G.R. No. 152984 ; November 22, 2006
WILLIAM G. KWONG, Petitioner, vs. ATTY. RAMON GARGANTOS, ANACLETO GARGANTOS, SPS. REY & REMY SANTOS, and SPS. LORNA & DANIEL ARCEO, Respondents.

FACTS

Petitioner William Kwong, owner of fifteen lots in Pampanga, entered into an unnotarized Deed of Conditional Sale with respondents Anacleto Gargantos, Remy Santos, and Lorna Arceo in November 1986. The purchase price was $137,255.00, with an initial payment of $10,000.00 and the balance due on December 15, 1986. Respondents repeatedly failed to pay the balance despite extensions and demand letters. On May 1, 1990, Atty. Ramon Gargantos, acting under a Special Power of Attorney from the respondents, paid a substantial sum and executed with petitioner a notarized Deed of Absolute Sale covering eleven lots for ₱500,000.00, along with a Promissory Note for the balance covering the remaining four lots. Atty. Gargantos again defaulted on the promissory note, leading to further demands.

ISSUE

The primary issue is whether the subsequent Deed of Absolute Sale and Promissory Note novated or superseded the original Deed of Conditional Sale, thereby extinguishing petitioner’s right to seek its rescission.

RULING

The Supreme Court denied the petition, affirming the Court of Appeals. The legal logic centers on the principle of novation under Article 1292 of the Civil Code. Novation requires a clear intent to extinguish the old obligation by substituting a new one, which may be deduced from the incompatibility of the terms of the old and new agreements. Here, the Deed of Absolute Sale and the accompanying Promissory Note created a new obligation that was materially and substantially incompatible with the old Deed of Conditional Sale. The conditional sale was an executory contract where ownership would pass only upon full payment, whereas the absolute sale, though covering only eleven of the original fifteen lots, purported to transfer ownership immediately upon its execution, with the balance for the remaining lots secured by a separate promissory note. The Court found that the parties, through their actions—including petitioner’s acceptance of payment under the new terms and his subsequent demands based on the promissory note—demonstrated a mutual intent to replace the original conditional sale. Consequently, the original obligation was extinguished by novation. Since the Deed of Conditional Sale no longer existed, petitioner’s action for its rescission had no legal basis. The Court also noted that petitioner could not be compelled to deliver titles for the eleven lots, as respondents did not appeal the dismissal of their counterclaim.