G.R. No. 174665 & G.R. No. 175221; September 18, 2013
Case Title: PHILIPPINE RECLAMATION AUTHORITY (Formerly PUBLIC ESTATES AUTHORITY), Petitioner, vs. ROMAGO, INCORPORATED, Respondent. ( G.R. No. 174665 ) and ROMAGO, INCORPORATED, Petitioner, vs. PHILIPPINE RECLAMATION AUTHORITY (Formerly PUBLIC ESTATES AUTHORITY), Respondent. (G.R. No. 175221)

FACTS

The Bases Conversion and Development Authority (BCDA) was created to develop former military bases. For the Heritage Park Project in Fort Bonifacio, BCDA entered into a Memorandum of Agreement designating the Philippine Reclamation Authority (PRA) as Project Manager. A Pool Formation Trust Agreement (PFTA) was executed among BCDA, PRA, and Philippine National Bank (PNB) as trustee. Pursuant to this, PRA awarded a construction contract for the park’s outdoor electrical and lighting works to Romago, Inc. on March 18, 1996. Later, the Heritage Park Management Corporation (HPMC) was organized to take over project management. On February 24, 2000, HPMC notified PRA of the termination of its management functions under the PFTA and demanded turnover. On March 13, 2000, PRA informed Romago that due to HPMC’s assumption of functions, it was assigning Romago’s construction contract to HPMC, stating that all contractual liabilities would henceforth devolve upon HPMC. HPMC refused to recognize the contract. Consequently, on March 17, 2004, Romago filed a complaint with the Construction Industry Arbitration Commission (CIAC) against PRA, HPMC, and another entity to collect various claims totaling over ₱24 million, including unpaid balances, retention money, and additional costs. PRA denied liability, arguing it merely processed payments from a fund it did not control and that all funds and responsibilities had been turned over to HPMC. HPMC moved to dismiss, claiming no arbitration agreement and that PRA’s turnover did not constitute an assignment of liabilities. The CIAC rendered a decision holding PRA and HPMC jointly and severally liable to Romago. Both PRA and Romago appealed to the Court of Appeals (CA). The CA modified the CIAC decision, holding PRA solely liable to Romago and absolving HPMC. Both PRA and Romago filed petitions for review with the Supreme Court.

ISSUE

Whether the assignment by PRA of its contract with Romago to HPMC novated the original contract and extinguished PRA’s liability to Romago.

RULING

No. The Supreme Court denied the petitions and affirmed the CA decision with modification on the interest rate. The Court held that novation, as a mode of extinguishing an obligation, requires the concurrence of four requisites: (1) a previous valid obligation; (2) an agreement of the parties to make a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation. The assignment made by PRA to HPMC did not constitute novation. Novation is never presumed. For novation to take place, the intent to extinguish the old obligation must be clear and express. The letter from PRA to Romago merely stated it was “assigning” the contract to HPMC and that liabilities “shall hereafter accrue to and devolve upon the assignee.” This did not clearly demonstrate an agreement between PRA and Romago to extinguish PRA’s original obligation and replace it with a new one involving HPMC as the sole debtor. An assignment does not necessarily imply novation; it may simply be a designation of a third party to fulfill the obligation, without releasing the original debtor. Since Romago did not consent to release PRA from its obligation, novation did not occur. Therefore, PRA remained liable to Romago for its claims under the construction contract. The Court affirmed that PRA is solely liable to Romago, as HPMC was not a party to the construction agreement and did not assume PRA’s liabilities by mere turnover of the project. The awarded amounts were upheld, but the interest rate was modified to 6% per annum from the finality of the decision until full payment.