intention and Evidence:
- Clear Evidence Requirement: Courts closely analyze whether the parties intended novation, especially in implied novation cases.
- Burden of Proof: The party claiming novation must prove that the original obligation was replaced by a new one.

VI. Key Philippine Cases on Novation

The Supreme Court of the Philippines has consistently ruled that novation is not presumed and requires clear proof of intention to extinguish the original obligation. Notable cases include:

Asia Banking Corporation v. Javier: The Court held that novation must be clearly established either by the terms of the new agreement or by evidence showing an unequivocal intent to replace the original obligation.
Bank of the Philippine Islands v. C.A.: In this case, the Court emphasized that novation by implied incompatibility requires a substantial and fundamental difference in the obligations to constitute novation.

Conclusion

Novation is a complex and precise legal concept that requires a clear intention to replace an existing obligation with a new one. Express novation requires explicit agreement, while implied novation relies on the incompatibility of the old and new obligations. The effects are profound, as novation extinguishes the original obligation, releasing parties from their prior commitments. Philippine jurisprudence underscores the necessity for clear evidence in proving novation, particularly in implied cases.