G.R. No. 206806 , June 25, 2014.
ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners, vs. DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC PRODUCTS ENTERPRISES, Respondent.

FACTS

Respondent Dan T. Lim, doing business as Quality Paper and Plastic Products Enterprises, delivered scrap papers worth ₱7,220,968.31 to petitioner Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its President, petitioner Candida A. Santos, from February to March 2007. The parties agreed that Arco Pulp and Paper would either pay the value of the raw materials or deliver finished products of equivalent value to Lim. Arco Pulp and Paper issued a post-dated check for ₱1,487,766.68 as partial payment, which was dishonored upon deposit for being drawn against a closed account. On the same day the check was dishonored (April 18, 2007), Arco Pulp and Paper and a certain Eric Sy executed a Memorandum of Agreement (MOA) wherein Arco Pulp and Paper bound itself to deliver finished products to Megapack Container Corporation (owned by Eric Sy), with the raw materials to be supplied by Lim’s company. Lim demanded payment, and upon non-payment, filed a complaint for collection of sum of money. The Regional Trial Court dismissed the complaint, ruling that the MOA novated the original obligation, extinguishing Arco Pulp and Paper’s debt to Lim. The Court of Appeals reversed the trial court, holding that novation did not occur, that the obligation was alternative, and ordered Arco Pulp and Paper and Santos to pay Lim the principal amount with damages. Petitioners Arco Pulp and Paper and Santos filed this petition.

ISSUE

1. Whether the obligation between the parties was extinguished by novation.
2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc.
3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded.

RULING

1. NO, the obligation was not extinguished by novation. The Supreme Court held that the original obligation was an alternative obligation under Article 1199 of the Civil Code, where Arco Pulp and Paper, as debtor, had the option to either pay the price or deliver finished products of equivalent value. By tendering a check (even though dishonored), Arco Pulp and Paper exercised its option to pay, and Lim’s receipt and deposit of the check constituted notice of this election. The subsequent MOA with Eric Sy, which arranged for delivery of finished products to a third party, did not constitute novation. Novation requires a clear declaration in unequivocal terms or incompatibility between the old and new obligations on every point. The MOA did not show an intent to extinguish the original obligation to Lim, nor was it incompatible with it; it merely reflected Arco Pulp and Paper’s arrangement with a third party regarding the disposition of finished products, which did not alter its existing debt to Lim for the raw materials supplied.
2. YES, Candida A. Santos was solidarily liable. The Supreme Court affirmed the Court of Appeals’ finding that Santos, as the corporation’s President and Chief Executive Officer, was the “prime mover” of the transaction. She personally dealt with Lim and assured him the check would not bounce. By failing to show that she acted in good faith and within the scope of her authority, and considering her direct participation in the transaction that resulted in corporate liability, she was held solidarily liable with the corporation.
3. The awards for moral damages and exemplary damages were DELETED for lack of basis. The Supreme Court found that the factual circumstances did not warrant an award for moral damages, as the breach was a simple breach of contract without proof of fraud or bad faith warranting such damages. Exemplary damages could not be awarded in the absence of moral, temperate, or compensatory damages. However, the award for attorney’s fees was SUSTAINED because Lim was compelled to litigate to protect his interests. The interest rate on the principal obligation was MODIFIED in accordance with prevailing jurisprudence (Nacar v. Gallery Frames). The rate of interest was set at 12% per annum from the date of extrajudicial demand (May 5, 2007) until June 30, 2013, and at 6% per annum from July 1, 2013 until full payment.