Novation and Accommodation

Can novation of contract be presumed?  Can there be an accommodation when the instrument is non-negotiable instrument?

These are the two main questions raised in the case of Romeo Garcia vs. Dionisio Llamas, GR 154127, Dec. 8, 2003.

Garcia and his partner De Jesus drew a promissory note which they acknowledged solidary obligation on the loan they receive from Llamas amounting to Php 400,000.00

Llmas filed a complaint for collection of sum of money and for damages as a result of the issuance of dishonored check issued by De Jesus and his failure to pay the oblgation despite Llamas repeated demands for payment.  

For his part, Garcia put up as defense that he was merely an accommodation party and that issuance of the check of De Jesus and acceptance of Llmas, despite the fact that it was subsequently dishonored, novated their obligation and that De Jesus assumed the entire obligation.  

In deciding the case, the SC defined what novation and accommodation mean.  As to the former, novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor.  The Civil Code provides that,

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 rights mentioned in articles 1236 and 1237.

For novation to take place, the following requisites must concur:
1)    There must be a previous valid obligation.
2)    The parties concerned must agree to a new contract.
3)    The old contract must be extinguished.
4)    There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation declares in unequivocal terms that the old obligation is extinguished. It is implied when the new obligation is incompatible with the old one on every point. The test of incompatibility is whether the two obligations can stand together, each one with its own independent existence. 

Perusing the facts of the case, there was no unequivocally declaration that the old obligation had been extinguished by the issuance and the acceptance of the check, or that the check would take the place of the note. There is no incompatibility between the promissory note and the check. As the CA correctly observed, the check had been issued precisely to answer for the obligation. On the one hand, the note evidences the loan obligation; and on the other, the check answers for it. Verily, the two can stand together.  

Also there was novation by substitution of debtor.  In order to change the person of the debtor, the old one must be expressedly release fromt the obligation, and the third person or the new debtor must assume the former’s place in the novation.  

As to the second question, Garcia cannot put up as defense that he has no liablity being an accommodation party.  The defense of accommodation party is available only if the instrument is negotiable.  However, the instrument in this case is not negotiable.  Even granting that NIL is applicable, he is still liable for under Article 29 of Act 2031,

An accommodation party is liable for the instrument to a holder for value even if, at the time of its taking, the latter knew the former to be only an accommodation party.

The relation between an accommodation party and the party accommodated is, in effect, one of principal and surety — the accommodation party being the surety. 

It is a settled rule that a surety is bound equally and absolutely with the principal and is deemed an original promisor and debtor from the beginning. The liability is immediate and direct.