Novation of the obligation and criminal liability

From time to time, clients of our law office approach us with concerns where a company employee is alleged to have misappropriated company assets, whether in cash or kind.

Following an administrative investigation to establish the occurrence of theft or misappropriation, the company seeks advice regarding the appropriate course of action and legal ramifications of either recovering the misappropriated funds, or seeking restitution for the value of the item taken.

On occasion, the offending party offers to return the money or pay for the items taken.

In that regard, clients usually express concern that if they accept a promissory note from the offender for return of the items or even partial payment, the offending party might be able to claim that the company waived its right to institute a criminal complaint, or that the offender’s obligations have been novated, thereby converting their liability from criminal to civil.

As a backgrounder, our Civil Code provides that novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates the first, 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. (Sps. Reyes v. BPI Family Savings Bank, GR No. 149840-41, March 31, 2006)

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The question is whether this concept of novation of the obligation would have a possible effect on the criminal liability of the offender.

The Revised Penal Code of the Philippines provides that extinguishment of criminal liability refers to the legal cessation of an individual’s obligation to suffer punishment for a crime. This can occur through various means recognized under Philippine law, including:

1. Death of the offender
2. Service of the sentence
3. Amnesty
4. Absolute pardon
5. Prescription of the crime
6. Prescription of the penalty
7. Marriage of the offended woman to the offender
8. Forgiveness.

In the case of forgiveness of crimes, in crimes of adultery and concubinage, the case shall only be prosecuted upon a complaint filed by the offended spouse. For the crimes of seduction, abduction, rape, or acts of lasciviousness, the offender is prosecuted only upon a complaint by the offended party and the marriage of the offender with the offended party shall extinguish the criminal action or remit the penalty already imposed. (Art. 89 and 344, Revised Penal Code)

The Supreme Court has in the past declared that novation is not a mode of extinguishing criminal liability. It is the State which may waive the criminal action against an accused.

In one case, the complainant was a jeweler, and the accused would receive from her jewelry to sell. The accused would earn through the overprice which served as his commission, and he had the obligation to account for the proceeds of sale or to return any unsold items.

The complainant claimed that the accused did not complete the payments nor return unsold items, which prompted her to file a criminal complaint for estafa against the accused. The accused, on the other hand, claimed that his partial payments to the complainants novated his contract with them from agency to loan, thereby converting his liability from criminal to civil.

He claimed that his failure to complete his payments prior to the filing of the criminal complaint, as well as the formal proposal before barangay authorities on the payment of the balance of his outstanding obligations, confirmed that novation had occurred.

In the end, the Supreme Court affirmed the conviction of the accused for estafa. While the novation of a contract of agency to make it one of sale may relieve an offender from an incipient criminal liability, this did not happen in this case, as the partial payments and the proposal to pay the balance the accused made during the barangay proceedings were not incompatible with the accused’s liability under the agency that had already attached. (Degaños v. People of the Philippines, GR 162826, October 14, 2013)

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In a more recent case, however, the Supreme Court had a different ruling. The case involved a complaint for estafa where the complainant filed a case against the accused for failing to return a cement mixer he borrowed.

Before the barangay, the parties agreed to an amicable settlement. However, after the settlement, the accused was charged with estafa.

The lower courts convicted the accused of estafa, finding the amicable settlement did not exonerate the accused from criminal liability, which was entered into after the commission of the crime.

The Supreme Court reversed the lower courts and acquitted the accused of estafa.

The general rule is that criminal liability for estafa is not affected by payment, indemnification, reimbursement of amounts misappropriated, compromise, or by novation of the contract, since estafa is a public offense which must be prosecuted and punished by the State even though complete reparation was made to the offended party.

Acceptance of partial payments, without further change in the original relation between the complainant and the accused, cannot produce novation. Even when the offended party accepts a promissory note for all or part of the amount misapplied, the criminal offense is not obliterated.

However, the Supreme Court recognized that in cases involving certain types of estafa, where there is an underlying contractual relationship or bilateral agreement between the parties which they can modify or alter, it is possible that novation may serve to either prevent the rise of criminal liability, or to cast doubt as to the true nature of the original transaction. The rise of criminal liability is prevented when there is a novation before an Information is filed in court.

In this case, the court found that prior to the filing of the criminal information with the court, the complainant had already renounced or relinquished her ownership over the property subject of the criminal case in favor of petitioner. Consequently, the elements of the crime of estafa became nonexistent.

The novation can be explicitly stated or when the old and new obligations are incompatible on every point, where the old and new can have its own independent existence.

In this case, the court found that the amicable settlement before the barangay effectively novated the old obligation, as it involved the unpaid accounts of the accused, including the value of the cement mixer and this was made before the information for estafa was filed before the court.

Moreover, the parties agreed that they would desist from filing countercharges against each other, and that the complainant agreed to waive her ownership of the properties subject of the dispute.

Accordingly, there was no longer any duty or obligation on the part of petitioner to deliver or return the cement mixer to the complainant and, by this reason, no longer any prejudice caused to the complainant. Thus, the court declared that the complainant was estopped from filing the complaint and that any incipient criminal liability of the accused for failing to return the cement mixer was averted. (Sorongon v. People of the Philippines, GR No. 230669, June 16, 2021)

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)