CASE TITLE: AGRO CONGLOMERATES, INC. and MARIO SORIANO, petitioners, vs.

THE HON. COURT OF APPEALS and REGENT SAVINGS and LOAN BANK, INC.,
respondents, G.R. No. 117660, December 18, 2000
FACTS:
The Agro Conglomerates, Inc. sold two parcels of land to Wonderland Food
Industries on July 17, 1982. In their original memorandum of agreement, the parties
stipulated that the purchase price of Five Million (P5,000,000.00) Pesos would be
settled by the vendee, under the following terms and conditions: (1) One Million
(P1,000,000.00) Pesos shall be paid in cash upon the signing of the agreement; (2) Two
Million (P2,000,000.00) Pesos worth of common shares of stock of the Wonderland
Food Industries, Inc.; and (3) The balance of P2,000,000.00 shall be paid in four equal
installments, the first installment falling due, 180 days after the signing of the agreement
and every six months thereafter, with an interest rate of 18% per annum, to be
advanced by the vendee upon the signing of the agreement.
Two days after, on July 19, 1982, the vendor, vendee and the respondent Regent
Savings and Loan Bank, revised the previous stipulation on the settlement of the initial
payment of P1,000,000.00 and prepaid interest of P360,000.00 (18% of
P2,000,000.00), in an Addendum to the original Memorandum of Agreement:
1. The vendee instead of paying the total of P1,360,000 initial payment in cash,
authorizes the vendor to obtain a loan from Summa Savings and Loan Association
(which is currently known as Regent Savings and Loan Bank), provided however that
the said loan shall be made for and in the name of the vendor.
2. The vendee undertakes to pay the full amount of the said loan to the financier of
Summa Savings and Loan Association, on such terms and conditions agreed upon by
the financier and the vendor, it being understood that while the loan will be secured from
and in the name of the vendor, the vendee will be the one liable to pay the entire
proceeds thereof including interest and other charges.
Thereafter, petitioner Mariano Soriano signed as maker several promissory notes
payable to the respondent bank. The corresponding proceeds from the loan were
received by the petitioners. However, the petitioners failed to meet their obligations as
the loans came due, and as the respondent bank gave reasonable extensions to meet
the said obligations.
Consequently, the respondent bank filed three separate complaints before the Regional
Trial Court of Manila for Collection of Sums of money. As a retort, petitioners interposed
the defense of novation and insisted there was a valid substitution of debtor. They
alleged that the addendum specifically states that although the promissory notes were
under their names, Wonderland promised to take responsibility for the payments to the
said loan.
However, it was found out that Wonderland did not comply with the provisions under the
Addendum, as the agreement to turn over the farmland did not materialize, and there
was actually no sale transaction that happened.
ISSUE: Whether the court of appeals erred in not finding that the addendum, signed by
the petitioners, respondent bank and Wonderland, Inc., constitutes a novation of the
contract by substitution of debtor which exempts the petitioners from any liability over
the promissory notes.
RULING: No, the respondent appellate court did not err in holding that petitioners are
liable under the law to pay the claims of respondent bank from whom they had obtained
the loan proceeds, based on the following provisions of law:
1. Sec. 119 (d) of the Negotiable Instruments Law includes novation as a method to
discharge a negotiable instrument. But the first requisite in order for a valid novation to
take place, that there must be a previous valid obligation, is lacking. The contract of sale
between the parties is rescinded upon the failure of Agro Conglomerate, Inc. to turn
over the farmland to Wonderland. This constitutes substantial breach of contract, which
defeats the fundamental objectives of the agreement of the parties. Hence, the essence
of a contract of sale is a reciprocal transaction, wherein, the obligation or promise of
each party is the cause or consideration for the obligation or promise by the other.
There was no novation by "substitution" of debtor because there was no prior obligation
which was substituted by a new contract.
2.