Case Digest: SPOUSES BENJAMIN and AGRIFINA SIM v. M.B. FINANCE CORPORATION

SPOUSES BENJAMIN and AGRIFINA SIM v. M.B. FINANCE CORPORATION

508 SCRA 556 (2006)

In the absence of an agreement, the mere fact that the creditor is entitled to the proceeds of the insurance policy does not release the debtor from his responsibility. Such a situation does not constitute novation.

Spouses Benjamin and Agrifina Sim purchased a motor vehicle from Angus Motors Corporation (Angus) on installment basis. To secure the obligation, they executed a chattel mortgage over the vehicle which is insured with the Commonwealth Insurance Company (CIC) and a promissory note in favor of Angus. The latter then assigned its rights, title and interest to M.B. Finance Corporation (MBC). Spouses Sim defaulted in paying the monthly installments. The vehicle was carnapped and was not recovered, prompting them to file an insurance claim with the CIC making MBC as the beneficiary thereof. M.B. Finance then filed a complaint against Spouses Sim for sum of money with damages before the Regional Trial Court of Makati. The trial court discredited Spouses Sim‘s claim that the payment of the proceeds of the insurance policy for the loss of the vehicle extinguished their obligation.

On appeal, Spouses Sim argued that the insurance contract novated their obligation which should be computed on the basis of the principal amount. The appellate court, however, held that there was no novation.

ISSUE:

Whether or not the appellate court erred when it failed to release Spouses Sim from liability to the M.B. Finance on the ground that the contract between the parties has not been novated

HELD:

In the absence of an agreement, the mere fact that M.B. Finance is entitled to the proceeds of the insurance policy issued by CIC does not release spouses Sim from their responsibility. Such a situation does not constitute novation.

Novation may either be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or principal conditions, or by substituting the person of the debtor or subrogating a third person in the rights of the creditor. Under this mode, novation would have dual functions ─ one to extinguish an existing obligation, the other to substitute a new one in its place ─ requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.

In this case, there is no new or old contract to speak of since all agreements were apparently executed simultaneously, or on or about the same time. Furthermore, the insurance agreement was between Benjamin L. Sim, respondent and CIC as the insured, beneficiary and the insurer, respectively. There was no reference to said promissory note. Clearly, the insurance policy was not intended to substitute the promissory note.