Duñgo vs. Lopena

A compromise agreement entered into by one purporting to act in another's behalf without a special power of attorney is not void but merely unenforceable, and is rendered fully binding upon the latter by his ratification, which may be established by his subsequent execution of an instrument adopting the court order approving the compromise as an integral part thereof. Corollarily, the mere assumption of a mortgaged obligation by a third person does not novate the original obligation where the original debtor is not released, the third person becoming at most a co-debtor or surety.

The controversy is governed by the Civil Code provisions on compromise and agency, which supply the analytical framework for the entire decision. Article 2028 defines a compromise as a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced; Article 1878(3) requires a special power of attorney for one to compromise the interest of another; and Article 1403(1) classifies as unenforceable, unless ratified, contracts entered into in the name of another by one without authority or legal representation. The transaction out of which the litigation arose involved several members of the Lopena family as creditors and the same two vendees as debtors, giving rise to three consolidated foreclosure cases in the Court of First Instance of Rizal, of which the decision resolves only the claim of Adriano Lopena against Anastacio Duñgo.

On September 10, 1959, Anastacio G. Duñgo and Rodrigo S. Gonzales purchased three parcels of land from the spouses Adriano Lopena and Rosa Ramos for a total price of P269,804.00. Of that amount, P28,000.00 was paid as down payment, with the parties agreeing that the balance of P241,804.00 would be paid in six monthly installments. To secure payment of the balance, Duñgo and Gonzales executed on September 11, 1958 (as the decision dates the instrument) a deed of real estate mortgage over the same three parcels in favor of Lopena and Ramos. The mortgage was duly registered with the Office of the Register of Deeds of Rizal and carried the condition that the vendees' failure to pay any installment on its maturity date would automatically cause the entire unpaid balance to become due and demandable.

The vendees defaulted on the first installment. On November 7, 1959, Lopena and Ramos filed a complaint for foreclosure of the real estate mortgage before the Court of First Instance of Rizal, presided over by Judge Andres Reyes. Duñgo and Gonzales answered the complaint on December 7, 1959. In the meantime, two other civil cases had been filed in the same court against the same defendants — one by Dionisio Lopena and another by Bernardo Lopena and Maria de la Cruz — both involving the same cause of action and arising out of the same transaction. Because of their identical nature, the three cases were consolidated into a single proceeding, although the decision rendered was to govern solely the interests and claim of Adriano Lopena against Anastacio Duñgo alone.

Before the cases could be tried, a compromise agreement dated January 15, 1960 was submitted to the lower court for approval. It was signed by Adriano Lopena and Rosa Ramos on one hand and by Rodrigo S. Gonzales on the other; Duñgo did not sign it. Gonzales represented that his signature was affixed for both himself and Duñgo, and Duñgo's counsel of record, Atty. Manuel O. Chan — the same lawyer who had signed and submitted the answer to the complaint — was present at the preparation of the agreement and affixed his signature thereto. Under the agreement, the plaintiffs gave the defendants until June 30, 1960 to pay the mortgage indebtedness in each case; should the defendants fail to pay, judgments of foreclosure would thereafter be entered against them; the defendants waived the period of redemption provided by law after entry of judgment; and, in the event of sale, the properties involved in the three cases were to be sold at one time at public auction, one piece not being sellable without the others. The lower court approved the compromise agreement on the same day it was submitted, January 15, 1960.

Subsequently, on May 3, 1960, a Tri-Party Agreement was drawn up among Duñgo and Gonzales as debtors, Lopena and Ramos as creditors, and Emma R. Santos as payor. The agreement recited that the debtors were indebted to the creditors in the aggregate amount of P503,000.00, for the collection of which the creditors had instituted the three foreclosure proceedings; that the payor bound herself to the force and effect of the January 15, 1960 order of the Court of First Instance of Pasig, Rizal, Branch VI, which order was made an integral part of the agreement as Annex "A"; and that the payor proposed to pay the indebtedness in installments of P50,000.00 on or before May 31, 1960, P70,000.00 on or before June 30, 1960, P70,000.00 on or before July 31, 1960, and P313,000.00 on or before August 31, 1960. The debtors and the payor waived any right to object to, and obliged themselves not to oppose, any motion the creditors might file informing the court of the exact money obligation and praying for an order to sell the mortgaged property, and further agreed that if the payor defaulted on any installment, the creditors could execute the order of sale and that they waived all objections to the propriety of the public auction and to the confirmation of the sale.

When Duñgo and Gonzales failed to pay the balance of their indebtedness on June 30, 1960, Lopena and Ramos filed on July 5, 1960 a motion for the sale of the mortgaged property. Although the motion was filed ex parte, Duñgo and Gonzales were notified of it by the lower court; neither filed any opposition. The lower court granted the motion on July 19, 1960 and ordered the sale of the mortgaged property. On August 25, 1960, the three parcels of land were sold by the Sheriff at public auction, where the petitioner together with the plaintiffs in the other two cases emerged as the highest bidders. The sheriff's sale was confirmed by the lower court on August 30, 1960, notice of the motion for confirmation having been given to Duñgo, who filed no opposition.

On August 31, 1960, Duñgo filed a motion to set aside all the proceedings on the ground that the compromise agreement of January 15, 1960 was void ab initio with respect to him because he had not signed it, and that consequently all subsequent proceedings under and by virtue of that agreement, including the foreclosure sale of August 25, 1960, were void and null as regards him. The lower court denied the motion in its order of December 14, 1960. Duñgo then filed a notice of appeal from the order of August 31, 1960 approving the foreclosure sale and from the order of December 14, 1960 denying his motion to set aside, but the respondents opposed approval of the record on appeal, claiming that the judgment was not appealable, having been rendered by virtue of the compromise agreement; the lower court dismissed the appeal. The lower court's factual findings material to the petition are that Duñgo was duly notified of both the motion for the sale of the mortgaged property and the motion for confirmation of the sale, and that he filed no opposition to either; and that his counsel of record signed the compromise agreement.

• Void Compromise Agreement: Petitioner insisted that the compromise agreement of January 15, 1960 was void ab initio and could have no effect whatsoever against him because he did not sign it, and that because it was void, all proceedings subsequent to its execution, including the order approving it, were similarly void and could not result in anything adverse to his interest.
• Novation by Substitution of Debtor: Petitioner argued that even assuming the compromise agreement was valid, it could not be enforced against him because it had been novated by the Tri-Party Agreement, which brought in a third party, Emma R. Santos, who assumed the mortgaged obligation of the petitioner, thereby substituting a new debtor in place of the original one.
• Abuse of Discretion in Dismissing the Appeal: Petitioner contended that the lower court abused its discretion when it dismissed his appeal from the orders of August 31, 1960 and December 14, 1960.

• Non-Appealability of the Judgment: Respondent spouses opposed the approval of petitioner's record on appeal, contending that the judgment was not appealable, having been rendered by virtue of the compromise agreement.

• Validity of the Compromise Agreement and Subsequent Proceedings: Whether the compromise agreement of January 15, 1960, the order of the same date approving it, and all proceedings subsequent thereto were valid or void insofar as petitioner Anastacio Duñgo is concerned.
• Dismissal of the Appeal: Whether the lower court abused its discretion when it dismissed the appeal of the petitioner.

• Validity of the Compromise Agreement and Subsequent Proceedings: Valid. The absence of a special power of attorney did not render the compromise agreement void but merely unenforceable under Article 1403(1) of the Civil Code, and the agreement was ratified by petitioner through the Tri-Party Agreement of May 3, 1960, which adopted the January 15, 1960 order as an integral part thereof.
• Dismissal of the Appeal: No. The lower court committed no abuse of discretion in dismissing the appeal, the judgment having been rendered by virtue of a compromise agreement validly and enforceably binding upon petitioner.

• Validity of the Compromise Agreement and Subsequent Proceedings: A compromise is in itself a contract, and it is as such that the Civil Code speaks of it in Article 2028, which defines it as a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. Under Article 1878(3) of the Civil Code, a special power of attorney is necessary in order to compromise the interest of another. Although the Civil Code expressly requires such a special power, it is neither accurate nor correct to conclude that its absence renders the compromise agreement void; in such a case the compromise is merely unenforceable. This results from the nature of a compromise as a contract, which must be governed by the rules and the law on contracts; Article 1403(1) classifies as unenforceable, unless ratified, those contracts entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers. The logical next inquiry, therefore, was whether petitioner had ratified the compromise agreement, for if he had, the agreement was legally enforced against him, and if he had not, he should be sustained in his contention that it never bound him. Ratification was conclusively established by the Tri-Party Agreement of May 1960. The compromise agreement had been submitted to and approved by the lower court on January 15, 1960, and the Tri-Party Agreement expressly referred to that order by stipulating that the payor submitted and bound herself to the force and effect of the order dated January 15, 1960 of the Court of First Instance of Pasig, Rizal, Branch VI, which order was made an integral part of the agreement as Annex "A". Having consented to making that court order an integral part of the Tri-Party Agreement, petitioner could not thereafter repudiate the compromise agreement and claim he had not authorized it. The Court likewise relied on the rule that when it appears that the client, on becoming aware of the compromise and the judgment thereon, fails to repudiate promptly the action of his attorney, he will not afterwards be heard to contest its validity, citing Rivero vs. Rivero, 59 Phil. 15. It was also significant that although petitioner was not a signatory to the compromise agreement, its principal provision was for his benefit: his obligation originally matured and became demandable on October 10, 1959, but the compromise agreement extended the date of maturity to June 30, 1960, thereby affording him more time and opportunity to fulfill his monetary obligations; for that reason alone he should not be heard to repudiate the agreement. Finally, the compromise agreement's stipulation that should the defendants fail to pay the mortgage indebtedness, judgment of foreclosure would thereafter be entered against them, was ratified by the Tri-Party Agreement, which covenanted that if the payor defaulted or failed to pay any installment, the payor and the debtor permitted the creditor to execute the order of sale and waived any and all objections or oppositions to the propriety of the public auction sale and to the confirmation of the sale to be made by the court.
• Dismissal of the Appeal: The petition's second ground was resolved by the first. Having held that the compromise agreement was valid and enforceable against petitioner, it followed that the lower court committed no abuse of discretion when it dismissed his appeal. Petitioner's alternative theory of novation did not alter this conclusion. Novation by presumption has never been favored; to be sustained, it must be established that the old and new contracts are incompatible in all points, or that the will to novate appears by express agreement of the parties or in acts of similar import, as held in Martinez vs. Cavives, 25 Phil. 581; Tiy Sinco vs. Havana, 45 Phil. 707; Asia Banking Corp. vs. Lacson Co., 48 Phil. 482; and Pascual vs. Lacsamana, 53 O.G. 2467 (April 1957). An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing only the term of payment and adding other obligations not incompatible with the old one, as held in Inchausti vs. Yulo, 34 Phil. 978, and Pablo vs. Sapungan, 71 Phil. 145, or wherein the old contract is merely supplemented by the new one, as held in Ramos vs. Gibbon, 67 Phil. 371. Petitioner's claim that the entry of Emma R. Santos and her assumption of the mortgaged obligation produced a novation by substituting a new debtor in place of the original one was rejected: in this kind of novation it is not enough that the juridical relation of the parties to the original contract is extended to a third person; it is necessary that the old debtor be released from the obligation and that the third person or new debtor take his place in the new relation. Without such release there is no novation, and the third person who has assumed the obligation of the debtor merely becomes a co-debtor or surety; if there is no agreement as to solidarity, the first and the new debtors are considered jointly obligated, citing IV Tolentino, Civil Code, p. 360, in turn citing Manresa. No such release of the original debtor appeared in the Tri-Party Agreement. It is a very common thing in business affairs for a stranger to a contract to assume its obligations, and while this may have the effect of adding to the number of persons liable, it does not necessarily imply the extinguishment of the liability of the first debtor, as held in Rios vs. Jacinto, 49 Phil. 7, and Garcia vs. Khu Yek Ching, 65 Phil. 466. The mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor, as held in Straight vs. Haskell, 49 Phil. 614; Pacific Commercial Co. vs. Sotto, 34 Phil. 237; and Estate of Mota vs. Serra, 47 Phil. 446. Accordingly, the Tri-Party Agreement was an instrument intended to render effective the compromise agreement; it merely complemented and ratified the same, and the involvement of a third person was inconsequential, no release of petitioner being even inferable from the new agreement.

• Compromise as a contract — Article 2028 of the Civil Code defines a compromise as a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. Because a compromise is a contract, it is governed by the rules and the law on contracts, including the rules on unenforceable contracts and ratification. The Court applied this characterization to hold that the compromise agreement in this case, though not signed by petitioner, was governed by the law on contracts and could be ratified by him.
• Absence of a special power of attorney renders a compromise unenforceable, not void — Under Article 1878(3) of the Civil Code, a special power of attorney is necessary to compromise the interest of another. The Court held, however, that the absence of such a special power does not render the compromise agreement void; the agreement is merely unenforceable under Article 1403(1), which classifies as unenforceable, unless ratified, contracts entered into in the name of another by one who has been given no authority or legal representation, or who has acted beyond his powers. The consequence is that the agreement may be validated retroactively by ratification.
• Ratification of an unauthorized compromise — An unenforceable compromise may be ratified by the party whose interest was compromised. Ratification was found to be conclusively established where the petitioner executed a Tri-Party Agreement that expressly submitted to the force and effect of the court order approving the compromise and made that order an integral part of the new agreement as an annex. The Court likewise applied the rule that a client who, upon becoming aware of a compromise and the judgment thereon, fails to repudiate promptly the action of his attorney, will not afterwards be heard to contest its validity.
• Benefit to the party as a bar to repudiation — A party who accepts the benefit of a compromise may not later repudiate it. The compromise agreement, though unsigned by petitioner, extended the maturity of his obligation from October 10, 1959 to June 30, 1960, thereby affording him more time and opportunity to fulfill his monetary obligations; for that reason he was not heard to repudiate the agreement.
• Novation is never presumed — Novation by presumption has never been favored. To be sustained, it must be established that the old and the new contracts are incompatible in all points, or that the will to novate appears by express agreement of the parties or in acts of similar import. The mere change of the term of payment and the addition of obligations not incompatible with the old one, in a new instrument wherein the old contract is ratified, does not novate the obligation; neither does a new instrument that merely supplements the old.
• Substitution of a debtor requires the release of the original debtor — In novation by substitution of debtor, it is not enough that the juridical relation of the parties to the original contract is extended to a third person; it is necessary that the old debtor be released from the obligation and that the third person or new debtor take his place in the new relation. Without such release there is no novation, and the third person who has assumed the obligation of the debtor merely becomes a co-debtor or surety; absent an agreement as to solidarity, the first and the new debtors are considered jointly obligated. A stranger's assumption of a contract's obligations may add to the number of persons liable but does not necessarily extinguish the liability of the first debtor, and the creditor may still enforce the obligation against the original debtor.

• "However, although the Civil Code expressly requires a special power of attorney in order that one may compromise an interest of another, it is neither accurate nor correct to conclude that its absence renders the compromise agreement void. In such a case, the compromise is merely unenforceable." — This is the ratio decidendi on the central issue: it recharacterizes the defect from voidness to mere unenforceability, thereby opening the door to ratification and defeating petitioner's motion to set aside the proceedings.
• "When it appears that the client, on becoming aware the compromise and the judgment thereon, fails to repudiate promptly the action of his attorney, he will not afterwards be heard to contest its validity (Rivero vs. Rivero, 59 Phil. 15)." — This states the ratification principle applied against petitioner, whose counsel of record had signed the compromise agreement and who thereafter executed an instrument adopting the order approving it.
• "Novation by presumption has never been favored. To be sustained, it need be established that the old and new contracts are incompatible in all points, or that the will to novate appears by express agreement of the parties or in acts of similar import." — This is the canonical formulation of the anti-presumption rule on novation, cited in rejecting petitioner's claim that the Tri-Party Agreement novated the compromise.
• "In this kind of novation, however, it is not enough that the juridical relation of the parties to the original contract is extended to a third person; it is necessary that the old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. Without such release, there is no novation; the third person who has assumed the obligation of the debtor merely becomes a co-debtor or surety." — This defines the requisites of novation by substitution of debtor and explains why the assumption of the mortgaged obligation by Emma R. Santos left petitioner's liability intact.

• Rivero vs. Rivero, 59 Phil. 15 — Cited as authority for the rule that a client who, upon becoming aware of a compromise and the judgment rendered thereon, fails to repudiate promptly the action of his attorney, will not afterwards be heard to contest its validity; applied to petitioner, whose counsel of record had signed the compromise agreement.
• Martinez vs. Cavives, 25 Phil. 581 — Cited, together with the cases following it, for the rule that novation by presumption has never been favored and must be established by showing that the old and new contracts are incompatible in all points or that the will to novate appears by express agreement or acts of similar import.
• Tiy Sinco vs. Havana, 45 Phil. 707 — Cited in the same line of authority on the strict requirements for establishing novation.
• Asia Banking Corp. vs. Lacson Co., 48 Phil. 482 — Cited in the same line of authority on the strict requirements for establishing novation.
• Pascual vs. Lacsamana, 53 O.G. 2467 (April 1957) — Cited in the same line of authority on the strict requirements for establishing novation.
• Inchausti vs. Yulo, 34 Phil. 978 — Cited for the rule that an obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing only the term of payment and adding other obligations not incompatible with the old one.
• Pablo vs. Sapungan, 71 Phil. 145 — Cited in the same line of authority on change of the term of payment as not constituting novation.
• Ramos vs. Gibbon, 67 Phil. 371 — Cited for the rule that there is no novation where the old contract is merely supplemented by the new one; applied to the Tri-Party Agreement, which was held merely to complement and ratify the compromise agreement.
• Rios vs. Jacinto, 49 Phil. 7 — Cited for the rule that a stranger's assumption of a contract's obligations may add to the number of persons liable but does not necessarily imply the extinguishment of the liability of the first debtor.
• Garcia vs. Khu Yek Ching, 65 Phil. 466 — Cited in the same line of authority on the non-extinguishment of the original debtor's liability upon a stranger's assumption of the obligation.
• Straight vs. Haskell, 49 Phil. 614 — Cited for the rule that the creditor's mere receipt of a guaranty or acceptance of payments from a third person who has agreed to assume the obligation, absent an agreement releasing the first debtor, does not constitute novation and does not bar enforcement against the original debtor.
• Pacific Commercial Co. vs. Sotto, 34 Phil. 237 — Cited in the same line of authority on the creditor's continued right to enforce the obligation against the original debtor.
• Estate of Mota vs. Serra, 47 Phil. 446 — Cited in the same line of authority on the creditor's continued right to enforce the obligation against the original debtor.

• Article 2028, Civil Code — Defines a compromise as a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. The Court used this provision to characterize the January 15, 1960 agreement as a contract governed by the law on contracts, which in turn made the rules on unenforceable contracts and ratification applicable to it.
• Article 1878(3), Civil Code — Requires a special power of attorney in order that one may compromise the interest of another. The Court acknowledged that the compromise agreement was signed by Gonzales purportedly for petitioner without such a special power, but held that this circumstance did not render the agreement void.
• Article 1403(1), Civil Code — Classifies as unenforceable, unless ratified, contracts entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers. The Court applied this provision to hold that the compromise agreement was merely unenforceable as to petitioner and could be, and was, ratified by him through the Tri-Party Agreement.

Labrador, Concepcion, Reyes, J.B.L., Barrera and Makalintal, JJ.