Credit Transactions - 1st Exam TSN

CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY.
JAZZIE SARONA-LOZARE 1
November 13, 2015 (Tongo) We also have the bailee, the recipient of the
property. He receives the custody or possession of
PART I: CONCEPT OF CREDIT TRANSACTIONS the thing delivered. Essentially in a contract of
bailment there is the obligation to restore or return
We will discuss transactions such as transactions
the subject of the bailment whether if the same or
involving purchase or loan of goods or money or
other form has been delivered.
even services wherein the loan or purchase is at
present with a promise to repay or deliver in the Kinds of bailment
future.
1. Sole benefit of the bailorit is gratuitous deposit
With the concept of this credit transactions .. such as mandatum?
exchanges is possible in the xx
commerce..because instead of waiting that you 2. Sole benefit of the bailee- commodatum.
have money to be able to purchase goods you get Gratituous, simple loan or mutuum.
to enjoy at present then pay it later. Or pay or
deliver it in the future. 3. For the benefit of boh the bailor or the bailee
such a deposit with compensation, involuntary
Contract of bailments, usury, suretyship, guaranty, deposit, pledge and xx for hire.
mortgage, antichresis, terms and preference of
credits these are essentially contracts that we The first two kinds of bailment for the sole benefits
would be discussing. So we have here contracts of of the bailor, bailee.. these are gratuitous bailments
security. where there is no consideration but parties have
their respective obligations.
There are two kinds of security contracts
For mutual benefit bailments, here the bailment
1. Secured transactions- when you have properties involved are transactions such as deposit or
whether personal or real which serve as a collateral compensation.
or property is encumbered such as that of a
mortgaged, pledge, antichresis or charged as lien What about bailments for hire? this is also a
thereon. bailment for the benefit of both parties since
compensation is involved. It can be for the hire of
2. Unsecured transactions- also known as personal things which will now be considered as a contract of
security. There is no property involved but rather lease, hire of service which is a contract of piece of
what serve as a security is a promise to pay the work under 1467, hire for carriage of goods—
person, the personal guaranty or commitment of the common carrier and hire of custody for storage and
guarantor or surety. those covered under warehouse receipts law.
Now contracts of security, with this type of contract PART II: LOAN
something is given, deposited or serve as a means
to ensure the fulfillment or the enforcement of an I. CONCEPT
obligation or protecting some interest in the II. COMMODATUM
property. We will be discussing contracts of
The first kind of credit transaction we have to
bailments ito yung contracts of loan, deposit.
discuss is a contract of loan and we have article
What happens in bailment? Bailment means may 1933
delivery of something, delivery of a property from
1933. By the contract of loan, one of the parties
one person to another in trust for a specific purpose
delivers to another, either something not
with a contract express or implied. That the trust
consumable so that the latter may use the same
should be faithfully executed and the property
for a certain time and return it, in which case the
returned or duly accounted for when the special
contract is called a commodatum; or money or
purpose is accomplished or kept until the bailor
other consumable thing, upon the condition that
retains it. Again this is a contract.
the same amount of the same kind and quality
We have two parties, the bailor and the bailee. The shall be paid, in which case the contract is
bailor is referred to as the commodatario, he is the simply called a loan or mutuum.
one who delivers possession or custody of the thing
Commodatum is essentially gratuitous.
bailed. He need not be the owner of the thing but
what is important is that he has possessory Simple loan may be gratuitous or with a
interest of the said property. In other words he stipulation to pay interest.
has the right to deliver it to another person.
In commodatum the bailor retains the
A lessee can be a bailor, a usurfructuary can be a ownership of the thing loaned, while in simple
bailor even if he was not the owner of the property loan, ownership passes to the borrower.
subject of the bailment.
Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY. JAZZIE SARONA-LOZARE 2
1953 discusses what a contract of loan is… to liable for payment that would be considered as
deliver something to another person consumable or double paper.
not so that the latter may use the same for a certain
time and return it. Two kinds of loan
Under 1933 we have two kinds of loan. We have Commodatum Simple loan
commodatum or simple loan or mutuum. Object Ordinary the Subject matter
object that is is money or
Now if we say mutuum or loan the first that comes something that is consumable
not consumable thing
to your mind is money, mag-utang. Actually that is
ownership No transfer of There is a
only one type of loan. That refers to a simple loan ownership as transfer of
or mutuum. Because loan or contract of loan is also ownership is ownership or
involved for example, if we borrow somebody else’s retained by the payee
book that is commodatum, that is a contract of loan. payor or lender
Cause Essentially Maybe
Now these contracts of loan whether commodatum gratuitous, under gratuitous or
or mutuum are real contracts as they are perfected article 1933 it is onerous. For
by delivery. They are also considered as unilateral very clear. example loan
there is interest
contract because once the subject matter has been
Obligation The bailee has To pay the
delivered, it creates obligation to the part of the involve the obligation to same amount
borrower. But again as you will see in the return the exact of the same
succeeding discussions, the bailor has still same thing to kind and
obligations to comply with. the bailor quality, not the
exact thing that
Now do not confuse loan from other terms such as was loaned
credit and discounting. Again when we talk about property Real or personal Personal
loan the first thing comes to our mind is loan of property property only.
Money,
money, mutuum or simple loan, wherein there is
consumable
delivery by other party and the recieve by other purpose Use or Consumption
party who becomes the owner of the sum of money temporary
that has been delivered or some other consumable possession
thing upon the agreement express or implied with Demand the you can demand You cannot
the obligation to repay the same amount of the return of the the return of the demand the
same kind and quality with or without interest. subject thing before the return before
matter expiration of the the lapse of the
Credit on the other hand is your ability to borrow term agreed period agreed
upon if there is upon.
money or things by virtue of the confidence or trust
an urgent need.
reposed by a lender that he will pay what was Who suffers The bailor. Why? Since in
promised within a specified period. loss Res peruit mutuum there
domino, owner is transfer of
On accounting its credit.. means the sum that is bears the loss ownership then
credited on the books of the company purse to a the bailee
person who appears to be entitled to it. suffers the
loss.
Discounting is different from loan. What happens As being Personal in Not personal
when you discount checks? Discounting usually personal nature
happens pag post dated yung check or malayo pa Two different kinds of commodatum
yung bangko for sa encashment or walay account
1. ordinary commodatum
ang payee sa cheke so instead of waiting for the
maturity or due date of the check you will find 2. precarium
another person, ‘puwede pa discount?’ so what
would happen? If the amount of check is 20000 Do not confuse loan as well from contract of lease,
what would happen when it is discounted the deposit, usufruct and barter.
amount that will be received by the payee or the
holder will be lesser, bawas na yung interest. Now In lease one of the parties binds himself to give to
there is no contract of loan, what you have there is another the enjoyment or use of that property for a
merely discounting, interest deducted in advance price certain,
unlike contract of loan or the general concept of a
In deposit there is delivery but the purpose is not
contract of loan it is only considered as a single
the use thereof but for safekeeping
paper or only the signature of the maker appears
therein. In usufruct the enjoyment of the fruits is the main
cause.
However if you have discounting you have two
signatures appearing therein both parties who are Barter—onerous because you exchange something
for another thing.

Let’s have specific provision In a contract of commodatum, one of the parties

delivers to another something not consumable
Art 1935. The bailee in commodatum acquires so that the latter may use the same for a certain
the use of the thing loaned but not its fruits; if time and return it. An essential feature of
any compensation is to be paid by him who commodatum is that it is gratuitous. Another
feature of commodatum is that the use of the thing
acquires the use, the contract ceases to be a
belonging to another is for a certain period. Thus,
commodatum. the bailor cannot demand the return of the thing
loaned until after expiration of the period stipulated,
Two things are emphasized here or after accomplishment of the use for which the
commodatum is constituted. If the bailor should
1. purpose is use of the thing loan as a general rule have urgent need of the thing, he may demand its
hindi kasama ang fruits. return for temporary use. If the use of the thing is
merely tolerated by the bailor, he can demand the
2. if there is compensation it could not be return of the thing at will, in which case the
considered as a commoadtum anymore. Why? contractual relation is called a precarium. Under the
Refer to 1933, commodatum is essentially Civil Code, precarium is a kind of commodatum.
gratuitous.
The Kasunduan reveals that the
Pajuyo vs CA accommodation accorded by Pajuyo to Guevarra
was not essentially gratuitous. While the
Kasunduan did not require Guevarra to pay rent, it
Pajuyo vs. CA(430 SCRA 492, G.R. No. 146364,
obligated him to maintain the property in good
June 3, 2004) condition. The imposition of this obligation makes
the Kasunduan a contract different from a
COLITO T. PAJUYO, petitioner, vs. COURT OF commodatum. The effects of the Kasunduan are
APPEALS and EDDIE GUEVARRA, respondents. also different from that of a commodatum. Case law
on ejectment has treated relationship based on
FACTS: tolerance as one that is akin to a landlord-tenant
relationship where the withdrawal of permission
Petitioner Pajuyo paid P400 to a certain would result in the termination of the lease. The
Pedro Perez for the rights over a lot, where Pajuyo tenant’s withholding of the property would then be
subsequently built a house. In 1985, Pajuyo and unlawful.
private respondent Guevarra executed a
Kasunduan wherein Pajuyo allowed Guevarra to Even assuming that the relationship
live in the house for free, on the condition that between Pajuyo and Guevarra is one of
Guevarra would maintain the cleanliness and commodatum, Guevarra as bailee would still have
orderliness of the house. Guevarra promised that the duty to turn over possession of the property to
he would vacate the premises upon Pajuyo’s Pajuyo, the bailor. The obligation to deliver or to
demand. return the thing received attaches to contracts for
safekeeping, or contracts of commission,
In 1994, Pajuyo informed Guevarra of his administration and commodatum.70 These
need of the house and demanded that the latter contracts certainly involve the obligation to deliver
vacate the house. Guevarra refused. Pajuyo filed or return the thing received.
an ejectment case against Guevarra before the
MTC. Guevarra turned his back on the
Kasunduan on the sole ground that like him, Pajuyo
Guevarra claimed that Pajuyo had no valid is also a squatter. Guevarra should know that there
title over the lot since it is within the area set aside must be honor even between squatters. Guevarra
for socialized housing. MTC rendered its decision in freely entered into the Kasunduan. Guevarra cannot
favor of Pajuyo, which was affirmed by RTC. (MTC now impugn the Kasunduan after he had benefited
and RTC basically ruled that the Kasunduan from it. The Kasunduan binds Guevarra.
created a legal tie akin to that of a landlord and
tenant relationship). The Kasunduan is not void for purposes of
determining who between Pajuyo and Guevarra has
CA reversed the RTC decision, stating that a right to physical possession of the contested
the ejectment case is without legal basis since both property. The Kasunduan is the undeniable
Pajuyo and Guevarra illegally occupied the said lot. evidence of Guevarra’s recognition of Pajuyo’s
CA further stated that both parties are in pari better right of physical possession. Guevarra is
delicto; thus, the court will leave them where they clearly a possessor in bad faith. The absence of a
are. CA ruled that the Kasunduan is not a lease contract would not yield a different result, as there
contract, but a commodatum because the would still be an implied promise to vacate.
agreement is not for a price certain.
What kind of contract is involved here?

ISSUE: WON the contractual relationship between
Pajuyo and Guevarra was that of a commodatum
NO This is an innominate contract. I give that you may
do. Do ut facias.
HELD:
Assuming that it is a contract of commodatum what
is the liability on the part of the bailee?

Guevarra as bailee has the obligation to return the  Specifically, Sanchez asked Vives to deposit in a
house upon demand of pajuyo bank a certain amount of money in the bank
account of Sterela for purposes of its
Why is it important to determine whether there is a incorporation. She assured Vives that he could
commodatum or not, again because the case withdraw his money from said account within a
involved ejectment, unlawful detainer, who has the month’s time.
 Vives issued a check worth P 200,000 in favor of
better right to possess the property. Now take note
Sterela. Said money was used to open a savings
here the contention that pajuyo had no valid title is account in the name of Sterela in petitioner
not relevant. Why? Because whether it is Producers Bank (Bank).
commodatum, lease as we have mentioned an  However, when Vives and his wife later went to
innominate contract, ownership is not required. In the bank to verify if their money in Sterela’s
the first place there was already an agreement account was still intact, they were informed that
between the parties that pajuyo would allow part of the money in the savings account had
been withdrawn by Doronilla and that only P
guevarra to make use of the poperty.
90,000 remained therein. They were also told that
said remaining amount cannot be withdrawn
When you will have provrem, important thing to
because it had to answer for some postdated
determine is solely who has the better right to checks issued by Doronilla.
possess. The one who questions or the one who  When Vives tried to get in touch with Doronilla
demands possession of the property need not be through Sanchez, he was again reassured that
the owner thereof. his money was intact and would be returned to
him.
Again here this emphasizes the nature of a  Doronilla thereafter issued a postdated check for
commodatum which is essentially gratuitous and P212,000 in favor of Vives. However, this check
what we have in pajuyo is an innominate contract, I was dishonored.
give that you may do.  Vives instituted an action for recovery of sum of
money in the RTC against Doronilla.
Also take note that there is a similarity between  RTC ruled in favor of Vives, and held petitioner
bank jointly and severally liable with Doronilla
donation and commodatum.
because the bank’s employee Mr. Atienza was
found partly responsible for the loss of Vives’s
Both are gratuitious in nature, the benefit is to the
money. CA affirmed in toto.
recipient of the contracts.  Petitioner bank’s contention: The transaction
between Vives and Doronilla is a simple loan
Now with regard to commodatum, there is a (mutuum) since all the elements of a mutuum are
presumption that the bailor has no use of the thing present: first, what was delivered by private
that he has loaned to another person. However the respondent to Doronilla was money, a
difference to donation is that donation has a consumable thing; and second, the transaction
transfer of ownership but not in commodatum was onerous as Doronilla was obliged to pay
interest, as evidenced by the check issued by
1935 also emphasizes the main purpose of a Doronilla in the amount of P212,000.00
commodatum
ISSUE: WON the transaction between Doronilla
and Vives was one of simple loan (mutuum)– NO, it
2. use to the thing that was loaned. Take note fruits
was a commodatum.
are excluded as a general rule. Why? Because it
would be the bailor or the owner who would be HELD:* Commodatum even if what is involved is
naturally entitled to the enjoyment of the fruits. a consumable thing
The transaction between Vives and
Fruits may be subject of the commodatum by Doronilla was a commodatum and not a mutuum. A
stipulation of the parties. circumspect examination of the records reveals that
the transaction between them was a commodatum.
Remember the purpose of a contract of Article 1933 of the CC distinguishes between the
commodatum, it is for the temporary use of the two kinds of loans (see provision for reference).
thing loaned and also for a certain time. The said provision seems to imply that if
the subject of the contract is a consumable thing,
Producers bank vs CA such as money, the contract would be a mutuum.
However, there are some instances where a
commodatum may have for its object a consumable
Producers Bank vs CA
thing. Article 1936 of the CC provides:
(397 SCRA 651, G.R. No. 115324, February 19,
2003)
Consumable goods may be the subject of
PRODUCERS BANK OF THE PHILIPPINES (now
commodatum if the purpose of the contract is
FIRST INTERNATIONAL BANK), petitioner, vs.
not the consumption of the object, as when it is
HON. COURT OF APPEALS AND FRANKLIN
merely for exhibition.
VIVES, respondents.
Thus, if consumable goods are loaned only
FACTS:
for purposes of exhibition, or when the intention of
 Private respondent Vives was asked by his friend the parties is to lend consumable goods and to
Sanchez to help Col. Arturo Doronilla in have the very same goods returned at the end of
incorporating Doronilla’s business, the Sterela the period agreed upon, the loan is a commodatum
Marketing and Services (Sterela). and not a mutuum.

The rule is that the intention of the parties Regarding 12,000 Php interest? Who is entitled to
thereto shall be accorded primordial consideration 12,000?
in determining the actual character of a contract. In
case of doubt, the contemporaneous and The one entitled with12,000 is the bailor citing1935
subsequent acts of the parties shall be considered
in such determination. Take note of 1936
In the case at bar, evidence shows that
Vives agreed to deposit his money in the savings Article 1936. Consumable goods may be the
account of Sterela specifically for the purpose of subject of commodatum if the purpose of the
making it appear "that said firm had sufficient
contract is not consumption of the object, as
capitalization for incorporation, with the
promise that the amount shall be returned when it is merely for exhibition.
within thirty (30) days." Vives merely
"accommodated" Doronilla by lending his money So I have mentioned earlier one of the main
without consideration, as a favor to his good friend disctinction between commodatum and mutuum is
Sanchez. It was however clear to the parties to the that in commodatum ordinarily involved is
transaction that the money would not be removed something that is not consumable but in this case
from Sterela’s savings account and would be what we have here is money. Nevertheless the
returned to Vives after thirty (30) days.
Supreme Court ruled that what was enetered into is
* The additional P 12,000 did not convert
commodatum to mutuum commodatum and not mutuum. Again, to determine
Doronilla’s attempts to return to Vives the nature of the contract we always go back to the
the amount of P200,000 which the latter deposited intention of the parties.
in Sterela’s account together with an
additional P12,000, allegedly representing interest The intention of the parties shall be afforded
on the mutuum, did not convert the transaction primordial consideration in determining the actual
from a commodatum into a mutuum because xx of a contract, the contemporaneous and
such was NOT THE INTENT of the parties and
subsequent act of the parties shall be considered in
because the additional P12,000 corresponds to the
fruits of the lending of the P200,000. Article 1935 such determination. In this case it was shown that
of the CC expressly states that "the bailee in the private respondent agreed to deposit his money
commodatum acquires the use of the thing in the account of sterela, specifically for the purpose
loaned but not its fruits." Hence, it was only of making it appear that the said firm sufficient
proper for Doronilla to remit to Vives the interest capitalization for the purpose of incorporation with
accruing to the latter’s money deposited with the promise that the amount shall be returned within
petitioner bank.Petition denied. Take note SC said
30 days. In this case there was merely an
that whether it is a mutuum or a commodatum has
no bearing on the question of bank’s liability for the accommodation. The money was not for
return of Vives’s money because the factual consumption but only to show that there was
circumstances of the case clearly show that compliance with capitalization purposes.
petitioner bank, through its employee Mr. Atienza,
was partly responsible for the loss of Vives’s money How about the 12,000 pesos? It was alleged that
and is liable for its restitution.POLICY: You cannot the 12,000 pesos converted the transaction into a
automatically say that contract is mutuum if the mutuum however that was not the intention of the
subject matter is a consumable thing, such as
parties. Nevertheless the bailor in this case is
money. Such contract may be commodatum if the
purpose of the contract is not the consumption of entitled with the 12000 as it is considered the fruit of
the object, as when it is merely for exhibition. The the lendee of the 200000 pesos applying 1935.
INTENTION of the parties must always be
ascertained. However take note class that this is a unique type
What are the subject matter in a commodatum? of commodatum, why? Because when you strictly
speak of commodatum what is to be returned is the
Real and personal property exact the same thing that was borrowed. In this
case although the purpose is not for consumption
What is the subject matter here? but merely for exhibition… still considered as a
commodatum, the money that was deposited in the
Money
account is not exactly the money you will return to
Can money be a valid subject matter of a the bailor, not exact series number, denomination.
commodatum? Take note it is very unique in that sense and do not
forget that essentially when we talk about
Yes, if its for exhibition purpose and not for commodatum, you return the exact same thing that
consumption. was borrowed.
In this case do we have a commodatum? Also with regard to subject matter, the general rule
is non consumable, it could be movable or
Yes. The Court said that it is the intention of the immovable as provided by article 1937.
parties should prevail and in this case the intention
was merely for exhibition and not to use it. Art 1937. Movable or immovable property may
be the object of commodatum.

Another good example is a wine, inexhibit ang wine ISSUES:

collection mo not for the purpose of drinking it but to
exhibit it with the intention to return the exact wine 1. WON the contract of sale to Cu Joco is valid. NO
to you then it would be considered commodatum.
2. WON there is commodatum. NO
Again take note when you talk of consumable
things these are things which cannot be used HELD:
without being consumed.
As respects this action for recovery, this
Mina vs Pascual Supreme Court finds:
Mina vs Pascual 1. That it is a fact admitted by the litigating

(G.R. No. 8321, October 14, 1913) parties, both in this and in the previous suit, that
ALEJANDRA MINA, ET AL., plaintiffs-appellants, Andres Fontanilla, the defendants' predecessor in
vs. RUPERTA PASCUAL, ET AL., defendants- interest, erected the warehouse on the lot, some
appellees. thirty years ago, with the explicit consent of his
FACTS: brother Francisco Fontanilla, the plaintiff's
predecessor in interest.
Francisco Fontanilla and Andres Fontanilla
were brothers. Andres Fontanilla, with the 2. That it also appears to be an admitted
consent of his brother Francisco, erected a fact that the plaintiffs and the defendants are the
warehouse on a part of Francisco’s lot. coowners of the warehouse.
Francisco Fontanilla, the former owner of the lot,
being dead, the herein plaintiffs, Alejandro Mina, et 3. That it is a fact explicitly admitted in the
al., were recognized without discussion as his heirs. agreement, that neither Andres Fontanilla nor his
Andres Fontanilla, the former owner of the successors paid any consideration or price
warehouse, also having died, the children of whatever for the use of the lot occupied by the said
Ruperta Pascual were recognized likes without building; whence it is, perhaps, that both parties
discussion. The fact is that the plaintiffs and the have denominated that use a commodatum.
defendants are virtually, to all appearance, the
owners of the warehouse; while the plaintiffs are
undoubtedly, the owners of the part of the lot pon the premise of these facts,
occupied by that building, as well as of the or even merely upon that of the first of them, the
remainder thereof. sentencing of the defendants to deliver the lot to the
plaintiffs does not follow as a necessary corollary of
the judicial declaration of ownership made in the
This was the state of affairs, when, on May previous suit, nor of that of the nullity of the sale of
6, 1909, Ruperta Pascual, as the guardian of her the lot, made in the present case.
minor children, the herein defendants,
petitioned the Curt of First Instance of Ilocos
Norte for authorization to sell "the six-sevenths of The defendants do not hold lawful
possession of the lot in question. But, although
the one-half of the warehouse, of 14 by 11 meters,
together with its lot." The plaintiffs — that is both litigating parties may have agreed in their idea
Alejandra Mina, et al. — opposed the petition of of the commodatum, on account of its not being, as
Ruperta Pascual for the reason that the latter had indeed it is not, a question of fact but of law, yet that
included therein the lot occupied by the warehouse, denomination given by them to the use of the lot
which they claimed was their exclusive property. All granted by Francisco Fontanilla to his brother,
Andres Fontanilla, is not acceptable. Contracts
this action was taken in a special proceeding in re
are not to be interpreted in conformity with the
guardianship.
name that the parties thereto agree to give
them, but must be construed, duly considering
The plaintiffs did more than oppose their constitutive elements, as they are defined
Pascual's petition; they requested the court, through and denominated by law.
motion, to decide the question of the ownership of
the lot before it pass upon the petition for the sale of
By the contract of loan, one of the
the warehouse. But the court before determining
parties delivers to the other, either anything not
the matter of the ownership of the lot occupied by
the warehouse, ordered the sale of the perishable, in order that the latter may use it
warehouse together with the lot at a public during the certain period and return it to the
auction to Cu Joco. There was an agreement: the former, in which case it is called commodatum .
ninth paragraph of which is as follows: . . (art. 1740, Civil Code).
It is, therefore, an essential feature of the

9. That the herein plaintiffs excepted to the
commodatum that the use of the thing
judgment and appealed therefrom to the Supreme
belonging to another shall for a certain period.
Court which found for them by holding that they are
Francisco Fontanilla did not fix any definite
the owners of the lot in question, although there
period or time during which Andres Fontanilla
existed and still exists a commodatum by virtue
of which the guardianship (meaning the defendants) could have the use of the lot whereon the latter was
had and has the use, and the plaintiffs the to erect a stone warehouse of considerable value,
ownership, of the property, with no finding and so it is that for the past thirty years of the lot
concerning the decree of the lower court that has been used by both Andres and his successors
ordered the sale. in interest. The present contention of the plaintiffs
that Cu Joco, now in possession of the lot, should

pay rent for it at the rate of P5 a month, would Because it is for the benefit of his child. Hwoever it
destroy the theory of the commodatum sustained by did not materialized because fructos oalready died
them, since, according to the second paragraph of ahead of andres.
the aforecited article 1740, "commodatum is
essentially gratuitous," and, if what the plaintiffs The intention here was not really for commodatum,
themselves aver on page 7 of their brief is to be
use for a certain period of time but rather the
believed, it never entered Francisco's mind to limit
the period during which his brother Andres was to possession would fall to the hands of fructoso, son
have the use of the lot, because he expected that of andres but it did not happen because fructuoso
the warehouse would eventually fall into the hands died ahead of andres. It appears more likely that
of his son, Fructuoso Fontanilla, called the adopted Francisco allowed his brother with the intention of
son of Andres, which did not come to pass for the lease.
reason that Fructuoso died before his uncle Andres.
With that expectation in view, it appears more likely Emphasis on ‘for certain period of time’ and that
that Francisco intended to allow his brother Andres commodatum is essentially gratuituous. Demand of
a surface right; but this right supposes the payment
payment would destroy their theory of commodatum
of an annual rent, and Andres had the gratuitous
use of the lot. because commodatum is essentially gratituous in
nature.
Hence, as the facts aforestated only show
that a building was erected on another's ground, the In this case the property involve is a real property it
question should be decided in accordance with the is possible that a real property can be subject of
statutes that, thirty years ago, governed accessions commodatum will be used to build something for
to real estate, and which were Laws 41 and 42, title use but without rentals without intention to pay
28, of the third Partida, nearly identical with the rents. So looking at the intention of the parties
provisions of articles 361 and 362 of the Civil Code. herein there could be no commodatum.
So, then, pursuant to article 361, the owner of the
land on which a building is erected in good faith has
1938. The bailor in commodatum need not to be
a right to appropriate such edifice to himself, after
payment of the indemnity prescribed in articles 453 the owner of the thing.
and 454, or to oblige the builder to pay him the
value of the land. Such, and no other, is the right to Again if there is delivery of the subject matter in a
which the plaintiff are entitled. commodatum ownership is not transferred to the
bailee and in fact a lessee, usufructuary can be a
For the foregoing reasons, it is only bailor in a commodatum unless otherwise
necessary to annul the sale of the said lot which prohibited by the true owner of the lessor therein.
was made by Ruperta Pascual, in representation
of her minor children, to Cu Joco, and to 1939. Commodatum is purely personal in
maintain the latter in the use of the lot until the
character. Consequently:
plaintiffs shall choose one or the other of the two
rights granted them by article 361 of the Civil Code.
(1) The death of either the bailor or the bailee
extinguishes the contract;
What is essentially pertinent to the case
is the fact that the defendant agree that the
(2) The bailee can neither lend nor lease the
plaintiffs have the ownership, and they
themselves only the use, of the said lot. On this object of the contract to a third person.
premise, the nullity of the sale of the lot is in all However, the members of the bailee’s
respects quite evident, whatsoever be the manner household may make use of the thing loaned,
in which the sale was effected, whether judicially or unless there is a stipulation to the contrary, or
extrajudicially. He who has only the use of a thing unless the nature of the thing forbids such use.
cannot validly sell the thing itself. The effect of (n)
the sale being a transfer of the ownership of the
thing, it is evident that he who has only the mere
Commodatum can be personal in nature. You take
use of the thing cannot transfer its ownership. The
sale of a thing effected by one who is not its into consideration the character, conduct, his credit.
owner is null and void. The defendants never That is what you mean that commodatum is purely
were the owners of the lot sold. The sale of it by personal you take into consideration the character
them is necessarily null and void. One cannot and conduct of the bailee.
convey to another what he has never had himself.
How many years were they in possession of the What is the effect if commodatum is purely personal
property. more than 30 years. in character? If either of the bailee or the bailor dies
then the commodatum is extinguished. The trust
Was there a commodatum? No. reposed by the bailor to the bailee is not
transferrable to their respective heirs. This is the
Lets take into consideration the inention of the
trust that is intransmissible so that is why the death
parties when it was allowed to be used by andres,
of either of the parties terminates the contract
what was the intention therein for the use of said
unless stipulated by the parties that it is
property? why was there no agreement as to
transmissible.
period.

Also take note that if there are two or more bailees condition that they should be returned to the owner
the death of one bailee does not extinguish the as soon as the work at the mill was terminated.
contract. It will continue because you still have one
Plaintiff alleges in the present suit, however
bailee. Exception: stipulation of the parties.
that Magdaleno Jimenea, however, did not return
the carabaos, notwithstanding the fact that the
So first paragraph
plaintiff claimed their return after the work at the mill
was finished. The suit was brought against Agustina
No 1 in 1939 these are exception of 1178 of your
Jarra , administratrix of Magadaleno after the
obligations and contracts. latter’s death.
1178. Subject to the laws, all rights acquired in Jarra alleges that Magdaleno was actually
virtue of an obligation are transmissible, if there only able to obtain 3 carabaos from De Los Santos
has been no stipulation to the contrary. and that these carabaos were afterwards
transferred by sale to Magdaleno.
- under 1939 in the absence of stipulation it is
STILL intransmissible because it is clearly The trial Court ruled in favor of De Los
Santos and ordered the return of the remaining 6
provided under the law.
carabaos (4 have already died) or to pay the value
thereof.
How about the second paragraph? Remember
ownership is not required on the part of the bailorit ISSUE: WON Jarra, as administratrix, can be
is sufficient that he has possessory interest. How compelled to return the carabaos. YES
about on the part of the bailee? Is he allowed to HELD:
lend or the let other person use the property that There was enough witnesses and evidence
was loaned to him? As a general rule he cannot do to prove that indeed ten carabaos were obtained by
Magdaleno and not ten. The Court also noted that
so exception: (p2) members of the bailee’s
there was no official document evidencing the
household may make use of the thing loaned, transfer of the large cattle.
exception to the exception. The Court found that the six carabaos were
not the property of the deceased nor of any of his
unless there is a stipulation to the contrary, or descendants. Therefore , it is the duty of the
administratrix of the estate to return them or
unless the nature of the thing forbids such use. indemnify the owner for their value.
(n)
The Civil Code, in dealing with loans in
for example pinahiram ka ng damit, that is a general, from which generic denomination the
commodatum pero by the nature of the thing usuall specific one of commodatum is derived, establishes
hindi mo siya pinahihiram sa kapitbahay most likely prescriptions in relation to the last-mentioned
ikaw lang may kasya nyan. contract by the following articles:
ART. 1740. By the contract of loan, one of
1940. A stipulation that the bailee may make use the parties delivers to the other, either anything not
perishable, in order that the latter may use it during
of the fruits of the thing loaned is valid. (n) a certain period and return it to the former, in which
case it is called commodatum, or money or any
This is the exception to 1935, by stipulation the other perishable thing, under the condition to return
bailee is entitled to make use of the principal thing an equal amount of the same kind and quality, in
but also the fruits, there could be a stipulation. which case it is merely called a loan.
However take note that the use of the fruits is only Commodatum is essentially gratuitous.
incidental to the principal thing because of the main A simple loan may be gratuitous, or made under a
stipulation to pay interest.
cause of the contract is to allow the bailee to make
use of the fruits then that is not a commodatum ART. 1741. The bailee acquires retains the
anymore that would become a usufruct. ownership of the thing loaned. The bailee acquires
the use thereof, but not its fruits; if any
De Los Santos vs Jarra compensation is involved, to be paid by the person
requiring the use, the agreement ceases to be a
De Los Santos vs Jarra commodatum.
(G.R. No. 4150, February 10, 1910) ART. 1742. The obligations and rights
FELIX DE LOS SANTOS, plaintiff- which arise from the commodatum pass to the heirs
appelle, vs.AGUSTINA JARRA, administratrix of of both contracting parties, unless the loan has
the estate of Magdaleno Jimenea, been in consideration for the person of the bailee, in
deceased, defendant-appellant. which case his heirs shall not have the right to
FACTS: continue using the thing loaned. The carabaos
In the latter part of 1901, Magdaleno delivered to be used not being returned by the
Jimenea borrowed and obtained from the plaintiff defendant upon demand, there is no doubt that
ten first-class carabaos, to be used at the animal- she is under obligation to indemnify the owner
power mill of his hacienda during the season of thereof by paying him their value.
1901-2, without recompense or remuneration Article 1101 of said code reads:
whatever for the use thereof, under the sole Those who in fulfilling their obligations are guilty of
fraud, negligence, or delay, and those who in any

manner whatsoever act in contravention of the Commodatum is purely personal in character.

stipulations of the same, shall be subjected to Consequently:
indemnify for the losses and damages caused (1) The death of either the bailor or the
thereby. bailee extinguishes the contract;
(2) The bailee can neither lend nor lease the
The obligation of the bailee or of his object of the contract to a third person.
successors to return either the thing loaned or its However, the members of the bailee's
value, is sustained by the supreme tribunal of household may make use of the thing
Sapin. In its decision of March 21, 1895, it sets out loaned, unless there is a stipulation to
with precision the legal doctrine touching the contrary, or unless the nature of the
commodatum as follows: thing forbids such use.
Although it is true that in a contract of Art. 1940.

commodatum the bailor retains the ownership of the A stipulation that the bailee may make use of
thing loaned, and at the expiration of the period, or the fruits of the thing loaned is valid.
after the use for which it was loaned has been
accomplished, it is the imperative duty of the bailee
In the case of Delos Santos last time, it was
to return the thing itself to its owner, or to pay him
emphasized that the bailee has the obligation to
damages if through the fault of the bailee the thing
return the subject matter. Remember in
should have been lost or injured, it is clear that
commodatum, there is no transfer of ownership, so
where public securities are involved, the trial court,
the bailee has the obligation to return the EXACT
in deferring to the claim of the bailor that the
same thing. So that’s the primary obligation of the
amount loaned be returned him by the bailee in
bailee. Along with Art. 1941.
bonds of the same class as those which constituted
the contract, thereby properly applies law 9 of title
11 of partida 5. Art. 1941.
The bailee is obliged to pay for the ordinary
Was there a contract of commodatum? Yes. expenses for the use and preservation of the
thing loaned.
If the thing itself cannot be returned what is the
liability? Take note, what we have here are ORDINARY
EXPENSES. Why is it that the bailee must shoulder
Indemnify of the owner the value of the thing that these expenses? Because the bailee acquires the
use of the same. So it’s just proper that for the
was the subject of commodatum.
ordinary expenses, he should be the one to
shoulder it. Along with this obligation for ordinary
Take note here , let us not detract from the fact that expenses, we also take into consideration the
death of the bailee terminates the contract of standard diligence. Diligence of a good father of the
commodatum, because here who is held liable? family is applicable here. The bailee has the
The estate of the deceased it is not individually the obligation to take good care of the thing with the
heirs but the estate. Again,the commodatum diligence of a good father of the family.
obligation of the parties are still intransimissible.
Example, sasakyan as the subject of a
Again this emphasizes the primary obligation of the commodatum. Ordinary expenses, we have
gasoline, change oil, cleaning, washing, among
bailee that is to return the thing that was loaned to
others.
the bailor however in this case the carabaos
delivered could not be returned therefore there was Now one of the important provisions with regard to
an obligation to indemnify on the part of the estate commodatum is Art. 1942.
the bailor bypaying the value thereof. It is the
imperative duty to return the thing to the owner or Art. 1942.
pay damages if through the fault of bailee the thing The bailee is liable for the loss of the thing,
even if it should be through a fortuitous event:
was lost or injured.
(1) If he devotes the thing to any purpose
November 16, 2015 (Damalerio) different from that for which it has been
loaned;
We discussed the distinctions between a (2) If he keeps it longer than the period
commodatum and mutuum, and from other stipulated, or after the accomplishment
contracts and arrangements. of the use for which
the commodatum has been constituted;
We also emphasized as to the subject matter: as a (3) If the thing loaned has been delivered
general rule, we have non-consumable goods for with appraisal of its value, unless there
commodatum, but consumable goods can be a is a stipulation exemption the bailee
subject matter of commodatum provided its purpose from responsibility in case of a
is for exhibition. fortuitous event;
(4) If he lends or leases the thing to a third
Ownership on the part of the bailor is not required in person, who is not a member of his
a valid commodatum since there is no transfer of household;
ownership in commodatum. (5) If, being able to save either the thing
borrowed or his own thing, he chose to
Art. 1939. save the latter.

Remember the general rule, owner bears the loss. Whether, depending on the nature of the contract,
Res perit domino. That’s still the general rule with the respondent is liable for the death of the bull
regard to commodatum. However, we have 1942 as
the exceptions to the res perit domino rule. In these HELD:
instances, the BAILEE would be liable for the loss A contract of commodatum is essentially gratuitous.
even if the loss of the thing is due to a fortuitous If the breeding fee be considered a compensation,
event. then the contract would be a lease of the bull.
Under article 1671 of the Civil Code the lessee
We have here: if he devotes the thing to any would be subject to the responsibilities of a
purpose different from that for which it has been possessor in bad faith, because she had continued
loaned. Why? It shows BAD FAITH on the part of possession of the bull after the expiry of the
the bailee. contract. And even if the contract be commodatum,
still the appellant is liable, because article 1942 of
If he keeps it longer than the period stipulated, or the Civil Code provides that a bailee in a contract of
after the accomplishment of the use, obviously this commodatum -
refers to DELAY. So if there is delay, we already . . . is liable for loss of the things, even if it should
know that even if the thing was lost due to a be through a fortuitous event:
fortuitous event, the bailee would still be liable. (2) If he keeps it longer than the period stipulated . .
.
As to the 3rd instance, if there is appraisal. Why? (3) If the thing loaned has been delivered with
Because by putting a value to the thing subject of appraisal of its value, unless there is a stipulation
commodatum, there is an INTENTION that the exempting the bailee from responsibility in case of a
borrower shall be liable. Unless there is a fortuitous event.
stipulation exempting the bailee from responsibility
in case of a fortuitous event, even if there is an The loan of one bull was renewed for another
appraisal. period of one year to end on 8 May 1950. But the
appellant kept and used the bull until November
As for the 4th instance, in relation to 1939, 1953 when during a Huk raid it was killed by stray
remember a commodatum is PURELY PERSONAL bullets. Furthermore, when lent and delivered to the
in character, and therefore if he lends it to a 3 rd deceased husband of the appellant the bulls had
person who is not a member of his household, and each an appraised book value. It was not stipulated
without the consent of the bailor, he would be liable. that in case of loss of the bull due to fortuitous
event the late husband of the appellant would be
As to the 5th instance: by instinct, we save our own exempt from liability.
personal belongings. However, if there is a
commodatum, and you choose to save your own Special proceedings for the administration and
things rather than the thing loaned to you settlement of the estate of the deceased Jose V.
gratuitously, it could be considered as an Bagtas having been instituted in the Court of First
INGRATITUDE on your part, and therefore you Instance of Rizal (Q-200), the money judgment
would still be held liable. rendered in favor of the appellee cannot be
enforced by means of a writ of execution but must
We have here the case of Republic vs. Bagtas: be presented to the probate court for payment by
the appellant, the administratrix appointed by the
REPUBLIC VS. JOSE BAGTAS court.
FACTS: So applying Art. 1942, did the Supreme Court say

On May 8, 1948, Jose Bagtas borrowed from the that we had a commodatum here? Can it be
Bureau of Animal Industry 3 bulls for 1 year for considered as a commodatum?
breeding purposes, subject to breeding fee for 10% NO, the SC did not categorically state that
of the book value of the bulls. Upon the expiration there is commodatum in this case because there is
of the contract, Bagtas asked for a renewal for a consideration of 10% bidding fee. If this bidding
another year. The renewal granted was only for 1 fee is considered as a compensation, then the
bull. Bagtas offered to buy the bulls at book value contract entered into is not a commodatum, but a
less depreciation, but the Bureau told him that he Lease.
should either return the bulls or pay for their book
value. Bagtas failed to pay the book value, and so And of course, there was delivery with appraisal of
the Republic commenced an action with the CFI the value of the said goods.
Manila to order the return of the bulls of the
payment of book value. Felicidad Bagtas, the Now in this case, if the bidding fee will be
surviving spouse and administratrix of the considered as a compensation, there won’t be a
decedent’s estate, stated that the 2 bulls have commodatum because again, commodatum is
already been returned in 1952, and that the essentially gratuitous. So it could be a Lease.
remaining one died of gunshot during a Huk raid.
As regards the two bulls, is was proven that they Nevertheless, whether it is a lease or a
were returned and thus, there is no more obligation commodatum, the SC held that Bagtas will be liable
on the part of the appellant. As to the bull not under his continued possession after the expiration
returned, Felicidad contends that the obligation is of the contract. If it is commodatum, the applicable
extinguished since the contract is that of a provision is 1942, specifically paragraphs 2 and 3 –
commodatum and that the loss through fortuitous liable for the loss even if it was thru a fortuitous
event should be borne by the owner. thing.
ISSUE:

The gunshot wounds suffered by the bulls here lots being used as sites of the Catholic Church,
shall be considered fortuitous event, however building, convents, high school building, school
Bagtas will still be liable because again: gymnasium, dormitories, social hall and stonewalls.
1) He kept them longer than the period
stipulated 1963: Heirs of Juan Valdez and Heirs of Egmidio
2) There was delivery with appraisal, without Octaviano claimed that they have ownership over
stipulation exempting them from liability. lots 1, 2 and 3. (2 separate civil cases)
Considering that the 2 bulls were already
returned, it is only the value of the bull 1965: The land registration court confirmed the
which was killed in the custody of the registrable title of Vicar to lots 1, 2, 3 and 4. Upon
administratrix of his estate. appeal by the private respondents (heirs), the
decision of the lower court was reversed. Title for
lots 2 and 3 were cancelled.
We said that commodatum is a personal contract
extinguished by the death of the party, take note VICAR filed with the Supreme Court a petition for
here that it was the estate that was held liable. review on certiorari of the decision of the Court of
Therefore, we do not say that the obligation was Appeals dismissing his application for registration of
already extinguished just because Bagtas is already Lots 2 and 3.
dead. It was his estate which was made liable for
the value of the bull that died. During trial, the Heirs of Octaviano presented one
(1) witness, who testified on the alleged ownership
Art. 1943. of the land in question (Lot 3) by their predecessor-
The bailee does not answer for the deterioration in-interest, Egmidio Octaviano; his written demand
of the thing loaned due only to the use thereof to Vicar for the return of the land to them; and the
and without his fault. reasonable rentals for the use of the land at
P10,000 per month.
What do we have here? Depreciation expense.
Ordinary wear and tear, borne by the bailor. Bailee, On the other hand, Vicar presented the Register of
of course, will be liable if he’s at fault or negligent or Deeds for the Province of Benguet, Atty. Sison, who
devotes the thing to any purpose different from the testified that the land in question is not covered by
nature of the thing, or different from which they any title in the name of Egmidio Octaviano or any of
have agreed upon. the heirs. Vicar dispensed with the testimony of
Mons. Brasseur when the heirs admitted that the
Art. 1944. witness if called to the witness stand, would testify
The bailee cannot retain the thing loaned on the that Vicar has been in possession of Lot 3, for 75
ground that the bailor owes him something, years continuously and peacefully and has
even though it may be by reason of expenses. constructed permanent structures thereon.
However, the bailee has a right of retention for
damages mentioned in Article 1951. ISSUE: WON Vicar had been in possession of lots
2 and 3 merely as bailee borrower in commodatum,
a gratuitous loan for use.
Going back to our example last meeting. Jan
HELD:
Michael loaned his car to Lyzzaik. Now while there
YES. Private respondents were able to prove that
is a commodatum between them, let’s say that JM
their predecessors' house was borrowed by
also borrowed money from Lyzzaik. So there’s a
petitioner Vicar after the church and the convent
simple loan. Now the time has come for Lyzzaik to
were destroyed. They never asked for the return of
return the car to JM, so JM demanded the return of
the house, but when they allowed its free use, they
the car. Lyzzaik cannot say “I will not return the car
became bailors in commodatum and the petitioner
unless you pay me the obligation, your debt is
the bailee.
already due and demandable.”
The bailees' failure to return the subject matter of
That could not be used as a defense of the bailee to
commodatum to the bailor did not mean adverse
refuse the return of the thing. The bailee CANNOT
possession on the part of the borrower. The bailee
retain the thing loaned even as security for claims
held in trust the property subject matter of
he has against the bailor.
commodatum. The adverse claim of petitioner came
only in 1951 when it declared the lots for taxation
There is only one exception, under Art. 1951, in
purposes. The action of petitioner Vicar by such
case of hidden defects on the subject of the thing
adverse claim could not ripen into title by way of
loaned.
ordinary acquisitive prescription because of the
absence of just title.
Now JM, let us say Lyzzaik failed to return the
subject matter to you, will it now constitute adverse
The Court of Appeals found that petitioner Vicar did
possession?
not meet the requirement of 30 years possession
for acquisitive prescription over Lots 2 and 3.
What happened in the case of Catholic vs. CA.
Neither did it satisfy the requirement of 10 years
possession for ordinary acquisitive prescription
CATHOLIC VICAR VS. CA because of the absence of just title. The appellate
court did not believe the findings of the trial court
FACTS: that Lot 2 was acquired from Juan Valdez by
1962: Catholic Vicar Apostolic of the Mountain purchase and Lot 3 was acquired also by purchase
Province (Vicar), petitioner, filed with the court an from Egmidio Octaviano by petitioner Vicar because
application for the registration of title over lots 1, 2, there was absolutely no documentary evidence to
3 and 4 situated in Poblacion Central, Benguet, said

support the same and the alleged purchases were of the lender, wherein it takes into account the
never mentioned in the application for registration. personal integrity and responsibility of both the
bailees.
What was the issue here with regard to Lots 2 & 3?
Who was in possession thereof? In what concept? So this is an exception to Art. 1208, and in
Was is in the concept of an owner? Do you have consonance with 1207. There is solidary liability
commodatum here, at any point in time? only when the obligation expressly so states, or
when the law or the nature of the obligation requires
What if there was no commodatum and you do not liability.
own the subject matter? You’re not obliged to return
the thing to the owner? Still obliged! So here we can now say that the following are the
obligations of the bailee:
What is the relevance here of adverse possession? 1) To return the thing
Why was it necessary to determine that it was in 2) To pay for ordinary expenses
1951 that Catholic Vicar was deemed in adverse 3) To take good care of the thing with the
possession of the parcel land, not anymore in the diligence of a good father of the family
concept of a bailee in commodatum? For 4) For ostentatious expenses, it may be the
acquisitive prescription. 10 years in good faith and bailee who will be liable
with just title; if without good faith and just title, 30 5) For extraordinary expenses, we will discuss
years. that in 1949
6) Loss due to fortuitous event, as a general
Now when Catholic vicar was in possession of the rule, bailee is not liable unless instances in
property in 1951 onwards, what was the nature of 1942 are present
its possession? IN BAD FAITH. 7) With regard to deterioration, bailee is not
liable. Exception, if it is shown that bailee is
That means, who would now be entitled to the negligent, at fault, or have used the thing
property in dispute? The land now belongs to the for other purposes not stipulated
State. 8) No right to retain the subject matter unless
1951
So here, petitioner was in possession as borrower 9) Solidary liability of 2 or more bailees
in commodatum only up to 1951. What happened in
1951? Catholic repudiated the trust by declaring the
properties in its name for taxation purposes. Now How about on the part of the bailor? We have Art.
acquisitive prescription: 10 years in good faith with 1946.
just title, 30 years extraordinary acquisitive
prescription when in bad faith. Art. 1946.
The bailor cannot demand the return of the
Why is Catholic deemed to be in possession in bad thing loaned till after the expiration of the period
faith? Because before 1951, it had knowledge that it stipulated, or after the accomplishment of the
was the heirs of Valdez who have the right to use for which the commodatum has been
possess the property. The heirs were able to prove constituted. However, if in the meantime, he
that their predecessors’ house was borrowed by should have urgent need of the thing, he may
petitioner after the Church and the convent were demand its return or temporary use.
destroyed. They never asked for the return of the
house, and when they allowed its free use, they In case of temporary use by the bailor, the
became bailors in commodatum and petitioner as contract of commodatum is suspended while
bailee. the thing is in the possession of the bailor.
The mere failure to return on the part of the bailee Remember the obligation on the part of the bailor: it
did not mean adverse possession on the part of the is to allow the bailee to use the thing for the
borrower. So the acquisitive prescriptive period did duration of the period stipulated or until the
not yet begin to run. It was only in 1951 when they accomplishment of the purpose, so for a certain
were declared for taxation purposes. So time. So with that, as a general rule, the bailor
predecessors-in-interest and private respondents cannot demand the return of the thing unless the
were possessors under claim of ownership in good period stipulated has arrived or unless the use or
faith from 1906, and that petitioner was only a the purpose has already been accomplished.
bailee in commodatum, and that the adverse claim
and repudiation of trust came only in 1951. 1946 provides for an exception: in case of urgent
need of the thing, wherein the bailor may demand
Art. 1945. for its return or temporary use.
When there are two or more bailees to whom a
thing is loaned in the same contract, they are So let us say ang pinahiram is sasakyan. But the
liable solidarily. bailor’s relative is very sick and he has no other
vehicle, he has to take the relative to the hospital.
Remember the general rule under obligations and So he can demand form the bailee the temporary
contracts, obligation is presumed to be joint. use of the car subject of the commodatum. Again, it
Instances when it is solidary: by law, by stipulation is solely for temporary use. And as clearly provided
of the parties, and by nature of the obligation. in 1946, the commodatum is suspended while the
thing is in the possession of the bailor.
Under 1945, the law specifically provides that when
there are 2 or more bailees, they are liable Art. 1947
solidarily. This is to safeguard effectively the rights

The bailor may demand the thing at will, and the her obligation to get the furniture when they were
contractual relation is called a precarium, in the offered to her.
following cases:
(1) If neither the duration of the contract nor ISSUE 2:
the use to which the thing loaned should WON Quintos is bound to bear the deposit fees.
be devoted, has been stipulated; or NO.
(2) If the use of the thing is merely tolerated
by the owner. HELD 2:
As BECK had voluntarily undertaken to return all
the furniture to the Quintos, upon the latter's
demand, the Court could not legally compel her to
Do we have a precarium in the case of Quintos vs.
bear the expenses occasioned by the deposit of the
Beck?
furniture at the BECK's behest. The latter, as bailee,
was not entitled to place the furniture on deposit;
MARGARITA QUINTOS vs. BECK nor was Quintos under a duty to accept the offer to
return the furniture, because he wanted to retain the
FACTS: three gas heaters and the four electric lamps.
BECK was a tenant of the Quintos and as such
occupied the latter's house on M. H. del Pilar street, As to the value of the furniture, we do not believe
No. 1175. On January 14, 1936, upon the novation that Quintos is entitled to the payment thereof by
of the contract of lease between them, the former BECK in case of his inability to return some of the
gratuitously granted to the latter the use of the furniture because under paragraph 6 of the
furniture subject to the condition that the BECK stipulation of facts, BECK has neither agreed to nor
would return them to the Quintos upon the latter's admitted the correctness of the said value. Should
demand. Quintos sold the property to Maria Lopez he fail to deliver some of the furniture, the value
and Rosario Lopez and on September 14, 1936, thereof should be later determined by the trial Court
these three notified BECK of the conveyance, through evidence which the parties may desire to
giving him sixty days to vacate the premises under present.
one of the clauses of the contract of lease. There
after Quintos required BECK to return all the ISSUE 3:
furniture transferred to him for them in the house WON Quintos is entitled to the costs of litigation.
where they were found. YES.
On November 5, 1936, BECK, through another HELD 3:
person, wrote to Quintos reiterating that she may The costs in both instances should be borne by
call for the furniture in the ground floor of the house. BECK because the plaintiff is the prevailing party
On the 7th of the same month, he wrote another (section 487 of the Code of Civil Procedure). He
letter to Quintos informing her that he could not give was the one who breached the contract of
up the three gas heaters and the four electric lamps commodatum, and without any reason he refused
because he would use them until the 15th of the to return and deliver all the furniture upon demand.
same month when the lease in due to expire. In these circumstances, it is just and equitable that
Quintos refused to get the furniture in view of the he pay the legal expenses and other judicial costs
fact that BECK had declined to make delivery of all which the plaintiff would not have otherwise
of them. On November 15th, before vacating the defrayed.
house, the BECK deposited with the Sheriff all the
furniture belonging to Quintos and they are now on POLICY:
deposit in the warehouse situated at No. 1521, Commodatum is a contract where the bailor
Rizal Avenue, in the custody of the said sheriff. delivers to the bailee a non-consumable thing so
that the latter may use it for a certain time and
ISSUE 1: return the identical thing.
WON BECK complied with his obligation to return
the furniture upon the Quintos’ demand. NO.
Is there a difference between commodatum and
precarium? Or is precarium a classification of
HELD 1:
commodatum? Yes it is.
The contract entered into between the parties is
one of commadatum, because under it Quintos
Let’s apply the general rule on obligations and
gratuitously granted the use of the furniture to
contracts. For payment or performance to
BECK, reserving for herself the ownership thereof;
extinguish the obligation of the debtor, what should
by this contract he bound himself to return the
be the nature of the payment or performance? So
furniture to Quintos, upon the latter’s demand
here, the debtor is the bailee. So to extinguish his
(clause 7 of the contract, Exhibit A; articles 1740,
obligation as a bailee, he should return the thing to
paragraph 1, and 1741 of the Civil Code). The
the bailor.
obligation voluntarily assumed by BECK to return
the furniture upon demand, means that he should
Isn’t it that he is willing to return it to the bailor? Yes
return all of them to Quintos at the latter's residence
ma’am.
or house. BECK did not comply with this obligation
when he merely placed them at the disposal of the
So why is it that he is still liable for the expenses for
Quintos, retaining for his benefit the three gas
the deposit of the furniture to the sheriff? Apply the
heaters and the four eletric lamps. The provisions of
rule in obligations and contracts, Payment or
article 1169 of the Civil Code cited by counsel for
performance must be COMPLETE.
the parties are not squarely applicable. The trial
court, therefore, erred when it came to the legal
conclusion that the Quintos failed to comply with

Here, he said that he would still use it and decided The bailor may demand the immediate return of
not to return it. So with that, the refusal of Quintos the thing if the bailee commits any act of
was valid. Creditor, as in this case the bailor, ingratitude specified in Article 765.
cannot be compelled to accept PARTIAL delivery,
or partial return of the subject matter. So even if it So yung acts of ingratitude as to donation. Apply it
was deposited with the sheriff, bailee would still be to commodatum, 765 will now be:
liable for the expenses because there was valid 1) Bailee should commit an offense against
refusal to accept performance on the part of the the person or property of the bailor, or his
bailor. wife or children under his parental authority.
So act of ingratitude yan.
So here, you have a PRECARIUM because of the 2) When bailee imputes to the bailor any
fact that the use of the furniture is subject to the criminal offense or any act involving moral
condition that the defendant would return them to turpitude, even though he should prove it,
the plaintiff upon the latter’s demand. That is the unless the act or the crime has been
contract here, a Precarium, and not just an ordinary committed against the bailee himself, his
commodatum. wife or children under his authority.
3) Bailee unduly refuses the bailor support
Remember there are 2 classifications of when the bailee is legally or morally bound
commodatum: to give support to the bailor
1) Ordinary Commodatum – stipulated therein
the return of the thing, or the purpose Same premise that we have before, similarity
thereof is specific, wherein it must be return between commodatum and donation is that they are
after the accomplishment of the use or such essentially gratuitous. So as in a donation, wherein
purpose the donee is unworthy of the trust reposed upon
2) Precarium – as provided under 1947, if him by virtue of his acts of ingratitude, we apply the
neither the duration or where the use same to a bailee in a commodatum.
should be devoted is stipulated, or if the
use of the thing is merely tolerated by the Art. 1949.
owner The bailor shall refund the extraordinary
expenses during the contract for the
In this case, plaintiff gratuitously granted the use of preservation of the thing loaned, provided the
the furniture to the defendant reserving for herself bailee brings the same to the knowledge of the
the ownership thereof. And the defendant bound bailor before incurring them, except when they
himself to return the furniture to the plaintiff upon are so urgent that the reply to the notification
the latter’s demand. cannot be awaited without danger.
It means, he should return ALL of them to the If the extraordinary expenses arise on the
plaintiff at the latter’s residence or house. Here, the occasion of the actual use of the thing by the
defendant did not comply with the obligation when bailee, even though he acted without fault, they
he merely placed them at the disposal of the shall be borne equally by both the bailor and the
plaintiff and retained for his benefit the heaters and bailee, unless there is a stipulation to the
the electric lamps. contrary.
The court did not legally compel Quintos to bear the Who shall bear the extraordinary expenses? 1949
expenses occasioned by the deposit of the furniture provides the answer.
of the defendant’s behest. The latter was not
entitled to place the furniture on deposit. Nor was First take note, what is the nature of the
the plaintiff under the duty to accept the offer to extraordinary expense? If it is for the preservation
return the furniture because, again, defendant of the thing loaned, it shall be borne by the bailor.
wanted to retain the heaters and lamps. Because by virtue of this extraordinary expense, it
is the bailor who will benefit from it. Why? Because
So the cost should be borne by the defendant he is still the owner thereof. For example, a
because the plaintiff is the prevailing party. property is damaged due to a calamity. So
extraordinary expense yan.
So again, in Ordinary Commodatum, possession of
the bailee si more secure because he has the right Now take note, if the bailee incurs the expenses for
to retain the thing loaned until the expiration of the this extraordinary expense, the bailor has the
period agreed upon, or the accomplishment of the obligation to refund the bailee, provided the bailee
use for which the commodatum has been has notified or informed the bailor before incurring
constituted. such.
Unlike that in Precarium, it is less secure on the As a general rule, if the bailee fails to notify the
part of the bailee. Bailor may demand the return of bailor before this extraordinary expense is incurred,
the thing at will, at anytime. Contract by which the the bailor has no liability to refund the bailee,
owner of the thing, at the request of another person, UNLESS the need for the extraordinary expense is
gives the latter the thing for use as long as the so urgent that notice or informing the bailor would
owner shall please. So it’s subject to revocation by only delay the said repairs necessary.
the bailor at anytime.
However, if the extraordinary expenses are those
Art. 1948. from the ACTUAL use of the thing loaned, for
example, you borrowed a car and then while
driving, it had a collision. Now, 50/50. 50% from the

bailee, and 50% from the bailor. Why? Sino defect? Because unlike Sale, a commodatum is
gumamit? Arising from the use, Bailee. essentially gratuitous. Sale is onerous in nature.
Nevertheless, it would be returned to the bailor, so
ownership, Bailor. So general rule, 50/50 sila
UNLESS otherwise stipulated. Art. 1952.
The bailor cannot exempt himself from the
Art. 1950. payment of expenses or damages by
If, for the purpose of making use of the thing, abandoning the thing to the bailee.
the bailee incurs expenses other than those
referred to in Articles 1941 and 1949, he is not Why? This would be unfair to the bailee. In a sense
entitled to reimbursement. na hindi pwede sabihin ng bailor na, “imuha nalang
ng sakyanan bai, di nalang nako kuhaon, pero di na
So what do we have here? Yung expenses for tika i-reimburse for the expenses.” Why unfair?
display or ostentatious expenses. For this type of Because the expenses would be MORE THAN the
expense, it would be the bailee who would be held value of the thing. And it would now be unfair to
liable. allow the bailor to just abandon the thing instead of
paying the said expenses or damages.
Art. 1951.
The bailor who, knowing the flaws of the thing Again, he cannot exempt himself by abandoning the
loaned, does not advise the bailee of the same, thing to the bailee. He will still be liable.
shall be liable to the latter for the damages So with that, what are the obligations of the
which he may suffer by reason thereof. BAILOR?
1) The right to demand the return of the thing
This is the exception with regard to the retention of 2) If what you have is an ordinary
the subject matter. Again as a general rule, the commodatum, right to demand only upon
bailee CANNOT RETAIN the thing for any other expiration of the period or accomplishment
liability of the bailor, unless 1951 is applicable. of the purpose agreed upon, unless there is
an urgent need
When do you apply 1951? 3) If it is Precarium, there is right to demand
1) If there is a flaw or defect of the thing the return of the subject matter anytime
subject of the commodatum 4) Bailor is given the right of the immediate
2) The flaw or defect is hidden or latent return of the thing in case of ingratitude on
3) The bailor is aware of the said defect the part of the bailee
4) The bailor does not advise the bailee of the 5) Liable to refund the bailee for Extraordinary
said flaw or defect expenses incurred, provided that he was
5) The bailee suffers damages by reason of notified before the said expenses were
the said flaw or defect incurred, UNLESS urgent
6) Liability for damages under 1951
If ALL of these requisites are present, the bailee 7) Under 1952, bailor has no right to abandon
can RETAIN the thing until he is reimbursed for the the subject matter instead of paying the
expenses, or he is indemnified for the damages he expenses and damages
has suffered.
November 17, 2015 (Calatrava)
Take note in Sales, sa warranty against hidden
III. MUTUUM
defects, good faith on the part of the seller is NOT a
defense. He would still be liable. Now, under Article 1953 states:
But under 1951, while it talks about hidden defects, Art. 1953. A person who receives a loan of
it is required that the bailor is in bad faith. Bailor money or any other fungible thing acquires the
must be aware thereof in order for 1951 to be ownership thereof, and is bound to pay to the
applied. Now bailor is in bad faith, and all other creditor an equal amount of the same kind and
requisites in 1951 are present, bailee has the right
quality. (1753a)
to retain the subject matter until damages are paid.
So, simple loan or mutuum is a contract whereby
Take note, RIGHT TO RETAIN, but he has no right
one of the parties delivers to another, money or
to sell it to other persons. He has NO right to
other consumable thing with the understanding that
exercise ownership over the subject matter.
the same amount of the same kind or quality shall
Example, may sira or defect pala sa brake ng be paid.
sasakyan, the bailor was aware thereof and did not
Notice it involves the return of the equivalent only
tell the bailee, so while driving di nagwork yung
brake, the bailee suffered damages. and not the identical thing because the borrower
acquires ownership of the subject matter. Also
However, if the bailee could have known after notice in 1953, you have the term there, ‘bound to
inspection, 1951 is NOT applicable. Bailor could not pay’ and not to return, because again, the bailee
be held liable. Why? Because the defect is not here is obliged to give back, pay the equivalent of
anymore hidden. And if the bailor has no knowledge what he has received. So here, in mutuum, since
or was not aware of the said defect, the bailor will there is a transfer of ownership, the borrower can
not be liable. dispose of the thing borrowed and his act will not be
considered a misappropriation. In other words, hindi
Why is it that there is a difference between a Sale siya mahulog na estafa.
and Commodatum with regard to this hidden

Now, do distinguish loan from a contract of lease or P350,000 in cash and assumed the P500,000
rent. balance of Roa’s indebtedness with AIDC.
LOAN RENT/LEASE AIDC, however, was not willing to extend the old
Signifies the delivery of A contract by which one interest rate to ALS and proposed to grant them a
money or some other of the parties delivers to new loan of P500,000 to be applied to Roa’s debt
consumable thing to another some non- and secured by the same property, at an interest
another with a promise consumable thing in rate of 20% per annum and service fee of 1% per
to repay an equivalent order that the latter may annum on the outstanding principal balance
amount of the same use it during a certain
payable within ten years in equal monthly
kind and quality, but not period and return it to
a promise to return the the former. amortization.
same thing loaned Consequently, on March 1981, ALS executed a
which becomes the
mortgage deed containing the above stipulations
property of the obligor.
with the provision that payment of the monthly
There is a transfer of In a contract of rent, the
ownership; the borrower owner or lessor of the amortization shall commence on May 1, 1981.
becomes the owner of property does not lose On August 1982, ALS and Litonjua updated Roa’s
the thing loaned. his ownership. He arrearages by paying BPIIC the sum of
simply loses his control
P190,601.35. This reduced Roa’s principal balance
over the property rented
during the period of the to P457,204.90 which, in turn, was liquidated when
contract. BPIIC applied thereto the proceeds of ALS’s loan of
The relation between In a contract of “rent,” P500,000.
the parties is that of the relation is that of
On September 13, 1982, BPIIC released to ALS
obligor and oblige. landlord and tenant.
P7,146.87, purporting to be what was left of their
The creditor receives The owner of the
payment for his loan. property receives the loan after full payment of Roa’s loan.
compensation or price In June 1984, BPIIC instituted foreclosure
either in money, proceedings against ALS on the ground that they
provisions, chattels, or
failed to pay the mortgage indebtedness which from
labor from the occupant
thereof in return for its May 1, 1981 to June 30, 1984, amounted to
use. P475,585.31.
ALS and Litonjua filed a civil case against BPIIC.

Now, when we distinguish simple loan from They alleged, among others, that they were not in
commodatum, we emphasized that the subject arrears in their payment, but in fact made an
matter in a mutuum is money or a consumable overpayment as of June 30, 1984. They maintained
thing. But if you take a look at 1953, you have there that they should not be made to pay amortization
fungible thing. So if you recall what is a fungible before the actual release of the P500,000 loan in
thing, these are things which are dealt by number or August and September 1982. Further, out of the
measurement. Just like rice, oil or sugar since they P500,000 loan, only the total amount of
are measured by kilos or liters among others P464,351.77 was released to ALS.
wherein any given unit or portion is treated as RTC favored ALS and Litonjua. CA affirmed in toto.
equivalent to any other given unit or portion. Now, if
you strictly define a consumable thing, these are CA reasoned that a simple loan is perfected only
things which are used or consumed by being used. upon the delivery of the object of the contract. The
However, under this concept of loan, the terms contract of loan between BPIIC and ALS & Litonjua
fungible thing or consumable thing are used was perfected only on September 13, 1982, the
interchangeably. So fungible things are considered date when BPIIC released the purported balance of
those which cannot be used without being the P500,000 loan after deducting therefrom the
consumed, again similar to that of a consumable value of Roa’s indebtedness. Thus, payment of the
thing. monthly amortization should commence only a
month after the said date, as can be inferred from
Now, we have here the case of BPI vs CA. the stipulations in the contract. This, despite the
BPI INVESTMENT CORPORATION vs. HON. express agreement of the parties that payment shall
COURT OF APPEALS and ALS MANAGEMENT commence on May 1, 1981. From October 1982 to
& DEVELOPMENT CORPORATION June 1984, the total amortization due was only
P194,960.43. Evidence showed that ALS had an
FACTS: Frank Roa obtained a loan at an interest overpayment. Therefore, there was no basis for
rate of 16.25% per annum from Ayala Investment BPIIC to extrajudicially foreclose the mortgage.
and Development Corporation (AIDC), the
BPIIC contends among others that CA erred in
predecessor of petitioner BPIIC, for the construction
ruling that because a simple loan is perfected upon
of a house on his lot in New Alabang Village,
the delivery of the object of the contract, the loan
Muntinlupa. Said house and lot were mortgaged to
contract in this case was perfected only on
AIDC to secure the loan. Sometime in 1980, Roa
September 13, 1982. BPIIC claims that a contract
sold the house and lot to private respondents ALS
of loan is a consensual contract, and a loan
and Antonio Litonjua for P850,000. They paid
contract is perfected at the time the contract of

mortgage is executed conformably with SC’s ruling payment of the monthly amortization of ALS and
in Bonnevie v. CA, 125 SCRA 122. Litonjua.
Q: Wherein it would include?
ISSUE: WON a contract of loan is a consensual A: It would also include the payment for interest.
contract. NO, A CONTRACT OF LOAN IS A REAL Q: Now, between the allegations of the parties
CONTRACT. here, which was upheld by the Supreme Court?
A: The contention of ALS and Litonjua was upheld
HELD: A loan contract is not a consensual by the Supreme Court. It was held that the contract
contract but a real contract. It is perfected only upon was perfected on September 13, 1982 and that the
the DELIVERY of the object of the contract. BPIIC contract of mutuum or commodatum is a real
misapplied Bonnevie. The contract in Bonnevie contract.
declared by this Court as a perfected consensual Q: But in this case, what kind of loan was
contract falls under the first clause of Article 1934, involved?
CC. It is an accepted promise to deliver something A: Simple loan.
by way of simple loan. A perfected consensual BPI vs CA: So again here, whether it is a
contract, as shown above, can give rise to an action commodatum or mutuum, it is perfected by delivery.
for damages. However, said contract does not Or it is a contract perfected by delivery and
constitute the real contract of loan which requires therefore a real contract. In this case, even if the
the delivery of the object of the contract for its loan contract was signed on March 13, 1981, it was
perfection and which gives rise to obligations only only perfected on September 13, 1982 when the full
on the part of the borrower. loan was released to private respondents. A
perfected loan agreement imposes reciprocal
In the present case, the loan contract between BPI,
obligations where the obligation or promise of each
on the one hand, and ALS and Litonjua, on the
party is the consideration of the other. The
other, was perfected only on September 13, 1982,
consideration for BPIIC for entering into the loan
the date of the second release of the loan.
contract is the promise of the private respondents to
Following the intentions of the parties on the
pay the monthly amortization. On the part of the
commencement of the monthly amortization, as
private respondent, the promise of BPIIC to deliver
found by the CA, ALS’s obligation to pay
the money. As mentioned in reciprocal obligations,
commenced only on October 13, 1982, a month
neither party occurs in delay if the other does not
after the perfection of the contract. A contract of comply or is not ready to comply in a proper
loan involves a reciprocal obligation, wherein the manner with what is incumbent upon him. In this
obligation or promise of each party is the case, there was no delay when they did not
consideration for that of the other. commence paying the monthly amortization on May
As averred by ALS, the promise of BPIIC to extend 1, 1981 as it was only in September 13, 1982 when
and deliver the loan is upon the consideration that petitioner fully complied with its obligation.
ALS and Litonjua shall pay the monthly amortization Again, a loan contract is not a consensual contract
commencing on May 1, 1981, one month after the but a real contract perfected only upon delivery.
supposed release of the loan. It is a basic principle And it is a contract which involves reciprocal
in reciprocal obligations that neither party incurs in obligations.
delay, if the other does not comply or is not ready to
comply in a proper manner with what is incumbent So, what happens here? If you try to borrow money
upon him. Only when a party has performed his part from a bank and let us say the bank instead of
of the contract can he demand that the other party giving you cash delivers a check, so is there a
also fulfills his own obligation and if the latter fails, simple loan already perfected? If what was
default sets in. delivered to you was a mere check, is the simple
loan already perfected? There is the delivery of the
Consequently, petitioner could only demand for the check pero it’s not the subject matter yet. When is
payment of the monthly amortization after the contract of loan perfected in that scenario?
September 13, 1982 for it was only then when it When the check has already been encashed. So,
complied with its obligation under the loan contract. mere issuance of the check does not perfect a
Therefore, in computing the amount due as of the contract of loan.
date when BPIIC extrajudicially caused the
foreclosure of the mortgage, the starting date is Now, what if the thing loaned was destroyed? The
October 13, 1982 and not May 1, 1981. thing loaned here is money. So would it extinguish
the obligation? No. Why? Genus never perishes.
Other points raised by BPIIC in connection with this Genus nunquam perit. Destruction of the thing
issue, such as the date of actual release of the loan loaned does not extinguish the obligation.
and whether ALS were the cause of the delay in the
release of the loan, are factual. Now we also have here the case of Yong Cham
Kim vs People.
CA decision was affirmed but with modification as
to the award of damages. YONG CHAN KIM vs. PEOPLE OF THE
PHILIPPINES, HON. EDGAR D. GUSTILO
Q: So why was there an issue here as to the Presiding Judge, RTC, 6th Judicial Region,
perfection of the contract? Branch 28 Iloilo City and COURT OF APPEALS
A: There was an issue here because upon the
(13th Division), SOUTHEAST ASIAN FISHERIES
perfection of the contract, it will then start the

DEVELOPMENT CENTER AQUACULTURE In order that a person can be convicted under the
DEPARTMENT (SEAFDEC) above-quoted provision, it must be proven that he
had the obligation to deliver or return the same
FACTS: Petitioner Yong Chan Kim was employed
money, good or personal property that he had
as a Researcher at the Aquaculture Department of
received. Was petitioner under obligation to return
the Southeast Asian Fisheries Development Center
the same money (cash advance) which he had
(SEAFDEC) with head station at Tigbauan,
received? We believe not.
Province of Iloilo. As Head of the Economics Unit of
the Research Division, he conducted prawn surveys Liquidation simply means the settling of
which required him to travel to various selected indebtedness. An employee, such as herein
provinces in the country where there are potentials petitioner, who liquidates a cash advance is in fact
for prawn culture. paying back his debt in the form of a loan of money
advanced to him by his employer, as per diems and
On 15 June 1982, petitioner was issued Travel allowances.
Order No. 2222 which covered his travels to
different places in Luzon from 16 June to 21 July Similarly, as stated in the assailed decision of the
1982, a period of thirty five (35) days. Under this lower court, "if the amount of the cash advance he
travel order, he received P6,438.00 as cash received is less than the amount he spent for actual
advance to defray his travel expenses. travel . . . he has the right to demand
reimbursement from his employer the amount he
Within the same period, petitioner was issued spent coming from his personal funds.
another travel order, T.O. 2268, requiring him to
travel from the Head Station at Tigbauan, Iloilo to In other words, the money advanced by either party
Roxas City from 30 June to 4 July 1982, a period of is actually a loan to the other. Hence, petitioner was
five (5) days. For this travel order, petitioner under no legal obligation to return the same cash or
received a cash advance of P495.00. money, i.e., the bills or coins, which he received
from the private respondent.
On 14 January 1983, petitioner presented both
travel orders for liquidation, submitting Travel Article 1933 and Article 1953 of the Civil Code
Expense Reports to the Accounting Section. When define the nature of a simple loan.
the Travel Expense Reports were audited, it was
discovered that there was an overlap of four (4) Art. 1933. By the contract of loan, one of the parties
days (30 June to 3 July 1982) in the two (2) travel delivers to another, either something not
orders for which petitioner collected per consumable so that the latter may use the same for
diems twice. In sum, the total amount in the form a certain time and return it, in which case the
of per diems and allowances charged and collected contract is called a commodatum; or money or
by petitioner under Travel Order No. 2222, when he other consumable thing, upon the condition that the
did not actually and physically travel as represented same amount of the same kind and quality shall be
by his liquidation papers, was P1,230.00. paid, in which case the contract is simply called a
loan or mutuum.
Petitioner was required to comment on the internal
auditor's report regarding the alleged anomalous Commodatum is essentially gratuitous.
claim for per diems. In his reply, petitioner denied Simple loan may be gratuitous or with a stipulation
the alleged anomaly, claiming that he made make- to pay interest.
up trips to compensate for the trips he failed to
undertake under T.O. 2222 because he was In commodatum the bailor retains the ownership of
recalled to the head office and given another the thing loaned, while in simple loan, ownership
assignment. passes to the borrower.
In September 1983, two (2) complaints for Estafa Art. 1953.— A person who receives a loan of
were filed against the petitioner before the money or any other fungible thing acquires the
Municipal Circuit Trial Court at Guimbal, Iloilo. ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and
ISSUE: Whether or not petitioner can be held quality.
criminally liable on the ground of failure to liquidate
her traveling expenses. NO. The ruling of the trial judge that ownership of the
cash advanced to the petitioner by private
RULING: It is undisputed that petitioner received a respondent was not transferred to the latter is
cash advance from private respondent SEAFDEC erroneous. Ownership of the money was
to defray his travel expenses under T.O. 2222. It is transferred to the petitioner.
likewise admitted that within the period covered by
T.O. 2222, petitioner was recalled to the head Since ownership of the money (cash advance) was
station in Iloilo and given another assignment which transferred to petitioner, no fiduciary relationship
was covered by T.O. 2268. The dispute arose when was created. Absent this fiduciary relationship
petitioner allegedly failed to return P1,230.00 out of between petitioner and private respondent, which is
the cash advance which he received under T.O. an essential element of the crime of estafa by
2222. For the alleged failure of petitioner to return misappropriation or conversion, petitioner could not
the amount of P1,230.00, he was charged with the have committed estafa.
crime of Estafa under Article 315, par. 1(b) of the
Revised Penal Code.

Additionally, it has been the policy of private to the latter was erroneous. Again, since what we
respondent that all cash advances not liquidated have here is a simple loan, ownership was
are to be deducted correspondingly from the salary transferred to Yong Chan.
of the employee concerned. The evidence shows
Again, it was emphasized also that there was no
that the corresponding salary deduction was made
fiduciary relationship when the cash advance was
in the case of petitioner vis-a-vis the cash advance
released to the employee. Absent this fiduciary
in question.
relationship which is an essential element of the
(Failure of bank to return the amount deposited, crime of estafa by misappropriation or conversion,
not a case of estafa) petitioner could not have committed estafa.
Q: What was the defense here of Yong Chan? And then we have the case of Spouses Tan vs
A: He said that the cash advances were actually a Villapaz.
simple loan and that there was no obligation on his
part to return the excess. SPOUSES ANTONIO and LOLITA TAN vs.
Q: What was his obligation if it does not include CARMELITO VILLAPAZ
the obligation to return the excess?
FACTS: On February 6, 1992, respondent Villapaz
A: Only to pay such (?) and not just to pay the
excess. issued a Philippine Bank of Communications
Q: So what was the ruling of the Court? (PBCom) crossed check in the amount of
A: So the Supreme Court here ruled that cash P250,000.00, payable to the order of petitioner
advances are in the form of simple loan, so there is Tony Tan. On that date, the check was deposited at
a transfer of ownership. And, being that there is a the drawee bank, PBCom Davao City branch at
transfer of ownership, Yong Chan, since there was Monteverde Avenue, to the account of petitioner
no fiduciary relationship created between him and Antonio Tan also at said bank.
the one who gave the cash advances, he cannot be
made liable since that is the basis for the liability for On November 7, 1994 respondent filed a Complaint
estafa. And also, based on the policy of the agency, for sum of money against the spouses, alleging that
SEAFDEC, in case there was no liquidation, it will on February 6, 1992, the spouses went to his place
only be deducted from the salary of Yong Chan and of business at Malita, Davao and obtained a loan of
he cannot be sued for estafa. P250,000.00, hence, his issuance of the February
Q: So was there liability here on the part of 6, 1992 PBCom crossed check which loan was to
Yong Chan? be settled interest-free in six (6) months.
A: Yes. There is a liability for him to pay but that will
only be deducted from his salary but he cannot be On the maturity date of the loan or on August 6,
held liable for estafa. 1992, petitioner Antonio Tan failed to settle the
YONG CHAN KIM vs PEOPLE: So, there is only same, and despite repeated demands, petitioners
civil liability but no criminal liability. So what do you never did, drawing Villapaz to file the complaint;
have here? A situation wherein money is released, and on account of the willful refusal of petitioners to
per diems, allowances to an employee and the honor their obligation, he suffered moral damages
employee fails to return the excess back to the in the amount of P50,000.00, among other things.
employer. The spouses denied having gone to Malita and
Now, with regard to estafa, in order for a person to having obtained a loan from respondent, alleging
be convicted for estafa, you have here Article 315, that the check was issued by respondent in Davao
par. 1 (b), it must be proven that he had the City on February 6, 1992 "in exchange for
obligation to deliver or return the money, good or equivalent cash"; they never received from
personal property that he had received. In this case, respondent any demand for payment, be it verbal or
Yong Chan had no obligation to do so. His written, respecting the alleged loan; since the
obligation was first, liquidation. Liquidation means alleged loan was one with a period payable in six
the settling of an indebtedness. An employee who months, it should have been expressly stipulated
liquidates a cash advance is in fact paying his debt upon in writing by the parties but it was not, hence,
in the form of a loan of money advanced to him by the essential requisite for the validity and
his employer, as per diems and allowances. So the enforceability of a loan is wanting; and the check is
Supreme Court emphasized the decision of the inadmissible to prove the existence of a loan for
lower court, kasi what if the cash advance received P250,000.00.
by the employee is less than the amount for actual Petitioners maintain that they did not secure a loan
travel. He can actually demand reimbursement from from respondent, insisting that they encashed in
his employer. So with that, the money that was Davao City respondent's February 6, 1992 crossed
released to the employee was in the form of loan check; in the ordinary course of business, prudence
and therefore there was no legal obligation for dictates that a contract of loan must be in writing as
petitioner to return the same cash or money which in fact the New Civil Code provides that to be
he received from the private respondent. Now when enforceable "contracts where the amount involved
we say same cash (?) here, do not confuse it with exceed[s] P500.00 must appear in writing even a
commodatum. Because what you have here is private one," hence, respondent's "self-serving"
money or consumable thing and the intention here claim does not suffice to prove the existence of a
was to transfer ownership. The ruling of the trial loan; respondent's allegation that no memorandum
judge that the ownership of the cash transfer to the in writing of the transaction was executed because
petitioner by private respondent was not transferred he and they are "kumpadres" does not inspire belief

for respondent, being a businessman himself, was convenience, not for validity. It bears emphasis that
with more reason expected to be more prudent; and at the time Villapaz delivered the crossed-check to
the mere encashment of the check is not a the petitioner spouses, Villapaz had no account
contractual transaction such as a sale or a loan whatsoever with them. Spouses' contention that
which ordinarily requires a receipt and that explains they did not obtain any loan but merely exchanged
why they did not issue a receipt when they the latter's check for cash is not borne by any
encashed the check of respondent. evidence.
Petitioners furthermore maintain that they were That apart from the check, no written proof of the
financially stable on February 6, 1992 as shown by grant of the loan was executed was credibly
the entries of their bank passbook hence, there was explained by respondent when he declared that
no reason for them to go to a distant place like petitioners' son being his godson, he, out of trust
Malita to borrow money. and respect, believed that the crossed check
sufficed to prove their transaction.
The lower Court gave four reasons for ruling out a
loan: As for petitioners' reliance on Art. 1358[22] of the
Civil Code, the same is misplaced for the
(a) the defense of spouses Tan that they did not go requirement that contracts where the amount
to Villapaz's place on February 6, 1992, date the involved exceeds P500.00 must appear in writing is
check was given to them; only for convenience.
(b) Spouses Tan could not have borrowed money At all events, a check, the entries of which are no
on that date because from January to March, 1992, doubt in writing, could prove a loan transaction.
they had an average daily deposit of P700,000 and
on February 6, 1992, they had P1,211,400.64 in the Q: First, what was the contract entered into?
bank, hence, they had "surely no reason nor logic" A: Loan.
to borrow money from Villapaz; Q: So it was a loan, specifically what kind?
A: Mutuum.
(c) the alleged loan was not reduced in writing and Q: So with that what was the other issue that
the check could not be a competent evidence of was needed to be addressed considering that
loan. what we have here was a simple loan or
mutuum?
ISSUE: Whether or not the transaction in dispute A: W/N the contract of mutuum should be reduced
was a contract of loan and not a mere matter of into writing to be enforceable. The Court here ruled
check encashment as found by the trial court. YES. in the negative ruling that in a contract of loan, it is
not a consensual contract but rather it is a real
HELD: The four-fold reasoning cannot be contract perfected upon delivery. So, form is not
sustained. They are faulty and do not accord either necessary and that it is already perfected upon
with law or ordinary conduct of men. For one thing, delivery of the same. Furthermore, it was ruled by
the first two given reasons partake more of alibi and the Court that a contract is not one of those
speculation, hence, deserve scant consideration. enforceable contracts that need to be reduced into
For another, the last two miss the applicable writing to be enforceable.
provisions of law. Q: Now how about with regard to the defense
that there was no promissory note issued in
The existence of a contract of loan cannot be relation to that release of the check? How was
denied merely because it is not reduced in writing. the check considered here? How was the loan
Surely, there can be a verbal loan. Contracts are transaction proven?
binding between the parties, whether oral or written. A: Through the mere existence of the check.
The law is explicit that contracts shall be obligatory SPOUSES TAN vs VILLAPAZ: The mere
in whatever form they may have been entered into,
existence of the check would already show that
provided all the essential requisites for their validity
there is already a contract of loan. You already
are present. A loan (simple loan or mutuum) exists
have negotiable instruments. Wala pa kayo nag
when a person receives a loan of money or any
abot ng section 1 but tapos na kayo sa functions?
other fungible thing and acquires the ownership
One of the functions of a negotiable instrument is
thereof. He is bound to pay to the creditor the equal
that it is an evidence of indebtedness. So that was
amount of the same kind and quality.
taken into consideration here. It was raised as an
Contracts are perfected by mere consent, and from issue that number 1, there was nothing in writing to
that moment the parties are bound not only to the show that naghiram ng pera. What they have was
fulfillment of what has been expressly stipulated but only the check. So they were asking that there must
also to all the consequences which, according to be a promissory note to make the contract
their nature, maybe in keeping with good faith, enforceable. First, it was not necessary because
usage and law. number 1, the contract involved here was not one of
those mentioned under Article 1403 (2), statute of
frauds, for the contract to be enforceable. Second,
as mentioned, again, a contract of loan is perfected
The lower Court misplaced its reliance on Article
by delivery. When the proceeds of the check was
1358 of the Civil Code providing that to be
released, there was already a perfected contract of
enforceable, contracts where the amount involved
loan. And third, in relation to your negotiable
exceed five hundred pesos, must appear in writing.
instruments, there was no necessity to issue a
Such requirement, it has been held, is only for

separate paper contract to show that a contract of the currency which is legal tender in the
loan was perfected. Because the mere issuance of Philippines.
the check could prove that there was a loan The delivery of promissory notes payable to
transaction. Again, one of the functions of a order, or bills of exchange or other mercantile
negotiable instrument as in this case a check, is documents shall produce the effect of payment
that it is an evidence of indebtedness. only when they have been cashed, or when
through the fault of the creditor they have been
Notice in this case it was in Digos, Davao del Sur impaired.
and I think this was a bank here in Davao, PBCOM
Monteverde Branch. And I think it was among In the meantime, the action derived from the
friends because there was an allegation that the original obligation shall be held in the
check was not merely, he did not borrow money abeyance. (1170)
because he has money in the bank. That does not
mean, as held by the Supreme Court, that it is Art. 1250. In case an extraordinary inflation or
impossible to believe that if a businessman has deflation of the currency stipulated should
such an outstanding balance in his account, he supervene, the value of the currency at the time
would have no need to borrow an extra amount. So of the establishment of the obligation shall be
no defense in that instance. the basis of payment, unless there is an
agreement to the contrary. (n)
Now, Article 1954.
What is 1249 of the Civil Code? Payment. Legal
Art. 1954. A contract whereby one person tender, in the currency stipulated or legal tender in
transfers the ownership of non-fungible things the Philippines. Mercantile checks, mercantile
to another with the obligation on the part of the documents, delivery thereof shall not be considered
latter to give things of the same kind, quantity, as payment or performance until the same has
and quality shall be considered a barter. (n) been encashed or impaired through the fault of the
debtor. In the meantime, demandability of the
Alright, distinctions between barter or exchange and obligation may be held in abeyance.
mutuum.
1250, inflation, extraordinary inflation or deflation.
Art. 1638. By the contract of barter or exchange one That is also taken into consideration here since
of the parties binds himself to give one thing in what you have as a subject matter is money or
consideration of the other's promise to give another consumable thing. If the subject of mutuum is
thing. money, payment must be made in the currency
stipulated. In case of extraordinary inflation or
Mutuum, commodatum, barter, they are different deflation, the basis of the payment shall be the
contracts. value of the currency at the time of the creation of
COMMODATUM/MUTUUM BARTER the obligation. Distinguish it if the subject matter is a
In mutuum the subject The subject matter is fungible thing. Obligation is to pay the lender
matter is money or non-fungible or non- another thing of the same kind, quantity and quality.
consumable things. In consumable. If impossible to do so, pay its value at the time of
commodatum as a general the perfection of the loan. In case it is impossible to
rule, non-consumable. deliver the same kind, the value at the time of the
In commodatum, the bailee The equivalent thing perfection of the loan shall be paid.
is bound to return the is given in return for
identical thing borrowed. In what has been And then we have Article 1956. Very short, but
mutuum, equivalent of the received. actually, most of our cases and discussion revolve
thing that was loaned. within this provision in relation to interest.
Mutuum may be gratuitous Barter is always
and commodatum is onerous. Art. 1956. No interest shall be due unless it has
essentially gratuitous. been expressly stipulated in writing. (1755a)
Now, if you take a look at that, we could say that

Art. 1955. The obligation of a person who the following are requisites for interest:
borrows money shall be governed by the
1. It must be expressly stipulated; and
provisions of Articles 1249 and 1250 of this
2. It must be in writing.
Code.
It is not enough that it is expressly stipulated, it
If what was loaned is a fungible thing other than
must also be in writing. And there is third requisite
money, the debtor owes another thing of the
which is mentioned in the discussion, that the
same kind, quantity and quality, even if it
interest must be lawful. But, considered that the
should change in value. In case it is impossible
usury law has already been suspended, then this
to deliver the same kind, its value at the time of
requisite that interest must be lawful is likewise not
the perfection of the loan shall be paid. (1754a)
necessary as of this time.
Art. 1249. The payment of debts in money shall Now, with regard to payment of interest in relation
be made in the currency stipulated, and if it is to 1956, considering this is within the chapter on
not possible to deliver such currency, then in mutuum, therefore the requirement for the express
stipulation in writing of interest, is only required if

interest is demanded subject of a simple loan or 6% per annum in accordance with Art. 2209 of the
mutuum. Civil Code. Indeed, the monetary judgment in favor
of private respondent does not involve a loan or
Now, contracting parties may stipulate freely on any forbearance of money, hence the proper imposable
adjustment of interest rate because again, usury rate of interest is six (6%) per cent.
law has already been suspended. However, as
most probably you have already learned in your Therefore, the proper rate of interest referred to in
obligations and contracts, the law does not the judgment under execution is only 6%. This
authorize the increase of interest rate by one party interest shall be computed from the time of the filing
without the other party’s consent and any change of the complaint considering that the amount
must be mutually agreed by the parties. adjudged (P98,691.90) can be established with
reasonable certainty. Said amount being merely the
Now, with regard to interest, in the cases that you uncollected balance of the purchase price covered
have read and you will read, you will always by the 23 checks encashed and appropriated by
encounter this term, forbearance. Ibarrola's agents. However, once the judgment
Q: What do you mean by forbearance? becomes final and executory, the "interim period
from the finality of judgment awarding a monetary
A: Forbearance is a loan. claim and until payment thereof, is deemed to be
equivalent to a forbearance of credit."
What happened in the case of PNB vs
IBARROLA? *6% from filing of complaint until full payment before
finality of judgment.
PNB VS. CA AND IBARROLA
*12% from finality of judgment.
FACTS: Province of Isabela issued several checks
drawn against its account with PNB (P) in favor of Q: Now first, before you go to the issue on 6%
Lyndon Pharmaceuticals Laboratories, a business or 12%, is the requirement in 1956 applicable in
operated by Ibarrola (R), as payments for the this case? Is it required here that the stipulated
purchase of medicines. interest be in writing?
A: No.
The checks were delivered to R’s agents who Q: Why not? What was the basis for the claim
turned them over to R, except 23 checks amounting for interest? It’s clear that there in entitlement
to P98k. Due to failure to receive full amount, R for interest, the issue was whether 6% or 12 %.
filed case against P. But why was there a demand for payment of
interest in the first place?
Trial Court, CA and SC ordered PNB to pay; A: There is a demand for payment of interest in the
however, all 3 courts failed to specify the legal rate first place because of the failure of the Province of
of interest – 6% or 12%. Isabela to pay the balance of P98,691 to Ibarrola.
Q: Would that be considered as a forbearance
ISSUE: WoN the rate to be used is 6%. of money? What is forbearance? In this case,
how was it defined, forbearance of money?
What is involved in forbearance?
HELD: YES. This case does not involve a loan, A: Money.
forbearance of money or judgment involving a loan Q: Why would it be relevant that the transaction
or forbearance of money as it arose from a contract herein involves forbearance? When do you
of sale whereby R did not receive full payment for apply 6%, when do you apply 12%?
her merchandise. A: The 6% is applicable if it arises from a contract of
sale just like in this case.
When an obligation arises “from a contract of Q: So only for contracts of sale? When do you
purchase and sale and not from a contract of loan apply the 12%?
or mutuum,” the applicable rate is 6% per annum as A: The 12% is applied if the obligation arises from a
provided in Art. 2209 of the NCC and not the rate of forbearance of money or a contract of loan.
12% per annum as provided in (CB) Cir. No. 416. Q: So in this case, what is the applicable
interest rate?
The rate of 12% interest referred to in Cir. 416 A: The applicable interest rate in this case is 6%
applies only to: Loan or forbearance of money, or to because it arises from a contract of sale wherein it
cases where money is transferred from one person was due to the medicines purchased by the
to another and the obligation to return the same or Province of Isabela. And according to the Supreme
a portion thereof is adjudged. Court, 6% is applicable, aside from the obligation
arising from a contract of sale, because the
Any other monetary judgment which does not judgment here is not yet final so the 6% shall be
involve or which has nothing to do with loans or computed from the date of the filing of the complaint
forbearance of any money, goods or credit does not until satisfaction of such before final judgment. And
fall within its coverage for such imposition is not so the proper rate of interest here in the judgment
within the ambit of the authority granted to the rendered by the court is 6%. However, the Supreme
Central Bank. Court here also cited the case of Eastern Shipping.
According to the Supreme Court that, if the
When an obligation not constituting a loan or judgment becomes final, the interim period from the
forbearance of money is breached then an interest finality of the judgment which awards the money
on the amount of damages awarded may be claim until full payment of such would be
imposed at the discretion of the court at the rate of considered as a forbearance of credit or treated as
a loan. Of which the 12% shall be applicable.

PNB vs IBARROLA: What was the action here? It downpayment in case of breach, they cant be liable
was actually an action for damages. The interest for legal interest as well.
was imposed based on the action for damages. So
there was no contract of loan involved here and RTC ruled saying that the Spouses are entitled to
therefore 1956 is not an applicable provision. For the interest but only at 6% per annum and also
the demand of interest here, it is not required that it entitled to atty’s fees. On appeal, CA said that the
must be stipulated in writing. Now, considering that, issue to resolve is whether it is proper to impose
here you do not have an obligation constituting a interest for an obligation that does not involve a
loan or forbearance of money, an interest on the loan or forbearance of money in the absence of
amount of damages awarded may be imposed at stipulation of the parties. CA affirmed RTC.
the discretion of the court at the rate of 6%. The That interest should start on date of formal demand
case at bench does not involve a loan, forbearance by Spouses to return the money not when contract
of money, or judgment involving a loan or was executed as stated by the RTC; That Arias not
forbearance of money as it arose from a contract of be solidarily liable as he acted as agent only and
sale. Forbearance is considered as a contractual did not expressly bind himself or exceeded his
obligation of a lender or creditor to refrain during a authority.
given period of time from requiring debtor/borrower
to repay the loan or debt then due or payable. The Estores contends: Not bound to pay interest
rate of 12% only applies to such loan or because the deed only provided for the return of the
forbearance of money or cases where money is downpayment in case of failure to comply with her
transferred from one person to another and the obligations; That atty fees not proper because both
obligation is to return the same or a portion thereof RTC and CA sustained her contention that 12%
is adjudged. Once the judgment becomes final and interest was uncalled for so it showed that Spouses
executory, the interim period from finality of did not win.
judgment awarding monetary claims until payment
Spouses contend: It is only fair that interest be
from that time will now be considered as a
imposed because Estores failed to return the
forbearance of credit wherein the 12% p.a. should
amount upon demand and used the money for her
be imposed and again would be computed from the
benefit.
time the judgment became final and executory until
fully satisfied. Estores failed to relocate the house outside the
perimeter of the subject lot and complete the
So here, it was the 6% from filing of the complaint
necessary documents.
until its full payment before finality of judgment. And
then, if the amount adjudged remains unpaid, the As to the fees, they claim that they were forced to
interest shall be paid from the time the judgment litigate when Estores unjustly held the amount.
became final and executory, in this case on
November 1993 until fully satisfied. ISSUES: Is the imposition of interest and attorney’s
fees is proper? YES
Now, also another case dealing with forbearance is
the case of Estores vs Supangan. Interest based on Art 2209 of CC (6%) or under
Central Bank Circular 416 (12%)? 12%
HERMOJINA ESTORES VS. SPOUSES ARTURO
AND LAURA SUPANGAN HELD: Interest may be imposed even in the
absence of stipulation in the contract.
FACTS: In Oct. 1993, Hermojina Estores and
Spouses Supangan entered into a Conditional Article 2210 of the Civil Code expressly provides
Deed of Sale where Estores offered to sell, and that “interest may, in the discretion of the court, be
Spouses offered to buy a parcel of land in Cavite for allowed upon damages awarded for breach of
P4.7M. contract.”
After almost 7 years and despite the payment of Estores failed on her obligations despite demand.
P3.5M by the Spouses, Estores still failed to comply She admitted that the conditions were not fulfilled
with her obligation to handle the peaceful transfer of and was willing to return the full amount of P3.5M
ownership as stated in 5 provisions in the contract. but hasn’t done so she is now in default.
In a letter in 2000, Spouses demanded the return of The interest at the rate of 12% is applicable in
the amount within 15 days from receipt. In reply, the instant case.
Estores promised to return the same within 120 Gen Rule: the applicable interest rate shall be
days. Spouses agreed but imposed an interest of computed in accordance with the stipulation of the
12% annually. Estores still failed despite demands. parties
Spouses filed a complaint with the RTC against Exc: if no stipulation, applicable rate of interest shall
Estores and Roberto Arias (allegedly acted as be 12% per annum when obligation arises out of a
Estores’ agent). loan or forbearance of money, goods or credits. In
In Answer, Estores said they were willing to pay the other cases, it shall be 6%
principal amount but without the interest as it was In this case, no stipulation was made.
not agreed upon. That since the Conditional Deed
of Sale provided only for the return of the Contract involved in this case is not a loan but a
Conditional Deed of Sale.

No question that the obligations were not met Forbearance of money, goods or credits should
and the return of money not made therefore refer to arrangements other than loan
agreements, where a person acquiesces to the
Even if transaction was a Conditional Deed of temporary use of his money, goods or credits
Sale, the stipulation governing the return of the pending happening of certain events or fulfillment of
money can be considered as a forbearance of certain conditions.
money which requires 12% interest Q: So again, why was the 12% imposed here
and not the 6%? Even if there was no loan, even
In Crismina Garments, Inc. v. Court of Appeals, if it was a sale, why was it that 12% was the rate
Forbearance-- “contractual obligation of lender or imposed?
creditor to refrain during a given period of time, from A: Because here, the respondent agreed that the
requiring the borrower or debtor to repay a loan or temporary use of his money pending the happening
debt then due and payable.” of a condition.
In such case, “forbearance of money, goods or ESTORES vs SUPANGAN: And even if all the
credits” will have no distinct definition from a loan. conditions were complied with, there was still
However, the phrase “forbearance of money, goods refusal to return the money as stipulated in the said
or credits” is meant to have a separate meaning deed. The unwarranted withholding again resulted
from a loan, otherwise there would have been no to liability for interest since it is now considered as a
need to add that phrase as a loan is already forbearance of money.
sufficiently defined in the Civil Code So here the Supreme Court noted the previous
Forbearance of money, goods or credits should definitions of forbearance as in the case of PNB vs
therefore refer to arrangements other than loan Ibarrola as a contractual obligation of lender or
agreements, where a person acquiesces to the refrain during a given period of time from requiring
temporary use of his money, goods or credits the borrower or debtor to repay a loan or debt then
pending happening of certain events or fulfillment of due and payable. Note that in mutuum, you give the
certain conditions. bailee a period to pay. You give time to pay the loan
already due and payable. Before that period, you
Estores’ unwarranted withholding of the money have no right to demand for the payment of the
amounts to forbearance of money which can be return of whatever has been borrowed.
considered as an involuntary loan so rate is 12%
starting in Sept. 2000 But in this case of Supangan and in subsequent
cases as well, the Supreme Court has already held
The award of attorney’s fees is warranted. that the phrase forbearance of money, would have
a separate meaning from a loan. Otherwise there
No doubt that the Spouses were forced to litigate to would have been no need to add that phrase as a
protect their interest, i.e., to recover their loan is already sufficiently defined in the Civil Code
money. The amount of P50,000.00 is more Forbearance of money, goods or credits should
appropriate. therefore refer to arrangements other than loan
agreements, where a person acquiesces to the
Q: How was it defined here, the term
forbearance of money? temporary use of his money, goods or credits
A: The Supreme Court here defined a forbearance pending happening of certain events or fulfillment of
of money as a contractual obligation of the lender or certain conditions.
creditor to refrain during a period of time to require
In this case, respondent spouses parted with their
the debtor to repay the loan.
Q: So if there was a forbearance of money, it money even before the conditions were fulfilled.
should be 12%? They have allowed or granted forbearance to
A: Yes, petitioner to use their money pending fulfillment of
Q: What was the rate imposed here? the conditions. They were deprived for the use of
A: it was 12%. their money pending fulfillment of conditions. And
Q: But wasn’t it that the basis here for interest when those conditions were breached, they are
was the breach of that conditional deed of sale? entitled not only to the principal amount but also to
Isn’t it that in the case of Ibarrola, it was also a the compensation for the use of their money. And
deed of sale, the rate imposed there was 6% and the compensation for the use of their money absent
the 12% was only from the finality of judgment? any stipulation should be the same rate of legal
A: The Supreme Court here considered the interest applicable to a loan since the use or
stipulation in the return of the downpayment as a
deprivation is similar to a loan. Petitioners
forbearance of money.
Q: In other words, even if there was no loan, unwarranted withholding of the money which
there was no lender, as you have mentioned in rightfully pertains to spouses amounts to
the definition and also the same in the case of forbearance of money which can be considered as
Ibarrola was not exactly the same definition a voluntary loan and therefore the applicable rate of
mentioned here by the Supreme Court. In fact it interest is 12% p.a.
expounded on the definition. What was the
definition here? Notice the difference here in the case of PNB vs
A: It was said that the phrase forbearance of money Ibarrola and the case if Supangan. In the latter case
goods or credits will have no distinct definition from of Supangan, the definition of the term forbearance
a loan otherwise there would have been no need to of money was expounded. Again, it’s not just loan,
add that phrase as a loan is already sufficiently but the fact that you allow another person to use
defined in the Civil Code your money in the meantime. So even if the basis

here was the deed of conditional sale, again the million as a requirement for the loan. Pan Pacific
rate that was imposed was 12%. also posted a surety bond. The P1.8 million was
released directly to laborers and suppliers and not a
November 23, 2015 (Jala) single centavo was given to Pan Pacific.
Still under interest for Mutuum. Again we have Pan Pacific made several demands for payment on
emphasized last time that under Art. 1956, no the price adjustment but respondent merely kept on
interest shall be due unless it has been expressly promising to release the same. Meanwhile, the P1.8
stipulated in writing. In 1956, the requirements million loan matured and respondent demanded
indicated therein apply only to a simple loan of payment plus interest and penalty. Pan Pacific
mutuum. The requisites for interest are it must be refused to pay the loan. Pan Pacific insisted that it
expressly stipulated and it must be in writing. The would not have incurred the loan if respondent
discussion by de Leon in his book, he noted that the released the price adjustment on time. Pan Pacific
third requisite, interest must be lawful is not alleged that the promissory note did not express the
required because of the suspension of the Usury true agreement of the parties. Pan Pacific
Law. maintained that the P1.8 million was to be
considered as an advance payment on the price
Also last time, we emphasized that we have in adjustment. Therefore, there was really no
obligations and contracts, I am pretty sure you had consideration for the promissory note; hence, it is
your discussion in obligation and contract that null and void from the beginning.
contracting parties may stipulate on any
adjustment on the interest rate of a loan or Respondent stood firm that it would not release any
forbearance of money. As to what is forbearance of amount of the price adjustment to Pan Pacific but it
money, we have already discussed the definition in would offset the price adjustment with Pan Pacifics
the earlier cases such as Ibarrola wherein the outstanding balance of P3,226,186.01, representing
definition was expounded in the subsequent cases the loan, interests, penalties and collection charges.
such as that of Estores
Pan Pacific refused the offsetting but agreed to
Now, regarding interest rate adjustments, the law receive the reduced amount of P3,730,957.07 as
does not authorize increase of interest rate by one recommended by the TCGI Engineers for the
party without the other party’s consent kasi any purpose of extrajudicial settlement, less P1.8 million
change must be mutually agreed upon by the and P414,942 as advance payments.
parties. But we have this case of Pan Pacific vs.
Equitable … On 6 May 1994, petitioners filed a complaint for
declaration of nullity/annulment of the promissory
PAN PACIFIC vs EQUITABLE PCI BANK note, sum of money, and damages against the
respondent with the RTC. On 12 April 1999, the
FACTS: Pan Pacific is engaged in contracting RTC declared the promissory note as null and void
mechanical works on airconditioning system. They and ordered Pan Pacific to
entered into a contract of mechanical works with pay P1,389,111.10 REPRESENTING UNPAID
respondent for the total consideration for the whole BALANCE OF THE ADJUSTMENT PRICE, AND
project was P23,311,410.30. The Contract INTEREST AT THE LEGAL RATE OF TWELVE
stipulated that Pan Pacific shall be entitled to a (12%) PERCENT PER ANNUM
price adjustment in case of increase in labor costs
and prices of materials under paragraphs 70.1 and The CA removed the deduction
70.2 of the General Conditions for the Construction ofP126,903.97 because it represented the final
of PCIB Tower II Extension. payment on the basic contract price. Hence, the CA
ordered respondent to pay P1,516,015.07 to
Pan Pacific commenced the mechanical works in petitioners, with interest at the legal rate of 12% per
the project site. In 1990, labor costs and prices of annum starting 6 May 1994.
materials escalated. On 5 April 1991, in accordance
with the escalation clause, Pan Pacific claimed a On MR he CA increased the loan rate to 18%, rate
price adjustment of P5,165,945.52. Respondents of equitable PCI.
asked for a reduction in the price adjustment. To
show goodwill, Pan Pacific reduced the price ISSUE: Whether the CA, in awarding the unpaid
adjustment toP4,858,548.67. balance of the price adjustment, erred in fixing the
interest rate at 12% instead of the 18% bank
On 28 April 1992, respondent asked that the price lending rate. YES
adjustment should be pegged at P3,730,957.07,
based on the DOLE Labor Indices and the General HELD: The CA went beyond the intent of the
Conditions of their contract. parties by requiring respondent to give its consent
to the imposition of interest before petitioners can
Due to the extraordinary increases in the costs of hold respondent liable for interest at the current
labor and materials, Pan Pacific’s operational bank lending rate. This is erroneous. A review of
capital was becoming inadequate for the project. Section 2.6 of the Agreement and Section 60.10 of
However, respondent withheld the payment of the the General Conditions shows that the consent of
price adjustment under the escalation clause the respondent is not needed for the imposition of
despite Pan Pacifics repeated demands. interest at the current bank lending rate, which
occurs upon any delay in payment.
Instead, respondent offered Pan Pacific a loan
of P1.8 million. Pan Pacific was constrained to Article 1956 of the Civil Code, which refers to
execute a promissory note in the amount of P1.8 monetary interest, specifically mandates that no

interest shall be due unless it has been expressly So here, it was agreed by the parties that consent
stipulated in writing. Therefore, payment of of the repondent is not needed for the imposition of
monetary interest is allowed only if: interest at the current bank lending rate which
(1) there was an express stipulation for the payment occurs upon any delay in payment.
of interest; and
(2) the agreement for the payment of interest was Here, in case of default or delay, the consent of the
reduced in writing. The concurrence of the two respondent is not needed in order to impose
conditions is required for the payment of monetary interest at the current bank lending rate. This is not
interest. similar to what I have mentioned earlier that the law
does not authorize increase of interest rate without
The consent of the respondent is not needed in the other party’s consent because sometimes bank
order to impose interest at the current bank lending would include that. In Obligations and contracts, as
rate. what was discussed to you, that just because there
is a stipulation such as increase in the lending rate
Under Article 2209 of the Civil Code, the valid na yun just because you agreed that your
appropriate measure for damages in case of delay consent was not necessary. That has already been
in discharging an obligation consisting of the invalidated. That obligations has been considered
payment of a sum of money is the payment of void. But here it is different because the imposition
penalty interest at the rate agreed upon in the of interest is based on delay and 2209 of the Civil
contract of the parties. In the absence of a Code merely provides for interest in case of delay.
stipulation of a particular rate of penalty interest, Under Article 2209 of the Civil Code merely
payment of additional interest at a rate equal to the provides for interest in case of delay. The
regular monetary interest becomes due and appropriate measure for damages in case of delay
payable. Finally, if no regular interest had been in discharging an obligation consisting of the
agreed upon by the contracting parties, then the payment of a sum of money is the payment of
damages payable will consist of payment of legal penalty interest at the rate agreed upon in the
interest which is 6%, or in the case of loans or contract of the parties. Clearly in their agreement,
forbearances of money, 12% per annum. It is only there was no specific interest rate. What they
when the parties to a contract have failed to fix the mentioned was the current bank lending rate. In
rate of interest or when such amount is the absence of a stipulation of a particular rate of
unwarranted that the Court will apply the 12% penalty interest, payment of additional interest at a
interest per annum on a loan or forbearance of rate equal to the regular monetary interest becomes
money. due and payable. So there was an issue, ok, there
is liability based on delay. So what should it be, 18,
The written agreement entered into between 12 or 6? Because it was clear in their agreement
petitioners and respondent provides for an interest that the current bank lending rate on the interest
at the current bank lending rate in case of delay in rate imposed they had to consider what was the
payment and the promissory note charged an current bank lending rate that time and they saw
interest of 18%. that on the promissory note.
To prove petitioners entitlement to the 18% bank The promissory note, although it was considered
lending rate of interest, petitioners presented the void because it did not express the true intention of
promissory note prepared by respondent bank the parties, is substantial proof that the bank
itself. This promissory note, although declared void lending rate at that time of default was 18% per
by the lower courts because it did not express the annum.
real intention of the parties, is substantial proof that
the bank lending rate at the time of default was 18% Now we will be talking about interest, what are that
per annum. Absent any evidence of fraud, undue requisites and what are the effects in a contract. But
influence or any vice of consent exercised by what is really an interest?
petitioners against the respondent, the interest rate
agreed upon is binding on them. What do we mean by interest?
Why would there be a need to increase the principal
What was the basis of the 18%? sum?
Was there any liability for interest in this case?
Was there any issue with regard to the principal PRISMA CONSTRUCTION vs. MENCHAVEZ
amount?
Was it proper to impose an interest rate? FACTS: December 8, 1993, Pantaleon, President
How do you reconcile their agreement with that of and Chairman of the Board of PRISMA, obtained a
what is required under obligations and contracts? P1M loan from the respondent, with monthly
Was their agreement upheld by the Supreme interest of P40,000.00 payable for 6 months, or a
Court? Why was it upheld? total obligation of P1,240,000.00 payable within 6
What is the reason interest was being imposed months.
here?
What is the basis (legal) of interest based on delay? To secure the payment of the loan, Pantaleon
What is the interest to be imposed? issued a promissory. Pantaleon signed the
promissory note in his personal capacity and as
Even if the promissory note was void, the statement duly authorized by the Board of Directors of
there, 18% was considered as evidence. The PRISMA. The petitioners failed to completely pay
promissory note was used as an evidence to prove the loan within the 6-month period.
that the bank lending rate was 18%.
As of January 4, 1997, respondent found that the
petitioners still had an outstanding balance of

P1,364,151.00, to which respondent applied a 4% payment of interest; and (2) the agreement for the
monthly interest. payment of interest was reduced in writing. The
concurrence of the two conditions is required for the
On August 28, 1997, respondent filed a complaint payment of interest at a stipulated rate. The
for sum of money to enforce the unpaid balance, collection of interest without any stipulation in
plus 4% monthly interest. The petitioners admitted writing is prohibited by law.
the loan of P1,240,000.00, but denied the
stipulation on the 4% monthly interest, arguing that The interest of P40,000.00 per month corresponds
the interest was not provided in the promissory only to the six-month period of the loan, or from
note. Pantaleon also denied that he made himself January 8, 1994 to June 8, 1994, as agreed upon
personally liable and that he made representations by the parties in the promissory note. Thereafter,
that the loan would be repaid within six (6) months. the interest on the loan should be at the legal
interest rate of 12% per annum.
RTC found that the respondent issued a check for
P1M in favor of the petitioners for a loan that would When the obligation is breached, and it consists in
earn an interest of 4% or P40,000.00 per month, or the payment of a sum of money, i.e., a loan or
a total of P240,000.00 for a 6-month period. RTC forbearance of money, the interest due should be
ordered the petitioners to jointly and severally pay that which may have been stipulated in writing.
the respondent the amount of P3,526,117.00 plus Furthermore, the interest due shall itself earn legal
4% per month interest from February 11, 1999 until interest from the time it is judicially demanded. In
fully paid. the absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default,
Petitioners appealed to CA insisting that there was i.e., from judicial or extrajudicial demand under and
no express stipulation on the 4% monthly interest. subject to the provisions of Article 1169 of the Civil
CA favored respondent but noted that the interest of Code.
4% per month, or 48% per annum, was
unreasonable and should be reduced to 12% per The facts show that the parties agreed to the
annum. MR denied hence this petition. payment of a specific sum of money of P40,000.00
per month for six months, not to a 4% rate of
ISSUE: Whether the parties agreed to the 4% interest payable within a 6-month period.
monthly interest on the loan. If so, does the rate of
interest apply to the 6-month payment period only No issue on the excessiveness of the stipulated
or until full payment of the loan? amount of P40,000.00 per month was ever put in
issue by the petitioners; they only assailed the
RULING: Interest due should be stipulated in application of a 4% interest rate, since it was not
writing; otherwise, 12% per annum APPLIES. agreed upon.
Obligations arising from contracts have the force of It is a familiar doctrine in obligations and contracts
law between the contracting parties and should be that the parties are bound by the stipulations,
complied with in good faith. When the terms of a clauses, terms and conditions they have agreed to,
contract are clear and leave no doubt as to the which is the law between them, the only limitation
intention of the contracting parties, the literal being that these stipulations, clauses, terms and
meaning of its stipulations governs. Courts have no conditions are not contrary to law, morals, public
authority to alter the contract by construction or to order or public policy. The payment of the specific
make a new contract for the parties; a court’s duty sum of money of P40,000.00 per month was
is confined to the interpretation of the contract the voluntarily agreed upon by the petitioners and the
parties made for themselves without regard to its respondent. There is nothing from the records and,
wisdom or folly, as the court cannot supply material in fact, there is no allegation showing that
stipulations or read into the contract words the petitioners were victims of fraud when they entered
contract does not contain. It is only when the into the agreement with the respondent.
contract is vague and ambiguous that courts are
permitted to resort to the interpretation of its terms Therefore, as agreed by the parties, the loan of
to determine the parties’ intent. P1M shall earn P40,000.00 per month for a period
of 6 months, for a total principal and interest
In the present case, the respondent issued a check amount of P1,240,000.00. Thereafter, interest at the
for P1M. In turn, Pantaleon, in his personal capacity rate of 12% per annum shall apply. The amounts
and as authorized by the Board, executed the already paid by the petitioners during the pendency
promissory note. Thus, the P1M loan shall be of the suit, amounting toP1,228,772.00 as of
payable within 6 months. The loan shall earn an February 12, 1999, should be deducted from the
interest of P40,000.00 per month, for a total total amount due, computed as indicated above.
obligation of P1,240,000.00 for the six-month We remand the case to the trial court for the actual
period. We note that this agreed sum can be computation of the total amount due.
computed at 4% interest per month, but no such
rate of interest was stipulated in the promissory Did it comply with article 1956? Yes
note; rather a fixed sum equivalent to this rate was So what is the issue here? Application of 4%
agreed upon. Why did the SC apply 12%
The 4% to be applied to the 6-month period, can we
Article 1956 of the Civil Code specifically mandates say that it is excessive?
that “no interest shall be due unless it has been
expressly stipulated in writing.” The payment of Here, while there was a stipulated interest at 40
interest in loans or forbearance of money is allowed thousand per month for a 6-month period, the
only if: (1) there was an express stipulation for the Supreme Court ruled that no such rate of interest

was stipulated in the promissory note. Rather, it interest ceilings prescribed by the Usury Law.
was a fixed sum equivalent to the rate that was Petitioners add that respondents were in pari
agreed upon, again only for that 6-month period. So delicto since they agreed on the stipulated interest
with that stipulation, there is compliance of the rates of 7% and 5% per month. They further aver
requirement under 1956. they honestly believed that the interest rates they
imposed on respondents’ loans were not usurious.
However, as to the interest to be imposed beyond
the 6-month period, the Supreme Court held that it ISSUE:Whether or not the original stipulated
was an interest of loan, the legal interest should be interest rates of 7% and 5%, equivalent to 84% and
12% per annum. 60% per annum, are unconscionable
As to whether the 4% per month is excessive, the RULING: Yes. The stipulated interest rates of 7%
Supreme Court held that this was not held that no and 5% per month imposed on respondents’ loans
issue on the excessiveness of the stipulated must be equitably reduced to 1% per month or 12%
amount of P40,000.00 per month was ever put in per annum. We need not unsettle the principle we
issue by the petitioners they only assailed the had affirmed in a plethora of cases that stipulated
application of a 4% interest rate, since it was not interest rates of 3% per month and higher are
agreed upon. excessive, iniquitous, unconscionable and
exorbitant. Such stipulations are void for being
What is the effect if deemed to excessive? Reduce contrary to morals, if not against the law. While C.B.
to what extent? Circular No. 905-82, which took effect on January 1,
1983, effectively removed the ceiling on interest
CHUA vs. TIMAN rates for both secured and unsecured loans,
regardless of maturity,nothing in the said circular
FACTS:In February and March 1999, petitioners could possibly be read as granting carte
Salvador and Violeta Chua granted respondents blanche authority to lenders to raise interest rates to
Rodrigo, Ma. Lynn and Lydia Timan the following levels which would either enslave their borrowers or
loans: a) P100,000; b) P200,000; c) P150,000; lead to a hemorrhaging of their assets.
d) P107,000; e) P200,000; and f) P107,000. These
loans were evidenced by promissory notes with Petitioners cannot also raise the defenses of in pari
interest of 7% per month, which was later reduced delicto and good faith. The defense of in pari
to 5% per month. delicto was not raised in the RTC, hence, such an
issue cannot be raised for the first time on appeal.
Respondents paid the loans initially at 7% interest The defense of good faith must also fail because
rate per month until September 1999 and then at such an issue is a question of factwhich may not be
5% interest rate per month from October to properly raised in a petition for review under Rule
December 1999. Sometime in March 2000, 45 of the Rules of Civil Procedure which allows only
respondents offered to pay the principal amount of questions of law.
the loans through a Philippine National Bank
manager’s check worth P764,000, but petitioners As well set forth in Medel:
refused to accept the same insisting that the We agree … that the stipulated rate of interest
principal amount of the loans totalled P864,000. at 5.5% per month on the P500,000.00 loan is
excessive, iniquitous, unconscionable and
On May 3, 2000, respondents deposited P864,000 exorbitant. However, we can not consider the
with the Clerk of Court of the RTC of Quezon City. rate "usurious" because this Court has
Later, they filed a case for consignation and consistently held that Circular No. 905 of the
damages which was released to the petitioners. Central Bank, adopted on December 22, 1982,
has expressly removed the interest ceilings
The RTC rendered a decision in favor of prescribed by the Usury Law and that the Usury
respondents which was affirmed by the CA. It ruled Law is now "legally inexistent."
that the original stipulated interest rates of 7% and
5% per month were excessive. It further ordered In Security Bank and Trust Company vs. Regional
petitioners to refund to respondents all interest Trial Court of Makati, it was held that CB Circular
payments in excess of the legal rate of 1% per No. 905 "did not repeal nor in any way amend the
month or 12% per annum. Usury Law but simply suspended the latter’s
effectivity." "Usury has been legally non-existent in
The Court of Appeals declared illegal the stipulated our jurisdiction. Interest can now be charged as
interest rates of 7% and 5% per month for being lender and borrower may agree upon."
exorbitant. Accordingly, the Court of Appeals Nevertheless, we find the interest at 5.5% per
reduced the stipulated interest rates of 7% and 5% month, or 66% per annum, stipulated upon by the
per month (equivalent to 84% and 60% per annum, parties in the promissory note iniquitous or
respectively) to a fair and reasonable rate of 1% per unconscionable, and, hence, contrary to morals
month or 12% per annum. The Court of Appeals ("contra bonos mores"), if not against the law. The
also ordered petitioners to refund to respondents all stipulation is void.
interest payments in excess of 12% per annum.
What was the status of the rate that was agreed
Petitioners aver that the stipulated interest of 5% upon? The stipulation is void.
monthly and higher cannot be considered What was the interest imposed by the SC? Why
unconscionable because these rates are not 12%?
usurious by virtue of Central Bank (C.B.) Circular
No. 905-82 which had expressly removed the

What is the effect if the interest rate imposed by the PILIPINAS BANK vs. COURT OF APPEALS
creditor or agreed by the parties is iniquitous,
unconscionable, excessive and exorbitant? As in FACTS:Private respondent Lilia Echaus filed a
this case the Supreme Court held that such complaint against petitioner and its president,
stipulation being contrary to morals, if not against Constantino Bautista, for collection of a sum of
the law, is considered void. However, this does not money. The complaint alleged: (1) that petitioner
mean that the debtor shall not be liable for any and Greatland Realty Corporation executed a
interest at all. In this case, the interest was "Dacion en Pago," wherein Greatland conveyed to
equitably reduced to 1% per month or 12% per petitioner several parcels of land in consideration of
annum. the sum of P7,776,335.69; (2) that Greatland
assigned P2,300,000.00 out of the total
Notice in this case that the Supreme Court held that consideration of the Dacion en Pago, in favor of
there is no need to unsettle the principle we had private respondent; and (3) that notwithstanding her
affirmed in a plethora of cases that stipulated demand for payment, petitioner in bad faith, refused
interest rates of 3% per month and higher are and failed to pay the said amount assigned to her.
exorbitant. However, there is no definite figure of The trial court ordered petitioner and its co-
interest rate which we can say is an excessive or defendant, jointly and severally, to pay private
iniquitous. In fact in the case we discussed, the respondent P2,300,000.00 the total amount
parties agreed to the 4% interest per month. assigned by Greatland in her favor out of the
Nevertheless, the Supreme Court held that it was P2,300,000.00 liability of defendant Pilipinas to
not placed as an issue and upheld the imposition of Greatland plus legal interest from the dates of
interest. assignments until fully paid.
So aside from the cases ruled by the Supreme On March 22, 1985, petitioner appealed the
Court, it is not an absolute rule that the 3% per decision of the trial court to the Court of Appeals.
month and above interest rate would automatically On the same day, private respondent filed a motion
be unconscionable. We still have to know other for Immediate Execution Pending Appeal which the
circumstances in the case. trial court granted.
Also it was held by the Supreme Court that even Petitioner complied with the writ of execution
with the 5.5% per month, again it was not pending appeal by issuing two manager's checks in
considered as usurious because the usury law has the total amount of P5,517,707.00 and which was
already been suspended. encashed by the private respondent.
Kinds of interest, we have there, one classification, On June 28, 1990, the Court of Appeals rendered a
monetary and compensatory interest. Then you decision in CA-G.R. No. CV-06017, which modified
also have the kinds of interest classified as follows: the judgment and ordered Pilipinas Bank to pay
(1) Simple interest. — that which is paid for the 2,300,000,00 Pesos, representing the total amount
principal at acertain rate fixed or stipulated assigned by Greatland to her, with interest at the
by the parties legal rate starting July 24, 1981, date when demand
(2) Compound interest. — that which is was first made.
imposed upon interest due and unpaid. The
accrued interest is added to the principal On September 4, 1990, petitioner filed a motion in
sum and the whole (principal and accrued the trial court praying that private respondent to
interest) is treated as a new principal upon refund to her the excess payment of P1,898,623.67
which the interest for the next period is with interests at 6%.
calculated. This is an interest already
earned but not yet received on the part of Private respondent opposed the motion of petitioner
the creditor. with respect to the rate of interest to be charged on
(3) Legal interest. — that which the law directs the amount of P2,300,000.00. According to private
to be charged in the absence of any respondent, the legal interest on the principal
agreement as to the rate between the amount of P2,300,000.00 due her should be
parties. 12% per annum pursuant to CB Circular No. 416
and not 6% per annum as computed by petitioner.
If you look at the provisions of the new civil code
which was enacted in 1950, you have therein the On October 12, 1990, the trial court, while ordering
legal interest rate at 6%, but it was on 1974, with the refund to petitioner of the excess payment, fixed
the resolution of the monetary board wherein the the interest rate due on the amount of
legal interest rate was 12%. Then, as we have P2,300.000.00 at 12% per annum as proposed by
mentioned before, that in january 1 (?), 2013, the private respondent, instead of 6% per annum as
legal interest rate is now 6%. proposed by petitioner.
Do not confuse the term legal interest from lawful The Court of Appeals was of the theory that the
interest. When we talk about lawful or unlawful action in Civil Case No. 239-A filed by private
interest it touches upon the interest rate being respondent against petitioner "involves forbearance
usurious or not. So when we say lawful it means it of money, as the principal award to plaintiff-
does not exceed the maximum prescribed by law. appellee (private respondent) in the amount of
Again, there is no lawful or unlawful because there P2,300.000.00 was the overdue debt of defendant-
is no usury law which fixes the maximum interest appellant to her since July 1981. The case is, in
rate. effect, a simple collection of the money due to
plaintiff-appellee, as the unpaid creditor from the

defendant bank, the debtor" (Resolution, p.3; Rollo, immediately.

p. 33). Applying Central Bank Circular No. 416, the
Court of Appeals held that the applicable rate of Note that Circular No. 416, fixing the rate of interest
interest is 12% per annum. at 12% per annum, deals with (1) loans; (2)
forbearance of any money, goods or credit; and (3)
Petitioner argues that the applicable law is Article judgments.
2209 of the Civil Code, not the Central Bank
Circular No. 416. Said Article 2209 provides: What then is the nature of the judgment ordering
Art. 2209. If the obligation consists in the payment petitioner to pay private respondent the amount of
of a sum of money, and the debtor incurs in delay, P2,300,000.00?
the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of The said amount was a portion of the
the interest agreed upon, and in the absence of P7,776,335.69 which petitioner was obligated to
stipulation, the legal interest, which is six per cent pay Greatland as consideration for the sale of
per annum. several parcels of land by Greatland to petitioner.
The amount of P2,300,000.00 was assigned by
ISSUE: Whether or not the legal rate of interest on Greatland in favor of private respondent. The said
the amount of P2,300,000.00 adjudged to be paid obligation therefore arose from a contract of
by petitioner to private respondent is 12% per purchase and sale and not from a contract of loan
annum. or mutuum. Hence, what is applicable is the rate of
6% per annum as provided in Article 2209 of the
RULING:Presidential Decree No. 116 authorized Civil Code of the Philippines and not the rate of
the Monetary Board to prescribe the maximum rate 12% per annum as provided in Circular No. 416.
or rates of interest for the loan or renewal thereof or
the forbearance of any money, goods or credits and Petitioner next contends that, consistent with its
amended the Usury Law (Act No. 2655) for that thesis that Circular No. 416 applies only to
purpose. judgments involving the payment of loans or
forbearance of money, goods and credit, the Court
As amended, the Usury Law now provides: of Appeals should have ordered private respondent
Sec. The rate of interest for the loan or to pay interest at the rate of 12% on the
forbearance of any money, goods, or credits overpayment collected by her pursuant to the
and the rate allowed in judgments, in the advance execution of the judgment.
absence of express contract as to such rate of
interest, shall be six per centum per annum or We sustain petitioner's contention as correct.Private
such rate as may be prescribed by the respondent was paid in advance the amount of
Monetary Board of the Central Bank of the P5,517,707.00 by petitioner to the order for the
Philippines for that purpose in accordance with execution pending appeal of the judgment of the
the authority hereby granted. trial court. On appeal, the Court of Appeals reduced
the total damages to P3,619,083.33, leaving a
Sec. 1-a. The Monetary Board is hereby balance of P1,898,623.67 to be refunded by private
authorized to prescribe the maximum rate or respondent to petitioner. In an execution pending
rates of interest for the loan or renewal thereof appeal, funds are advanced by the losing party to
or the forbearance of any money, goods or the prevailing party with the implied obligation of the
credits, and to charge such rate or rates latter to repay former, in case the appellate court
whenever warranted by prevailing economic cancels or reduces the monetary award.
and social conditions:Provided, That such
changes shall not be made oftener that once In the case before us, the excess amount ordered
every twelve months. to refunded by private respondent falls within the
ruling in Viloria and Buiser that Circular No. 416
In the exercise of the authority herein granted, applies to cases where money is transferred from
the Monetary Board may prescribe higher one person to another and the obligation to return
maximum rates for consumer loans or the same or a portion thereof is subsequently
renewals thereof as well as such loans made adjudged.
by pawnshops, finance companies and other
similar credit institutions although the rates When we say 6% or 12%, when will it start to run?
prescribed for these institutions need not
necessarily be uniform. When do we begin to demand the interest rate?
EASTERN SHIPPING LINES, INC. vs.HON.
Acting on the authority vested on it by the Usury COURT OF APPEALS
Law, as amended by P.D. No. 116, the Monetary
Board of Central Bank issued Central Bank Circular FACTS:This is an action against defendants
No. 416, which provides: shipping company, arrastre operator and broker-
By virtue of the authority granted to it under forwarder for damages sustained by a shipment
Section 1 of Act 2655, as amended, otherwise while in defendants' custody, filed by the insurer-
known as the "Usury Law" the Monetary Board subrogee who paid the consignee the value of such
in its Resolution No. 1622 dated July 29, 1974, losses/damages.
has prescribed that the rate of interest for
the loan, or forbearance of any money, goods, On December 4, 1981, two fiber drums of riboflavin
or credits and the rate allowed in judgments, in were shipped from Yokohama, Japan for delivery
the absence of express contract as to such vessel "SS EASTERN COMET" owned by
rate of interest, shall be twelve (12%) per defendant Eastern Shipping Lines. The shipment
cent per annum. This Circular shall take effect was insured under plaintiff's Marine Insurance

Policy No. 81/01177 for P36,382,466.38. unconditionally placed in the possession of, and
received by, the carrier for transportation until
Upon arrival of the shipment in Manila on delivered to, or until the lapse of a reasonable time
December 12, 1981, it was discharged unto the for their acceptance by, the person entitled to
custody of defendant Metro Port Service, Inc. The receive them (Arts. 1736-1738, Civil Code; Ganzon
latter excepted to one drum, said to be in bad order, vs. Court of Appeals, 161 SCRA 646; Kui Bai vs.
which damage was unknown to plaintiff. Dollar Steamship Lines, 52 Phil. 863). When the
goods shipped either are lost or arrive in damaged
On January 7, 1982 defendant Allied Brokerage condition, a presumption arises against the carrier
Corporation received the shipment from defendant of its failure to observe that diligence, and there
Metro Port Service, Inc., one drum opened and need not be an express finding of negligence to
without seal. hold it liable.
On January 8 and 14, 1982, defendant Allied 2. It may not be unwise, by way of clarification and
Brokerage Corporation made deliveries of the reconciliation, to suggest the following rules of
shipment to the consignee's warehouse. The latter thumb for future guidance.
excepted to one drum which contained spillages,
while the rest of the contents was adulterated/fake. I. When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-
Plaintiff contended that due to the losses/damage delicts is breached, the contravenor can be held
sustained by said drum, the consignee suffered liable for damages. The provisions under Title XVIII
losses totaling P19,032.95, due to the fault and on "Damages" of the Civil Code govern in
negligence of defendants. Claims were presented determining the measure of recoverable damages.
against defendants who failed and refused to pay
the same. II. With regard particularly to an award of interest in
the concept of actual and compensatory damages,
As a consequence of the losses sustained, plaintiff the rate of interest, as well as the accrual thereof, is
was compelled to pay the consignee P19,032.95 imposed, as follows:
under the aforestated marine insurance policy, so 1. When the obligation is breached, and it consists
that it became subrogated to all the rights of action in the payment of a sum of money, i.e., a loan or
of said consignee against defendants forbearance of money, the interest due should be
that which may have been stipulated in writing.
The Court, among others, ordered defendants to Furthermore, the interest due shall itself earn legal
pay plaintiff, jointly and severally The amount of interest from the time it is judicially demanded. In
P19,032.95, with the present legal interest of the absence of stipulation, the rate of interest shall
12% per annum from October 1, 1982, the date of be 12% per annum to be computed from
filing of this complaints, until fully paid (the liability default, i.e., from judicial or extrajudicial demand
of defendant Eastern Shipping, Inc. shall not under and subject to the provisions of Article
exceed US$500 per case or the CIF value of the 1169 of the Civil Code.
loss, whichever is lesser, while the liability of 2. When an obligation, not constituting a loan or
defendant Metro Port Service, Inc. shall be to the forbearance of money, is breached, an interest on
extent of the actual invoice value of each package, the amount of damages awarded may be imposed
crate box or container in no case to exceed at the discretion of the court at the rate of 6% per
P5,000.00 each, pursuant to Section 6.01 of the annum. No interest, however, shall be adjudged on
Management Contract) unliquidated claims or damages except when or
until the demand can be established with
ISSUE: reasonable certainty. Accordingly, where the
1. Whether or not a claim for damage sustained on demand is established with reasonable certainty,
a shipment of goods can be a solidary, or joint and the interest shall begin to run from the time the
several, liability of the common carrier, the arrastre claim is made judicially or extrajudicially (Art. 1169,
operator and the customs broker. YES Civil Code) but when such certainty cannot be so
2. Whether the payment of legal interest on an reasonably established at the time the demand is
award for loss or damage is to be computed from made, the interest shall begin to run only from the
the time the complaint is filed or from the date the date the judgment of the court is made (at which
decision appealed from is rendered. time the quantification of damages may be deemed
3. Whether the applicable rate of interest, referred to have been reasonably ascertained). The actual
to above, is twelve percent (12%) or six percent base for the computation of legal interest shall, in
(6%). 6% any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum
HELD: of money becomes final and executory, the rate of
1. Solidary. Since it is the duty of the ARRASTRE to legal interest, whether the case falls under
take good care of the goods that are in its custody paragraph 1 or paragraph 2, above, shall be
and to deliver them in good condition to the 12% per annum from such finality until its
consignee, such responsibility also devolves upon satisfaction, this interim period being deemed to be
the CARRIER. Both the ARRASTRE and the by then an equivalent to a forbearance of credit.
CARRIER are therefore charged with the obligation
to deliver the goods in good condition to the 3. The legal interest to be paid is SIX PERCENT
consignee. (6%) on the amount due computed from the
decision, dated 03 February 1988, of the court a
The common carrier's duty to observe the requisite quo. A TWELVE PERCENT (12%) interest, in lieu
diligence in the shipment of goods lasts from the of SIX PERCENT (6%), shall be imposed on such
time the articles are surrendered to or amount upon finality of this decision until the

payment thereof. writing. Furthermore, the interest due shall itself

earn legal interest from the time it is judicially
NOTE:The Central Bank Circular imposing the 12% demanded (from the time this is filed in court). In
interest per annum applies only to loans or the absence of stipulation, the rate of interest shall
forbearance of money, goods or credits, as well as be 12% per annum to be computed from
to judgments involving such loan or forbearance of default, i.e., from judicial or extrajudicial demand.
money, goods or credits, and that the 6% interest
under the Civil Code governs when the transaction 2. When an obligation, not constituting a loan or
involves the payment of indemnities in the concept forbearance of money, is breached, an interest on
of damage arising from the breach or a delay in the the amount of damages awarded may be imposed
performance of obligations in general. Observe, too, at the discretion of the court at the rate of 6% per
that in these cases, a common time frame in the annum. No interest, however, shall be adjudged on
computation of the 6% interest per annum has been unliquidated claims or damages except when or
applied, i.e., from the time the complaint is filed until until the demand can be established with
the adjudged amount is fully paid. reasonable certainty. Where the demand is
*Focus on guidelines laid down in the case established with reasonable certainty, the interest
shall begin to run from the time the claim is made
Here the cause of action was for damages (?) and judicially or extrajudicially (Art. 1169, Civil Code) but
the parties referred to different cases by the when such certainty cannot be so reasonably
Supreme Court. The Supreme Court herein had established at the time the demand is made, the
groups of cases. With regard to the imposition of interest shall begin to run only from the date the
6% or 12%, there was no issue. judgment of the court is made. The actual base for
the computation of legal interest shall, in any case,
In the "first group", the basic issue focuses on the be on the amount finally adjudged.
application of either the 6% (under the Civil Code)
or 12% (under the Central Bank Circular) 3. When the judgment of the court awarding a sum
interest per annum. It is easily discernible in these of money becomes final and executory, the rate of
cases that there has been a consistent holding that legal interest, whether the case falls under
the Central Bank Circular imposing the 12% paragraph 1 or paragraph 2, above, shall be
interest per annum applies only to loans or 12% per annum from such finality until its
forbearance of money, goods or credits, as well as satisfaction…
to judgments involving such loan or forbearance of
money, goods or credits, and that the 6% interest Which in this case was applied by the Supreme
when the transaction involves the payment of Court – the legal interest to be paid is 6% of the
indemnities in the concept of damage arising from amount due and 12 % of the amount upon finality
the breach or a delay in the performance of until payment. So that was the guideline that was
obligations in general. Observe, too, that in these used by the Supreme Court. Notice that in Pilipinas
cases, a common time frame in the computation of Bank did not refer to Eastern Shipping ruling, unlike
the 6% interest per annum from the time the the previous cases we discussed last time. Why?
complaint is filed until the adjudged amount is fully Because na una itong pilipinas bank. Subsequent
paid. cases dealing with issues on interest, Eastern
shipping was the case referred to and guideline
The "second group", did not alter the pronounced provided therein. With the amendment of the legal
rule on the application of the 6% or 12% interest per interest rate, actually it is still the same, kaya lang
annum, depending on whether or not the amount lahat 6%.
involved is a loan or forbearance, on the one hand,
or one of indemnity for damage, on the other hand. Also take note that this guideline in Eastern
Unlike, however, the "first group" which remained Shipping, we could also take into consideration,
consistent in holding that the running of the legal articles 2209 – 2213 of the civil code. This article is
interest should be from the time of the filing of the about torts, but still in relation to interest.
complaint until fully paid, the "second group" varied
on the commencement of the running of the legal Article 2209. If the obligation consists in the
interest. payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no
That is why the Supreme Court, by way of stipulation to the contrary, shall be the payment of
clarification and reconciliation, to suggest the the interest agreed upon, and in the absence of
following rules for future guidance. stipulation, the legal interest, which is six per cent
per annum. (1108)
I. When an obligation, regardless of its source, i.e., Article 2210. Interest may, in the discretion of the
law, contracts, quasi-contracts, delicts or quasi- court, be allowed upon damages awarded for
delicts is breached, the contravenor can be held breach of contract.
liable for damages. Article 2211. In crimes and quasi-delicts, interest
as a part of the damages may, in a proper case, be
II. With regard particularly to an award of interest in adjudicated in the discretion of the court.
the concept of actual and compensatory damages, Article 2212. Interest due shall earn legal interest
the rate of interest, as well as the accrual thereof, is from the time it is judicially demanded, although the
imposed, as follows: obligation may be silent upon this point. (1109a)
Article 2213. Interest cannot be recovered upon
1. When the obligation is breached, and it consists unliquidated claims or damages, except when the
in the payment of a sum of money, i.e., a loan or demand can be established with reasonable
forbearance of money, the interest due should be certainty.
that which may have been stipulated in

On May 8, 1996, the bidding invoving the properties

November 24, 2015 (Romero) was conducted, with petitioner Dio as the sole
bidder, purchased the properties for P3,500,000.
Given for example, the parties voluntarily agree as
to interest rates (let us say 5%/month), can we not The appellate court affirmed the decision of the trial
say that the debtor is already estopped from raising court with respect to the validity of the Deed of Real
the defense that the interest rate is excessive? Can Estate Mortgage, but modified the interest and
you apply the principle of estoppel even if the rates penalty rates for being unconscionable and
can be deemed as excessive? exorbitant.
A: The interest rate agreed upon may be valid
during the period stipulated upon by the parties. ISSUE: Whether or not the stipulations on interest
and penalty in the Deed of Real Estate Mortgage is
DIO vs. SPOUSES JAPOR contrary to morals, if not illegal and were
respondents entitled to any "surplus" on the auction
FACTS: Herein respondents Spouses Virgilio Japor sale price
and Luz Roces Japor were the owners of an 845.5
square-meter residential lot including its RULING: On the main issue, petitioner contends
improvements. Adjacent to the Japor’s lot is another that The Usury Law1 has been rendered ineffective
lot owned by respondent Marta Japor. by Central Bank Circular No. 905, series of 1982
and accordingly, usury has become legally non-
On August 23, 1982, the respondents obtained a existent in this jurisdiction, thus, interest rates may
loan of P90,000 from the Quezon Development accordingly be pegged at such levels or rates as
Bank (QDB), and as security therefor, they the lender and the borrower may agree upon.
mortgaged the two lots as evidenced by a Deed of
Real Estate Mortgage duly executed by and Respondents admit they owe petitioner P350,000
between the respondents and QDB. and do not question any lawful interest on their loan
but they maintain that the Deed of Real Estate
On December 6, 1983, respondents and QDB Mortgage is null and void since it did not state the
amended the Deed of Real Estate Mortgage true intent of the parties, which limited the 5%
increasing respondents’ loan to P128,000. interest rate to only two (2) months from the date of
the loan and which did not provide for penalties and
The respondents failed to pay their aforesaid loans. other charges in the event of default or delay.
However, before the bank could foreclose on the Respondents vehemently contend that they never
mortgage, respondents, thru their broker, one Lucia consented to the said stipulations and hence,
G. Orian, offered to mortgage their properties to should not be bound by them.
petitioner Teresita Dio. Petitioner prepared a Deed
of Real Estate Mortgage, whereby respondents On the first issue, we are constrained to rule
mortgaged anew the two properties already against the petitioner’s contentions.
mortgaged with QDB to secure the timely payment
of a P350,000 loan that respondents had from Central Bank Circular No. 905, which took effect on
petitioner Dio. January 1, 1983, effectively removed the ceiling on
interest rates for both secured and unsecured
Under the terms of the deed, respondents agreed to loans, regardless of maturity. However, nothing in
pay the petitioner interest at the rate of five percent said Circular grants lenders carte blanche authority
(5%) a month, within a period of two months or until to impose interest rates, which would result in the
April 14, 1989. In the event of default, an additional enslavement of their borrowers or to the
interest equivalent to five percent (5%) of the hemorrhaging of their assets. While a stipulated
amount then due, for every month of delay, would rate of interest may not technically and necessarily
be charged on them. be usurious under Circular No. 905, usury now
being legally non-existent in our
The respondents failed to settle their obligation to jurisdiction, nonetheless, said rate may be equitably
petitioner on April 14, 1989, the agreed deadline for reduced should the same be found to be iniquitous,
settlement. unconscionable, and exorbitant, and hence,
contrary to morals (contra bonos mores), if not
On August 27, 1991, petitioner made written against the law. What is iniquitous, unconscionable,
demands upon the respondents to pay their debt. and exorbitant shall depend upon the factual
circumstances of each case.
Despite repeated demands, respondents did not In the instant case, the Court of Appeals found that
pay, hence petitioner applied for extrajudicial the 5% interest rate per month and 5% penalty rate
foreclosure of the mortgage. per month for every month of default or delay is in
reality interest rate at 120% per annum. This Court
Meanwhile, on February 24, 1992, respondents has held that a stipulated interest rate of 5.5% per
filed an action for Fixing of Contractual month or 66% per annum is void for being
Obligation with Prayer for Preliminary iniquitous or unconscionable. We have likewise
Mandatory Injunction/ Restraining Order, praying ruled that an interest rate of 6% per month or
that the Deed of Real Estate Mortgage dated 72% per annum is outrageous and inordinate.
February 13, 1989 be declared null and void, and Conformably to these precedent cases, a combined
the plea that the trial court fix the contractual interest and penalty rate at 10% per month or
obligations of the Japors with Dio. 120% per annum, should be deemed iniquitous,
unconscionable, and inordinate. Hence, we sustain
the appellate court when it found the interest and
penalty rates in the Deed of Real Estate Mortgage

in the present case excessive, hence legally consideration the factual circumstances of the case.
impermissible. Reduction is legally called for now in Take note, even if, for example in the case of
rates of interest and penalty stated in the mortgage Prisma and even in this case (wherein the SC said
contract. that the parties are now estopped from claiming that
the 5% for 2 months is excessive), you cannot
What then should the interest and penalty rates be? apply it in every scenario or case. Even if the
parties stipulated for a 5% interest per month, again
The evidence shows that it was indeed the you cannot say that it is valid because in this case,
respondents who proposed the 5% interest rate per such ruling that the parties are now estopped from
month for two (2) months. Having agreed to said claiming otherwise.
rate, the parties are now estopped from claiming
otherwise. For the succeeding period after the two We have discussed interest in obligations and
months, however, the Court of Appeals correctly contracts. If you recall your cases in obligations and
reduced the interest rate to 12% per annumand the contracts, again there is no exact rule as to what
penalty rate to 1% per month, in accordance with specific rate is considered is unconscionable or
Article 2227 of the Civil Code. iniquitous. And in fact, you cannot always choose
the defense or allegation, such as in this case of
But were respondents entitled to the "surplus" Dio, that the debtor could be held in estoppel
of P2,247,326 as a result of the "overpricing" in the because they already agreed to that 5% per month.
auction? I think what was also taken into consideration here
is because of the 2 month period. If you compare it
We note that the "surplus" was the result of the to the case of Prisma, it is also a 6 month period.
computation by the Court of Appeals of But again, looking at the factual circumstances of
respondents’ outstanding liability based on a the case, the interest for these 2 cases were not
reduced interest rate of 12% per annum and the deemed iniquitous for that short period of time. So
reduced penalty rate of 1% per month. that is one factual circumstance to consider.
In the instant case, however, there is no "surplus" to Factual circumstances to consider:

speak of. In adjusting the interest and penalty rates  Period of time
to equitable and conscionable levels, what the  Interest rate
Court did was merely to reflect the true price of the  Purpose
land in the foreclosure sale. The amount of the
petitioner’s bid merely represented the true amount Again, there is no definite rate and you cannot
of the mortgage debt. No surplus in the purchase always use estoppel, otherwise what will be the
price was thus created to which the respondents as effect? The SC will now be bound to the stipulations
the mortgagors have a vested right. they voluntarily agreed upon, and the SC will
impose the interest agreed upon. Again, if we use
** The interest rate for the subject loan owing to the same premise, remember that the SC, in the
QDB is hereby fixed at five percent (5%) for the first same stipulation by the parties in the case of Dio vs
two (2) months following the date of execution of Japor, as to the additional interest of 5% of month.
the Deed of Real Estate Mortgage, and twelve In fact that was also voluntarily agreed upon by the
percent (12%) for the succeeding period. The parties, but the SC held that this time, this part of
penalty rate thereafter shall be fixed at one percent the interest should be reduced to 12% per annum.
(1%) per month. Petitioner Teresita Dio is declared Plus the penalty rate of 1% per month for the
free of any obligation to return to the respondents, succeeding period after 2 months. Again take note,
the Spouses Virgilio Japor and Luz Roces Japor there is no exact rule as to what specific rate should
and Marta Japor, any surplus in the foreclosure sale be considered as unconscionable or excessive.
price. There being no surplus, after the court below
had applied our ruling in Sulit, respondents could In the case of Medel vs CA (GR 131622 Nov 27,
not legally claim any overprice from the petitioner, 1998), the stipulated rate of 5.5% is considered
much less the amount of P2,247,326.00. excessive but not usurious (since we all know that
the Usury Law has already been suspended), so it
Q: So in this case, it was 2 months, and in the case was reduced to 12% per annum plus 1% per month
of Prisma it was 6 months, now what if the parties as penalty charge as liquidated damages. Also take
stipulated for 5% interest per month until fully paid? note there was a surplus as the result of the
What will be taken into consideration by the court? computation of the outstanding liability, so the SC
Do you think the court will deem such interest rate held that in this case, there is no surplus to speak of
as unconscionable? in adjusting the interest and penalty rates to
A: The court said that what is iniquitous and equitable levels, what the court did was merely to
unconscionable would depend on the facts of the reflect true price of the land in the foreclosure sale.
case, and in this case the 2 month period is where
the 5% interest will apply. Last night we also discussed the case of Eastern
Q: But what if the parties voluntarily agreed that Shipping, which laid down the guidelines for the
there will be a 5% interest until fully paid? Could the imposition of interest, like when to apply 6% or
interest be deemed as excessive? when to 12%, as well as the guideline as to when
A: It is excessive. will interest begin to run. Now after the Central
Q: What is the effect if it is found to be excessive? Bank issued Circular 799, the new legal interest is
A: The court will reduce the interest rate to 12% per now effective July 1, 2013 and one of the earlier
annum. cases applied to this circular is the case of NACAR
vs GALLERY FRAMES.
Take note, with regard to whether is deemed
excessive or unconscionable, always take into

DARIO NACAR vs GALLERY FRAMES AND/OR monetary consequences of the dismissal is

FELIPE BORDEY, JR. affected.
As to the payment of legal interest, the guidelines

FACTS: Petitioner Dario Nacar filed a complaint for laid down in the case of Eastern Shipping Lines are
constructive dismissal before the National Labor accordingly modified to embody BSP-MB Circular
Relations Commission (NLRC) against Gallery No. 799, as follows:
Frames (GF) and/or Felipe Bordey, Jr.
I. When an obligation, regardless of its source, i.e.,
On October 15, 1998, the Labor Arbiter rendered a law, contracts, quasi-contracts, delicts or quasi-
Decision in favor of petitioner and found that he was delicts is breached, the contravenor can be held
dismissed from employment without a valid or just liable for damages. The provisions under Title XVIII
cause and was never afforded due process. Thus, on “Damages” of the Civil Code govern in
petitioner was awarded backwages and separation determining the measure of recoverable damages.
pay in lieu of reinstatement, in the amount of II. With regard particularly to an award of interest in
P158,919.92, computed only up to promulgation of the concept of actual and compensatory damages,
this decision. Length of service was 8 yrs and 1 the rate of interest, as well as the accrual thereof, is
day. imposed, as follows:
On November 5, 2002, petitioner filed a Motion for 1. When the obligation is breached, and it consists
Correct Computation, praying that his backwages in the payment of a sum of money, i.e., a loan
be computed from the date of his dismissal on or forbearance of money, the interest due
January 24, 1997 up to the finality of the Resolution should be that which may have been stipulated
of the Supreme Court on May 27, 2002. Upon in writing. Furthermore, the interest due shall
recomputation, NLRC arrived at an updated amount itself earn legal interest from the time it is
in the sum of P471,320.31. w judicially demanded. In the absence of
stipulation, the rate of interest shall be 6% per
Respondents filed a Motion to Quash Writ of annum to be computed from default, i.e., from
Execution, arguing that no more recomputation is judicial or extrajudicial demand under and
required after the decision becomes final and subject to the provisions of Article 1169 of the
executory, the same cannot be altered or amended Civil Code.
anymore. Denied. Reappealed and a recomputation 2. When an obligation, not constituting a loan or
was granted but only in the amount of P147,560.19. forbearance of money, is breached, an interest
on the amount of damages awarded may be
Nacar then filed a Motion praying for the re- imposed at the discretion of the court at the rate
computation of the monetary award to include the of 6% per annum. No interest, however, shall
appropriate interests. be adjudged on unliquidated claims or
damages, except when or until the demand can
The Labor Arbiter granted the motion, but reasoned be established with reasonable certainty.
that it is the October 15, 1998 Decision that should Accordingly, where the demand is established
be enforced considering that it was the one that with reasonable certainty, the interest shall
became final and executory. However, the Labor begin to run from the time the claim is made
Arbiter reasoned that since the decision states that judicially or extrajudicially (Art. 1169, Civil
the separation pay and backwages are computed Code), but when such certainty cannot be so
only up to the promulgation of the said decision, it is reasonably established at the time the demand
the amount of P158,919.92 that should be is made, the interest shall begin to run only
executed. Thus, since petitioner already received from the date the judgment of the court is made
P147,560.19, he is only entitled to the balance of (at which time the quantification of damages
P11,459.73. may be deemed to have been reasonably
ascertained). The actual base for the
Nacar appealed to the CA. Denied. It opined that computation of legal interest shall, in any case,
since petitioner no longer appealed the October 15, be on the amount finally adjudged.
1998 Decision of the Labor Arbiter, which already
became final and executory, a belated correction 3. When the judgment of the court awarding a sum
thereof is no longer allowed. The CA stated that of money becomes final and executory, the rate
there is nothing left to be done except to enforce of legal interest, whether the case falls under
the said judgment. paragraph 1 or paragraph 2, above, shall be 6%
per annum from such finality until its
ISSUE: WON a re-computation in the course of satisfaction, this interim period being deemed to
execution of the labor arbiter's original computation be by then an equivalent to a forbearance of
of the awards made is legally proper. YES credit.
HELD: Computation should start from the time The Decision of the CA is reversed and set aside.
Nacar was illegally dismissed until judgment has The case is remanded back to the LA for the proper
become final and executory on May 27, 2013. recomputation.
Moreover, a recomputation is necessary and is not
a violation of the principle of immutability of final * The rate of interest starting July 1, 2013 is 6% per
judgments. The recomputation of the consequences annum (since the original case was decided in
of illegal dismissal upon execution of the decision 2002, 12% int was still applied) and applies
does not constitute an alteration or amendment of prospectively. Computation of backwages and
the final decision being implemented. The illegal separation pay should start from the time an
dismissal ruling stands; only the computation of employee is illegally dismissed to the time judgment

has become final and executory. Interest of such but it referred to simple interest of 12% per
amount acrrues until full payment is made. annum.
 MCMP vs MONARK EQUIPMENT (GR
Q: What were the interest rates applied in the 201001 Nov. 10, 2014): Again the SC
decision of the SC? When did it begin and when did reduced the interest to 12% and its guide
it end? was prevailing jurisprudence.
A: 12% was applied from the date of the finality of
judgment up to July 1, 2013 (this is with regard to So these are all 2014 cases. Why did I mention
the monetary award). these? Because it means that by reducing it to a
Q: How about when you take into consideration the reasonable rate, 12% is still deemed proper. In
time when he was dismissed?(because we are these cases, it is not necessary na 6% na ung
talking about backwages) So when will the 12% interest rate, magbaba na rin dapat. When I
interest begin to run? discussed 2 years ago, when this BSP Circular took
A: From May 27, 2002. It was when the judgment effect, we had no idea at that time as to whether
became final. reduction of interest would be 6% or if it will stay at
Q: Until when? 12%. So apparently the SC, despite the legal
interest of 6%, the SC still applied the prevailing
Just take note first that this is a labor case and this jurisprudence of reducing it to 12% per annum.
was an illegal dismissal case. So there was need
for backwages and separation pay. The SC took ART 1957 Contracts and stipulations, under any
into consideration Circular 799 stating the legal cloak or device whatever, intended to circumvent
interest rate at 6% per annum effective July 1, the laws against usury shall be void. The borrower
2013. The SC emphasized that the new rate will may recover in accordance with the laws on usury.
only be applied prospectively and not retroactively,
and that is why we still discuss the cases as to the So usury refers to prohibitive interest. But again it
imposition and the guidelines mentioned in Eastern was suspended as interest rates are no longer
Shipping. subject to a ceiling, the rate will depend on the
agreement of the parties provided that it is not
In fact, in this case, this is an August 2013 case, the excessive or unconscionable. Take note that when
SC held that the (???) for backwages, for illegal we talk about usurious interest, it is with reference
dismissal, until finality, separation pay from August to a contract of loan or forbearance of money,
1990 until May 27, 2002 (from the time he started goods, or credits. In other words, if there is no loan
employment in 1990). And interest, 12% per annum or forbearance, there could be no usury to speak of.
May 27, 2002, that is the time when the resolution With regard to usurious interest, the agreement as
of the board became final and executory to June to the usurious interest will be considered void, but
30, 2013, and another 6% from July 1, 2013 until not the principal obligation.
their full satisfaction.
Why do I still include in your outline the Usury Law?
Now consolidating what we have discussed, we all Because it is just suspended. When you mean
know that we take into consideration factual suspended, it can used again although I doubt that.
circumstances to determine whether the interest is So just take not of that.
usurious, excessive, or exorbitant. Generally, 3%
and above is deemed excessive, but again that is ART 1958 In the determination of the interest, if it is
not sufficient. You take into consideration factual payable in kind, its value shall be appraised at the
circumstances, like what happened in the case of current price of the products or goods at the time
Dio and Prisma. and place of payment.
Now what is the effect of this BSP Circular (6%
I’d like you to differentiate that from Art 1955. Kasi
legal interest rate). Because in the cases we have
sa Art 1955, borrows money Art 1249 and 1250.
discussed where the interest rate is deemed
Basis: currency at the time the obligation was
excessive, it reduced the interest rate at 12% per
created. In Art 1955, wherein the subject matter is
month, and if there was a stipulation for penalties,
money or a fungible thing, remember the value
just an additional 1% per month as a penalty. Now
thereof in case of extraordinary deflation or inflation.
12%, that was deemed applied most probably
This is the payment for the value of money, its
because that was the legal interest at the time that
currency at the time of the creation of the obligation.
the SC promulgated the said decision.
If the subject of the loan is a fungible thing, same
But with this BSP Circular, lowering the legal
kind and quality, and if it is impossible, value
interest at 6%, does it mean that for cases deemed
thereof at the time of the perfection of the loan. But
excessive and exorbitant, the SC will now reduce it
if we’re talking about interest, it is appraised at the
to 6% or just 12%? Now in the recent 2014 cases,
time and place of payment.
the SC still applied 12% interest rate.
Q: What do you mean by compound interest? How
Take note of these cases:
is it different from a simple interest?
 ALBOS vs SPOUSES EMBISAN (GR
210831 Nov 26, 2014): 5% per month was
ANTONIO TAN v. COURT OF APPEALS and the
deemed as unconscionable and the SC
CULTURAL CENTER OF THE PHILIPPINES
imposed and called it a simple interest of
12% per annum. Kasi if you compare it to
FACTS: On May 14, 1978 and July 6, 1978,
older cases that state: “reduce it to the legal
petitioner Antonio Tan obtained two (2) loans each
interest of 12%”, in this case, it is still 12%
in the principal amount of (P2,000,000.00), or in the
total principal amount of Four Million Pesos

(P4,000,000.00) from respondent Cultural Center of provided in the promissory note marked Exhibit “A”.
the Philippines (CCP) evidenced by two (2) The petitioner takes exception to the computation of
promissory notes with maturity dates on May 14, the private respondent whereby the interest,
1979 and July 6, 1979, respectively. Petitioner surcharge and the principal were added together
defaulted but after a few partial payments he had and that on the total sum interest was imposed.
the loans restructured by respondent CCP, and Petitioner also claims that there is no basis in law
petitioner accordingly executed a promissory note for the charging of interest on the surcharges for the
on August 31, 1979 in the amount of reason that the New Civil Code is devoid of any
(P3,411,421.32) payable in five (5) installments. provision allowing the imposition of interest on
Petitioner Tan failed to pay any installment on the surcharges.
said restructured loan of (P3,411,421.32), the last
installment falling due on December 31, 1980. We find no merit in the petitioner’s contention.
Article 1226 of the New Civil Code provides that:
In a letter dated January 26, 1982, petitioner
requested and proposed to respondent CCP a In obligations with a penal clause, the penalty shall
mode of paying the restructured loan, i.e., (a) substitute the indemnity for damages and the
twenty percent (20%) of the principal amount of the payment of interests in case of non-compliance, if
loan upon the respondent giving its conformity to there is no stipulation to the contrary. Nevertheless,
his proposal; and (b) the balance on the principal damages shall be paid if the obligor refuses to pay
obligation payable in thirty-six (36) equal monthly the penalty or is guilty of fraud in the fulfillment of
installments until fully paid. the obligation.
On October 20, 1983, petitioner again sent a letter The penalty may be enforced only when it is
to respondent CCP requesting for a moratorium on demandable in accordance with the provisions of
his loan obligation until the following year allegedly this Code.
due to a substantial deduction in the volume of his
business and on account of the peso devaluation. In the case at bar, the promissory note (Exhibit “A”)
No favorable response was made to said letters. expressly provides for the imposition of both
Instead, respondent CCP, through counsel, wrote a interest and penalties in case of default on the part
letter dated May 30, 1984 to the petitioner of the petitioner in the payment of the subject
demanding full payment, within ten (10) days from restructured loan. The pertinent portion of the
receipt of said letter, of the petitioner’s restructured promissory note (Exhibit “A”) imposing interest and
loan which as of April 30, 1984 amounted to penalties provides that:
(P6,088,735.03).
xxx xxx xxx
On August 29, 1984, respondent CCP filed in the
RTC of Manila a complaint for collection of a sum of With interest at the rate of FOURTEEN per cent
money against the petitioner after the latter failed to (14%) per annum from the date hereof until paid.
settle his said restructured loan obligation. The PLUS THREE PERCENT (3%) SERVICE
petitioner interposed the defense that he merely CHARGE.
accommodated a friend, Wilson Lucmen, who
allegedly asked for his help to obtain a loan from In case of non-payment of this note at maturity/on
respondent CCP. Petitioner claimed that he has not demand or upon default of payment of any portion
been able to locate Wilson Lucmen. of it when due, I/We jointly and severally agree to
pay additional penalty charges at the rate of TWO
While the case was pending in the trial court, the per cent (2%) per month on the total amount due
petitioner filed a Manifestation wherein he proposed until paid, payable and computed monthly. Default
to settle his indebtedness to respondent CCP by of payment of this note or any portion thereof when
proposing to make a down payment of due shall render all other installments and all
(P140,000.00) and to issue twelve (12) checks existing promissory notes made by us in favor of
every beginning of the year to cover installment the CULTURAL CENTER OF THE PHILIPPINES
payments for one year, and every year thereafter immediately due and demandable.
until the balance is fully paid. However, respondent
CCP did not agree to the petitioner’s proposals and xxx xxx xxx
so the trial of the case ensued.
The stipulated fourteen percent (14%) per annum
TC: Ruled in favor of CCP. CA: Affirmed trial court’s interest charge until full payment of the loan
decision. constitutes the monetary interest on the note and is
allowed under Article 1956 of the New Civil Code.
ISSUE (1): Whether there are contractual and legal On the other hand, the stipulated two percent (2%)
bases for the imposition of the penalty, interest on per month penalty is in the form of penalty charge
the penalty and attorney’s fees. YES which is separate and distinct from the monetary
interest on the principal of the loan.
HELD 1: The petitioner imputes error on the part of
the appellate court in not totally eliminating the Penalty on delinquent loans may take different
award of attorney’s fees and in not reducing the forms. In Government Service Insurance System v.
penalties considering that the petitioner, contrary to Court of Appeals, this Court has ruled that the New
the appellate court’s findings, has allegedly made Civil Code permits an agreement upon a penalty
partial payments on the loan. And if penalty is to be apart from the monetary interest. If the parties
awarded, the petitioner is asking for the non- stipulate this kind of agreement, the penalty does
imposition of interest on the surcharges inasmuch not include the monetary interest, and as such the
as the compounding of interest on surcharges is not

two are different and distinct from each other and The said statement of account also shows that the
may be demanded separately. amounts stated therein are net of the partial
payments amounting to a total of (P452,561.43)
The penalty charge of two percent (2%) per month which were made during the period from May 13,
in the case at bar began to accrue from the time of 1983 to September 30, 1983. The petitioner now
default by the petitioner. There is no doubt that the seeks the reduction of the penalty due to the said
petitioner is liable for both the stipulated monetary partial payments. The principal amount of the
interest and the stipulated penalty charge. The promissory note (Exhibit “A”) was (P3,411,421.32)
penalty charge is also called penalty or when the loan was restructured on August 31,
compensatory interest. 1979. As of August 28, 1986, the principal amount
of the said restructured loan has been reduced to
ISSUE (2): whether interest may accrue on the (P2,838,454.68). Thus, petitioner contends that
penalty or compensatory interest without violating reduction of the penalty is justifiable pursuant to
the provisions of Article 1959 of the New Civil Code. Article 1229 of the New Civil Code which provides
YES that: “The judge shall equitably reduce the penalty
when the principal obligation has been partly or
HELD 2: Art. 1959. Without prejudice to the irregularly complied with by the debtor. Even if there
provisions of Article 2212, interest due and unpaid has been no performance, the penalty may also be
shall not earn interest. However, the contracting reduced by the courts if it is iniquitous or
parties may by stipulation capitalize the interest due unconscionable.” Petitioner insists that the penalty
and unpaid, which as added principal, shall earn should be reduced to ten percent (10%) of the
new interest. unpaid debt in accordance with Bachrach Motor
Company v. Espiritu.
According to the petitioner, there is no legal basis
for the imposition of interest on the penalty charge There appears to be a justification for a reduction of
for the reason that the law only allows imposition of the penalty charge but not necessarily to ten
interest on monetary interest but not the charging of percent (10%) of the unpaid balance of the loan as
interest on penalty. He claims that since there is no suggested by petitioner. Inasmuch as petitioner has
law that allows imposition of interest on penalties, made partial payments which showed his good
the penalties should notearn interest. But as we faith, a reduction of the penalty charge from two
have already explained, penalty clauses can be in percent (2%) per month on the total amount due,
the form of penalty or compensatory interest. Thus, compounded monthly, until paid can indeed be
the compounding of the penalty or compensatory justified under the said provision of Article 1229 of
interest is sanctioned by and allowed pursuant to the New Civil Code.
the above-quoted provision of Article 1959 of the
New Civil Code considering that: In other words, we find the continued monthly
accrual of the two percent (2%) penalty charge on
First, there is an express stipulation in the the total amount due to be unconscionable
promissory note (Exhibit “A”) permitting the inasmuch as the same appeared to have been
compounding of interest. The fifth paragraph of the compounded monthly.
said promissory note provides that: “Any interest
which may be due if not paid shall be added to the Considering petitioner’s several partial payments
total amount when due and shall become part and the fact he is liable under the note for the two
thereof, the whole amount to bear interest at the percent (2%) penalty charge per month on the total
maximum rate allowed by law.” Therefore, any amount due, compounded monthly, for twenty-one
penalty interest not paid, when due, shall earn the (21) years since his default in 1980, we find it fair
legal interest of twelve percent (12%) per annum, in and equitable to reduce the penalty charge to a
the absence of express stipulation on the specific straight twelve percent (12%) per annum on the
rate of interest, as in the case at bar. total amount due starting August 28, 1986, the date
of the last Statement of Account.
Second, Article 2212 of the New Civil Code
provides that “Interest due shall earn legal interest Q: Was there a stipulation as to the term of
from the time it is judicially demanded, although the interest?
obligation may be silent upon this point.” In the A: Yes. It is provided in the promissory note that the
instant case, interest likewise began to run on the interest rate is 14% per annum, plus 3% for service
penalty interest upon the filing of the complaint in charge. There is also stipulation that in case of
court by respondent CCP on August 29, 1984. default, there is an additional 2% penalty per
Hence, the courts a quo did not err in ruling that the month.
petitioner is bound to pay the interest on the total
amount of the principal, the monetary interest and Q: What kind of interest will a penalty clause be?
the penalty interest. A: The penalty clause is deemed to constitute a
compensatory interest.
In the case at bar, however, equity cannot be
considered inasmuch as there is a contractual Q: How about the 14% interest, what kind of
stipulation in the promissory note whereby the interest is that?
petitioner expressly agreed to the compounding of A: As provided by the PN, the 14% is with respect
interest in case of failure on his part to pay the loan to the principal amount and it is a simple interest.
at maturity. Inasmuch as the said stipulation on the
compounding of interest has the force of law Q: Did the SC upheld the imposition of the 14%
between the parties and does not appear to be interest and the 2% per month penalty? Was it
inequitable or unjust, the said written stipulation deemed excessive?
should be respected.

A: Yes, but the SC reduced it because there was failed to do so. Worse, he learned that the actual
already partial payment that was made. area was only 26 square meters, not 30 square
meters as indicated in their contract to sell, and the
Q: Compounding of the penalty interest, was it also company refused to grant his corresponding
upheld by the SC? reduction in the purchase price; instead the
companies told him to settle his arrears in
Here, the PN expressly provides for the imposition amortizations. He learned later that that company
for both interest and penalties. The stipulated 14% sold Unit 808 to a third party.
interest per annum charged until full payment In their defense, the respondent faulted
constitutes as the monetary interest. In other words, complainant for unjustifiably refusing to accept
they applied Art 1956, it is expressly stipulated in delivery of the condominium unit; that they were
writing, so the SC upheld that. As to the stipulated forced to cancel the contract to sell because of the
2% per month penalty, it is form of a penalty refusal of the complainant to settle his past arrears.
charge, separate and distinct from the monetary The HLURB ruled in favor of the complainant and
interest. The new Civil Code permits an agreement ordered the company to reimburse the respondent
upon the penalty apart from the monetary interest. If the amount of P452,551.65, plus legal interest, from
the parties stipulate this kind of agreement, the the filing of the complaint, and to pay the
penalty does not include the monetary interest and respondent P50,000.00 as moral damages,
as such they are different and distinct from each P50,000.00 as attorney’s fees, and P50,000.00 as
other and may be demanded separately. exemplary damages.[11]
The company appealed the case all the way to the
Now the penalty charge of 2% per month that CA and eventually to the Supreme Court.
begins at the time of default, there is no doubt that
petitioner is liable for the stipulated monetary ISSUE: W/N ECE should be liable to reimburse
interest of 14% per annum and the stipulated Hernandez
penalty charge of 2% per month, which is
considered as the compensatory interest. Penalty RULING: YES. The Supreme Court affirmed the
clauses can be in the form of penalty or ruling of the lower four and tribunals, with a slight
compensatory interest. Compounding of the penalty modification of the legal interest imposable:
or compensatory interest is sanctioned by the “Article 2209 of the New Civil Code provides that “If
provisions of the CC. We have Art 1959 the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the
ART 1959 Without prejudice to the provisions of Art indemnity for damages, there being no stipulation to
2212, interest due and unpaid shall not earn the contrary, shall be the payment of the interest
interest. However, the contracting parties may by agreed upon, and in the absence of stipulation, the
stipulation capitalize the interest due and unpaid, legal interest, which is six per cent per
which as added principal, shall earn new interest. annum.” There is no doubt that ECE incurred in
delay in delivering the subject condominium unit, for
Here the PN provides that any interest which may which reason the trial court was justified in
be due if not paid shall be added to the total amount awarding interest to the respondent from the filing
when due and shall become part thereof, the whole of his complaint. There being no stipulation as to
amount to bear interest at the maximum rate interest, under Article 2209 the imposable rate is six
allowed by law. Therefore there is a stipulation for percent (6%) by way of damages, following the
the compounding of interest rate. Any penalty guidelines laid down in the landmark case of
interest not paid when due shall earn the legal Eastern Shipping Lines v. Court of Appeals:
interest of 12% per annum in the absence of an II. With regard particularly to an award of interest in
express stipulation on the specific rate of interest. the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is
Now Art 2212 also provides that… imposed, as follows:
1. When the obligation is breached, and it
ART 2212 Interest due shall earn legal interest from consists in the payment of a sum of money, i.e., a
the time it is judicially demanded, although the loan or forbearance of money, the interest due
obligation may be silent upon this point. should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially
So in this case, interest began to run on the
demanded. In the absence of stipulation, the rate
penalty interest upon the filing of the complaint in
of interest shall be 12% per annum to be computed
court by respondent CCP. So the SC affirmed the
from default, i.e., from judicial or extrajudicial
findings of the CA, however it reduced the penalty
demand under and subject to the provisions of
charge to 12% per annum starting Aug 28, 1996
Article 1169 of the Civil Code.
because of the good faith on the part of the debtor.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
November 27, 2015 (Gementiza)
the amount of damages awarded may be imposed
ECE REALTY AND DEVELOPMENT, INC., VS. at the discretion of the court at the rate of 6% per
HAYDYN HERNANDEZ annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or
FACTS: Haydn filed a complaint for specific until the demand can be established with
reasonable certainty. Accordingly, where the
performance with damages against EMIR and ECE
Realty due to the failure of the respondents to demand is established with reasonable certainty,
the interest shall begin to run from the time the
deliver a condominium unit which he purchased
from them. The respondents allegedly promised to claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so
turn over to him the unit by December 31, 1999, but

reasonably established at the time the demand is

made, the interest shall begin to run only from the 12% rate applies only to Forbearance of
date the judgment of the court is made (at which money. This Governed by guideline in ruling in
time the quantification of damages may be deemed Eastern Shipping because it is not a forbearance of
to have been reasonably ascertained). The actual money
base for the computation of legal interest shall, in
any case, be on the amount finally adjudged. If interest is unconscionable, stipulation is
3. When the judgment of the court awarding a void but the courts will reduce the interest rate (In
sum of money becomes final and executory, the cases 12%PA). in determining whether interest is
rate of legal interest, whether the case falls under unconscionable, we said that the factor to be
paragraph 1 or paragraph 2, above, shall be 12% considered is FACTUAL CIRCUMSTANCES OF
per annum from such finality until its satisfaction, THE CASE. As in the case of Prisma, the SC said
this interim period being deemed to be by then an that 3% or more PM is deemed unconscionable.
equivalent to a forbearance of credit.” That by itself does not mean that all obligations with
“The term “forbearance,” within the context of usury 3% per month interest is already unconscionable.
law, has been described as a contractual obligation Because in cases of Prisma and Chua, the rates
of a lender or creditor to refrain, during a given are higher than 3%, but nevertheless they are valid.
period of time, from requiring the borrower or debtor In Prisma, the rate is valid because the parties did
to repay the loan or debt then due and payable. not raise it as an issue; and the other, 2 month
Eastern Shipping Lines, Inc. synthesized the rules period and interest rate were valid because it was
on the imposition of interest, if proper, and the the debtor who voluntarily offered the interest rate.
applicable rate, as follows: The 12% per annum But again do not say that by virtue of estoppel, a Dr
rate under CB Circular No. 416 shall apply only to cannot later say that it is unconscionable because
loans or forbearance of money, goods, or credits, again the principle of estoppel can not be
as well as to judgments involving such loan or predicated on an illegal contract, validity cannot be
forbearance of money, goods, or credit, while the given to it if it is prohibited by law or is against
6% per annum under Art. 2209 of the Civil Code public policy. Unconscionable interest rate is
applies “when the transaction involves the payment against Public Policy, even if it is not against the
of indemnities in the concept of damage arising law(Usury law is suspended)
from the breach or a delay in the performance of
obligations in general,” with the application of both What is a compound interest under Art. 1959?
rates reckoned “from the time the complaint was
filed until the [adjudged] amount is fully paid.” In Article 1959. Without prejudice to the provisions
either instance, the reckoning period for the of article 2212, interest due and unpaid shall not
commencement of the running of the legal interest earn interest. However, the contracting parties
shall be subject to the condition “that the courts are may by stipulation capitalize the interest due
vested with discretion, depending on the equities of and unpaid, which as added principal, shall earn
each case, on the award of interest.” (Emphasis new interest.
ours)
Thus, from the finality of the judgment awarding a General Rule: Accrued interest (interest already
sum of money until it is satisfied, the award shall be due but unpaid) shall not earn interest except in two
considered a forbearance of credit, regardless of (2) instances:
whether the award in fact pertained to 1. As provided in Article 2212 wherein it
one. Pursuant to Central Bank Circular No. 416 states that, ―Interest due shall earn legal
issued on July 29, 1974, in the absence of written interest from the time it is judicially
stipulation the interest rate to be imposed in demanded, although the obligation may be
judgments involving a forbearance of credit was silent upon this point.
twelve percent (12%) per annum, up from six 2. The second exception is by express
percent (6%) under Article 2209 of the Civil stipulation made by the parties in which they
Code. This was reiterated in Central Bank Circular can apply compounding interest. (TAN vs CA)
No. 905, which suspended the effectivity of the
Usury Law beginning on January 1, 1983. Article 1956. No interest shall be due unless it
But since July 1, 2013, the rate of twelve percent has been expressly stipulated in writing. (1755a)
(12%) per annum from finality of the judgment until
What is the effect if there is a contract of loan but
satisfaction has been brought back to six percent
the requirements under 1956 are not present?
(6%). Section 1 of Resolution No. 796 of the
Monetary Board of the Bangko Sentral ng Pilipinas
dated May 16, 2013 provides: “The rate of interest SEBASTIAN SIGA-AN vs ALICIA VILLANUEVA
for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the FACTS: Respondent Alicia Villanueva filed a
absence of an express contract as to such rate of complaint for sum of money against petitioner
interest, shall be six percent (6%) per Sebastian Siga-an alleging that she was a
annum.” Thus, the rate of interest to be imposed businesswoman engaged in supplying office
from finality of judgments is now back at six percent materials and equipment to the Philippine Navy
(6%), the rate provided in Article 2209 of the Civil Office (PNO) while petitioner was a military officer
Code.” and comptroller of the PNO. Respondent claimed
that petitioner approached her inside the PNO and
offered to loan her the amount of P540,000.00.
Why 6%? Why did the SC ruled that six
Since she needed capital for her business
percent (6%) interest per annum from
transactions with the PNO, she accepted
September 7, 2006 until finality hereof by way of
petitioner’s proposal. The loan agreement was not
actual and compensatory damages, and not
reduced in writing. Also, there was no stipulation as
12%?
to the payment of interest for the loan.

Respondent issued a check worth P500,000.00 as An interest may be imposed even in the absence of
partial payment of the loan, another check of express stipulation, verbal or written, regarding
P200,000.00 as payment of the remaining balance payment of interest under Art 2209 of CC that if the
of the loan. Petitioner told her that since she paid a obligation consists in the payment of a sum of
total amount of P700,000.00 for theP540,000.00 money, and the debtor incurs delay, a legal interest
worth of loan, the excess amount of P160,000.00 of 12% per annum may be imposed as indemnity
would be applied as interest for the loan. Not for damages if no stipulation on the payment of
satisfied with the amount applied as interest, interest was agreed upon. It only applies to
petitioner pestered her to pay additional interest compensatory interest and not to monetary interest.
and threatened to block or disapprove her The case at bar involves petitioner’s claim for
transactions with the PNO if she would not comply. monetary interest. Further, said compensatory
Thus she paid additional amounts for the loan. The interest is not chargeable in the instant case
total amount paid to petitioner for the loan and because it was not duly proven that respondent
interest accumulated toP1,200,000.00. defaulted in paying the loan.
Respondent consulted a lawyer and her lawyer told The principle of solutio indebiti applies where (1) a
her that petitioner could not validly collect interest payment is made when there exists no binding
because there was no agreement between her and relation between the payor, who has no duty to pay,
petitioner regarding payment of interest thus she and the person who received the payment; and (2)
made overpayment to petitioner so she sent a the payment is made through mistake, and not
demand letter to petitioner asking for the return of through liberality or some other cause. Respondent
the excess amount of P660,000.00. But petitioner was under no duty to make such payment because
ignored her claim for reimbursement. there was no express stipulation in writing to that
effect. There was no binding relation between
ISSUE: WON respondent is entitled to petitioner and respondent as regards the payment
reimbursement? YES of interest. The payment was clearly a mistake.
Since petitioner received something when there
HELD: Interest is a compensation fixed by the was no right to demand it, he has an obligation to
parties for the use or forbearance of money. This is return it.
referred to as monetary interest. Interest may also
be imposed by law or by courts as penalty or POLICY: No interest shall be due unless it has
indemnity for damages. This is called compensatory been expressly stipulated in writing.
interest. The right to interest arises only by virtue of
a contract or by virtue of damages for delay or Is there a contract of loan (Mutuum)? Yes
failure to pay the principal loan on which interest is Is it required that it be reduced in writing?
demanded. No
In this case was there a document signed
Article 1956 of the Civil Code, which refers to by the Dr? No
monetary interest, specifically mandates that no Did it affect the validity of the loan? No
interest shall be due unless it has been expressly Interest, was there an agreement as to its
stipulated in writing. Payment of monetary payment? None
interest is allowed only if: Liable? Under 1956, she cannot be held
(1) there was an express stipulation for the payment liable.
of interest; and What happened to the payment she already
(2) the agreement for the payment of interest was made as to the interest? Entitled to reimbursement,
reduced in writing. basis thereof is solutio indebiti.
The concurrence of the two conditions is required. In the absence of express stipulation in writing, the
Thus, we have held that collection of interest Dr cannot be held liable for interest. That is,
without any stipulation therefor in writing is monetary interest. But as to compensatory interest,
prohibited by law. she can be liable.
Petitioner and respondent did not agree on the We all know that solutio indebiti is one of the
payment of interest for the loan. Neither was there quasicontracts as provided by the Civil Code.
convincing proof of written agreement between the
two regarding the payment of interest. Interest is a compensation fixed by the
parties for the use or forbearance of money. This is
As to the contention of petitioner that respondent referred to as monetary interest. Interest may also
executed a promissory note: the presented be imposed by law or by courts as penalty or
promissory note was in her handwriting because indemnity for damages. This is called compensatory
Siga-an told her to copy it and she did because she interest. The right to interest arises only by virtue of
feared the threats of Sigaan to block her deals with a contract or by virtue of damages for delay or
the PhilNavy. And as to the alleged admission in failure to pay the principal loan on which interest is
the BP 22 cases that they had agreed on the demanded.
payment of interest at the rate of 7%, respondent
merely testified that after paying the total amount of It is based on the principle that no shall be
loan, petitioner ordered her to pay interest. unjustly enriched to the expense of the other. It
Respondent did not categorically declare in the applies in two instances: where (1) a payment is
same case that she and respondent made made when there exists no binding relation
an express stipulation in writing as regards payment between the payor, who has no duty to pay, and the
of interest at the rate of 7%. person who received the payment and (2) the

payment is made through mistake, and not through It was enacted in 1916 and was amended
liberality or some other cause. Respondent was in 1974 wherein it prescribed that the rate of
under no duty to make such payment because monetary interest for loan or forbearance of money
there was no express stipulation in writing to that from the resolution of the monetary board, in the
effect. absence of express contract shall be 12% per
annum. However, in January 1, 1983, the Usury
In this case, the Court applied the first Law has become legally inexistent due to the
instance since there is no obligation to pay interest suspension thereof. Since it is merely suspended,
in the absence of stipulation in writing of the the ceiling of interest rates may be restored by the
payment thereof. The loan is valid even though it is Monetary Board. If there is no loan or forbearance
not in writing since it is a contract perfected by involved, there is no usury.
delivery and the amount is delivered to respondent.
However, with regard to the interest, the respondent With that, it is NOT applicable to:
borrower would not be liable. Therefore, based on 1. Rental in contract of lease;
solutio indebiti, she can demand for the payment for 2. Bona fide sale;
the interest she had paid in favor of the creditor. In 3. Increase in price of thing sold as a result of
Article 2212 where the imposition of legal interest is a sale on credit; and
6%, remember, the Civil Code was enacted in 1950 4. Bona fide Pacto de Retro sale.
and it was in 1974 where the legal interest became
12% and now it was changed in 2013. Notice 1916 Usury Law took effect, New
Civil Code took effect 1950. That's why meron
Also, As to the contention that what was talagang reference dyan sa Usury law and Usurious
paid was a compensatory interest, SC said that interest.
such is not chargeable in the instant case because
it was not duly proven that respondent defaulted in It was only in 1974 when the Monetary
paying the loan. Also, as earlier found, no interest Board prescribed that the interest for any
was due on the loan because there was no written forbearance of money, goods, or credit, shall be
agreement as regards payment of interest. 12%PA. Balik sa Art 2209, anong legal interest
nakalagay dyan, 6%. NCC took effect 1950, 6%. In
Article 1960 covers not only solutio indebiti 1974, 12% na. In 1983, the Usury Law was
but also natural obligations. NATURAL suspended but the legal interest still remained at
OBLIGATION is not based on the positive law but 12%PA. And now you have Bangko Sentral Circular
on equity and natural law. It is the grant on right of 799, July 1, 2013 wherein the legal interest is
action to enforce the performance that after reduced to 6%.
voluntary fulfillment of the obligor they authorized
the redemption of what has been delivered or SOLIDBANK vs PERMANENT HOMES
rendered by reason thereof.
FACTS: PERMANENT HOMES is a real estate
PART III: USURY LAW development company, and to finance its housing
Article 1961. Usurious contracts shall be project known as the “Buena Vida Townhomes”
governed by the Usury Law and other special located within Merville Subdivision, Parañaque City,
laws, so far as they are not inconsistent with it applied and was subsequently granted by
this Code. SOLIDBANK with an “Omnibus Line” credit facility
in the total amount of SIXTY MILLION PESOS. Of
So again Usury Law has already become the entire loan, FIFTY NINE MILLION as time loan
legally inexistent. Interest depends upon the for a term of up to three hundred sixty (360) days,
agreement of the parties but it must not be with interest thereon at prevailing market
iniquitous and unconscionable. rates, and subject to monthly repricing. The
remaining ONE MILLION was available for
Usury Law (Act 2655) is just suspended domestic bills purchase.
and is not repealed so it can be lifted but for how
many years, the suspension was not lifted. The rule To secure the aforesaid loan, PERMANENT
with regard to Usury Law, as a brief history, is HOMES initially mortgaged three (3) townhouse
enacted in 1916 and took effect in May 1, 1916. It is units within the Buena Vida project in Parañaque.
for the protection of borrowers from the imposition At the time, however, the instant complaint was filed
of unscrupulous lenders who take undue advantage against SOLIDBANK, a total of 36 townhouse units
of the necessities of others. It is undoubtedly were mortgaged with said bank.
against public policy to charge excessive interest
for the use of money. Of the 60 million available to PERMANENT
HOMES, it availed of a total of 41.5 million pesos,
The elements of usury consist of the following: covered by three (3) promissory notes, which
(1) A loan or forbearance; contain the following provisions, thus:
(2) An understanding between the parties that
the loan shall or may be returned; “xxx
(3) An unlawful intent to take more than the 5. We/I irrevocably authorize Solidbank to
legal rate for the use of money or its increase or decrease at any time the interest rate
equivalent; and agreed in this Note or Loan on the basis of, among
(4) The taking or agreeing to take for the use others, prevailing rates in the local or international
of the loan of something in excess of capital markets. For this purpose, We/I authorize
what is allowed by law. Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of us.
The adjustment of the interest rate shall be effective

from the date indicated in the written notice sent to during the monthly interest repricing dates,
us by the bank, or if no date is indicated, from the depending on the changes in prevailing interest
time the notice was sent. rates in the local and international capital markets.
6. Should We/I disagree to the interest rate SOLIDBANK, to establish its defense, presented its
adjustment, We/I shall prepay all amounts due lone witness, Mr. Cesar Lugtu, who testified to the
under this Note or Loan within thirty (30) days from effect that, contrary to PERMANENT HOMES’
the receipt by anyone of us of the written notice. assertions that it was not promptly informed of the
Otherwise, We/I shall be deemed to have given our repriced interest rates, SOLIDBANK’s
consent to the interest rate adjustment.” officers verbally advised PERMANENT HOMES of
the repriced rates at the start of the period, and
Contrary, however, to the specific provisions as even added that their transaction[s] were based on
afore- quoted, there was a standing agreement by trust. Aside from these allegations, however, no
the parties that any increase or decrease in written memorandum or note was presented by
interest rates shall be subject to the mutual SOLIDBANK to support their assertion that
agreement of the parties. PERMANENT HOMES was timely advised of the
repriced interests.
For the first loan availment of PERMANENT
HOMES on March 20, 1997, in the amount of 19.6 The trial court promulgated its Decision in favor of
MILLION, from the initial interest rate of14.25% per Solidbank. Permanent filed an appeal before the
annum (p.a.), the rate was increased to 30% appellate court. The appellate court granted the
p.a. on January 16, 1998. For the second loan appeal, and set aside the trial court’s ruling. The
availment in the amount of 18 million, the rate was appellate court not only recognized the validity of
initially pegged at 15.75% p.a. on June 24, 1997 escalation clauses, but also underscored the
increased 30% p.a.from January 22, 1998 to necessity of a basis for the increase in interest rates
February 20, 1998. and of the principle of mutuality of contracts.
For the third loan availment on July 15, 1997, in the ISSUE: WON the increases in the interest rates on
amount of 3.9 million, the interest rate was initially Permanent’s loans are void for having been
pegged at 35% p.a., decreased at 29% p.a. for the unilaterally imposed without basis. YES.
month of February.
HELD: The Usury Law had been rendered legally
It is Permanent’s stand that SOLIDBANK ineffective by Resolution No. 224 dated 3
unilaterally and arbitrarily accelerated the interest December 1982 of the Monetary Board of the
rates without any declared basis of such increases, Central Bank, and later by Central Bank Circular
of which PERMANENT HOMES had not agreed to, No. 905 which took effect on 1 January 1983.
or at the very least, been informed of. This is These circulars removed the ceiling on interest
contrary to their earlier agreement that any interest rates for secured and unsecured loans regardless
rate changes will be subject to mutual agreement of of maturity. The effect of these circulars is to allow
the parties. PERMANENT HOMES further admits the parties to agree on any interest that may be
that it was not able to protest such arbitrary charged on a loan. The virtual repeal of the Usury
increases at the time they were imposed by Law is within the range of judicial notice which
SOLIDBANK, for fear that SOLIDBANK might cut courts are bound to take into account. Although
off the credit facility it extended to PERMANENT interest rates are no longer subject to a ceiling,
HOMES. the lender still does not have an unbridled
license to impose increased interest rates. The
Permanent filed a case before the trial court lender and the borrower should agree on the
seeking the following: (1) the annulment of the imposed rate, and such imposed rate should be in
increases in interest rates on the loans it obtained writing.
from SOLIDBANK, on the ground that it was
violative of the principle of mutuality of agreement The stipulations, contained in the 3 promissory
of the parties, as enunciated in Article 1409 of the notes on interest rate repricing are valid because
New Civil Code, (2) the fixing of the interest rates at (1) the parties mutually agreed on said stipulations;
the applicable interest rate, and (3) for the trial court (2) repricing takes effect only upon Solidbank’s
to order SOLIDBANK to make an accounting of the written notice to Permanent of the new interest rate;
payments it made, so as to determine the amount and (3) Permanent has the option to prepay its loan
of refund PERMANENT is entitled to, as well as to if Permanent and Solidbank do not agree on the
order SOLIDBANK to release the remaining new interest rate. The phrases “irrevocably
available balance of the loan it extended to authorize,” “at any time” and “adjustment of the
PERMANENT. In addition, Permanent prays for the interest rate shall be effective from the date
payment of compensatory, moral and exemplary indicated in the written notice sent to us by the
damages. bank, or if no date is indicated, from the time the
SOLIDBANK, on the other hand, avers that notice was sent,” emphasize that Permanent
PERMANENT HOMES has no cause of action should receive a written notice from Solidbank
against it, in view of the pertinent provisions of the as a condition for the adjustment of the interest
Omnibus Credit Line and the promissory notes rates.
agreed to and signed by PERMANENT HOMES.
Solidbank’s range of lending rates were consistent
Thus, in accordance with “prevailing rates in the local or international
with said provisions, SOLIDBANK was authorized capital markets.” The interest rate repricing
to, upon due notice, periodically adjust the interest happened at the height of the Asian financial crises
rates on PERMANENT HOMES’ loan availments in late 1997, when banks clamped down on

lendings because of higher credit risks across Article 1962. A deposit is constituted from the
industries, particularly the real estate industry. moment a person receives a thing belonging to
another, with the obligation of safely keeping it
The SC also recognize that Solidbank admitted and of returning the same. If the safekeeping of
that it did not promptly send Permanent written the thing delivered is not the principal purpose
repriced rates, but rather verbally advised of the contract, there is no deposit but some
Permanent’s officers over the phone at the start other contract. (1758a)
of the period.
Who are the parties to a deposit?
Solidbank did not present any written memorandum In a contract of deposit, there are two
to support its allegation that it promptly advised parties here:
Permanent of the change in interest rates. (1) the depositor, or the depositante or the
Solidbank advised Permanent on the repriced giver; and
interest rate applicable for the 30-day interest (2) the depositary, or the depositorio who is the
period only after the period had begun. Permanent recipient, or the one who receives the
presented a tabulation which showed that subject of the contract of deposit.
Solidbank either did not send a billing statement, or
sent a billing statement 6 to 33 days late. It is not required that the depositor be the
Solidbank’s computation of the interest due from owner of the thing since a contract of deposit does
Permanent should be adjusted to take effect only not involve transfer of ownership. Of course, if the
upon Permanent’s receipt of the written notice depositary is the owner of the thing, then it cannot
from Solidbank. be considered as a contract of deposit because you
are just giving it back to the owner. In that case, the
How much is the interest rate? 30%PA. purpose is no longer for safekeeping as the
depositary [who is really the owner] can already
Can we not say that it is unconscionable? abuse, use, and enjoy the fruits thereof.
No, considering the factual circumstance of the
case. The interest rate repricing happened at the A deposit is perfected by delivery, same
height of the Asian financial crises in late 1997, with commodatum, it is a real contract.
when banks clamped down on lendings because of
higher credit risks across industries, particularly the A contract of deposit may be (1) unilateral
real estate industry. and gratuitous, or (2) bilateral and subject to
compensation.
Permanent is liable for 30% PA only upon
Permanent Homes, Incorporated receipt of the The principal purpose of a contract of
written notice from Solidbank Corporation of the deposit is safekeeping. If safekeeping is merely an
adjustment in interest rate. accessory obligation, then it would not be
considered as a contract of deposit. It may be
The stipulations on interest rate repricing another contract i.e. a contract of lease,
are valid because: commodatum, or a contract of agency. In a contract
(1) the parties mutually agreed on said of deposit, the principal purpose is safekeeping. If
stipulations; safekeeping is only an accessory purpose, then it
(2) repricing takes effect only upon Solidbank‘s must be some other contract.
written notice to Permanent Homes of the
new interest rate; and, Example: Delivery of records of a case to a
(3) Permanent Homes has the option to prepay lawyer you hired to represent you in court. You do
its loan if Permanent Himes and Solidbank not give it to the lawyer for safekeeping. You do not
do not agree on the new interest rate. give it to a person for the purpose of safekeeping.
Essentially, you have there a contract of agency.
The phrases irrevocably authorize, at any Example: When there is a balance as to the
time and adjustment of the interest rate shall be commission amount in the possession of the agent.
effective from the date indicated in the written It is a deposit and the agent must return it to the
notice sent to us by the bank, or if no date is principal. It is a contract of agency, the money is not
indicated, from the time the notice was sent, given for purposes of safekeeping. In fact it is the
emphasize that Permanent should receive a written duty of the agent to return it, if he misappropriates
notice from Solidbank as a condition for the it, he can be held liable for estafa.
adjustment of the interest rates.
BPI vs IAC
A contract containing a condition which
makes its fulfillment dependent exclusively upon the FACTS: The original parties to the case were
uncontrolled will of one of the contracting parties is Zshornack and Commercial Bank and Trust
void. There was no showing that either Solidbank or Company of the Phils (Comtrust). In 1980, BPI
Permanent coerced each other to enter into the absorbed Comtrust through a merger and was
loan agreements. The terms of the Omnibus Line substituted as party to the case.
Agreement and the promissory notes were mutually
and freely agreed upon by the parties. Zshornack and his wife maintained in Comtrust a
dollar savings account and a peso current account.
PART IV: DEPOSIT On Dec 8, 1975, Zshornack delivered to the bank
$3000 for safekeeping. When he requested the
I. DEPOSIT IN GENERAL & ITS return of the money, Comtrust explained that the
DIFFERENT KINDS sum was disposed of in this manner: US$2,000.00
was sold on December 29, 1975 and the peso

proceeds amounting to P14,920.00 were deposited executed against the provisions of a

to Zshornack's current account per deposit slip mandatory/prohibitory law. More importantly, it
accomplished by Garcia; the remaining affords neither of the parties a cause of action
US$1,000.00 was sold on February 3, 1976 and the against the other. "When the nullity proceeds from
peso proceeds amounting to P8,350.00 were the illegality of the cause or object of the contract,
deposited to his current account per deposit slip and the act constitutes a criminal offense, both
also accomplished by Garcia. parties being in pari delicto, they shall have no
cause of action against each other. . ." [Art. 1411,
Aside from asserting that the US$3,000.00 was New Civil Code.] The only remedy is one on behalf
properly credited to Zshornack's current account at of the State to prosecute the parties for violating the
prevailing conversion rates, BPI now posits another law.
ground to defeat private respondent's claim. It now
argues that the contract embodied in the document Therefore, Zshornack cannot recover under this
is the contract of depositum (as defined in Article cause of action.
1962, New Civil Code), which banks do not enter
into. The bank alleges that Garcia exceeded his DEPOSIT MUTUUM
powers when he entered into the transaction. Principal Purpose is For consumption
Hence, it is claimed, the bank cannot be liable safekeeping
under the contract, and the obligation is purely Depositor can demand Must wait for the
personal to Garcia. for the return of the thing expiration of period
granted to the Debtor
ISSUE: WON the contract between petitioner and Subject matter can be Money or consumable
respondent bank is a deposit. YES. movable or immovable things
Parties are depositor Lender and borrower
HELD: The document which embodies the contract and depositary
states that the US$3,000.00 was received by the
bank for safekeeping. The subsequent acts of the December 1, 2015 (Batacan)
parties also show that the intent of the parties was
really for the bank to safely keep the dollars and to II. VOLUNTARY DEPOSIT
return it to Zshornack at a later time, Thus, So we begin tonight with voluntary deposit. As we
Zshornack demanded the return of the money on have mentioned last meeting, there are two types of
May 10, 1976, or over five months later. deposit, judicial and extra-judicial. And under extra-
judicial deposit, we have voluntary deposit and
The above arrangement is that contract defined involuntary deposit. So Chapter 2 in Deposit deals
under Article 1962, New Civil Code, which reads: with voluntary deposit and let’s have Art 1968.
Art. 1962. A deposit is constituted from the moment
Art. 1968. A voluntary deposit is that wherein
a person receives a thing belonging to another, with
the delivery is made by the will of the depositor.
the obligation of safely keeping it and of returning
A deposit may also be made by two or more
the same. If the safekeeping of the thing delivered
persons each of whom believes himself entitled
is not the principal purpose of the contract, there is
to the thing deposited with a third person, who
no deposit but some other contract.
shall deliver it in a proper case to the one to
whom it belongs.
Note that the object of the contract between
Zshornack and COMTRUST was foreign exchange.
Hence, the transaction was covered by Central Okay, so voluntary deposit, the term voluntary – the
Bank Circular No. 20, Restrictions on Gold and delivery is made by the will of the depositor. He
Foreign Exchange Transactions, promulgated on gets to choose who will be the depositary. In a
December 9, 1949, which was in force at the time voluntary deposit, ordinarily, there are 2 parties/ 2
the parties entered into the transaction involved in persons involved however, as said in 1968, 3
this case. Under the said circular, safekeeping of persons may be involved. In such case, the third
the greenbacks without selling them to Central person assumes the obligation who shall deliver it
Bank within 1 business day from receipt, is a in a proper case to the one to whom it belongs.
transaction which is not authorized.
When would this happen? Let us say a thing was
As earlier stated, the document and the subsequent delivered to a person for the purpose of
acts of the parties show that they intended the bank safekeeping. Or it could be that he has in his
to safekeep the foreign exchange, and return it later possession a thing which is to be delivered to a
to Zshornack, who alleged in his complaint that he certain person which he believes has the right.
is a Philippine resident. The parties did not intended What if yung bigyan nya or yang deliver-an nya or
to sell the US dollars to the Central Bank within one to whom he will deliver the property has already
business day from receipt. Otherwise, the contract died? And here comes 2 persons who will say, ako
of depositum would never have been entered into at ang bigyan mo dahil ako ang asawa, ako ang
all. rightful heir. So both parties are contesting who
among them should be entitled to the delivery of the
Since the mere safekeeping of the greenbacks, thing. So that is the scenario covered under the
without selling them to the Central Bank within one second sentence of Art 1968. Wherein in that
business day from receipt, is a transaction which is instance, para hindi maipit yung person who is in
not authorized by CB Circular No. 20, it must be possession of the thing, he could file an action for
considered as one which falls under the general what we call, interpleader.
class of prohibited transactions. Hence, pursuant to
Article 5 of the Civil Code, it is void, having been It is a special civil action, so kung sa 3 rd year
subject pa, whereby a person has property in his

possession or an obligation to render, whether fully HELD: No. There is no contract of pledge. The
or partially, without any claim or any right therein or elements of a contract of pledge are as follows:
an interest which is not disputed by the claimant 1. the pledge is constituted to secure the fulfillment
comes to court and asks that the persons who of a principal obligation; 2. the pledgor be the
considered themselves entitled, to demand absolute owner of the thing pledged; and
compliance of the obligation be required to litigate 3. the person constituting the pledge has the free
among themselves, in order to determine who is disposal of his property, and in the absence thereof,
entitled to the property. that he be legally authorized for the purpose.
In this case, element number 2 is missing. Mike is
Para hindi sya maipit. Mamaya ibigay nya dito, eh not the absolute owner of the tractor.
wala pala syang right, andun pala sa isa. So he will
go to court and file this special civil action of There is no contract of agency between Pablo and
interpleader. So in that instance, the 3 rd person who Mike.
is in possession will be considered as a depositary. It was proven in court that Pablo only left the tractor
He can voluntary consider himself a depositary in in his son’s possession only for the purpose of
the meantime that the interpleader case will be safekeeping. Pablo was not aware that his son
heard in court. pledged it to Calibo and he never authorized his
son to do so.
Now, voluntary and necessary deposit:
There is no contract of deposit between Mike and
Voluntary Necessary Calibo.
The depositor has
No free choice in the There is no deposit where the principal purpose for
complete freedom in
deposit, on the part of receiving the object is not safekeeping. In this case,
choosing the depositary.
the depositor Calibo himself admitted in court that Mike delivered
the tractor to him as security for Mike’s debts.
Now, as we have mentioned earlier, in a deposit,
whether it is voluntary or not, ownership is not The judgment ordering Calibo to return the tractor
required. Because there is no transfer of ownership to Pablo was affirmed by the Supreme Court.
upon delivery of the subject matter in a contract of
deposit. QUESTIONS:
 How about the that Mike’s son acted as agent
Now we have the case of Calibo. of Pablo in delivering the tractor to Calibo? - No
agency in this case. Requisites not present.
CALIBO, JR. VS COURT OF APPEALS  So under the facts of this case, there’s no
deposit at all? –yes
FACTS: In 1985, Mike Abella rented a house  So what was the nature of the contract when
owned by Atty. Dionisio Calibo, Jr. Meanwhile, Dr. Pablo delivered the tractor to Mike? – for
Pablo Abella, Mike’s father, entrusted to Mike a safekeeping. Deposit. – so while there was a
tractor. Pablo delivered the tractor to Mike in order deposit between the father and son, there was
for the latter to safe-keep the same. no contract of deposit between Mike and
Calibo.
In November 1986, Mike defaulted in his rental
payments to Calibo. Calibo repeatedly demanded DISCUSSION:
payments but Mike failed to pay. However, Mike So here, the reason that Calibo was in possession
assured Calibo that he will soon pay and Mike used of the said tractor was that it was a security for an
his father’s tractor as a security. Hence, Calibo took obligation of Mike to him. So that could be , uhmm
possession of the tractor. Later, Mike advised what he is alleging is that there is a contract of
Calibo that he can sell the tractor as payment for pledge. Delivery of a personal property to secure an
his debts. obligation however, for a valid pledge to exist, one
of the requisites is that the pledger must be the
Pablo learned of the foregoing and so he contacted absolute owner of the thing pledge.
Calibo. He offered to pay a portion of Mike’s debt
and in return Calibo must return the tractor. Calibo However in this case, Mike was not the absolute
refused and he wanted Pablo to guarantee all of owner thereof, and therefore there could be no valid
Mike’s debt which Pablo does not want. Eventually, pledge. In a contract of deposit, we all know that
to redeem his tractor, Pablo filed a replevin suit ownership is not required on the part of the
against Calibo, which Pablo won. depositor. However, Mike, when he delivered the
tractor to Calibo, he delivered it not for the purpose
On appeal, Calibo invoked that the replevin should of safekeeping but for the purpose of securing his
not have been granted as there was a valid contract obligation. So considering that the principal purpose
of pledge between him and Mike; and that Mike was of the delivery of the subject matter is not
Pablo’s agent because Pablo was aware of the fact safekeeping, there could be no contract of deposit.
that Mike pledged the tractor to him. In the There is no deposit where the principal purpose for
alternative, Calibo invoked that if there’s no contract receiving the object is not safekeeping.
of pledge, there is at least a contract of deposit
since Mike himself left the tractor with him in the Also in this case, there also does not appear to be
concept of an innkeeper. any agency as Pablo was categorical in stating that
the only purpose for his leaving the subject tractor
ISSUE: Whether or not the arguments of Calibo are in the care and custody of Mike Abella was for
valid. safekeeping. So as between the father and son,
there was a deposit but it was not for him to pledge

or alienate the same. Depositary returns the property to the legal

representative or to the depositary when he
If it were true that Mike pledged appellees tractor to acquires capacity. Who can demand the return?
appellant, then Mike was acting not only without Again the legal representative or the incapacitated
appellees authority but without the latters person who has already acquired capacity.
knowledge as well. Also recall Art. 1397:
Art. 1397. The action for the annulment of
Now article 1969: contracts may be instituted by all who are
Art. 1969. A contract of deposit may be entered thereby obliged principally or subsidiarily.
into orally or in writing. (n) However, persons who are capable cannot
allege the incapacity of those with whom they
However, what is discussed here is with regard to contracted; nor can those who exerted
formalities.. – except for the delivery of the thing, intimidation, violence, or undue influence, or
there are no formalities required for the existence of employed fraud, or caused mistake base their
the contract. Again recall the general rules sa action upon these flaws of the contract. (1302a)
contracts under art 1356.
Under your contracts, if you are the depositary, you
1356: cannot refuse to return the thing to the legal
Art. 1356. Contracts shall be obligatory, in representative or to the incapacitated depositor who
whatever form they may have been entered into, has acquired his capacity on the ground that the
provided all the essential requisites for their contract is voidable. Why? Coz again recall 1397,
validity are present. However, when the law persons who are capable, cannot allege the
requires that a contract be in some form in incapacity of the party withholding the contract.
order that it may be valid or enforceable, or that
a contract be proved in a certain way, that Now incapacitated depositary, Art. 1971:
requirement is absolute and indispensable. In Art. 1971. If the deposit has been made by a
such cases, the right of the parties stated in the capacitated person with another who is not, the
following article cannot be exercised. (1278a) depositor shall only have an action to recover
the thing deposited while it is still in the
However, we have already discussed under Art. possession of the depositary, or to compel the
1963, that there must be delivery to give rise to a latter to pay him the amount by which he may
contract of deposit. have enriched or benefited himself with the
thing or its price. However, if a third person who
Article 1970: acquired the thing acted in bad faith, the
Art. 1970. If a person having capacity to depositor may bring an action against him for
contract accepts a deposit made by one who is its recovery. (1765a)
incapacitated, the former shall be subject to all
the obligations of a depositary, and may be Okay, so an incapacitated depositary does not incur
compelled to return the thing by the guardian, the obligation of a depositary. Section 2 under this
or administrator, of the person who made the chapter. However, liability will arise for the return of
deposit, or by the latter himself if he should the thing deposited which was still in his possession
acquire capacity. (1764) or to pay the depositor the amount by which he may
have benefited himself with the thing or its price,
So this deals with capacity on the part of the subject to the right of any 3rd person who acquired
depositary. Regardless of the capacity or incapacity the thing in good faith.
of the depositor, the one who delivered the subject
matter, that as long as the depositary is If you delivered the thing for safekeeping to an
capacitated, he will be subject to the obligations of incapacitated depositary, you can demand the
a depositary. As such, if the depositor is return of the thing if it is still in his possession. But
incapacitated, the depositary must return the what if he sold it to a third person? So you have to
property to the legal representative or to the consider. If he sold it to the 3rd person, you can
depositor himself if he should acquire capacity. demand for the amount which he may have
benefited himself. Remember, amount. Not the
What is the status of a contract if one of the parties value of the thing. If the value of the thing you
or in this case the depositor is incapacitated? – deposited or delivered to the incapacitated
Voidable. depositary is .. lets say 1k, tapos binenta nya ng
500. Anong ginawa nya sa 500, pinamili nya ng
If both parties are incapacitated? – Unenforceable. gamot, food. So to that extent he has been
benefited, you can demand only up to that 500. But
Now if lets say you have here the depositor who is remember he is an incapacitated depositary, what if
incapacitated, remember the obligation of the kinain nya mismo yung 500 bill, or gigisi nya. Di mo
depositary is to return the thing. If ikaw yung man masabi noh na nabusog sya sa 500 na kinain
depositary, would you return it to the incapacitated nya. So to that extent, wala, di sya nabenefit so the
depositor? What is the effect if you return the thing demand here to pay is with the limitation that the
to incapacitated depositor? Will your obligation be incapacitated depositary has been benfited.
extinguished? No diba! Remember, for payment or
performance, the person who receives such What if he has already sold it to a 3 rd person pero
payment or performance must also be capacitated wala pa nagbayad, or to some extent meron pang
to receive otherwise it will not be considered valid unpaid price. Here we have to take into
rd
so as to extinguish the obligation. So that is under consideration whether the 3 person who bought
your oblicon. So that’s the same premise here. the property from the incapacitated depositary is in
bad faith. In other words he has knowledge of the

incapacity of the depositary, or that the thing was Even if the deposit is gratuitous, due care is still
delivered to the incapacitated depositary for required from the depositary. If it is for
safekeeping. compensation, a higher degree of care is required
than if it is a gratuitous contract of deposit.
If the 3rd person is in bad faith, the depositor may
recover the thing from the said 3 rd person. But if the Chan vs Maceda..
3rd person is in good faith, the depositor’s action is
only against the depositary to compel him to return CHAN VS. MACEDA, JR.
the price received or the amount by which he may
have benefited himself. But you cannot go after the FACTS: On July 28, 1976, Bonifacio S. Maceda,
rd
3 person who was in good faith. Jr., herein respondent, obtained a P7.3 million loan
from the Development Bank of the Philippines for
Obligations of the depositary, Art. 1972: the construction of his New Gran Hotel Project in
Art. 1972. The depositary is obliged to keep the Tacloban City. Thereafter, on September 29, 1976,
thing safely and to return it, when required, to respondent entered into a building construction
the depositor, or to his heirs and successors, or contract with Moreman Builders Co., Inc.,
to the person who may have been designated in (Moreman). They agreed that the construction
the contract. His responsibility, with regard to would be finished not later than December 22,
the safekeeping and the loss of the thing, shall 1977.
be governed by the provisions of Title I of this
Book. Respondent purchased various construction
materials and equipment in Manila. Moreman, in
If the deposit is gratuitous, this fact shall be turn, deposited them in the warehouse of Wilson
taken into account in determining the degree of and Lily Chan, herein petitioners. The deposit was
care that the depositary must observe. (1766a) free of charge. Unfortunately, Moreman failed to
finish the construction of the hotel at the stipulated
Okay, this article emphasizes the 2 primary time. Hence, on February 1, 1978, respondent filed
obligations of the depositary. with the then Court of First Instance (CFI, now
 to safe keep the property and Regional Trial Court), Branch 39, Manila, an action
 to return the thing when required for rescission and damages against Moreman,
docketed as Civil Case No. 113498.
The degree of care to be exercised by the
depositary? Same diligence as he would exercise Meanwhile, during the pendency of the case,
over his own properties. Remember we are talking respondent ordered petitioners to return to him the
about voluntary deposit here. The depositary enjoys construction materials and equipment which
the trust and confidence from the depositor. It Moreman deposited in their warehouse. Petitioners,
involves the depositor’s confidence in the good faith however, told them that Moreman withdrew those
and trustworthiness of the depositary otherwise he construction materials in 1977.
would not deliver the thing for safekeeping.
Hence, on December 11, 1985, respondent filed
The depositary takes into account the diligence with the Regional Trial Court, Branch 160, Pasig
which the depositor is accustomed with respect to City, an action for damages with an application for a
his own property. writ of preliminary attachment against petitioners,7
docketed as Civil Case No. 53044.
Now remember, the depositary here cannot excuse
himself from the liability in case of loss by claiming ISSUES:
that he has exercised the same amount of care 1. Has respondent presented proof that the
toward the thing deposited as he would toward his construction materials and equipment were actually
own. in petitioners' warehouse when he asked that the
same be turned over to him? NO
Like for example, mawala dyud na sa akua kay sa 2. If so, does respondent have the right to demand
akong things, danghag(?) man ko, so what more sa the release of the said materials and equipment or
imuha. If noh, that is not a valid defense because claim for damages? NO
such care is less than that required by the
circumstances. So with that, you still apply what we HELD: Under Article 1311 of the Civil Code,
have learned under oblicon, the standard diligence contracts are binding upon the parties (and their
of care under 1163. Diligence of a good father of a assigns and heirs) who execute them. When there
family unless different standard of diligence is is no privity of contract, there is likewise no
required law or stipulation. obligation or liability to speak about and thus no
cause of action arises. Specifically, in an action
In relation thereto, negligence on the part of the against the depositary, the burden is on the plaintiff
depositary, liability under 1170. The depositary is to prove the bailment or deposit and the
liable if loss is due to his fault or negligence. And performance of conditions precedent to the right of
art. 1265, presumption. Loss of the thing while in action. A depositary is obliged to return the thing to
the possession of the debtor, in this case the the depositor, or to his heirs or successors, or to the
depositary, ordinarily raises a presumption of fault person who may have been designated in the
on his part. contract.
As to whether the deposit is onerous or gratuitous, In the present case, the record is bereft of any
that is also taken into consideration with regard to contract of deposit, oral or written, between
liability. petitioners and respondent. If at all, it was only
between petitioners and Moreman. And granting

arguendo that there was indeed a contract of acknowledged between the contract of deposit
deposit between petitioners and Moreman, it is still that was executed.
incumbent upon respondent to prove its existence  First, was there even proof that such favor was
and that it was executed in his favor. However, granted in favor of Maceda? – No
respondent miserably failed to do so. The only
pieces of evidence respondent presented to prove DISCUSSION:
the contract of deposit were the delivery receipts. So here the court emphasized the privity of
Significantly, they are unsigned and not duly contracts, as emphasized under art. 1311 of the
received or authenticated by either Moreman, NCC. So there is no privity of contract, where there
petitioners or respondent or any of their authorized is likewise no obligation or liability to speak about
representatives. Hence, those delivery receipts and thus no cause of action arises.
have no probative value at all. While our laws grant
a person the remedial right to prosecute or institute A depositary is obliged to return the thing to the
a civil action against another for the enforcement or depositor or his heir or successors or to the person
protection of a right, or the prevention or redress of who may have been designated in the contract. As
a wrong, every cause of action ex-contractu must in this case, there was no contract of deposit
be founded upon a contract, oral or written, express between spouses Chan and Maceda. While it is
or implied. true that there was a deposit, it was only between
spouses Chan and Moreman. And moreover,
Moreover, respondent also failed to prove that there respondent also failed to prove that there were
were construction materials and equipment in construction materials and equipment in petitioners
petitioners' warehouse at the time he made a warehouse at the time he made a demand for their
demand for their return. return. So therefore, no right whatsoever to claim
for damages. Also, with regard to the exemptions to
Considering that respondent failed to prove (1) the the privity of contract, the record bereft of any
existence of any contract of deposit between him contract of deposit between petitioners and
and petitioners, nor between the latter and respondent. And granting that there was indeed a
Moreman in his favor, and (2) that there were contract of deposit between petitioners and
construction materials in petitioners' warehouse at Moreman, it is still incumbent upon respondent to
the time of respondent's demand to return the prove its existence and that it was executed in his
same, we hold that petitioners have no favor. However, respondent miserably failed to do
corresponding obligation or liability to respondent so. So again,, take note of the nature of a contract
with respect to those construction materials. of deposit and who are bound by the obligations. So
the obligation on the part of spouses Chan to
Anent the issue of damages, petitioners are still not deliver was not as to Maceda because Maceda was
liable because, as expressly provided for in Article not the depositor. So when Moreman demanded for
2199 of the Civil Code, actual or compensatory the return of the said thing, or the things that were
damages cannot be presumed, but must be proved delivered to spouses Chan, spouses Chan just
with reasonable degree of certainty. A court cannot complied with their primary obligation as depositary.
rely on speculations, conjectures, or guesswork as
to the fact and amount of damages, but must Art. 1973:
depend upon competent proof that they have been Art. 1973. Unless there is a stipulation to the
suffered by the injured party and on the best contrary, the depositary cannot deposit the
obtainable evidence of the actual amount thereof. It thing with a third person. If deposit with a third
must point out specific facts which could afford a person is allowed, the depositary is liable for
basis for measuring whatever compensatory or the loss if he deposited the thing with a person
actual damages are borne. who is manifestly careless or unfit. The
depositary is responsible for the negligence of
Considering our findings that there was no contract his employees. (n)
of deposit between petitioners and respondent or
Moreman and that actually there were no more Okay so remember, a voluntary deposit is founded
construction materials or equipment in petitioners' on trust and confidence. So the general rule is that,
warehouse when respondent made a demand for the depositary is not allowed to deposit the thing to
their return, we hold that he has no right a 3rd person, exception: if there is an express
whatsoever to claim for damages. stipulation.
QUESTIONS: So who will be liable for the loss in case the thing is
 But isn’t it that there are exemptions to the deposited to a third person?
privity of the contracts under the principle of
privity of contracts, because the general rule, If the depositary transfers the deposit to a third
contracts are binding upon the parties by person without authority, he will be liable, even if
themselves or their heirs or to their assignees. there is no negligence on his part or even if there is
But under contracts, you already have no negligence on the part of the third person.
discussed several exceptions. Can we not
apply the exemptions or any of the exemptions However, if he is authorized, he can still be held
in this case? – Yes maam. We can apply the liable for loss if he deposits it with the third person
stipulation pour atrui. who is MANIFESTLY careless or unfit, even if there
 What is this stipulation pour atrui? – a is no negligence. As long as there is a loss, and the
stipulation is a contract clearly and deliberately third person is MANIFESTLY careless or unfit, the
conferring a benefit to a 3rd person. However for depositary shall be held liable even if he is
the said contract to be binding, in this case, authorized.
Maceda should agree or should have

Another instance wherein the depositary is liable: If my pamily..) nasa case ang answer.
the thing was lost through the negligence of his
employees. Since his employees are under his CA AGRO-INDUSTRIAL DEVELOPMENT CORP.
control and supervision. Whether the employees vs CA and SECURITY BANK AND TRUST
are MANIFESTLY careless or not, the depositary as COMPANY
an employer will be held liable.
FACTS: On July 3, 1979, petitioner through its
So when will be the depositary be exempted from president Sergio Aguirre, and spouses Ramon and
liability even if he deposits it with a 3 rd person? Paula Pugao entered into an agreement where the
Obviously, he will not be responsible if there is no former purchased from the latter two parcels of land
rd
negligence on the part of the 3 person whom he for P350,625. P75,725 was paid as downpayment
was allowed to deposit the thing. He was while the balance was covered by three postdated
authorized. As long as such 3rd person is not checks. Among the terms and conditions of said
MANIFESTLY careless or unfit. agreement were that the titles to the lots shall be
transferred to the petitioner upon full payment of the
So again, take note, liability of the depositary in purchase price and that the owner's copies of the
case of deposit to a third person. certificates of title shall be deposited in a safety
deposit box. The same could be withdrawn only
Art. 1974: upon the joint signatures of petitioner and spouses
Art. 1974. The depositary may change the way Pugaos upon full payment of the purchase price.
of the deposit if under the circumstances he
may reasonably presume that the depositor Petitioner and spouses Pugaos then rented safety
would consent to the change if he knew of the deposit box no. 1448 of respondent Security Bank
facts of the situation. However, before the and Trust Company and for this purpose both
depositary may make such change, he shall signed a contract of lease which contained the
notify the depositor thereof and wait for his following conditions:
decision, unless delay would cause danger. (n)
13. The bank is not a depositary of the
Okay, so depositary can change the way or manner contents of the safe and it has neither the
of the deposit if there are circumstances indicating possession nor control of the same.
that the depositor would consent to the change.
Way or manner – probably where it is placed, how it 14. The bank has no interest whatsoever in
is placed, packaging, temperature among others. said contents, except herein expressly provided,
and it assumes absolutely no liability in connection
Depositary, however, should first notify the therewith.
depositor and wait for the depositor’s decision,
unless delay would cause danger, wherein, he is Thereafter, a certain Mrs. Margarita Ramos offered
not required to notify and wait for the decision of the to buy from the petitioner the two lots and
depositor. This is still in keeping with the obligation demanded the execution the deed of sale which
of the depositary to exercise diligence of a good necessarily entailed the production of the
father of a family. certificates of title. However, when the safety
deposit box was open, the box yielded no such
Art. 1975: certificates. The delay in the reconstitution of the
Art. 1975. The depositary holding certificates, title compelled Mrs. Ramos to withdraw her offer
bonds, securities or instruments which earn and as a consequence, petitioner allegedly suffered
interest shall be bound to collect the latter when a loss which forced the latter to file a complaint for
it becomes due, and to take such steps as may damages against Security Bank and Trust
be necessary in order that the securities may Company.
preserve their value and the rights
corresponding to them according to law. The Court of First Instance (Regional Trial Court)
decided in favor of respondent bank citing
The above provision shall not apply to contracts paragraph 13 and 14 of the contract of lease which
for the rent of safety deposit boxes. (n) exonerates the bank from any liability. The Court of
Appeals in turn affirmed the decision of the trial
Obligations on the part of depositary if the thing court on the theory that the contract executed
deposited is with interest: between petitioner and respondent bank is a
1. Obligation to collect the interest as it contract of lease (Article 1643) by virtue of which
becomes due, as well as; respondent bank was divested of any possession
2. To take such steps as may be necessary to nor control over the safety deposit box.
preserve its value and the rights
corresponding to it. ISSUE: Is the contractual relation between
petitioner and respondent bank one of bailor and
Now 1975 is more important because of the last bailee or one of lessor and lessee? bailor and
sentence, 2nd paragraph of 1975… “The above bailee
provision shall not apply to contracts for the rent of
safety deposit boxes.” HELD: The contract in the case at bar is a special
kind of deposit.
So rent, it is a contract of lease. But is it the same?
.. What is the difference between an ordinary The Court agrees with the petitioner that the
contract of lease and a lease or rent of a safety contract for the rent of the safety deposit box is not
deposit box? What makes it special? What an ordinary contract of lease. However, the Court
happened in the case of CA Agro? – (My pamily.. cannot fully subscribe to the view that the same

contract is to be strictly governed by the provisions performing its obligation, it is found guilty of fraud,
of the Civil Code on deposit. It cannot be negligence, delay or contravention of the tenor of
characterized as a contract of lease because the the agreement.
full and absolute possession and control of the
safety deposit box was not given to the joint renters. N.B.
The guard key remained with the bank and without
this, the renters cannot open the safety deposit box. 1. In the absence of any stipulation
On the other hand, the respondent bank could not prescribing the degree of diligence required, that of
likewise open the box without the renter's key. a good father of a family is to be observed. Hence,
Thus, Article 1643 and Article 1975 which was any stipulation exempting the depositary from any
invoked by the Court of Appeals does not apply in liability arising from the loss of the thing deposited
the present case. on account of fraud, negligence or delay would be
void for being contrary to law and public policy.
We observe, however, that the deposit theory itself Thus, conditions 13 and 14 of the questioned
does not altogether find unanimous support even in contract of lease of the safety deposit box are void
American jurisprudence. We agree with the as they are contrary to law and public policy.
petitioner that under the latter, the prevailing rule is
that the relation between a bank renting out safe- 2. Although the contract between petitioner
deposit boxes and its customer with respect to the and respondent bank was considered as a contract
contents of the box is that of a bail or and bailee, of deposit, the Court still affirmed the CA's decision
the bailment being for hire and mutual benefit. This to dismiss the case because no competent proof
is just the prevailing view because: was presented to show that respondent bank was
aware of the agreement between the petitioner and
There is, however, some support for the view that spouses Pugaos to the effect that the certificates of
the relationship in question might be more properly title were withdrawable from the safety deposit box
characterized as that of landlord and tenant, or only upon both parties' joint signatures. Also, no
lessor and lessee. It has also been suggested that it evidence was submitted to reveal that the loss of
should be characterized as that of licensor and the certificates of title was due to fraud or
licensee. The relation between a bank, safe-deposit negligence of the respondent bank.
company, or storage company, and the renter of a
safe-deposit box therein, is often described as
contractual, express or implied, oral or written, in QUESTIONS:
whole or in part. But there is apparently no  There were two provisions that were pointed
jurisdiction in which any rule other than that out here.. – yes ma’am. *refer to the case
applicable to bailments governs questions of the digest please*
liability and rights of the parties in respect of loss of  Why would it be contrary to public policy and
the contents of safe-deposit boxes. law? (the provisions) – removes the due
diligence needed by the banks to be practiced.
In the context of Philippine laws which authorize  So with that, is the bank liable here? – not liable
banking institutions to rent out safety deposit boxes, because no proof that bank was aware of the
it is clear that in this jurisdiction, the prevailing rules joint signatures or agreements of the parties.
in the United States has been adopted. Section 72
of the General Banking Act provides: DISCUSSION:
So what happens when you lease noh, you pay an
Sec. 72. In addition to the operations annual fee with the bank, here in the Philippines to
specifically authorized elsewhere in this Act, lease that space. So that makes it a contract of
banking institutions other than building and loan lease. But it is a special kind of deposit because it
associations may perform the following services: also imposes diligence on the part of the bank to
safe keep what you have put in your safety deposit
(a) Receive in custody funds, documents, box. However, the bank has no knowledge kung
and valuable objects, and rent safety deposit boxes ano ang nilagay mo dyan. What happens is that,
for the safeguarding of such effects. when you apply for a contract of lease for a safety
xxx xxx xxx deposit box, you will be given 2 keys, dalawang
The banks shall perform the services susi. And then you will fill out the form as to who are
permitted under subsections (a), (b) and (c) of this authorized to open the safety deposit box. You also
section as depositories or as agents. . . .(emphasis submit pictures. So every time you try to open it,
supplied) they have to check if you are authorized to open it,
i-record when you open it, when you leave, then
It is to be noted that the primary function is still you also have to present your key. Kung ikaw
found within the parameters of a contract of deposit, andun ka pero di mo dala yung susi, they will not
i.e., the receiving in custody of funds, documents open. I don’t thing they can open because there are
and other valuable objects for safekeeping. The two keyholes in the safety deposit box. As
renting out of the safety deposit boxes is not mentioned, the guard key, as kept by the bank and
independent from, but related to or in conjunction the other key is in your possession as the lessee of
with, this principal function. . A contract of deposit the safety deposit box.
may be entered into orally or in writing and,
pursuant to Article 1306 of the Civil Code, the Now also, if you have another person to open it,
parties thereto may establish such stipulations, while he may have the key, pero hindi sya
clauses, terms and conditions as they may deem authorized, I doubt noh i-allow sya. Some may
convenient, provided they are not contrary to law, allow if may SPA, but I’m not sure if it is allowed in
morals, good customs, public order or public policy. all instances. Now, what happens here. No change
Accordingly, the depositary would be liable if, in in relation between the bank and the lessee

depositor, even if the bank is not aware of the reveal that the loss of the certificates of title was
contents. Ang important dun is, since it is within its due to the fraud or negligence of the respondent
premises, they safe keep whatever ang nandoon. Bank.
When you put things in your safety deposit box or
when you get something from it, hindi man yan sila So while it was a contract of deposit, special kind of
mag check. In fact, you don’t even indicate if you deposit, either of them could ask the bank for
put something or got something from it. What they access to the safety deposit box and therefore the
will do is just.. yung log in log out lang. Yung i- bank is not held liable for damages.
record ang time. SIA vs CA..
So what happened in this case of CA Agro? 2 keys SIA v. CA

were given. 1 was in favor of Aguirre, and the other
one to the Pugaos. The guard key was with the FACTS: Herein petitioner and respondent entered
bank. Why is the bank not held liable here? into a contract denominated as a Lease Agreement
Because it appears that the Pugaos were able to whereby the former rented a safety deposit box
present the key and had access and the bank had owned by the latter . Petitioner placed in the deposit
no right to refuse access. Because they were duly box her stamp collection which was subsequently
authorized. Lessee sila dun. And they had the other lost and damaged due to a flood that took place in
key. There was nothing mentioned to the bank that 1985 and 1986. The defendant bank rejected the
they had this agreement between Aguirre and petitioner’ s claim for compensation for his
Pugaos na dapat sabay sila doon for the opening or damaged stamps collection, so, the plaintiff
access to the safety deposit box. That’s why the instituted an action for damages against the
bank was not held liable. defendant bank.
Now here, the SC emphasized that the contract for The bank alleged that the contract was that of lease
the rent of safety deposit box is not an ordinary and its liability was limited to the exercise of the
contract of lease. It is a special kind of deposit, diligence to prevent the opening of the safe by any
because the full and absolute possession and person other than the Renter, his authorized agent
control of the safety deposit box was not given to or legal representative; The Bank is not a
the joint renters — the petitioner and the Pugaos. depository of the contents of the safe and it has
The guard key of the box remained with the neither the possession nor the control of the same.
respondent Bank; but the bank cannot open the box The Bank has no interest whatsoever in said
without the renter’s key. contents, except as herein provided, and it
assumes absolutely no liability in connection
It was emphasized, relation between a bank renting therewith.
out safe-deposit boxes and its customer with
respect to the contents of the box is that of a bail or RTC ruled in favor of petitioner. CA reversed the
and bailee, the bailment being for hire and mutual decision.
benefit.
ISSUE: Is SBTC liable for damages and loss? YES
Two provisions here were raised noh, that the bank
is not a depositary of the contents of the safe and it HELD: SBTC is a Depository Notwithstanding the
has neither the possession nor control of the same; Contract of Lease.
which is very contrary to the arrangement. It has the In the recent case CA Agro-Industrial Development
possession, it has the control. And in fact the Corp. vs. Court of Appeals, the Court held that the
general banking act, provides the renting noh as use of a safety deposit box is not a contract of lease
one of the functions or authorized operations of a and that it is actually a special kind of deposit.
bank.
The prevailing rule in American jurisprudence —
As to the next provision, par. 14. The bank has no that the relation between a bank renting out safe
interest whatsoever in said contents, except herein deposit boxes and its customer with respect to the
expressly provided, and it assumes absolutely no contents of the box is that of a bailor and bailee, the
liability in connection therewith. – ano yung void bailment for hire and mutual benefit — has been
actually dyan? Yung assumes absolutely no liability adopted in this jurisdiction, thus:
in connection therewith, because again this would In the context of our laws which authorize banking
make them uhmm.. this limits the duty to exercise institutions to rent out safety deposit boxes, it is
reasonable diligence, which of course, will be clear that in this jurisdiction, the prevailing rule in
contrary to public policy. the United States has been adopted. Section 72 of
the General Banking Act [R.A. 337, as amended]
The safety deposit box itself is located in its pertinently provides:
premises and is under its absolute control; the Bank "Sec. 72. In addition to the operations specifically
keeps the guard key to the said box and therefore it authorized elsewhere in this Act, banking
should exercise the diligence as that of a institutions other than building and loan
depositary. associations may perform the following services:
However the SC held that the bank could not be (a) Receive in custody funds, documents, and
held liable. No competent proof was shown that the valuable objects, and rent safety deposit boxes for
Bank was aware of the agreement between the the safequarding of such effects.
petitioner and the Pugaos to the effect that the xxx xxx xxx
certificates of title were withdrawable from the The banks shall perform the services permitted
safety deposit box only upon both parties' joint under subsections (a), (b) and (c) of this section
signatures, and that no evidence was submitted to

asdepositories or as agents. . . ."(emphasis from the relationship of the parties; liability of the
supplied) deposit company will not be enlarged or restricted
by words of doubtful meaning. The company, in
Note that the primary function is still found within renting safe-deposit boxes, cannot exempt itself
the parameters of a contract of deposit, i.e., the from liability for loss of the contents by its own fraud
receiving in custody of funds, documents and other or negligence or that, of its agents or servants, and
valuable objects for safekeeping. The renting out of if a provision of the contract may be construed as
the safety deposit boxes is not independent from, an attempt to do so, it will be held ineffective for the
but related to or in conjunction with, this principal purpose. Although it has been held that the lessor
function. A contract of deposit may be entered into of a safe-deposit box cannot limit its liability for loss
orally or in writing (Art. 1969, Civil Code] and, of the contents thereof through its own negligence,
pursuant to Article 1306 of the Civil Code, the the view has been taken that such a lessor may
parties thereto may establish such stipulations, limit its liability to some extent by agreement or
clauses, terms and conditions as they may deem stipulation.
convenient, provided they are not contrary to law,
morals, good customs, public order or public policy. SBTC is Negligent.
The depositary's responsibility for the safekeeping Respondent cannot invoke fortuitous event under
of the objects deposited in the case at bar is Article 1174by reason of its negligence . SBTC's
governed by Title I, Book IV of the Civil Code. negligence aggravated the injury or damage to the
Accordingly, the depositary would be liable if, in stamp collection. SBTC was aware of the floods of
performing its obligation, it is found guilty of fraud, 1985 and 1986; it also knew that the floodwaters
negligence, delay or contravention of the tenor of inundated the room where Safe Deposit Box No. 54
the agreement [Art. 1170, id.]. In the absence of was located. In view thereof, it should have lost no
any stipulation prescribing the degree of diligence time in notifying the petitioner in order that the box
required, that of a good father of a family is to be could have been opened to retrieve the stamps,
observed [Art. 1173, id.]. Hence, any stipulation thus saving the same from further deterioration and
exempting the depositary from any liability arising loss. In this respect, it failed to exercise the
from the loss of the thing deposited on account of reasonable care and prudence expected of a good
fraud, negligence or delay would be void for being father of a family, thereby becoming a party to the
contrary to law and public policy. aggravation of the injury or loss.
Condition 13 and 14 of the Contract of Lease are Accordingly, the aforementioned fourth
Void. characteristic of a fortuitous event is absent Article
Conditions 13 and l4 of the questioned contract of 1170 of the Civil Code is therefore applicable.
lease of the safety deposit box, which read:
"13. The bank is a depositary of the contents of the Those who in the performance of their obligation
safe and it has neither the possession nor control of are guilty of fraud, negligence, or delay, and those
the same. who in any manner contravene the tenor thereof,
"14. The bank has no interest whatsoever in said are liable for damages.
contents, except as herein expressly provided, and
it assumes absolutely no liability in connection QUESTIONS: (none)
therewith."
are void as they are contrary to law and public DISCUSSION:
policy. Said provisions are inconsistent with the Alright, what is the basis of the liability? –
respondent Bank's responsibility as a depositary Negligence.
under Section 72 (a) of the General Banking Act.
The cause of the damage noh as to the stamp
Furthermore, condition 13 stands on a wrong collection was a fortuitous event. We all know noh
premise and is contrary to the actual practice of the that a fortuitous event can be the cause for the
Bank. It is not correct to assert that the Bank has extinguishment of the obligation. However, what is
neither the possession nor control of the contents of the negligence here on the part of the bank? Its
the box since in fact, the safety deposit box itself is negligence aggravated the injury or damage to the
located in its premises and is under its absolute stamp collection. The bank SBTC was aware of the
control; moreover, the respondent Bank keeps the floods of 1985 and 1986; it also knew that the
guard key to the said box. floodwaters inundated the room where Safe Deposit
Box No. 54 was located. It should have lost no time
As stated earlier, renters cannot open their in notifying the petitioner in order that the box could
respective boxes unless the Bank cooperates by have been opened to retrieve the stamps, thus
presenting and using this guard key. Clearly then, saving the same from further deterioration and loss.
to the extent above stated, the foregoing conditions So here, it clearly failed to exercise the reasonable
in the contract in question are void and ineffective. care and prudence expected of a good father of a
It has been said: family. While it is true that it cannot open it because
"With respect to property deposited in a safe- again, the key is with Sia, while it is true that the
deposit box by a customer of a safe-deposit damage was primarily caused by the fortuitous
company, the parties, since the relation is a event, again the aggravation was due to their
contractual one, may by special contract define negligence. The fourth characteristic of a fortuitous
their respective duties or provide for increasing or event is absent Article 1170, wherein the obligor
limiting the liability of the deposit company, must be free from any participation in the
provided such contract is not in violation of law or aggravation of the injury resulting to the creditor.
public policy. It must clearly appear that there
actually was such a special contract, however, in December 04, 2015 (Cabangbang)
order to vary the ordinary obligations implied by law

Ok so voluntary deposit, sa voluntary makes the depository liable for damages; however,
deposit we already discussed Article 1975 again the depositary can make use of the thing even
take note of the last sentence therein that this without the express permission of the depositor if
provision in the first paragraph thereof is not applied such use is necessary for the preservation of the
to contracts for rent of safety deposit boxes. So we said thing. However the use must be limited to that
have already emphasized the distinctions between purpose only. Example of things which must be
a contract of lease, an ordinary contract of lease used in order to preserved it, give me an example
and the lease of a safety deposit box. So we have of things, na dapat gamitin to preserve it, CAR, the
emphasized that a lease of a safety deposit box is very least dapat paandarin, pero di mo rin pwede
considered as a special kind of deposit, so we have sabihin na idrive mo from Davao City to Panabo to
discussed the cases of CA Agro as well as Sia. preserve a car. Other examples, appliances, which
Now Article 1976 is refrigerator; they say noh dapat gamitin and ref
otherwise masira din yan siya katagalan.
Art. 1976. Unless there is a stipulation to the
contrary, the depositary may commingle grain Now what is the effect if the depositary is
or other articles of the same kind and quality, in permitted to use the thing?
which case the various depositors shall own or
have a proportionate interest in the mass. (n) Student Answer: If the depository is
permitted to use the thing Ma'am, it is converted
into a loan or a commadatum.
Right, so have the term here commingle
noh, ihalo or together, depositary as general rule, Now what happened in the case of Baron vs.
depositary is permitted to commingle grains and David.
other articles of the same kind and quality. Various
depositors of the commingled goods shall own the
entire mass in common and each depositor shall be SILVESTRA BARON and GUILLERMO BARON
entitled to such portion of the entire mass as the vs. PABLO DAVID
amount deposited by the millers being hold.
FACTS:
As an exception if the parties have
stipulated that even the subject matter is a grain or Silvestra and Guillermo are Pablo David’s aunt and
some other articles if it is stipulated that it cannot be uncle.
commingled with others of the same kind and
quality and that will prevail, however, if it is not of Pablo owned a popular rice mill in Pampanga,
the same kind and quality, the duty of the which burned in a fire on Jan. 17 1921.
depositary is to keep them separate or at least
identifiable as he must return to each depositor the Prior to the fire, at around June 1920, Silvestra
identical articles delivered. deposited 1k cavans and 24kilos of rice in Pablo’s
mill. Guillermo placed another 1.8k cavans and
Now what's the relevance of this provision? 43kilos. Pablo made an advance to Guillermo in the
In case of loss, in case of damage or deterioration. amount of P2800. The Barons claim that they sold
So let's say you have various depositors delivered the palay to David; that the deliveries were made at
let us say 1/2 sacks of rice each, they are the same David’s request, as he promised that he would
kind and quality. So as the general rule, depositary resell the palay during the times when the selling
can commingle it. now what's happen here there is price were the highest. He would then pay his aunt
a flood, wherein some of the sacks of rice, yung and uncle in December.
nasa baba, nadamage, so you cannot say for
come/first in, first out, so kung sino yung unang David, on the other hand, claims that the palay
nagdeposit sa kanya yung andun sa baba, so that were mere deposits subject to future withdrawal the
will be unfair to the rest. depositors or subject to some future sale which was
never effected. He therefore supposes himself to be
Now this 1976 provision would be relevant
relieved from all responsibility by virtue of the fire of
because with regard to the loss the depositors will
January 17, 1921.
suffer the loss proportionately. so that is the
relevance, so again that is only applicable with
ISSUES:
regard to Articles 1976, are of the same kind and
1.) What is the nature of the contract between the
quality and in the absence of an express stipulation
Barons and David? COMMODATUM
that the articles cannot be commingled.
2.) WON David is liable for the value of the palay.
Art. 1977. The depositary cannot make use of
YES
the thing deposited without the express
HELD:
permission of the depositor.
Otherwise, he shall be liable for damages. Contract of commodatum present if depository has
permission to make use of the thing deposited
However, when the preservation of the thing Under article 1768 of the Civil Code, when the
deposited requires its use, it must be used but depository has permission to make use of the thing
only for that purpose. (1767a) deposited, the contract loses the character of mere
deposit and becomes a loan or a commodatum;
and of course by appropriating the thing, the bailee
So again noh, to emphasized principal becomes responsible for its value.
purpose of a contract of deposit that is for
safekeeping and not for use. Unauthorized use The Court further said that David’s lawyers were

under the mistaken impression that if they were the contract of commodatum? - It's gratuitous
to prove that the contract was that of a deposit, Ma'am, essentially gratuitous.
David would be absolved of liability. Even if the
palay may have been delivered in the character of In this case, since it was not a contract of
deposit, subject to future sale or withdrawal at deposit, can we say it is a commodatum, can we
plaintiffs' election, nevertheless if it was understood say that it is essentially gratuitous contract between
that the defendant might mill the palay and he has the parties here? -
in fact appropriated it to his own use, he is of
course bound to account for its value. What’s the obligation of Pablo? - There was
an implied understanding ma'am that he will convert
David is liable, as he has appropriated the palay it into rice and sell it.
delivered by the Barons long before the fire
What happens to the proceeds if he sells it?
The palay in question was placed by the plaintiffs in - if he sells it he will give the proceeds to...
the defendant's mill with the understanding that the
defendant was at liberty to convert it into rice and So that's in consonance to the obligations
dispose of it at his pleasure. The mill was actively involving a contract of commadatum? - No Ma'am,
running during the entire season, and as palay was because there will already be compensation.
daily coming in from many customers and as rice
was being constantly shipped by the defendant to Ok so it will not be essentially gratuitous
Manila, or other rice markets, it was impossible to and further it's a real contract of commodatum, he
keep the plaintiffs' palay segregated. has the obligation to return the exact same thing. In
this case, hindi noh.
In view of the nature of the defendant's activities
and the How about a simple loan or mutuum? Can
way in which the palay was handled in the we consider that the parties who would have
defendant's mill, it is quite certain that all of the entered into a mutuum in this case?
plaintiffs' palay, which was put in before June 1,
1920, been milled and disposed of long prior to the So it's clear, it's not deposit and base on
fire of January 17, 1921. the facts defense say since the SC did not
categorically state as to its nature, however we can
Considering the fact that the defendant had thus say that it could not be a commodatum.
milled and doubtless sold the plaintiffs' palay prior
to the date of the fire, it result that he is bound to How about mutuum?
account for its value, and his liability was not
extinguished by the occurrence of the fire. What is the obligation involved in a contract
of mutuum? - to return the same thing.
Ok to return the equivalent of the thing that

was delivered.
Does Pablo have the obligation to return

QUESTIONS: the equivalent of what has been delivered to him? -
No Ma'am.
On what ground? On what ground that he
seeks to be relieved from liability? - Because of a Because again what was his obligation? -
fortuitous event Ma'am, because of the fire. to remit the proceeds of the same in case he
converts it into rice.
So was there really a contract of deposit
here? - No Ma'am. So if you look at the facts of this case, even
if the SC referred to Article 1768, now 1978 of the
Now why would that be relevant? Why was CC. it could not be loan or commodatum, what do
it that Pablo was asserting that this was a contract you think it could be? -
of deposit? - Because if it was a contract of deposit
ma'am, he will not be liable for the loss of the palay Delivery of Palay in exchange for what? -
due to the fortuitous event.
Again, what's the obligation of Pablo here?
Okay. Since it was not a deposit, did the - To give the proceeds..
Supreme Court state in its decision, what was the
nature of the contract entered into by the parties? - Ok proceeds, the process contract would
It did not categorically state Ma'am but the SC held be? Contract of sale
that it could be a loan or a commodatum. It can be
a commodatum if it is to prove that the use of the Ok contract of sale. Although again for
cavans of play must only for it to be converted into emphasizing the SC did not state as to what was
rice and sold to other customer. It could be a loan the real agreement. What is clear here is that there
or mutuum if Pablo himself converted it and is not contract of deposit and wherefore, Pablo is
consumed the rice for himself. not relieved from his obligation.
For himself? - For his own consumption. DISCUSSIONS:
Can we really say here that based on the Here the Supreme Court stated that the
facts of these case, can we really say that they defendant was at liberty to convert it into rice and
entered into a commodatum? What’s the nature of

dispose it at his pleasure. He’s bound to account for again was not the purpose of Baron vs. David
its value and his liability was not extinguished by Case.
the occurrence of the fire. In fact it was also pointed
out, that it was certain that the palay which is put in Now here if is not consumable, depositary
for June 01, 1920, had been milled and disposed is allowed to use. Again it losses the character of
prior to the fire in February 17, 1921. deposit and become commodatum despite being
denominated as deposit. Unless still keeping the
Even supposing that the palay may have principal purpose of a contract. however if the
been delivered in the character of deposit, subject subject matter is money or consumable thing and
to future sale or withdrawal at plaintiffs' election, the thing is deposited and the depositary is allowed
nevertheless if it was understood that the defendant to use it, it will result into consumption and converts
might mill the palay and he has in fact appropriated the contract into a simple loan or mutuum.
it to his own use, he is of course bound to account
for its value. So with that take note of the distinction
between a contract of loan and a deposit.
And then there's reference there to Article
1978, and the SC added that of course by Student Answer:
appropriating the thing the bailee becomes
responsible for its value. so again , the relevance In the contract of loan Ma'am, the principal
here, determining there was a deposit or not is as to purpose is the consumption of the subject matter
the liability of David, asserting that he could not be while in contract of deposit it is for purposes of
liable due to a fortuitous event. The SC said that safekeeping.
there is not deposit; therefore he would still be liable
to the Baron's, Silvestra and Guillermo. In deposit, depositor can demand the return
of the subject matter at will while in contract of loan,
So that Article 1978. it depends upon the expiration of the period.
Art. 1978. When the depositary has permission What happened in the case of Javellana?
to use the thing deposited, the contract loses
the concept of a deposit and becomes a loan or ANGEL JAVELLANA vs. JOSE LIM, ET AL.
commodatum, except where safekeeping is still
the principal purpose of the contract. FACTS:
Angel Javellana filed a complaint on the 30th of
The permission shall not be presumed, and its October, 1906 against Jose Lim and Ceferino
existence must be proved. (1768a) Domingo Lim. It was then alleged that on the 26th
of May, 1897, Lim executed and subscribed a
document, in favor of Javellana, reading as follows:
So here you take into consideration the nature of
the object. if the thing was deposited and the thing We have received from Angel Javellana, as a
is not consumable but the depository was allowed deposit without interest, the sum of two thousand
to use the thing then the contract losses the six hundred and eighty-six cents of pesos fuertes,
character of a deposit and it becomes a which we will return to the said gentleman, jointly
commodatum. and severally, on the 20th of January, 1898. —
Jaro, 26th of May, 1897. — Signed Jose Lim. —
Notice in the case of Baron vs. David, what Signed: Ceferino Domingo Lim.
was the subject thereof? Rice. So what's the nature
of rice? it is consumable thing. So we cannot apply, It was also alleged that, when the obligation
that's another reason that we can say it's not a became due, Lim begged Javellana for an
commodatum. extension of time for the payment thereof, building
themselves to pay interest at the rate of 15 per cent
And even if you say consumable thing, on the amount of their indebtedness, to which
which can be an object of commadatum the Javellana acceded; that on the 15th of May, 1902,
purpose must be merely for exhibition, which is the debtors paid on account of interest due the sum
again was not the purpose of Baron vs. David of P1,000 pesos, with the exception of either capital
Case. or interest, had thereby been subjected to loss and
damages.
Now here if is not consumable, depositary
is allowed to use. Again it losses the character of Lim answered that they admitted the statements of
deposit and become commodatum despite being the plaintiff relative to the payment of 1,102.16
denominated as deposit. Unless still keeping the pesos made
principal purpose of a contract. however if the on the 15th of November, 1902, not, however, as
subject matter is money or consumable thing and payment of interest on the amount stated in the
the thing is deposited and the depositary is allowed foregoing document, but on account of the principal,
to use it, it will result into consumption and converts and denied that there had been any agreement as
the contract into a simple loan or mutuum. to an extension of the time for payment and the
payment of interest at the rate of 15 per cent per
So with that take note of the distinction annum.
between a contract of loan and a deposit.
ISSUE: WON the contract is a deposit. NO, it was a
And even if you say consumable thing, contract of loan.
which can be an object of commodatum the
purpose must be merely for exhibition, which is HELD:

The document of indebtedness inserted in the Express permission: Javellana, the creditor, by
complaint states that the Javellana left on deposit granting them the extension, evidently confirmed
with Lim a given sum of money which they were the express
jointly and severally permission previously given to use and dispose of
obliged to return on a certain date fixed in the the amount stated as having been deposited,
document; but that, nevertheless, when the which, in accordance with the loan, to all intents
document written in the Visayan dialect and and purposes gratuitously, until the 20th of January,
followed by a translation into Spanish was 1898, and from that dated with interest at 15 per
executed, it was acknowledged, at the date thereof, cent per annum until its full payment, deducting
th
the 15 of November, 1902, that the amount from the total amount of interest the sum of 1,000
deposited had not yet been returned to Javellana. pesos, in accordance with the provisions of article
He was subjected to losses and damages 1173 of the Civil Code.
amounting to 830 pesos since the 20th of January,
1898, when the return was again stipulated with the Notwithstanding that it does not appear that Jose
further agreement that the amount deposited should Lim signed the document executed in the presence
bear interest at the rate of 15 per cent per annum of three
from January 20. The 1,000 pesos paid to the witnesses on the 15th of November, 1902, by
depositor on the 15th of May, 1900, according to Ceferino
the receipt issued by him to the debtors, would be Domingo Lim on behalf of himself and the former,
included, and that the said rate of interest would nevertheless, the said document has not been
obtain until the debtors on the 20th of May, 1897, it contested as false, either by a criminal or by a civil
is called a deposit consisted, and they could have proceeding, nor has any doubt been cast upon the
accomplished the return agreed upon by the authenticity of the signatures of the witnesses who
delivery of a sum equal to the one received by attested the execution of the same; and from the
them. evidence in the case one is sufficiently convinced
For this reason it must be understood that the that the said Jose Lim was perfectly aware of and
debtors were lawfully authorized to make use of the authorized his joint co-debtor to liquidate the
amount deposited, which they have done, as interest, to pay the sum of 1,000 pesos, on account
subsequent shown when asking for an extension of thereof, and to execute the aforesaid document No.
the time for the return thereof, inasmuch as, 2. A true ratification of the original document of
acknowledging that they have subjected the letter, deposit was thus made, and not the least proof is
their creditor, to losses and damages for not shown in the record that Jose Lim had ever paid the
complying with what had been stipulated, and being whole or any part of the capital stated in the original
conscious that they had used, for their own profit document.
and gain, the money that they received apparently
as a deposit, they engaged to pay interest to the There was no renewal of the contract deposited
creditor from the date named until the time when converted into a loan, because, as has already
the refund should be made. Such conduct on the been stated, the defendants received said amount
part of the debtors is unquestionable evidence that by virtue of real loan contract under the name of a
the transaction entered into between the interested deposit, since the so-called bailees were forthwith
parties was not a deposit, but a real contract of authorized to dispose of the amount deposited. This
loan. they have done, as has been clearly shown.
Article 1767 of the Civil Code provides that — QUESTIONS:

The depository cannot make use of the thing
deposited without the express permission of the
So what where taken into considerations here by
depositor.
the Court in saying that there is no deposit but only
Otherwise he shall be liable for losses and
a loan, despite the use of the term deposit in the
damages.
first agreement that they executed?
Article 1768 also provides that —
When the depository has permission to make use of Student Answer:`The look into account Article 1768
the thing deposited, the contract loses the character for in it was stated that, when the depositary has
of a deposit and becomes a loan or bailment. permission to use the thing deposited, the contract
loses the concept of a deposit and becomes a loan
The permission shall not be presumed, and its or commodatum, except where safekeeping is still
existence must be proven. the principal purpose of the contract.
Depository making use of the thing deposited: The permission shall not be presumed, and its
When existence must be proved.
on one of the latter days of January, 1898, Jose Lim
went to the office of the creditor asking for an As well as Article 1767, when it provided that the
extension of one year, in view of the fact the money depositary cannot keep the thing without the
was scare, and because neither himself nor the express..(cut-off..)
other defendant were able to return the amount
deposited, for which reason he agreed to pay What is the evidence here that debtor was allowed
interest at the rate of 15 per cent per annum, it was to make use of the money that was delivered to
because, as a matter of fact, he did not have in his them?
possession the amount deposited, he having made
use of the same in his business and for his own - when Lim went to the office of the creditor asked
profit; him for the extension of 1 year, for the fact that he

did not have in his possession the amount preservation of thing deposited and the burden is
deposited having made use of the same in his on the depositary that the permission has been
business. given.
Now can we say that there was a conversion of Now Article 1979
contract of deposit to a contract of loan by virtue of
that second agreement within the parties? - Yes Art. 1979. The depositary is liable for the loss of
Ma'am. the thing through a fortuitous event:
It was a conversion from deposit and become a (1) If it is so stipulated;

loan? - The Court said that even though the
contract was under the name of deposit it was really
(2) If he uses the thing without the depositor's
a loan.
permission;
So what does it mean? Was there a contract of
deposit that was converted into a contract of loan? - (3) If he delays its return;
(4) If he allows others to use it, even though he

What was the initial intention of the parties? Was it himself may have been authorized to use the
really for safekeeping or for the means to make use same. (n)
of the money delivered to them? - since the debtor
here engage to pay the interest and even though Ok so the general rule, depositary is not
they received apparently was a deposit, they liable for loss through a fortuitous event without his
engage between the interest of the creditor from the fault. So kung meron tayong exception sa
day until the time the refund should be made. So commodatum meron din tayong exception sa
the contract on the part of the debtor is not a deposit.
depository contract but of a loan.
Instances when the depositary is liable for
DISCUSSION: the loss of the thing even if because due to a
fortuitous event. So stipulated, uses the thing
So here notice in the first contract that they without permission of depositor, if there is delay, if
executed they use the term deposit with the he allows other to use it even though he himself
obligation to return the said amount to the creditor may have been authorize to use the same.
Javellana and then subsequently they executed the
second document wherein this time they referred to Now we proceed to article 1980.
the agreement with a real contract of loan with
interest. Art. 1980. Fixed, savings, and current deposits
of money in banks and similar institutions shall
Now with this case the SC held that they did not be governed by the provisions concerning
engage to return the same coins received and the simple loan. (n)
____ the amount to deposit consisted. And they
could have accomplished the return, agreed upon Bank deposited are considered in a nature
by the delivery of a sum equal to the one received of an irregular deposit.
by them. For this it must be understood that the
debtors were lawfully authorize to make use of the What do you mean by an irregular deposit?
amount deposited which they have done. So it's not - the benefit is on the depositor alone and that the
a deposit but a real contract of loan. by granting depositor is preference over the creditors and
them the extension, it confirmed the express depositors can demand the return thing/money
permission previously given them to use and anytime.
dispose of the amount stated as having been
deposited. What happened in the case of Rogers vs. Smith?
There was no renewal of the deposit converted into ROGERS VS. SMITH
the loan because again the defendants from the
very beginning received the said amount by virtue FACTS: Plaintiff Jose Rogers (Rogers) brought this
of a loan under the name of a deposit. Since the so action in the CFI city of Manila upon the following
called bailees were forthwith authorized to dispose document:(the subject document of the case) No.
of the amount deposited. 1418. $12,000.
So take note that when you consider a contract, a The sum of pesos twelve thousand has been
loan or a deposit there was a difference. Yung deposited with us, received from Jose Rogers,
obligation ng respective parties, aside from the which sum we will pay on the last day of the six
purpose, deposit - safekeeping; loan - to use. months after the presentation of this document, to
the order of Mr. Jose Rogers. Manila, February 17,
Also take into consideration, what is the obligation 1876. SMITH, BELL & CO.
in deposit? to return the exact same thing to the
depositor while in contract of loan, to deliver the The said sum of twelve thousand pesos shall bear
equivalent of what has been received. interest at the rate of eight per centum (8%) per
annum from this date, February 17, 1876.
now under 1978, is also stated with regard to
SMITH, BELL & CO.
permission, that is not commissioned to use is not
presumed. when such use is necessary for the When this document was delivered by the

defendants Smith, Bell & CO. (Smith) to Rogers,

12,000 pesos in silver were worth more than 12,000
pesos in gold. 1. in irregular deposit the benefit accrues to
the depositor alone whereas in loan the
The only question in the case is, whether upon benefit is for both parties, the essential
these documents Rogers is entitled to recover cause is the necessity of the borrower;
12,000 pesos or 24,000 pesos. CFI held that he
was entitled to recover only 12,000 pesos. Rogers 2. in irregular deposit the depositor has a
has appealed. Rogers delivered to Smith, in preference over other creditors whereas in
consideration of the execution of the document, loan there is no such preference;
12,000 in gold.
3. in irregular deposit the depositor can
Soon thereafter Rogers moved to Barcelona and demand the return of the article at any time
have since resided there. Smith remitted the whereas in loan the parties are bound by
interest to him every three months at the rate of 8 the contract.
per cent per annum until the 30th day of January,
1888, when they notified him that thereafter the In the first difference, the contract in question does
interest would be 6 per cent. Rogers accepted this not fulfill this requirement of an irregular deposit. It
reduction and interest and that rate was remitted to is very apparent that is was not for the sole benefit
him by Smith until the 10th of February, 1904. This of Rogers. It like any other loan of money was for
interest was remitted in silver; that is to say, every the benefit of both parties. The benefit which Smith,
three months the Smith took 180 pesos in silver and Bell & Co. received was the use of the money; the
with it bought exchange on Barcelona or other benefit which Rogers received was the interest of
European point converted into pesetas. Rogers his money. In the letter which Smith, Bell & Co. on
received these payments in silver without any the 30th of June, 1888, notified the plaintiff of the
protest whatever until the 10th day of February, reduction of the interest, they said: "We call your
1904. attention to this matter in order that you may if you
think best employ your money in some other place."
In his letter of that date, he called the attention of
the Smith to the fact that by the new American law The second difference which exists, according to
in force in the Philippines the gold standard had Manresa, between an irregular deposit and a loan
been introduced and that by reason thereof he was lies in the fact that in an irregular deposit the
entitled to receive his interest in gold, in view of the depositor has a preference over other creditors in
fact that when he delivered the money to the Smith the distribution of the debtor's property. It is
in 1876 he delivered it in gold coin. apparent, therefore, that this document does not
state those requisites which are essential to an
In another letter of the 15th of December, 1904, he irregular deposit.
expressly refers to the act of Congress of March 2,
1903, and to the subsequent proclamations of the Nor does the contract in question fulfill the third
Governor-General relating to coinage. requisite, which is, in an irregular deposit, the
depositor can demand the return of the article at
Rogers claims that, having paid to Smith 12,000 any time, while a lender is bound by the provisions
pesos in gold coin, he is now entitled to receive of the contract and cannot seek restitution until the
from them the value of 12,000 pesos in gold coin; time for payment, as provided in the contract, has
that is to say, 24,000 pesos in silver. It is necessary arisen. It is apparent from the terms of this
to determine in the first place the nature of the document that the plaintiff could not demand his
contract evidenced by the document of the 17th of money at any time. He was bound to give notice of
February, 1876. his desire for its return and then to wait for six
months before he could insist upon payment.
From the above discussions, it is very apparent that

ISSUE: WON the document is an evidence of an is was not for the sole benefit of Rogers. Like any
ordinary loan which created between the Rogers other loan it was for the benefit of both parties. The
and the Smith the simple relation of debtor and benefit of Smith Bell Company was the use of the
creditor. YES money while Jose Rogers' benefit was the interest
on his money. Also, he was not able to demand for
HELD: The document is an evidence of ordinary
the money at any time for he is supposed to give
loan.
notice and wait for six months first before payment.
Rogers repeatedly calls it a deposit, that is, that the Thus, the transaction is that of an ordinary loan and
ownership of the particular coin which was not an irregular deposit.
delivered by him to Smith did not pass to Smith but
remained in him and that Smith was bound to return
to him the identical coin which they had received. It
QUESTIONS:
is apparent that no such claim could be maintained
in view of that part of the instrument which provides
What's the issue here? - the issue is
for the payment of interest. But while not a deposit
whether the document is for an ordinary loan
in the strict sense of the word, the document
evidences what is known as an "irregular deposit."
Why would that be an issue? -
The Supreme Court cited Manresa's discussion on
the differences of a loan and an irregular deposit What was the allegation here on the part of
namely: Smith? Alright from the Smith and Bell Company
what was the allegation? What is the allegation on

the part of the creditor Roger's? It is a deposit to bound by the provisions of the contract and cannot
him or considered as a loan? According to Roger's seek restitution until the time of payment. As
Ma'am it was a deposit and that the ownership of provided in the contract as already said.
the coins is not transferred to Smith.
In this case plaintiff could not demand his
Why does he want it to be considered as money anytime. It is clearly stipulated in their
deposit and not a loan? - there was a passage of a agreement that they have to wait for six month from
law, new American law in force in the Philippines notice before he could insist for payment.
the gold standard had been introduced and that by
reason thereof he was entitled to receive his Likewise, an irregular deposit has a
interest in gold, in view of the fact that when he preference over other creditors in the distribution of
delivered the money to the Smith in 1876 he the debtor's properties. So here the document in
delivered it in gold coin. questions shows that what they agreed into is an
ordinary loan and the relation is that between of a
But if there was a certain interest, would it debtor and a creditor. Now this case of Rogers vs.
be contrary to his defense that it was a contract Smith was also mentioned in the case of Compania
of deposit or contrary to his allegation that it must Agricola.
be considered as a deposit and not a loan? - Yes
Ma'am
So what do you have here? is it a loan or a COMPAÑIA AGRICOLA VS. NEPOMUCENO

deposit? - According to the SC it was loan and not a
deposit, even if it will not be also considered as an FACTS: On March 17, 1927, the registered
irregular deposit because the three circumstances partnerships, Mariano Velasco & Co., Mariano
were not complied with. Velasco, Sons, & Co., and Mariano Velasco & Co.,
Inc., were declared insolvent by the Court of First
What are these three circumstances? it was Instance of Manila.
not solely for the benefit of Roger's Smith; the main
cause, the thing that was allegedly deposited was On the 16th day of April, 1927, the Compania
not solely for the benefit of Rogers but also for the Agricola de Ultramar filed a claim against one of the
benefit of Smith; Roger has no preference over the insolvents Mariano Velasco & Co., claiming the sum
thing; the depositor can demand the return of the of P10,000, with the agreed interest thereon at the
article, in the case Rogers cannot demand anytime rate of 6 per cent per annum from April 5, 1918,
the return of the articles. until its full payment was a deposit with said
Mariano Velasco & Co. and asked the court to
When can you demand for the return? - declare it a preferred claim.
from the notice of his demand and he has also have
to wait for 6 months from such notice to insist upon
payment. The assignee of the insolvency answered the claim
by interposing a general denial.
So here, what you have is a contract of
loan even if appellant Roger's repeated calls it a On September 23, 1929, the court rendered a
deposit. Why? Why was he is alleging that it was a decision declaring that the alleged deposit was a
deposit? Because here when the document, the preferred claim for the sum mentioned, with interest
note was delivered, 12, 000 that was the obligation, at 6 per cent per annum from April 5, 1918, until
12,000 pesos in silver were more than 2,000 pesos paid. From this decision the assignee appealed.
in gold. The plaintiff delivered to the defendant in
consideration of the execution of the document The evidence presented by the claimant Compania
12,000 pesos in gold but subsequently what Agricola de Ultramar consisted of a receipt in
happened? The value of gold increased. So ngayon writing, and the testimony of Jose Velasco who was
he is demanding na it's a deposit so he will now manager of Mariano Velasco & Co. at the time the
exactly revert the exact gold that I delivered to you. note was executed. The receipt reads as follows:
Rather than the 12,000 pesos in silver, this is now
the equivalent thereof, if it would be considered as MANILA, P. I., April 5, 1918.
a contact of loan. Received from the "Compania Agricola de
Ultramar" the sum of ten thousand Philippine pesos
But what was the obligation here of Smith as a deposit at the interest of six per cent annually,
Bell and Company? It was not to return the identical for the term of three months from date.
coins, gold coins that they have received, no such
thing could be returned in lieu on the part of the In witness thereof, I sign the present.
instruments which provides for the payment of MARIANO VELASCO & CO.
interest. Payment of interest is not present in a By (Sgd.) JOSE VELASCO
contract of deposit. Manager.
P10,000.00.
Now, it was claimed that this could be an
irregular deposit but the SC held that these could In his testimony, Jose Velasco stated that his
not be an irregular deposit. The benefit for a signature on the receipt was authentic and that he
contract of loan is for the benefit of both parties received the said sum of P10,000 from the appellee
while in contract of irregular deposit it only for the and deposited it with the bank in the current
sole benefit of the creditor. in an irregular deposit account of Mariano Velasco & Co.
the depositor can demand the return of the article at
any time while if it is a contract of loan, a lender is ISSUE: WON the claim filed is that of a deposit or a

loan? LOAN bound by the provisions of the contract and cannot

seek restitution until the time for payment, as
HELD: The Supreme Court reiterated the ruling in provided in the contract, has arisen. It is apparent
the case of Gavieres vs. De Tavera (1 Phil., 17) from the terms of this documents that the plaintiff
which had a very similar facts to the present case. could not demand his money at any time. He was
The court held that the transaction therein involved bound to give notice of his desire for its return and
was a loan and not a deposit. The court said: then to wait for six months before he could insist
upon payment.
Although in the document in question a deposit
is spoken of, nevertheless from an examination In the present case the transaction in question
of the entire document it clearly appears that was clearly not for the sole benefit of the
the contract was a loan and that such was the Compania Agricola de Ultramar; it was evidently
intention of the parties. It is unnecessary to for the benefit of both parties. Neither could the
recur to the cannons of interpretation to arrive alleged depositor demand payment until the
at this conclusion. The obligation of the expiration of the term of three months.
depository to pay interest at the rate of 6 per
cent to the depositor suffices to cause the For the reasons stated, the appealed judgment is
obligation to be considered as a loan and reversed, and we hold that the transaction in
makes it likewise evident that it was the question must be regarded as a loan, without
intention of the parties that the depository preference.
should have the right to make use of the
amount deposited, since it was stipulated that
the amount could be collected after notice of
two months in advance. Such being the case, QUESTIONS:
the contract lost the character of a deposit and
acquired that of a loan. (Art.1768, Civil Code.) Why would it be necessary to determine the
nature of the agreement? - because if the 10,000
Article 1767 of the Civil Code provides that —"The will be considered as a deposit then the Compania
depository cannot make use of the thing deposited as well do not have preferential right to pay such
without the express permission of the depositor." value.
"Otherwise he shall be liable for losses and
damages." So what do you have here, a loan or a
deposit? - it is a loan Ma'am
Article 1768 also provides that — "When the
depository has permission to make use of the thing Why was it considered as a loan? - it is
deposited, the contract loses the character of a considered as a loan by citing the case of
deposit and becomes a loan or bailment." "The Javellana, because this transaction involves, they
permission not be presumed, and its existence have interest and it is also for the benefit of the
must be proven." parties
Moreover it may be inferred that there was no Can we not say that what we have here is
renewal of the contract of deposit converted into a an irregular deposit?
loan, because, as has already been stated, the
defendants received said amount by virtue of a At the very least, it not be considered as
real loan contract under the name of a deposit, irregular deposit? No Ma'am, because citing the
since the so-called bailees were forthwith case of Rogers vs. Smith, the three points different
authorized to dispose of the amount deposited. between and a loan and a deposited is not
This they have done, as has been clearly satisfied.
shown.
DISCUSSIONS:
The ten thousand pesos delivered by the appellee
to Mariano Velasco & Co. cannot be regarded as a So what's the relevance of determining the
technical deposit. But the appellee argues that it is nature of a contract here? Remember the
at least an "irregular deposit." This argument is, we distinction between a deposit and a loan, is that
think, sufficiently answered in the case of Rogers with regard to a deposit if true deposit it would be
vs. Smith, Bell & Co. (10 Phil., 319). There this considered as a preferred thing unlike an ordinary
court said: contract of loan.
Now in this case of Compania vs.

…Manresa, in his Commentaries on the Civil Code
Nepomuceno, the SC again emphasized the
(vol. 11, p. 664), states that there are three points of
distinctions between a contract of loan and that of
difference between a loan and an irregular deposit.
an irregular deposit.
The first difference which he points out consists in
the fact that in an irregular deposit the only benefit
Again an irregular deposit the only benefit
is that which accrues to the depositor, while in a
is that each accrues to the depositor while in a loan
loan the essential cause for the transaction is the
the essential cause to the transaction is the
necessity of the borrower.
necessity of the borrower. in irregular deposit ,
depositor can demand the return of the article any
Nor does the contract in question fulfill the third time while the debtor is bound by the provisions of
requisite indicated by Manresa, which is, that in an the contract, it cannot seek restitution until the time
irregular deposit, the depositor can demand the for payment as provided in the contract. in this
return of the article at any time, while a lender is case, 3 months from the day the note or receipt was
issued.

BPI for the return of the balance in the disputed

in the present case the transaction was account subject of the Holdout Agreement and the
clearly not for the sole benefit of Compania Agricola interests thereon after deducting the amount due on
as it was for the benefit of both parties. Notice also, the promissory note.
that here was payment for interest, even if they
used the term deposit in the receipt, on in there RTC dismissed the complaint and CA affirmed the
agreement the SC, again said that what we have decision.
here is a contract of loan and not a deposit, not
even an irregular deposit. Again contracts are BPI’s CONTENTION: BPI alleged that the Holdout
determined not by the nomenclature or titles given Agreement in question was subject to a suspensive
by the parties but rather as defined by law based on condition stated therein, viz., that the "P331,261.44
the agreement with the parties. But we have here is shall become a security for respondent Lim's
a loan without preference. promissory note only if respondents' Lim and
Eastern Plywood Corporation's interests to that
So what about the proceeds in banks? this amount are established as a result of a final and
is provided in 1980. notice in these cases of definitive judicial action or a settlement between
Compania and Rogers, the SC distinction an and among the contesting parties thereto." Hence,
irregular deposit form that of a contract of loan. BPI asserts, the Court of Appeals erred in affirming
the trial court's decision dismissing the complaint on
But they at look at the case of BPI vs. CA the ground that it was the duty of CBTC to debit the
wherein the SC held that bank deposits, by nature, account of the defendants to set off the amount of
bank deposits is not of an irregular deposit however P73,000.00 covered by the promissory note.
you apply the provisions as to loan.
EASTERN and LIM’s CONTENTION: Eastern and
What happened in the case of BPI vs. CA? Lim dispute the "suspensive condition" argument of
the petitioner that they are rightful owners of the
BPI v. CA money in question, the suspensive condition does
not find any application in this case and the bank
FACTS: Private respondents Eastern Plywood had the duty to set off this deposit with the loan.
Corporation (Eastern) and Benigno D. Lim (Lim),
held one joint bank account with the Commercial ISSUES:
Bank and Trust Co. (CBTC), the predecessor-in-
1. WON BPI can demand payment of the loan of
interest of petitioner Bank of the Philippine Islands
P73,000.00 despite the existence of the Holdout
(BPI).
Agreement? YES
Sometime in March 1975, a joint checking account
2. WON BPI is still liable to the private respondents
with Lim in the amount of P120,000.00 was opened
on the account subject of the Holdout Agreement
by Mariano Velasco with funds withdrawn from the
after its withdrawal by the heirs of Velasco? YES
account of Eastern and/or Lim.
HELD:
Velasco died. At the time of his death, the
outstanding balance of the account stood at ISSUE 1: It is clear in paragraph 02 of the “Holdout
P662,522.87. Agreement” that CBTC, or BPI as its successor-in-
interest, had every right to demand that Eastern
On 5 May 1977, by virtue of an Indemnity
and Lim settle their liability under the promissory
Undertaking executed by Lim one-half of these
note. It cannot be compelled to retain and apply the
amounts was provisionally released and transferred
deposit in Lim and Velasco's joint account to the
to one of the bank accounts of Eastern with CBTC.
payment of the note. What the agreement conferred
Thereafter, Eastern obtained a loan of P73,000.00
on CBTC was a power, not a duty. Generally, a
from CBTC as "Additional Working Capital,".
bank is under no duty or obligation to make the
Eastern issued a negotiable promissory note for
application. To apply the deposit to the payment of
P73,000.00 payable on demand to the order of
a loan is a privilege, a right of set-off which the bank
CBTC with interest at 14% per annum. The note
has the option to exercise.
was signed by Lim. The loan is wholly/partly
secured by the Hold-Out on a 1:1 on C/A No. 2310- Also, paragraph 05 of the Holdout Agreement itself
001-42, which refers to the joint account of Velasco states that notwithstanding the agreement, CBTC
and Lim with a balance of P331,261.44. In addition, was not in any way precluded from demanding
Eastern and Lim, and CBTC signed another payment from Eastern and from instituting an action
document entitled "Holdout Agreement," to recover payment of the loan. What it provides is
an alternative, not an exclusive, method of
On the other hand, a case for the settlement of
enforcing its claim on the note. Its suit for the
Velasco's estate was filed. In the said case, the
enforcement of the note was then in order and it
whole balance of P331,261.44 in the aforesaid joint
was error for the trial court to dismiss it on the
account of Velasco and Lim was being claimed as
theory that it was set off by an equivalent portion in
part of Velasco's estate. The intestate court granted
C/A No. 2310-001-42 which BPI should have
motion of the heirs of Velasco to withdraw the
debited. The "suspensive condition" theory of the
balance and authorized the heirs to divide among
petitioner is, therefore, untenable.
themselves the amount withdrawn.
ISSUE 2: The Court of Appeals correctly decided
CBTC was merged with BPI. BPI filed a complaint
on the counterclaim. The counterclaim of Eastern
against Lim and Eastern demanding payment of the
and Lim for the return of the P331,261.44 was
promissory note for P73,000.00. Defendants Lim
equivalent to a demand that they be allowed to
and Eastern, in turn, filed a counterclaim against
withdraw their deposit with the bank. Article 1980

of the Civil Code expressly provides that "[f]ixed,

savings, and current deposits of money in banks Because here BPI demanded from Eastern
and similar institutions shall be governed by the and Lim the payment of their loan but Eastern and
provisions concerning simple loan." Lim made a counterclaim against BPI. What was
the basis of their counter claim? - the balance of
In Serrano vs. Central Bank of the Philippines, the said account was subject to a holdout
we held that bank deposits are in the nature of agreement
irregular deposits; they are really loans because
they earn interest. The relationship then Because of what happened between that
between a depositor and a bank is one of account of Lim and Velasco? - the said account has
creditor and debtor. The deposit under the being claimed the Velasco's heirs Ma'am
questioned account was an ordinary bank
deposit; hence, it was payable on demand of the So aside from it was being claimed by the
depositor. heirs of Velasco, what did the BPI or the CBTC,
the previous bank did with this account? -
The account was proved and established to belong BPI alleged here Ma'am that the hold out
to Eastern even if it was deposited in the names of agreement was subject to a suspensive condition,
Lim and Velasco. As the real creditor of the bank, that the P331,261.44 shall become a security for
Eastern has the right to withdraw it or to demand respondent Lim's promissory note only if
payment thereof. BPI cannot be relieved of its duty respondents' Lim and Eastern Plywood
to pay Eastern simply because it already allowed Corporation's interests to that amount are
the heirs of Velasco to withdraw the whole balance established as a result of a final and definitive
of the account. The petitioner should not have judicial action or a settlement between and among
allowed such withdrawal because it had admitted in the contesting parties thereto.
the Holdout Agreement the questioned ownership
of the money deposited in the account. What is that P331,261.44? where did that
come from? - the whole balance of the account
Moreover, the order of the court merely authorized Ma'am
the heirs of Velasco to withdraw the account. BPI what account? the account of Velasco and Lim
was not specifically ordered to release the account Ma'am
to the said heirs; hence, it was under no judicial
compulsion to do so. Because the ownership of the Ok then what did the bank do with that
deposit remained undetermined, BPI, as the debtor, balance in the joint account of Velasco and Lim?
had no right to pay to persons other than those in the bank released the balance to the heirs of
whose favor the obligation was constituted or Velasco
whose right or authority to receive payment is
indisputable. Payment made by the debtor to the Ok, it released, actually half lang noh,
wrong party does not extinguish the obligation as to because it appears that it is in the name of Velasco
the creditor who is without fault or negligence, even and Lim, it's a joint account. so in
if the debtor acted in utmost good faith and by other words based on that the heirs made a claim
mistake as to the person of the creditor, or through that they are entitled and that should be part of the
error induced by fraud of a third person. The estate of Velasco.
payment then by BPI to the heirs of Velasco, even if
done in good faith, did not extinguish its obligation Now here, is BPI for the released of the
to the true depositor, Eastern. amount to the heirs of Velasco? - Yes Ma'am.
Why did they are liable when Velasco is

So what is the issue here? - So in this case one of the holders of the joint account? -
Ma'am the issue is WON BPI can demand the
payment of the loan despite the hold out Who is the true owner of the amount in the
agreement? joint account of Velasco and Lim? - Eastern Ma'am
So BPI is the one who filed the case What was the evidence here in the part of
against? Lim and Eastern, for the payment of their Eastern? - the hold out agreement
loan.
Ok. Because of that hold out agreement.
What is the relevance of this case in And with that what is the liability of the part of BPI?
relation to Article 1980? Because Ma'am Article The hold out agreement serves as a, because the
19802 of the Civil Code Provides that "[f]ixed, bank here acknowledges Ma'am that the holder of
savings, and current deposits of money in banks the account did not directly pertain to Velasco but to
and similar institutions shall be governed by the Eastern, so there was ....and that..
provisions concerning simple loan." so in this case
Ma'am the nature of their transaction was being And that BPI, the bank should not have
questioned. allowed such withdrawal by the heirs because they
now in the first place that Velasco has no right to
Do you have a bank deposit here? - Yes said amount to the said joint account.
Ma'am there exist a bank deposit in this case.
DISCUSSIONS:
On whose account? - the account in the
name of Eastern and Velasco So what we have here SC emphasized,
banks deposit are in the nature of irregular
Alright it's a joint account of Lim and deposits. They are really loans because they earn
Velasco. what happened to that account?

interest. The relationship between a depositor and with the notation "For Deposit Payees’ Account
the bank, is one of a creditor and debtor. so even if Only."6
people say it's a saving deposit account or current
deposit account it's really in the nature of loan. You Without the indorsement or authority of his co-
put money in the bank, you earn little interest. payee BA Finance, Bitanga deposited the check to
Sometimes no interest if it's an ATM account. On his account with the Asianbank Corporation, now
the part of the bank they get to use it, noh purpose merged with herein petitioner Metropolitan Bank
in the contract of loan, they use the money that you and Trust Company (Metrobank). Bitanga
deposited for investment or allow it to be lend to subsequently withdrew the entire proceeds of the
other person. check.
Now in this case while it is true that the joint BA Finance eventually learned of the loss of the car
account was in the name of Velasco and Lim it was and of Malayan Insurance’s issuance of a crossed
proven and established that the amount therein check payable to it and Bitanga, and of Bitanga’s
belongs to Eastern. depositing it in his account at Asianbank and
withdrawing the entire proceeds thereof.
So who is the real creditor here? Eastern
and therefore has the right to withdraw it or demand
payment from the bank. The bank cannot be BA Finance thereupon demanded the payment of
relieved of its duty to pay Eastern simply because it the value of the check from Asianbank7 but to no
already allowed the heirs of Velasco to withdraw the avail, prompting it to file a complaint before the
whole balance of the account. Petitioner should Regional Trial Court (RTC) of Makati for sum of
have allowed such withdrawal because it had money and damages against Asianbank and
already admitted in the hold out agreement the Bitanga,8 alleging that, inter alia, it is entitled to the
questioned ownership of the money deposited in entire proceeds of the check.
the account.
In its Answer with Counterclaim,9 Asianbank alleged
But in the absence of the hold out that BA Finance "instituted [the] complaint in bad
agreement, BPI would not have been liable to faith to coerce [it] into paying the whole amount of
Eastern because again if you take a look in the the CHECK knowing fully well that its rightful claim,
account it is really in the name of Velasco and Lim, if any, is against Malayan [Insurance]. Asianbank
wherein the heirs the will be entitled to the said thereafter filed a cross-claim against
amount or account. Bitanga,11 alleging that he fraudulently induced its
personnel to release to him the full amount of the
However, here BPOI acknowledge that the check; And Asianbank filed a third-party complaint
true owners are not Velasco and Lim but rather against Malayan Insurance,13 alleging that Malayan
Eastern; therefore, it is held liable to Eastern who is Insurance was grossly negligent in issuing the
the real creditor of the Bank. check payable to both Bitanga and BA Finance and
delivering it to Bitanga without the consent of BA
December 7, 2015 (Tongo) Finance.
Metrobank vs BA Finance RTC ruled that Malayan Insurance cannot be

faulted for negligence for issuing the check payable
METROPOLITAN BANK vs .BA FINANCE to both BA Finance and Bitanga. The Court ruled
further that Asianbank was negligent in allowing
Bitanga to deposit the check to his account and to
FACTS: withdraw the proceeds thereof, without his co-
payee BA Finance having either indorsed it or
Lamberto Bitanga (Bitanga) obtained from authorized him to indorse it in its behalf,16 found
respondent BA Finance Corporation (BA Finance) Asianbank and Bitanga jointly and severally liable to
1
a P329,280 loan to secure which, he mortgaged his BA Finance following Section 41 of the Negotiable
car to respondent BA Finance.2 The mortgage Instruments Law and Associated Bank v. Court of
contained the following stipulation: Appeals.17
The MORTGAGOR covenants and agrees that he/it Court of Appeals affirmed RTC’s decision.
will cause the property(ies) hereinabove
mortgaged to be insured against loss x x x ISSUE: Whether or not BA Finance is liable.
x payable to the MORTGAGEE or its assigns as its
interest may appear x x x.
HELD: NO.
Bitanga thus had the mortgaged car insured by
RATIO:
respondent Malayan Insurance Co., Inc. (Malayan
Insurance)4 which issued a policy stipulating that,
inter alia, Loss, if any shall be payable to BA Clearly, petitioner, through its employee, was
FINANCE CORP. as its interest may appear. negligent when it allowed the deposit of the crossed
check, despite the lone endorsement of Bitanga,
The car was stolen. On Bitanga’s claim, Malayan ostensibly ignoring the fact that the check did not, it
Insurance issued a check payable to the order of bears repeating, carry the indorsement of BA
"B.A. Finance Corporation and Lamberto Bitanga" Finance.29
for P224,500, drawn against China Banking
Corporation (China Bank). The check was crossed As has been repeatedly emphasized, the banking
business is imbued with public interest such that the

highest degree of diligence and highest standards agency wherein the petitioner is considered as a
of integrity and performance are expected of banks collecting bank and therefore deemed as an agent
in order to maintain the trust and confidence of the of BA finance.
public in general in the banking
sector.30 Undoubtedly, BA Finance has a cause of Here in the case of Metrobank the SC emphasizes
action against petitioner.
that banking business is imbued with public interest.
The provisions of the Negotiable Instruments Law

and underlying jurisprudential teachings on the
black-letter law provide definitive justification for Reyes vs CA
petitioner’s full liability on the value of the check.
Reyes vs. CA
To be sure, a collecting bank, Asianbank in this
case, where a check is deposited and which
indorses the check upon presentment with the Facts:
drawee bank, is an indorser.[31] This is because in
indorsing a check to the drawee bank, a collecting In view of the 20th Asian Racing
bank stamps the back of the check with the phrase Conference to be held in Sydney, Australia, the
"all prior endorsements and/or lack of endorsement Philippine Racing Club, Inc. (PRCI) sent 4
guaranteed"32 and, for all intents and purposes, delegates to the conference. Petitioner Gregorio H.
treats the check as a negotiable instrument, hence, Reyes, VP for finance, racing manager, treasurer,
assumes the warranty of an indorser. 33 Without and director of PRCI, sent Godofredo Reyes, the
Asianbank’s warranty, the drawee bank (China club's chief cashier, to Far East Bank and Trust
Bank in this case) would not have paid the value of Company (FEBTC – private respondent) to apply
the subject check. for a foreign exchange demand draft in Australian
dollars (AU$1,610.00).
Petitioner, as the collecting bank or last indorser,
generally suffers the loss because it has the duty to Mr. Yasis, bank’s assistant cashier, denied
ascertain the genuineness of all prior indorsements the application because FEBTC did not have an
considering that the act of presenting the check for Australian dollar account in any bank in Sydney.
payment to the drawee is an assertion that the party Since Godofredo asked if there could be a way for
making the presentment has done its duty to respondent bank to accommodate PRCI's urgent
ascertain the genuineness of prior indorsements. need to remit Australian dollars to Sydney, Yasis
Accordingly, one who credits the proceeds of a informed him of another way of effecting the
check to the account of the indorsing payee is liable requested remittance to Sydney.
in conversion to the non-indorsing payee for the
entire amount of the check.35 FEBTC would draw a demand draft against
Is article 1980 applicable in this case? No Westpac Bank in Sydney, Australia (Westpac-
Sydney) and have the latter reimburse itself from
What should have asianbank done with regards to the U.S. dollar account of FEBTC in Westpac Bank
in New York, U.S.A. (Westpac-New York). This
the check? They should have waited for the xx.
arrangement has been customarily resorted to
Before they released the check. The two payees since the 1960's and the procedure has proven to
must be present to endorsed the same check. be problem-free.
Why was there a need to determine whether art On July 28, 1988, the respondent bank
1980 is applicable or not? What was present here is approved the said application of PRCI and issued
a contract of agency and not a contract of loan thus Foreign Exchange Demand Draft (FXDD) No.
the applicable here is not 12% and not 6% 209968 in the sum applied for payable to the order
of the 20th Asian Racing Conference Secretariat of
In this case who is the principal? The BA finance Sydney, Australia, and addressed to Westpac-
and the asianbank is the agent. Sydney as the drawee bank.
So here just take note the discussion with regard to On August 10, 1988, upon due
endorsement and the deposit of a crossed check presentment of the foreign exchange demand draft
and the effect thereof in relation to your negotiable the same was dishonoured because "xxx No
account held with Westpac." Meanwhile, on August
instruments. I would like to emphasized here is the
16, 1988, Wespac-New York sent a cable to
negligence on the part of the bank however, the FEBTC informing the latter that its dollar account in
negligence on the part of the bank does not arise the sum of AU$ 1,610.00 was debited. The
from a contract of loan so article 1980 is not respondent bank informed Wespac-New York
applicable. requesting the latter to honor the reimbursement
claim of Wespac-Sydney. Upon its second
With that the interest to be imposed is not 12% as presentment for payment, FXDD No. 209968 was
what we have discussed in eastern shippings again dishonored by Westpac-Sydney for the same
because this was still a 2009 case. It is not 12% reason.
due to the fact that it does not arise from load or
When petitioner Gregorio H. Reyes arrived
forbearance of money goods or credit. So the rate
in Sydney in the morning of September 18, 1988,
that was imposed is only 6% as an issue of the he went directly to the lobby of Hotel Regent
relationship between BA finance petitioner is one of Sydney to register as a conference delegate. At the

registration desk, the conference secretariat said Westpac-Sydney despite the fact that respondent
that he could not register because the foreign bank has a sufficient deposit dollar account with
exchange demand draft for his registration fee had Westpac-New York. That was the reason why the
been dishonored for the second time. The same respondent bank had to re-confirm and repeatedly
situation was experienced by his wife Consuelo notify Westpac-New York to debit its (respondent
who is a member of the House of Representatives bank's) deposit dollar account with it and to transfer
representing the lone Congressional District of or credit the corresponding amount to Westpac-
Makati, Metro Manila. Sydney to cover the amount of the said demand
draft.
The petitioners filed a complaint for
damages against FEBTC. The petitioners claim that
as a result of the dishonor of the said demand draft, Is the bank liable? NO. the bank is required to
they were exposed to unnecessary shock, social exercise not extraordinary diligence in this case but
humiliation, and deep mental anguish in a foreign only ordinary diligence. Since the contract here is a
country, and in the presence of an international contract of sale wherein reyes spouses would be
audience. RTC and CA ruled in favor of respondent.
the buyer and the bank is the seller of the foreign
xxx the standard required in this case is only
Issue: WON the respondent bank was negligent.
ordinary diligence.
Held: NO. The facts show that FEBTC did not
So the degree of diligence required from banks is
cause an erroneous transmittal of its SWIFT cable
more than that of a good father of a family where
message to Westpac-Sydney. It was the erroneous
decoding of the cable message on the part of the fiduciary nature of the relationship with their
Westpac-Sydney that caused the dishonor of the depositors is concerned. In other words if what you
foreign exchange demand draft. have is bank deposit wherein the provisions of law
are applicable.
The degree of diligence required of banks,
is more than that of a good father of a family where Banks are duty bound with the deposit accounts of
the fiduciary nature of their relationship with their their depositors with the highest degree of care. But
depositors is concerned. In other words banks are the said ruling only apply to the businesses wherein
duty bound to treat the deposit accounts of their bank act with their fiduciary capacity sa depositary
depositors with the highest degree of care. But the
of the deposits of their depositors. But the same
said ruling applies only to cases where banks act
under their fiduciary capacity, that is, as depositary higher degree of diligence is not expected to be
of the deposits of their depositors. But the same exerted by bank in commercial transactions that
higher degree of diligence is not expected to be would not involve their fiduciary relationship with
exerted by banks in commercial transactions that their depositors. Bank is not required more than the
do not involve their fiduciary relationship with their diligence of a good father of a family in regard to
depositors.
the sale and issuance of the subject foreign
exchange demand.
FEBTC was not required to exert more than
the diligence of a good father of a family in regard It was established here that the bank acted in good
to the sale and issuance of foreign exchange
faith and in fact was not the cause of the
demand draft. The case at bar does not involve the
handling of petitioners' deposit, if any, with the embarrassment of the petitioners in Australia.
FEBTC. Instead, the relationship involved was that
of a buyer and seller (between FEBTC as the seller Guingona vs CA
of demand draft, and PRCI as the buyer of the
same, with the 20th Asian Racing conference TEOFISTO GUINGONA, JR., vs. THE CITY
Secretariat in Sydney, Australia as the payee). As FISCAL OF MANILA
earlier mentioned, the said foreign exchange
demand draft was intended for the payment of the
FACTS: On December 23,1981, private respondent
registration fees of the petitioners as delegates of
David filed I.S. No. 81-31938 in the Office of the
the PRCI to the 20th Asian Racing Conference in
City Fiscal of Manila, which case was assigned to
Sydney.
respondent Lota for preliminary investigation
The evidence shows that FEBTC did

David charged petitioners (together with one Robert
everything within its power to prevent the dishonor
Marshall and the following directors of the Nation
of the foreign exchange demand draft. The
Savings and Loan Association (NSLA) with estafa
erroneous reading of its cable message to
and violation of Central Bank Circular No. 364 and
Westpac-Sydney by an employee of the latter could
related Central Bank regulations on foreign
not have been foreseen by FEBTC. Being unaware
exchange transactions
that its employee erroneously read the said cable
message, Westpac-Sydney merely stated that
FEBTC has no deposit account with it to cover for From March 20, 1979 to March, 1981, David
the amount of AU $1610.00 indicated in the foreign invested with NSLA P1,145,546.20 on nine
exchange demand draft. deposits, P13,531.94 on savings account deposits
(jointly with his sister, Denise Kuhne),
US$10,000.00 on time deposit, US$15,000.00
Thus, the respondent bank had the
under a receipt and guarantee of payment and
impression that Westpac-New York had not yet
made available the amount for reimbursement to

US$50,000.00 under a receipt dated June 8, 1980 money, goods or personal property that he received
(au jointly with Denise Kuhne), Petitioners had no such obligation to return the
same money, i.e., the bills or coins, which they
That David was induced into making the received from private respondents. As clearly as
investments by Robert Marshall an Australian stated in criminal complaints, the related civil
national said to be a close associate of petitioner complaints and the supporting sworn statements,
Guingona Jr., then NSLA President, petitioner the sums of money that petitioners received were
Martin, then NSLA Executive Vice-President of loans.
NSLA and petitioner Santos, then NSLA General
Manager; It can be readily noted from the above-quoted
provisions that in simple loan (mutuum), as
March 21, 1981 NSLA was placed under contrasted to commodatum the borrower acquires
receivership by the Central Bank, David filed claims ownership of the money, goods or personal
for his investments and those of his sister. On July property borrowed Being the owner, the borrower
22, 1981 David received a report from the Central can dispose of the thing borrowed (Article 248, Civil
Bank that only P305,821.92 of those investments Code) and his act will not be considered
were entered in the records of NSLA; that the misappropriation thereof' (Yam vs. Malik, 94 SCRA
respondents in I.S. No. 81-31938 may have 30, 34 [1979];
misappropriated the balance at the same time
violating Central Bank Circular No. 364 and related But even granting that the failure of the bank to pay
Central Bank regulations on foreign exchange the time and savings deposits of private
transactions; respondent, any incipient criminal liability was
deemed avoided, because when the aforesaid bank
After demands, petitioner Guingona Jr. paid only was placed under receivership by the Central Bank,
P200,000.00, thereby reducing the amounts petitioners Guingona and Martin assumed the
misappropriated to P959,078.14 and obligation of the bank to private respondent David,
US$75,000.00. thereby resulting in the novation of the original
contractual obligation arising from deposit into a
contract of loan and converting the original trust
Petitioners moved to dismiss the charges against
relation between the bank and private respondent
them for lack of jurisdiction because David's claims
David into an ordinary debtor-creditor relation
allegedly comprised a purely civil obligation which
between the petitioners and private respondent.
was itself novated. Fiscal Lota denied the motion to
Consequently, the failure of the bank or petitioners
dismiss
Guingona and Martin to pay the deposits of private
respondent would not constitute a breach of trust
After presentation of David's principal witness, but would merely be a failure to pay the obligation
petitioners filed the instant petition because as a debtor.
(a) the production of the Promisory Notes, Banker's Bank deposits are in the nature of irregular
Acceptance, Certificates of Time Deposits and deposits. They are really 'loans because they earn
Savings Account allegedly showed that the interest. All kinds of bank deposits, whether fixed,
transactions between David and NSLA were simple savings, or current are to be treated as loans and
loans, i.e., civil obligations of NSLA which were are to be covered by the law on loans.
novated when Guingona, Jr. and Martin assumed
them;
Hence, the relationship between the private
respondent and the Nation Savings and Loan
(b) David's principal witness allegedly testified that Association is that of creditor and debtor;
the duplicate originals of the instruments were all on consequently, the ownership of the amount
file with NSLA, contrary to David's claim that some deposited was transmitted to the Bank upon the
of his investments were not record perfection of the contract and it can make use of the
amount deposited for its banking operations, such
The sole issue for resolution is whether public as to pay interests on deposits and to pay
respondents acted without jurisdiction when they withdrawals. While the Bank has the obligation to
investigated the charges in I.S. No. 81-31938 return the amount deposited, it has, however, no
obligation to return or deliver the same money that
There is merit in the contention of the petitioners was deposited. And, the failure of the Bank to return
that their liability is civil in nature and therefore, the amount deposited will not constitute estafa
public respondents have no jurisdiction over the through misappropriation punishable under of the
charge of estafa. Revised Penal Code, but it will only give rise to civil
liability over which the public respondents have no-
ISSUE: WON failure of the Bank to return the jurisdiction.
amount deposited will constitute estafa through If what you have is a contract of loan? Would
misappropriation punishable under of the Revised there be liability for estaffa through
Penal Code. misappropriation?
HELD: Not estafa through misappropriation but No.

simple loan.
How about the liability of Guingona and the
In order that a person can be convicted under the other officers?
above-quoted provision, it must be proven that he
has the obligation to deliver or return the same No criminal liability but only civil liability.

Here it is a bank deposit. The contract that was delinquency sale of the BASECO property in favor
perfected was a simple loan or mutuum and not a of petitioner Province of Bataan.
contract of deposit/depositum. So again the court
emphasized here that bank deposits are in the On 30 June 1993, the PCGG filed with the lower
nature of regular deposits they are really loans court an "Urgent Motion to Deposit Lease Rentals,"
alleging inter alia that the rentals amounting to
because they earn interest. Failure of the
"Hundreds of Millions of Pesos" are "in danger of
respondent bank to honor its time deposit is failure being unlawfully spent, squandered and dissipated
to pay its obligation to the debtor and not a breach to the great and irreparable damage of plaintiffs
of trust arising from a depositories failure to deliver who are the rightful owners of the property leased."
the subject matter in deposit. The ownership of the
amount deposited is then transmitted to the bank On 28 July 1993, the lower court granted the
upon perfection of the contract and delivery and PCGG’s urgent motion and issued its assailed
therefore the bank can use the amount deposited order. the dispositive portion of which reads:
for its banking operations. There was no obligation
"ACCORDINGLY, the defendant Province of
to return the same money that was deposited and
Bataan is hereby ordered to remit to this Court the
the failure of the bank to return the amount lease rentals it may receive from the defendant 7-R
deposited will not constitute estaffa thru Port Services, Inc. and the Marina Port Services,
misappropriation. It will only give rise to civil liability Inc. to commence from its receipt of this Order and
and not criminal liability to which the public for the Clerk of Court of this Branch to deposit said
respondent, city fiscal here have no jurisdiction. amount under special time deposit with the Land
Obligation to deliver the same money, goods or Bank of the Philippines, Balanga Branch, in
Balanga, Bataan in the name and/or account of this
personal property that he received petitioners, have
Court to be held in ESCROW for the person or
no such obligation to return the same money. persons, natural or juridical, who may be finally
adjudged lawfully entitled thereto, and subject to
Province of Bataan vs Villafuerte further orders from this Court.”
Province of Bataan vs. Villafuerte - The sole issue for resolution revolves around
the propriety of the escrow order issued by the
Facts: Involved in the present controversy is an lower court in the civil suit for annulment of
expanse of real property situated at Mariveles, sale.
Bataan and formerly registered and titled in the
name of either the Bataan Shipyard and Petitioner insists that the issuance of the escrow
Engineering Corporation (BASECO), the Philippine order by the trial court "was patently irregular, if not
Dockyard Corporation or the Baseco Drydock and downright anomalous", reasoning that "nowhere in
Construction Co., Inc.. the Revised Rules of Court is the trial court, or any
court for that matter, authorized to issue such
Pursuant to PD No. 464, the Real Property Tax escrow order, whether as a provisional or
Code of 1974, the Provincial Treasurer of Bataan permanent remedy." According to petitioner, "the
advertised for auction sale the BASECO property escrow orders in question are null and void ab
due to real estate tax delinquency amounting to initio for having been issued absent any legal basis"
P7,914,281.72, inclusive of penalties.4 At the and are "merely calculated to prejudice the
auction sale held, no bidder vied for said property petitioner province without any practical or
as a result of which, the Provincial Treasurer of worthwhile, much less legal objective."
Bataan adjudged the property to, and acquired the
same for, and in the name of herein petitioner Held: The SC do not agree. In our jurisdiction, an
Province of Bataan. Upon the expiration of the one- escrow order issued by a court of law may find
year redemption period, and without the owner ample basis and support in the court’s intrinsic
exercising its right to redeem the subject property, power to issue orders and other ancillary writs and
the Provincial Government of Bataan consolidated processes incidental or reasonably necessary to the
its title thereon. exercise of its main jurisdiction. Evidently, judicial
power connotes certain incidental and inherent
Eventually, petitioner entered into a ten-year attributes reasonably necessary for an effective
contract of lease with 7-R Port Services, Inc., administration of justice - the deposit of the rentals
whereby portions of the BASECO property including in escrow with the bank, in the name of the lower
facilities and improvements thereon, were leased to court, "is only an incident in the main
the latter for a minimum escalating annual rental of proceeding." To be sure, placing property in
P18 million. On 10 May 1993, petitioner forged litigation under judicial possession, whether in the
another contract of lease with Marina Port Services, hands of a receiver, and administrator, or as in this
over a ten-hectare portion of the BASECO property. case, in a government bank, is an ancient and
accepted procedure.
On 11 May 1993, The Presidential Commission on
Good Government (PCGG), for itself and on behalf An escrow is a written instrument which by its terms
of the Republic of the Philippines and the BASECO, imports a legal obligation and which is deposited by
the Philippine Dockyard Corporation and the the grantor, promisor, or obligor, or his agent with a
Baseco Drydock and Construction Co. Inc., filed stranger or third party, to be kept by the depositary
with the RTC-Bataan a complaint for annulment of until the performance of a condition or the
sale principally assailing the validity of the tax happening of a certain event, and then to be
delivered over to the grantee, promisee, or obligee.

Under modern theories of law, the term escrow is it is no longer open to question that money may be
not limited in its application to deeds, but is applied delivered in escrow.
to the deposit of any written instrument with a third
person. Particular instruments which have been So It is deposited with the bank, it is an escrow but
held to be the subject of an escrow include bonds not a bank deposit. So, here just take note here of
or covenants, deeds, mortgages, oil and gas what is considered as escrow arrangement and the
leases, contracts for the sale of land or for the
Supreme Court held here that the deposit of the
purchase of personal property, corporate stocks
and stock subscriptions, promissory notes or other rentals in escrow in a bank pending the litigation of
commercial paper, insurance applications and a case was only incident of the main proceeding
policies, contracts for the settlement of will-contest and therefore it was deemed to be proper.
cases, indentures of apprenticeship, receipts
assigning concessions and discontinuances and Again take note of article note of article 1980
releases of causes of action. Moreover, it is no
longer open to question that money may be 1980. Fixed, savings and current deposits of
delivered in escrow. money in banks and similar institutions shall be
governed by the provisions concerning simple
Applying the foregoing principles and considering loan. (n)
the peculiarities of the instant case, the lower court,
in the course of adjudicating and resolving the
The savings are really loans to a bank because the
issues presented in the main suit, is clearly
empowered to control the proceedings therein bank will use the same for its ordinary transactions
through the adoption, formulation and issuance of and for the banking business in which it is engaged
orders and other ancillary writs, including the so take note of its nature.
authority to place the properties in custodia legis,
for the purpose of effectuating its judgment or Take note if there could be no liability in estaffa if
decree and protecting further the interests of the it’s a bank deposit
rightful claimants of the subject property.
Take note of the diligence required as to the bank
What is the money that was subject of escrow in being the depositary in that bank deposit.
this case?
And also recall your obligations and contracts with
The rentals of the property of baseco that was paid regard to compensation or set off. In compensation
to the province of bataan. or set off as a mode of extinguishing the obligation
it is applicable to a contract of loan or mutuum but it
Where was this money deposited as a subject of is not applicable to a contract of depositumm or real
an escrow? contract of real deposit. Compensation is allowed in
mutuum but not in deposit that is under article 1287.
landbank
Article 1981. When the thing deposited is
was the order for escrow proper.
delivered and closed and sealed, the depositary
YES. must return it in the same condition, and he
shall be liable for damages should the seal or
The Supreme Court discussed this escrow. It is a lock be broken through his fault.
written instrument by which its terms imports a legal
obligation and which is deposited by the grantor, Fault on the part of the depositary is presumed,
promisor or obligor or his agent to the stranger or unless there is proof to the contrary.
third party in this case landbank to be kept by the
As regards the value of the thing deposited, the
depositary , the bank, until the performance of a
statement of the depositor shall be accepted,
condition or the happening of a certain event and
when the forcible opening is imputable to the
then to be delivered over to the grantee, promissee
depositary, should there be no proof to the
or obligee. There was still… as who is entitled to
contrary. However, the courts may pass upon
the subject property which is subject to a lease so
the credibility of the depositor with respect to
the lease rentals payments are then made subject
the value claimed by him.
to escrow. The doctrine applies only, originally to..
by way of grant, instruments for conveyance of When the seal or lock is broken, with or without
land.. under modern theories of law is not anymore the depositary’s fault, he shall keep the secret
limited to these but likewise to any written of the deposit.
instruments to the third person such as bonds,
deeds, mortgages, oil and gas leases, contracts for 1982. When it becomes necessary to open a
the sale of land, purchase for the sale of personal locked box or receptacle, the depositary is
property, corporate stocks, stock subscription, presumed authorized to do so, if the key has
promissory notes, other commercial paper, been delivered to him; or when the instructions
insurance application and policies, contracts for the of the depositor as regads the deposit cannot
sacrament of will contest cases, indentures of be executed without opening the box or
apprenticeship, receipts assigining concessions and receptacle.

Under these two articles what are the obligations of depostary shall be relieved of all responsibility
the depositary, first return the thing deposited in the by returning the thing deposited to the
same condition when delivered closed and seal. depositor.
Depositary shall be liable for damages should the
seal or lock be broken through his fault. If the depositary has a reasonable grounds to
believe that the thing has not been lawfully
Presumption is he is at fault if the seal or lock is acquired by the depositor, the former may
broken unless he is able to prove otherwise. return the same.
Likewise there is an obligation to keep secret of the So the depositary cannot require the depositor to
deposit when the seal or lock is broken regardless if show proof that he is the owner otherwise the
he is at fault. depositary will not return the thing. Again ownership
is not required for the perfection of a contract of
Essentially what we have here.. we have to take deposit. If you would otherwise require the
into consideration obligation of the depositary with depositary to require proof of ownership on the part
regard to a sealed or closed thing deposited of the depositor then this may open door for
otherwise this would constitute violation of trust by badfaith as this may be used by the depositary as a
being depositary. The depositary must respect the ground on the pretense of requiring proof of
secrets which the depositor desires to keep such ownership then he will retain the subject matter.
desire is evident when the thing was delivered
closed and sealed. Again it is not essential that the depositor be the
owner. However when the depositary discovers that
The statement the depositor.. primafacie evidence the thing has been stolen and he knows who is the
only authorize to open under article 1982, take true owner thereof..what is the obligation of the
note, is presumed to authorized to do so if the key depositary? He must advise the true owner. The
has been delivered to him or through necessity. requirement
When the instructions of the depositor cannot be
executed without opening the box or receptacle. 1.) he knows it is stolen
Art. 1983 the thing deposited shall be returned 2) he knows the true owner
wiht all its products, accessories and
accessions. Then he gives the true owner one month to claim
the thing from the depositary from the time of
Should the deposit consist of money, the notice. Now what is the effect if after one month the
provisions relative to agents, in Article 1896 true owner fails to claim the subject matter. The
shall be applied to the depositary. depositary has the obligation to return it to the
depositor to return it upon demand. Now would it
Again the depositor may be the owner or represents that constitute bad faith upon the depositary and
owner of the thing deposited and he is entitled to would the depositary be liable for damages? Art.
the fruits of the thing including accessions and 1984 is clear that within one month he has to wait
accessories ofcourse he maybe the owner. The and after the lapse of one month he will not be
depositary has the obligation to return the thing liable anymore for the true owner. Again the true
itself plus the products, fruits, accessions and owner must claim it within the one month period.
accessories which are a consequence of What is the effect kung wala na claim sa true
ownership. Depositary has no right to make use owner? The depositary would not be liable to him
thereof but the true owner can nevertheless go after the
depositor who is in possession of the subject
If the depositary is in delay or has used the money matter. In otherwords the true owner can still
he shall be liable for interest as indemnity. That is in recover property through other legal
relation to article 1896 governing contracts of means/processes.
agency wherein the depositary will owe interest for
the sums he has applied for its own use from the Under the same article 1984… reasonable grounds
day to which he did so and those which he still that the thing has not been lawfully acquired .. in
owes after the extinguishment of the deposit. other words it he is not sure if its stolen but he has
a reasonable grounds to believe that it could not
Article 1984. The depositary cannot demand have been lawfully acquired by the depositor such
that the depositor prove his ownership of the as when the depositor delivers various jewelries to
thing deposited. the depositary but the depositary is awared that the
depositor has no means with acquiring such thing
Nevertheless, should he discover that the thing
or has no means to possess such subject matter.
has been stolen and who its true owner is, he
What is the remedy here on the part of the
must advise the latter of the deposit.
depositary? The depositary may return the same.
If the owner, in spite of such information, does Take note in the last paragraph obviously he does
not claim it within the period of one month, the not know who is the true owner thereof the only
basis is reasonable ground.

Now in relation to the article 1984 what if he knows However, if the obligation is solidary or the thing
the true owner. He notifies the true owner pero wala deposited is not divisible then the rules on active
pa nag expire yung one month period here comes solidary shall apply as provided under 1212 and art
the depositor who demands the return of the thing. 1214.
We very well know that the depositary has the
obligation to return the thing to the depositor upon Art 1212. Each one of the solidary creditor may
demand so if you take into consideration the nature do whatever may be useful to the others, but
of the deposit the depositary must comply, return not anything which may be prejudicial to others.
the thing to the depositor otherwise it would be
Art. 1214. The debtor may pay any one of the
contrary to the nature of the deposit but on the
solidary credits; but if any demand, judicial or
other hand it is also risky on the part of the
extrajudicial, has been made by one of them,
depositary to return in to the depositor despite
payment should be made to him.
notifying the true owner and the one month period
has not yet lapsed.
Take note if the return of the deposit is stipulated to
Now if you look at 1984 it does not cover the return to return to the person designated then the
scenario wherein demand is made by the depositor depositary is bound to return it to such person
within the one month period. So in other words what designated even though that person has not made
is the best remedy on the part of the depositary. any demand for its return
You can file an action for interpleader.
Art 1986. If the depositor should lose his
So here depositary demands for the return of the capacity to contract after having made the
thing again based on the fact that he is the deposit, the thing cannot be returned except to
depositor and on the other hand we have this the persons who may have the administration of
person who appears to be the true t owner thereof his property and rights.
so two different interest, depositary can file an
action for interpleader so two parties can litigate When we talk about incapacity of one of the parties
among themselves who has the better right as to it will affect the status of the contract if it existed at
possession of the subject matter. the time the obligation was perfected. So if the time
of the delivery one of the parties is incapacitated
So this could be better on the part of the depositary then we know that the contract is voidable-valid
so that he could not be subject to risk as well as to until annulled. However if incapacity occurred or
damages happened after the contract was perfected we still
take note of the obligation of the parties. Here what
Art. 1985. When there are two or more is the effect? Recall under 1970 property must be
depositors, if they are not solidary, and the returned to his guardian, administrator or to the
thing admits of division, each one cannot person who made the deposit or depositor himself if
demand more than his share. he should acquire capacity. Under 1986 if the
depositor consequently loses his capacity then the
When there is solidarity or the thing does not depositary must return the thing to the legal
admit of division, the provisions of Articles 1212 representative of the depositor.
and 1214 shall govern. However, if there is a
stipulation that the thing should be returned to Likewise as we have mentioned earlier for the
one of the depositors, the depositary shall obligation of the debtor in this case depositary to be
return it only to the person designated. extinguished he must return or deliver the thing to
the party who is capacitated. Otherwise if he
Recall your obligations and contracts sa delivered it to an incapacitated party even if he was
presumption on obligation is joint, exception it is the depositor then it will not extinguished his
solidary by stipulation of the parties as provided by obligation. So ideliver niya to legal representative of
law or due to the nature of the obligation. What the depositor or the person who may have the
does 1985 stipulate? If the thing deposited is administration of the property and rights of the
divisible and depositors are not solidary then what depositor
is the effect? Each depositor can only demand his
share. 1987. If at the time the deposit was made a place
was designated for the return of the thing, the
So let us say we have two depositor depositing depositary must take the thing deposited to
1000 sacks of rice if only one will demand for the such place; but the expenses for transportation
return of sacks of rice then he can only demand his shall be borne by the depositor.
proportionate share 500 sacks of rice. Thing is
divisible, depositor not solidary.. not solidary when If no lace has been designated for the return, it
1) not stipulated 2) not due to the nature of the shall be made where the thing deposited may
obligation 3) the law does not provide for such be, even if it should not be the same place
arrangement it to be considered as solidary. where the deposit was made, provided that

there was no malice on the part of the designated, return it to the depositor; and if the
depositary. latter should refuse to receive it, the depositary
may secure its consignation from the court.
Ofcourse if there is an agreement it should be in the
place agreed upon but the expenses shall be borne If the deposit is gratituous, depositary may likewise
by the depositor. In the absence of stipulation return the thing deposited notwithstanding the
where the thing deposited might be even if it should period has been agreed upon by the parties but
not be the same place where the original deposit again it must be for a justifiable reason. If the
was made provided that the transfer was depositor refuses to receive the thing the remedy
accomplished without malice on the part of the available to the depositary is to deposit the thing at
depositary. the disposal of a judicial authority through
consignation.
Differentiate this from contracts article 1251.. if
there is no express stipulation and it is a On the other hand if the deposit is subject to a
determinate thing place of delivery wherever the valuable consideration, depositary has no right to
thing might be at the moment the obligation was return the thing deposited before the expiration of
constituted which when you look at 1987 is the time designated even if he should suffer
different. inconvenience as a consequence.
1988. The thing deposited must be returned to Distinguish 1988 from 1989, 1988 the right of the
the depositor upon demand, even though a depositor to demand the return of the thing. 1989
specified period or time for such return may the right of the depositary to return the thing that is
have been fixed. the subject matter of the deposit.
This provisions shall not apply when the thing Article 1990. If the depositary by force majeure
is judicially attached while in the depositary’s or government order loses the thing and
possession, r should he have been notified of receives money or another thing in its place, he
the opposition of a third person to the return or shall deliver the sum or other thing to the
the removal of the thing deposited. In these depositor.
cases, the depositary must immediately inform
the depositor of the attachment or opposition. recall in 1972 depositary has the obligation to return
the exact thing that was the subject of the deposit.
Take note of the general rule the depositor can 1990 provides for the exception wherein depositary
demand the return of the thing deposited at will is not liable for the loss of the thing by force
whether the period was stipulated or not. Whenever majeure or through government order. However, if
the period is agreed the same is for the benefit of the depositary receives money or other thing
the depositor and therefore he can demand it because of the loss then the depositary has the
anytime as it will constitute waiver on his part. He duty to deliver to the depositor what he has
can validly waive his right. received otherwise there would be unjust
enrichment through the expense of the depositor.
If the deposit however is for compensation while it
is true that the depositor is entitled for the return the Article 1991. The depositary’s heir who in good
thing the depositary is nevertheless entitled to the faith may have sold the thing which he did not
compensation corresponding to the entire period know was deposited, shall only be bound to
because that has already been agreed upon. return the pice he may have received or to
assign his right of action against the buyer in
However take note of this exception wherein the case the price has not been paid to him.
depositor cannot demand for the return of the thing.
when the thing is judicially attached when in Take note nakalagay diyan depositary’s heir it must
depositary’s possession otherwise the depositary be depositary’s heir because depositary is the one
would be disobeying the judicial order of in possession of the subject matter however he died
attachment. and the his heir saw this subject matter of the
deposit. So what did the heir do with the subject of
Another exception when he is notified of the
this deposit, if in good faith he sells it the obligation
opposition of the third person to the return or
of the heir is to return the price he has received
removal of the thing deposited. That is clearly
from the sale or assign the right to collect the same
provided as an exception in 1988. Take note this
to the depositor if he has not been paid. Take note
may be prone to abuse as the depositary should
price again not the real value of the thing.
only be authorized in conflicting claims to consign
the thing in court through anaction of interpleader. However if there has been bad faith on the part of
the heir, he has knowledge of the subject of the
Article 1989. Unless the deposit is for a valuable deposit but nevertheless sells it to a third person he
consideration, the depositary who may have
will be liable for damages.
justifiable reasons for not keeping the thing
deposited may, even before the time

So with that the following are the obligations of the Otherwise, depositor would unjustly enrich himself
depositary at the expense of the depositary.
1. Art 1972 to safekeep the thing deposited. In the Take note of the difference between DEPOSIT and
same article to return the thing, general rule, upon COMMODATUM. Art. 1941 with regard to
commodatum, it’s the bailee who pays for this kind
demand .
of expenses. However, there is a distinction that
with regard to expenses for preservation, iba yung
2. 1988 if gratituous there must be justifiable
treatment if it is ordinary or extraordinary.
reason.
But when it comes to contract of Deposit, no
3. Obligation to return if the product has fruits, distinction. Right to reimbursement covers ALL
accessions and accessories. expenses for preservation, whether ordinary or
extraordinary. What is important is that this must be
4. If there is a force majeure or government… and a NECESSARY expense for the preservation of the
the depositary receives money or another thing in subject matter. With regard to useful expenses, or
place of the thing loss the obligation is to give it to those for pure luxury/pleasure, it is NOT covered
the depositor. under Art. 1992.
5. Where to return it? By agreement or in the What if the deposit is for compensation? The GR:
expenses for preservation are borne by the
absence of stipulation where the thing is deposited
depositary, since these expenses are deemed
as provided under article 1987. included in the compensation agreed upon by the
parties, unless otherwise stipulated by them.
6. Obligation not to deposit with the third person
unless authorized Now the other obligation of the depositor is to pay
for the losses incurred by the depositary due to the
7. Under 1974, obligation to change the xx of the character of the thing deposited.
deposit
Art. 1993.
8. 1975 obligation if the thing deposted earns The depositor shall reimburse the depositary for
interest, collect interest plus capital preserve its any loss arising from the character of the thing
value deposited, unless at the time of the constitution
of the deposit the former was not aware of, or
9. Again differentiate ordinary lease from a lease of was not expected to know the dangerous
safety deposit box. character of the thing, or unless he notified the
depositary of the same, or the latter was aware
10. Obligation not to comingle things If so stipulated of it without advice from the depositor.
or if it is of different kind and quantity.
So the GR is that: a depositary MUST be
11. Obligation not to make use of the thing reimbursed for the loss suffered by him because the
character of the thing deposited. What do you mean
deposited unless authorized
here? The thing deposited may be flammable, may
chemicals, etc. So if there is a loss suffered by the
12. Liability for loss incase of fortituous event take
depositary, then he will be reimbursed by the
note of the exceptions under 1979 depositor.
13. Obligation when the thing deposited is delivered However, take note of the following exceptions:
sealed and closed 1) At the time of the constitution of the
deposit, if the depositor was not aware of
14. Obligation to pay interest of sums converted to the character of the thing deposited, then
personal use if deposit consist of money. he will not be obliged to reimburse the
depositary;
15. And obligation to advise the true owner if 2) If the depositor was not expected to know
depositary discovers that the thing deposited was the dangerous character of the thing;
stolen. 3) If the depositary was notified of the
character of the subject matter;
December 8, 2015 (Damalerio) 4) If the depositary was aware of such
character, even without advise from the
Let’s continue with the obligations of the depositor. depositor
Art. 1992. Art. 1994.

If the deposit is gratuitous, the depositor is The depositary may retain the thing in pledge
obliged to reimburse the depositary for the until the full payment of what may be due him
expenses he may have incurred for the by reason of the deposit.
preservation of the thing deposited.
You have there a pledge created by operation of
This emphasizes one of the obligations of the law. What is a PLEDGE? It is a contract of security
depositor to pay for the expenses for preservation. wherein personal property is delivered for the
Obviously Art. 1992 is applicable only to gratuitous security of a principal obligation. So pwede i-hold
deposit. The basis of this EQUITY, as the depositor ng depositary ang subject matter if the depositor will
would have incurred these expenses just the same. not pay to him what is due.

Recall that this is contrary to the GR with regard to The deposit mentioned in No. 2 of the preceding
a commodatum. Because in commodatum, no right article shall be regulated by the provisions
to retain – that is the GR. The only exception is with concerning voluntary deposit and by Article
regard to hidden defects under Art. 1951. 2168.
So essentially here, the thing retained in the deposit Take note, Art. 2168 is just compensation. Now
serves as security for the payment of what may be kinds of necessary deposit, the 3 of which are
due to the depositary by reason of the deposit. enumerated in 1996 and 1997:
Again, this is different from commodatum. But this 1) By legal obligation (Art. 1996)
is somewhat similar to a Contract of Agency, 2) On occasion of any calamity (Art. 1996)
wherein the agent is also given the right to retain 3) Art. 1998
with regard to the obligation of the principal to 4) With regard to passengers of common
reimburse the agent for expenses. carriers (Art. 1754)
Art. 1995. 1. By virtue of legal obligation, a necessary

A deposit is extinguished: deposit is deemed created. What are these
(1) Upon the loss or destruction of the thing instances? Some of these are already
deposited; discussed in your Property.
(2) In case of a gratuitous deposit, upon the 1) Art. 538 – Judicial deposit of a thing,
death of either the depositor or the depositary. the possession of which is being
disputed in a litigation by 2 or more
This provides for modes of extinguishing a contract persons.
of deposit. But take note, these modes enumerated 2) Art. 586 - Deposit with a bank or public
herein are not exclusive, as other causes institution of public bonds or
extinguishing a deposit may also be present such instruments of credit payable to order
as: Return of the thing, Novation, Merger, or bearer given
Expiration of the term, Fulfillment of a Resolutory 3) Art. 3104 – the deposit of the thing
condition. pledged, when the creditor uses the
same without the authority of the
Now if the contract of deposit is gratuitous, then the owner, or misuses it in any other way
death of either the depositor or depositary 4) Those required in suits as required by
extinguishes the deposit. The depositary is not the Rules of Court
obliged to continue with the contract of deposit. 5) Those constituted to guarantee
contracts with the government – in this
However, distinguish it if it is a deposit for case, the deposit arises from an
compensation, because the death of either party obligation of public or administrative
will not extinguish the contract as an onerous character
deposit is NOT personal, unlike that of a gratuitous
deposit. 2. On the occasion of any calamity. So deposit
by accident or fortuitous event, the law imposes
So here, if the contract of deposit is for on the recipient the obligations of a bailee. The
compensation, then we apply the GR that rights and more immediate object is to save the property
obligations are transmissible to their respective rather than its safekeeping. Sometimes it is
heirs under Art. 1178. However the heirs of either referred to as a Quasi-Bailment, Involuntary
party may have the right to terminate the deposit bailment, Involuntary deposit, or Depositum
even before the expiration of the term. Miserape – causal relation between the
calamity and the constitution of the deposit.
III. NECESSARY DEPOSIT
In this instance the governing rules would apply
nd
Now let’s proceed to the 2 type of extrajudicial voluntary deposit, as well as Art. 2168 which
deposit: you have NECESSARY DEPOSIT. govern quasi-contracts. What are the 2 quasi-
contracts?
What happens in necessary deposit? There is no 1. Solutio Indebiti
freedom to choose who will be the depositary, 2. Negotiorum Gestio
unlike that of voluntary deposit wherein the
depositor has the freewill to choose who will be the Of the 2, which is more applicable with
depositary. necessary deposit on the occasion of any
calamity? Negotiorum Gestio. This was your
Art. 1996. example in your obligations and contracts. Like
A deposit is necessary: if may fire, so you get to save the belongings of
(1) When it is made in compliance with a legal your neighbor while he is not around. In the
obligation; meantime, you will be considered as a
(2) When it takes place on the occasion of any depositary of his belongings.
calamity, such as fire, storm, flood, pillage,
shipwreck, or other similar events. Art. 2168.
When during a fire, flood, storm, or other
Art. 1997. calamity, property is saved from destruction
The deposit referred to in No. 1 of the preceding by another person without the knowledge of
article shall be governed by the provisions of the owner, the latter is bound to pay the
the law establishing it, and in case of its former just compensation.
deficiency, by the rules on voluntary deposit.

Otherwise, there will be unjust enrichment. Now we’re talking here about the liability of a
hotel-keeper or innkeeper as a depositary.
3. Art. 1998 and 1999 – travelers in hotels or Please take note of the following elements to
inns. hold hotel-keepers or innkeepers responsible
as depositaries with regard to the effect of their
Art. 1998. guests:
The deposit of effects made by the travellers 1. That the hotel-keepers have been
in hotels or inns shall also be regarded as previously informed about the effect
necessary. The keepers of hotels or inns brought by the guests
shall be responsible for them as 2. The guests have taken precautions
depositaries, provided that notice was given prescribed regarding the same
to them, or to their employees, of the effects
brought by the guests and that, on the part DURBAN APARTMENTS VS. PIONEER
of the latter, they take the precautions which (639 SCRA 441, G.R. No. 179419, January 12,
said hotel-keepers or their substitutes 2011)
advised relative to the care and vigilance of
their effects. FACTS:
On July 22, 2003, Pioneer Insurance and Surety
Art. 1999. Corporation, by right of subrogation, filed [with the
The hotel-keeper is liable for the vehicles, RTC of Makati City] a Complaint for Recovery of
animals and articles which have been Damages against Durban Apartments Corporation,
introduced or placed in the annexes of the doing business under the name and style of City
hotel. Garden Hotel, and [defendant before the RTC]
Vicente Justimbaste.
Travelers or guests, these are terms which are
used synonymously. They refer to transients, Respondent’s contention:
not boarders. Non-transients, including Respondent averred that it is the insurer for loss
boarders, shall be governed by the rules on and damage of Jeffrey See’s Suzuki Grand Vitara in
contracts of lease. Hotel-keepers and the amount of P1,175,000.
innkeepers are also referred to synonymously.
Technically speaking, we have there the On April 30, 2002, See arrived and checked in at
definition of a hotel: the City Garden Hotel in Makati corner Kalayaan
Hotel – public building of many rooms, Avenues, Makati City before midnight, and its
chiefly for overnight accommodation of parking attendant, defendant Justimbaste got the
transients, in several floors served by elevators key to said Vitara from
usually with --- (?) lobby See to park it.
Inns – a public house for the lodging of
travelers, for compensation and until capacity is On May 1, 2002 (1am) – the Hotel Chief Security
reached Officer informed him that his car was carnapped
while it was parked unattended at the parking area
Personally, I don’t know how you classify of Equitable PCI Bank along Makati Ave.
nowadays the hotels and inns. Usually when
you say hotels,, you refer to the big ones, but See then reported the incident to the Operations
right now meron na yung maliliit na hotels which Division of Makati City Police Anti-Carnapping unit
they refer to as Botique Hotels. So how do you and then conducted investigation. The car has not
distinguish a boutique hotel and inn? Ang yet been recovered since July 23, 2002.
boutique hotel ba, may elevator, ang inn wala?
Im not sure. As long as someone can stay there Respondent paid P1,163,250 money claim of See
overnight, then we don’t anymore take into and mortagee ABN AMRO Savings Bank as
consideration its definition. And in connection indemnity for the loss of the car. The car was lost
with necessary deposit, these 2 terms are due to the negligence of Durban Apartments and
referred to synonymously. Justimbaste because it was discovered that this
was the second time that a similar incident of
And then you also have the term motels, which carnapping happened in the valet parking service of
came from the term “motorist hotels.” I don’t Durban Apartments and no necessary precautions
know if dit lang yan sa Philippines ang were taken to prevent its repetition.
reference or definition ng motel, because if you
really look at the definition of a motel: Defendant Justimbaste and Durban Apartments
Motel – an establishment which provides failed and refused to pay Pioneer’s valid, just, and
lodging and parking, in which rooms are usually lawful claim despite written demands.
accessible from an outdoor parking area.
Petitioner’s contention:
This is what you see in Hollywood movies. Best See did not check in at its hotel, on the contrary, he
example is Bates (?) Motel. Usually 2 floors was a guest of a certain Ching Montero x x x;
lang and then may parking space outside the defendant x x x Justimbaste did not get the ignition
door. I don’t know how we came about the key of See’s Vitara, on the contrary, it was See who
reference here, na when you say motel, we requested a parking attendant to park the Vitara at
laugh, meron kaagad maisip.  Nevertheless, any available parking space, and it was parked at
Art. 1998 and 1999 are also applicable whether the Equitable Bank parking area, which was within
it is a hotel, inn, or a motel. See’s view, while he and Montero were waiting in
front of the hotel.

They made a written denial of the demand of Plainly, from the facts found by the lower courts, the
[respondent] Pioneer Insurance for want of legal insured See deposited his vehicle for
basis; valet parking services are provided by the safekeeping with petitioner, through the latter’s
hotel for the convenience of its customers looking employee, Justimbaste. In turn, Justimbaste
for a parking space near the hotel premises; it is a issued a claim stub to See. Thus, the contract of
special privilege that it gave to Montero and See; it deposit was perfected from See’s delivery,
does not include responsibility for any losses or when he handed over to Justimbaste the keys
damages to motor vehicles and its accessories in to his vehicle, which Justimbaste received with
the parking area; and the same holds true even if it the obligation of safely keeping and returning it.
was See himself who parked his Vitara within the Ultimately, petitioner is liable for the loss of
premises of the hotel as evidenced by the valet See’s vehicle.
parking customer’s claim stub issued to him.
POLICY: A deposit is constituted from the moment
Defendant Justimbaste saw the Vitara speeding a person receives a thing belonging to another, with
away from the place where it was parked; he tried the obligation of safely keeping it and returning the
to run after it, and blocked its possible path but to same.
no avail.
What makes it a necessary deposit when you are a
RTC ruled in favor of respondent and ordered traveler? Because you are going to stay in this
Durban Apartment to pay respondent the sum of place. You have no other choice but to entrust your
P1, 163, 250.00. CA affirmed the decision of RTC. belongings to these hotel-keepers or innkeepers.
Hence, present petition.
Now in this case of Durban Apartments, what
ISSUE: happened? There was a necessary deposit
Whether or not petitioner is liable to respondent for perfected for the purpose of safekeeping when See
the loss of See’s vehicle.YES. delivered to Justimbaste, an employee of the hotel,
the keys to his vehicle. And as such, it was received
HELD: with the obligation of safely keeping the car and
In this case, respondent substantiated the returning it. So therefore, Durban Apartments is
allegations in its complaint, i.e., a contract of liable for the loss of See’s vehicle even if the car
necessary deposit existed between the insured See was parked, not anymore within the premises of
and petitioner. Durban hotel. What’s the basis? Take a look at Art.
1999.
On this score, we find no error in the following
disquisition of the appellate court. The records also What does it mean? The parking space here of
reveal that upon arrival at the City Garden Hotel, Equitable Bank was deemed as an annex of the
See gave notice to the doorman and parking hotel, as it was customary for them to park the
attendant of the said hotel, x x x Justimbaste, about vehicles of their guests after banking hours, with the
his Vitara when he entrusted its ignition key to the permission of Equitable Bank. So just the same, the
latter. x x x Justimbaste issued a valet parking hotel was obliged to exercise the diligence required
customer claim stub to See, parked the Vitara at the from a depositary even if the cars of their guests
Equitable PCI Bank parking area, and placed the were parked within the premises of Equitable Bank.
ignition key inside a safety key box while See The same is already deemed an annex of the hotel.
proceeded to the hotel lobby to check in. The
Equitable PCI Bank parking area became an annex So liability is not limited to effects lost or damaged
of City Garden Hotel when the management of the in the hotel rooms, which come under the terms
said bank allowed the parking of the vehicles of “baggage” or “articles” such as clothings, but also
hotel guests thereat in the evening after banking include those lost or damaged in hotel annexes
hours. such as vehicles in a hotel’s garage, or in this case,
in a property wherein it is deemed as an annex
Article 1962, in relation to Article 1998, of the Civil considering that it has been customary for the hotel
Code defines a contract of deposit and a necessary to park the cars in the said parking space.
deposit made by persons in hotels or inns:
Art. 1962. A deposit is constituted from the moment Art. 2000.

a person receives a thing belonging to another, with The responsibility referred to in the two
the obligation of safely keeping it and returning the preceding articles shall include the loss of, or
same. If the safekeeping of the thing delivered is injury to the personal property of the guests
not the principal purpose of the contract, there is no caused by the servants or employees of the
deposit but some other contract. keepers of hotels or inns as well as strangers;
but not that which may proceed from any force
Art. 1998. The deposit of effects made by travelers majeure. The fact that travellers are constrained
in hotels or inns shall also be regarded as to rely on the vigilance of the keeper of the
necessary. The keepers of hotels or inns shall be hotels or inns shall be considered in
responsible for them as depositaries, provided that determining the degree of care required of him.
notice was given to them, or to their employees, of
the effects brought by the guests and that, on the
part of the latter, they take the precautions which Art. 2001.
said hotel-keepers or their substitutes advised The act of a thief or robber, who has entered the
relative to the care and vigilance of their effects. hotel is not deemed force majeure, unless it is
done with the use of arms or through an
irresistible force.

those with whom they paid lodging. HK and IK have

Art. 2002. supervision and control of their inns and premises
The hotel-keeper is not liable for compensation thereof, it is not necessary in order to hold the IK
if the loss is due to the acts of the guest, his liable that the effects of the guests be actually
family, servants or visitors, or if the loss arises delivered to him or his employees. It is enough that
from the character of the things brought into the they are within the inn.
hotel.
So these 3 articles refer to those instances when YHT REALTY VS. CA

the hotel-keeper is liable or not. (451 SCRA 638, G.R. No. 126780, February 17,
2005)
Under these articles, the hotel keeper is liable
REGARDLESS of the care exercised in the FACTS:
following instances: McLoughlin (private respondent), an Australian
1. Loss or injury caused by his servants or businessman, regularly stayed at Sheraton Hotel
employees, as well as by strangers, during
provided that notice has been given and trips to Philippines. McLoughlin became friends with
proper precautions taken (Art. 2000 in Tan, who convinced the former to transfer from
relation to the requisites in art. 1998). Sheraton Hotel to Tropicana Hotel were
2. Loss is caused by the act of a thief or a (petitioners) Lainez, Payam and Lopez. Lopez
robber, done without the use of arms or served as manager while Lainez and Payam had
irresistible force (Art. 2001). In this custody of the keys for the safety deposit boxes of
instance, the HK is apparently negligent. Tropicana Hotel.
Instances when the HK is not liable: The procedure for the safety deposit box at
1. When the loss is caused by force majeure Tropicana Hotel was that it can be opened by 2
(Art. 2000); Theft or robbery by a stranger, keys only. 1 key is given to the registered hotel
not a HK’s servant or employee, with the guest while the other key is held by the hotel
use of arms or irresistible force (Art. 2001), management.
unless the HK is guilty of fraud or
negligence in failing to provide against the McLoughlin deposited $15,000 (US) and $10,000
loss or injury (AUS) as well as letters, bankbooks, credit cards
2. Loss is due to the acts of the guest, his and a checkbook in the safety deposit box during
family, servants or visitors (Art. 2002) his stay at Tropicana Hotel.
3. When the loss arises from the character of
the things brought in the hotel (Art. 2002) After his trips abroad, McLoughlin discovered that
some cash and valuables he deposited in the safety
deposit box were missing. McLoughlin immediately
Art. 2003. confronted Lainez and Payam. Both admitted that
The hotel-keeper cannot free himself from Tan opened the safety deposit box with the key
responsibility by posting notices to the effect assigned to him.
that he is not liable for the articles brought by
the guest. Any stipulation between the hotel- When McLoughlin confronted Tan, she admitted to
keeper and the guest whereby the responsibility have stolen the key with the assistance of Lopez,
of the former as set forth in articles 1998 to 2001 Payam and Lainez. A promissory note was written
is suppressed or diminished shall be void. by Lopez, promising to pay the amount of $4,000
(AUS) and $2,000 (US).
You always see this: “The management will not be
liable for the loss of your belongings… Please take McLoughlin insisted that Tropicana Hotel be
care of your things…” among others. Now mere responsible for the loss. However, Lopez refused
posting of these notices will not free the HK from and relied on the conditions for renting the safety
responsibility. We go back to the provisions similar deposit box which provides that the hotel is free
to safety deposit boxes, wherein otherwise we just from any liability arising from loss should the key be
allow the HK to be negligent or to not exercise any lost and to return the key and execute the release in
degree of diligence at all because anyway, they will favor of the hotel upon giving up the use of the box.
not be held liable.
McLoughlin filed a case against petitioners. RTC
It’s very clear under Art. 2003 that such notice is not ruled in favor of McLoughlin, making petitioners
binding to guests, and any stipulation suppressing jointly and severally liable for the losses plus
or diminishing such liability will be considered as damages. The hotel conditions were ruled not valid
VOID. This provision is similar to common carriers, for being contrary to Art 2003 of the NCC and public
where it is not allowed for common carriers to policy. The CA also ruled in favor of McLoughlin.
dispenses with or limit his responsibility by
stipulation or by posting of notices. Again, this is in ISSUE:
relation to your contracts, if it is contrary to law, Whether or not YHT Corporation is jointly and
morals and public policy then it will not be severally liable for the losses suffered by
considered as valid. McLoughlin? – YES.
HK and IK as depositaries should be subjected to HELD:

extraordinary degree of responsibility for the SC appreciated the facts found and proven by the
protection and safety of travelers who have no lower court that McLoughlin indeed deposited such
alternative but to rely on the good faith and care of cash and valuables as he claimed.

nothing anomalous in how the lower courts decided

The evidence also revealed that the hotel guest the controversy for this Court has pronounced a
alone cannot open the safety deposit box without jurisprudential rule that tort liability can exist even if
the assistance of the hotel management or its there are already contractual relations. The act that
employees. In case of loss of any item deposited, it breaks the contract may also be tort.
is inevitable to conclude that the management had
at least a hand in the consummation of the taking, Q: So what should have been done here in order for
unless the reason for the loss is force majeure. the hotel and its employees not to be deemed
negligent?
Noteworthy is the fact that Payam and Lainez, who
were employees of Tropicana, had custody of the A: They should have ascertained as to the person
master key of the management when the loss took of Tan, or gave notice to McLoughlin that Tan
place. They even admitted that they assisted Tan opened the safety deposit box at numerous
on 3 separate occasions in opening McLoughlin’s instances. And the fact that Tan opened the safety
safety deposit box. deposit box at night when Mcloughlin was asleep,
should have alerted the employees as to the
It is proved that Tropicana had prior knowledge that authorization of Tan to open such.
a person aside from the registered guest had
access to the safety deposit box. Yet the Again as we have discussed in cases of safety
management failed to notify McLoughlin of the deposit boxes, it is not sufficient that you have the
incident and waited for him to discover the taking key. You must also be an authorized person. In this
before it disclosed the matter to him. Therefore, case, who was the lessee of the SDB? It was only
Tropicana should be held responsible for the Mcloughlin, not Tan. Tan was only his companion.
damage suffered by McLoughlin by reason of the At the same time, Mcloughlin could also not open it
negligence of its employees. without the said key in his possession.
Tan’s acts should have prompted the management So here, with regard to depositaries in the instance
to investigate her relationship with McLoughlin. of HKs and their employees, he must exercise
Then, petitioners would have exercised due extraordinary diligence. Again it is not necessary
diligence required of them. Failure to do so that the effects of the guest be ACTUALLY
warrants the conclusion that the management had DELIVERED to him (HK). In this case there was no
been remiss in complying with the obligations actual delivery to the employees, but it was
imposed upon hotel-keepers under the law. Mcloughlin who placed the cash and other
belongings to the SDB. That is already sufficient for
Under Art 1170 of NCC, those who, in the the hotel to exercise the diligence required for a HK.
performance of their obligations, are guilty of
negligence, are liable for damages. As to who shall Art. 2004.
bear the burden of paying damages, Art 2180 Par The hotel-keeper has a right to retain the things
(4) of NCC provides that the owners and managers brought into the hotel by the guest, as a
of an establishment are likewise responsible for security for credits on account of lodging, and
damages caused by their employees in the service supplies usually furnished to hotel guests.
of the branches in which the latter are employed or
on the occasion of their functions. This is another instance where there is a Contract
of Pledge created by operation of law, wherein the
Also, this Court has ruled that if an employee is HK is given the right to retain the belongings of the
found negligent, it is presumed that the employer guest to compensate them for the liabilities imposed
was negligent in selecting and/or supervising him upon by law. The bailee in commodatum may
for it is hard for the victim to prove the negligence of likewise retain, but again it is only with regard to
such employer. damages by reason of defects.
Thus, given the fact that the loss of McLoughlin’s However take note, Art. 2004 only deals with the
money was consummated through the negligence civil liability, in the sense that the object or the
of Tropicana’s employees in allowing Tan to open things of the guest may be retained by the HK. On
the safety deposit box without the guest’s consent, the other hand, the HK can even hold the guest
both the assisting employees and YHT Realty liable for estafa under Sec. 2 if the guest obtained
Corporation itself, as owner and operator of full accommodation in the hotel or inn without
Tropicana, should be held solidarily liable pursuant paying therefor.
to Article 2193.
IV. SEQUESTRATION OR JUDICIAL
Also, Art 2003 is controlling which provides that the DEPOSIT
hotel-keeper cannot free himself from responsibility
by posting notices to the effect that he is not liable Now very briefly, let us go over the JUDICIAL
for the articles brought by the guest. Any stipulation DEPOSIT or SEQUESTRATION.
between the hotel-keeper and the guest whereby
the responsibility of the former as set forth in Art. 2005.
Articles 1998 to 2001 is suppressed or diminished A judicial deposit or sequestration takes place
shall be void. when an attachment or seizure of property in
litigation is ordered.
Petitioners contend that McLoughlin’s case was
mounted on the theory of contract, but the trial court Art. 2006.
and the appellate court upheld the grant of the Movable as well as immovable property may be
claims of the latter on the basis of tort. There is the object of sequestration.

Art. 2007. Petitioner argues that respondents do not have a

The depositary of property or objects right to the relief demanded, because they merely
sequestrated cannot be relieved of his have possession of the property, as the legal title is
responsibility until the controversy which gave in the name of Macy Africa.9 Furthermore, it claims
rise thereto has come to an end, unless the that the consolidation of title in its name does not
court so orders. constitute an "invasion of a right that is material and
substantial.
Art. 2008.
The depositary of property sequestrated is On the other hand, respondents maintain that they
bound to comply, with respect to the same, with would suffer great irreparable damage if the writ of
all the obligations of a good father of a family. preliminary injunction is not granted. 11 They likewise
contend that if petitioner is allowed to consolidate
its title to the subject property, they would lose their
So judicial deposit or sequestration takes place
ancestral home, a loss that would result in
when an attachment or seizure of property in
unnecessary and protracted proceedings involving
litigation is ordered by court. Judicial = of course
third parties.
that is a court order.
ISSUE:
If there is a notice of lis pendens, does it is
Whether the appellate court erred in issuing a writ
necessarily mean that the property is subject to
of preliminary injunction to stop petitioner’s
judicial deposit? No.
consolidation of its title to the subject property.
What is a notice of lis pendens?
It is an announcement to the whole world that the
HELD:
real property is subject of a pending litigation. It is
Main Issue:
also a warning to those who will acquire interest
Propriety of Preliminary Injunction
over the property, that they shall do so at their own
We agree with respondents.
risk, subject to the decision of the court.
The grounds for the issuance of a writ of preliminary
injunction are enumerated in Rule 58, Section 3 of
LOS BAÑOS RURAL BANK VS AFRICA the Revised Rules of Court, which reads as follows:
"Sec. 3. Grounds for issuance of preliminary
FACTS: injunction. – A preliminary injunction may be
Pacita Africa is the widow of Alberto Africa and the granted when it is established;
rest of her co-petitioners are their children. (a)That the applicant is entitled to the relief
demanded, and the whole or part of such relief
In June 1989, the Register of Deeds was razed by consists in restraining the commission or
fire, destroying some of its records/documents continuance of the act or acts complained of, or in
among which was the original TCT covering a requiring the performance of an act or acts, either
parcel of land registered in the name of petitioner for a limited period or perpetually;
Pacita. The aforesaid property was part of the (b)That the commission, continuance or non-
conjugal property of petitioner Pacita and her late performance of the act or acts complained of during
husband Alberto Africa. the litigation would probably work injustice to the
applicant; or
On request of Pacita, private respondent Macy (c)That a party, court, agency or a person is doing,
Africa, the common-law wife of petitioner Antonio threatening, or is attempting to do, or is procuring or
Africa, worked for the reconstitution of the TCT. suffering to be done, some act or acts probably in
While the reconstituted title was in her possession, violation of the rights of the applicant respecting the
Macy allegedly forged, or caused the forgery of, subject of the action or proceeding, and tending to
Pacita’s signature on a Deed of Absolute Sale render the judgment ineffectual."
purporting to transfer ownership of the subject
property to Macy. On the strength of the forged Injunction is a preservative remedy aimed at no
Deed of Absolute Sale, Macy was able to cause the other purpose than to protect the complainant’s
issuance of a TCT in her name, without the substantive rights and interests during the
knowledge of any of herein petitioners. pendency of the principal action. A preliminary
injunction, as the term itself suggests, is merely
In March 1994, petitioners discovered that the temporary. It is to be resorted to only when there is
subject property was mortgaged by Macy to the a pressing necessity to avoid injurious
respondent bank. To protect their interests over the consequences that cannot be remedied under any
subject property, petitioners lodged an action in standard of compensation.
court against Macy and the respondent bank for
Annulment of Title, Deed of Absolute Sale and Moreover, injunction, like other equitable remedies,
Deed of Mortgage. should be issued only at the instance of a suitor
who has sufficient interest in or title to the right or
The respondent bank in utter bad faith, foreclosed the property sought to be protected. It is proper only
the subject property on June 11, 1996 without due when the plaintiff appears to be entitled to the relief
notice to the petitioners, prompting the petitioners to demanded in the complaint. In particular, the
amend [their] complaint, this time incorporating existence of the right and the violation thereof must
therein a prayer for the issuance of a temporary appear in the allegations of the complaint and must
restraining order and/or writ of preliminary constitute at least a prima facie showing of a right to
injunction, to stop the respondent bank from, the final relief. Thus, there are two requisite
among others, consolidating title to the subject conditions for the issuance of a preliminary
property.

injunction, namely, (1) the right to be protected filed an Amended Complaint, praying for a writ of
exists prima facie, and (2) the acts sought to be preliminary injunction.
enjoined are violative of that right. It must be proven
that the violation sought to be prevented would Unless legally stopped, petitioner may consolidate
cause an irreparable injustice. title to the property in its name and enjoy the
unbridled freedom to dispose of it to third persons,
Further, while a clear showing of the right is to the damage and prejudice of respondents. What
necessary, its existence need not be conclusively respondents stand to lose is material and
established. In fact, the evidence required to justify substantial. They would lose their ancestral home
the issuance of a writ of preliminary injunction in the even without the benefit of a trial. Clearly, the act
hearing thereon need not be conclusive or sought to be enjoined is violative of their proprietary
complete. The evidence need only be a "sampling" right over the property.
intended merely to give the court an idea of the
justification for the preliminary injunction, pending A writ of preliminary injunction is issued precisely to
the decision of the case on the merits. Thus, to be preserve threatened or continuous irremediable
entitled to the writ, respondents are only required to injury to some of the parties before their claims can
show that they have the ostensible right to the final be thoroughly studied and adjudicated. Denial of
relief prayed for in their Complaint. the application for the writ may make the Complaint
of respondents moot and academic. Furthermore, it
First Requisite: Existence of the Right would render ineffectual a final judgment in their
In the case at bar, we find ample justification for the favor or, at the very least, compel them to litigate
issuance of a writ of preliminary injunction. needlessly with third persons who may have
Evidently, the question on whether or not acquired an interest in the property. Such a
respondents possess the requisite right hinges on situation cannot be countenanced.
the prima facie existence of their legal title to the
subject property. They have shown that they have Lis Pendens
that right, and that it is directly threatened by the act Petitioner further contends that respondents are not
sought to be enjoined. entitled to the relief prayed for, because they
caused a notice of lis pendens to be annotated at
First, Respondent Pacita Africa is the registered the back of TCT No. 81519, registered in the name
owner of the subject property. Her ownership is of Macy P. Africa; thus, that notice provided ample
evidenced by the reconstituted Transfer Certificate protection of their rights and interests.
of Title.
We are not persuaded. A notice of lis pendens
Second, the validity of the Deed of Sale dated serves as an announcement to the whole world that
December 29, 1992, is still in dispute because a particular real property is in litigation and as a
Respondent Pacita Africa claims that her signature warning that those who acquire an interest in the
was forged by the vendee, Macy Africa. property do so at their own risk -- they gamble on
the result of the litigation over it.
Third, there is doubt as to the validity of the
mortgage in favor of petitioner, because there exists However, the cancellation of such notice may be
on record two TCTs covering the mortgaged ordered by the court that has jurisdiction over it at
property: (1) TCT No. 81519 registered in the name any given time. Its continuance or removal -- like
of Pacita Africa and (2) TCT No. 81519 registered the continuance or the removal of a preliminary
in the name of Macy Africa. attachment or injunction -- is not contingent on the
existence of a final judgment on the action and
If indeed the Deed of Sale is a forgery, no parcel of ordinarily has no effect on the merits thereof. Thus,
land was ever transferred to the purported buyer the notice of lis pendens does not suffice to protect
who, not being the owner, could not have validly herein respondents’ rights over the property. It does
mortgaged the property. Consequently, neither has not provide complete and ample protection.
petitioner -- the buyer and mortgagee of the same
lot -- ever acquired any title thereto. Significantly, no Status Quo Ante
evidence was presented by petitioner to controvert Petitioner further claims that the RTC erred in
these allegations put forward by respondents. enjoining the foreclosure sale of the subject
Clearly then, on the basis of the evidence property. It argues that the foreclosure may no
presented, respondents possess the right to longer be enjoined, because it has long been
prevent petitioner from consolidating the title in its effected since 1996. We agree with petitioner.
name. The first requisite -- the existence of a right
to be protected -- is thus present. It is a well-entrenched rule that consummated acts
can no longer be restrained by injunction whose
Second Requisite: Violation of Applicant’s sole objective is to preserve the status quo until the
Right merits of the case are fully heard. Status quo is
As to the second requisite, what is sought to be defined as the last actual peaceful uncontested
enjoined by respondents is the consolidation of the situation that precedes a controversy, and its
title to the subject property in petitioner’s name. preservation is the office of an injunctive writ.
After having discovered that the property had been
mortgaged to petitioner, respondents filed on June In the instant case, the status quo was the situation
12, 1994 an action for Annulment of Title, Deed of of the parties at the time of the filing of the
Sale, and Mortgage to protect their rights over the Amended Complaint with a prayer for a writ of
property. This notwithstanding, petitioner foreclosed preliminary injunction. It was that point at which
it on June 11, 1996. To enjoin petitioner from petitioner had already foreclosed the subject
consolidating the title in its name, respondents then property and, hence, could no longer be enjoined

from going on with the foreclosure. However, the 6) Judicial - auxiliary to a case pending in
last actual uncontested status that preceded the court, its purpose is to maintain the status
controversy was when the property in dispute was quo during litigation or to ensure the rights
still registered in the name of Macy Africa, petitioner of the parties. The depositary is the person
not having consolidated in its name the title thereto. appointed by the court, with the obligation
Thus, the issuance of the writ would no doubt to exercise the diligence of a good father of
preserve the status quo. a family (Art. 2008), and he may not be
relieved of his responsibility until the
We cannot rule on the allegation of petitioner that litigation is ended, or the court so orders
this case is a "scam perpetrated by private (Art. 2007).
respondents" to defraud it. The truth or the falsity of
that assertion cannot be ascertained by this Court December 11, 2015 (Calatrava)
at this time. Verily, we refrain from expressing any
opinion on the merits of the case, pending a full PART V: THE WAREHOUSE RECEIPTS LAW
consideration of the evidence that would be
presented by the parties. So The Warehouse Receipts Law, that’s Act 2137.
What is the purpose of Warehouse Receipts Law?

So was the issuance of the writ of preliminary
injunction proper? 1. To regulate the status, rights, and liabilities of a
Yes. It was proper because they complied with the person in a warehousing contract;
2 requisites.
2. To protect those who in good faith and for value,
Because they allege that the notice of lis pendens acquire negotiable warehouse receipts by
was sufficient to protect the rights of the negotiation;
respondents, so that’s why they opposed to the
issuance of the writ of preliminary injunction. The 3. To render the title to and right of possession of
SC held here that the notice of lis pendens serves property stored in warehouses more easily
merely as an announcement to the whole world that convertible;
the particular property is in litigation, and a warning
that those who acquire interest in the property do so 4. To facilitate the use of warehouse receipts as
at their own risk. They gamble on the result of the documents of title;
litigation over it.
5. In order to accomplish these, to place much
The notice of lis pendens does not suffice to protect greater responsibility on the warehouseman.
respondents’ right over the property as it does not
The scope of this law covers all warehouses,
provide complete and actual protection. So the
whether public or private, whether bonded or not.
issuance of PI was proper as the notice was merely
a warning. In fact, rights to the property can be However we also have the General Bonding
transferred, but again subject to the notice that it is Warehouse Act which specifically regulates
under litigation. Again, Notice of lis pendens is warehouses which put up a bond. So in other
different from Judicial Deposit. words, the Warehouse Receipts Law is suppletory
to the General Bonding Warehouse Act with
Art. 2009. regarded to bonded warehouse.
As to matters not provided for in this Code,
judicial sequestration shall be governed by the Now, the Warehouse Receipts Law on the other
Rules of Court. hand prescribes mutual duties and the rights of a
warehouseman who issues warehouse receipts to
the depositor and covers all warehouses whether
So we only have 5 provisions on judicial deposit bonded or not.
because this is procedural in nature, therefore the
Rules of Court is applicable. Applicability: it applies to warehouse receipts issued
by a warehouseman as defined under Section 58 of
Take note of the distinctions between JUDICIAL the Warehouse Receipts Law. Civil Code on the
and EXTRAJUDICIAL DEPOSIT: other hand applies to cases or receipts not issued
1) Judicial - by the will of the court. by the warehouseman. Take note that what
Extrajudicial - by the will of the parties. happens herein, if you deliver things in a
2) Judicial - the purpose of which is to secure warehouse, essentially it is a contract of deposit. So
the right of the party to recover in case of a if what is involved is a warehouse receipt, you have
favorable judgment. Extrajudicial - for the special law. In circumstances if there is no
custody and safekeeping. warehouse receipt issued, we apply the rules on
3) As to subject matter: Judicial - maybe deposit under the Civil Code.
movable or immovable but generally
immovable. Extrajudicial - only movable Now, under the Civil Code the depositor is not
property. necessarily a holder of a warehouse receipt. On the
4) Remuneration: Judicial - always onerous. other hand, if you are under the Warehouse
Extrajudicial - maybe gratuitous or subject Receipts Law, you have the warehouseman as the
to compensation.
depositary of such arrangement. So the
5) Judicial - it is in behalf of the person who,
warehouseman is a person lawfully engaged in the
by judgment, has a right. Extrajudicial - in
behalf of the depositor or 3rd person business of storing goods for profit. The warehouse
designated. of course, that is the building or place where goods
are deposited and stored for profit.

Now, the warehouse receipt, it is a written (d) A statement whether the goods received will
acknowledgment by a warehouseman that he has be delivered to the bearer, to a specified person
received and holds certain goods therein described or to a specified person or his order,
in his warehouse for the person to whom it is
issued. It is one of those documents of title as (e) The rate of storage charges,
provided under Article 1636 of the New Civil Code. (f) A description of the goods or of the
Characteristics of a warehouse receipt are as packages containing them,
follows: (g) The signature of the warehouseman which
1. A contract- a contract of deposit and in may be made by his authorized agent,
certain instances it is considered as a (h) If the receipt is issued for goods of which
contract of carriage; the warehouseman is owner, either solely or
2. Evidence of the receipt of goods; and jointly or in common with others, the fact of
3. Represents the goods and operates as a such ownership, and
transferable document of title.
(i) A statement of the amount of advances made
Those who were with me under Sales, we have and of liabilities incurred for which the
briefly covered Documents of Title. A warehouse warehouseman claims a lien. If the precise
receipt is a document of title which must be amount of such advances made or of such
distinguished from your negotiable instruments. liabilities incurred is, at the time of the issue of,
Because take note, documents of title can be unknown to the warehouseman or to his agent
negotiable or non-negotiable. Remember, in a who issues it, a statement of the fact that
negotiable instrument, what is the subject matter? advances have been made or liabilities incurred
Money. However, in warehouse receipts you have and the purpose thereof is sufficient.
merchandise. Object of value in a negotiable
instrument is the instrument itself. In a negotiable A warehouseman shall be liable to any person
warehouse receipt, the goods subject of the injured thereby for all damages caused by the
deposit. In a negotiable instrument you have parties omission from a negotiable receipt of any of the
who are secondarily liable. But under the terms herein required.
warehouse receipts law with regard to negotiable
documents, there is no distinction between primary If the goods are incorrectly described, it would not
and secondary liable. In a negotiable instrument, necessarily make the warehouse receipt ineffective
original bearer instrument will always be considered when identity of the goods is fully established by
as original bearer instrument. However, with regard evidence.
to a negotiable warehouse receipt, even if it is What is the effect if these essential terms or any of
originally a bearer instrument, if it is especially these essential terms are omitted or are not present
endorsed, it is converted into an order instrument. in a warehouse receipt?
Now again, take note here of these distinctions. The 1. As a general rule it will not affect the validity
terms here bearer and order, same siya with your of the warehouse receipt;
negotiable instruments. Bearer instrument or bearer 2. However the warehouseman may be liable
document, negotiated by mere delivery. Order for damages;
document or order negotiable instrument, 3. The negotiability of the receipts will not
negotiated by indorsement plus delivery. However, necessarily be affected;
there is no concept of a holder in due course in 4. However it is possible that the contract will
negotiable warehouse receipts. But that is available be converted to an ordinary contract of
in a negotiable instrument where a holder in due deposit.
course can have a better title than the transferor.
Sa negotiable warehouse receipt, he only gets the Arrangement or contract involving a warehouse
subsequent holder, transferee only gets the same receipt is similar with other contracts. The
title as that of the transferor. agreement between the depositor and the
warehouseman must be of course not contrary to
Now take note section 2 of the law, you have the law, morals, public order, and customs among
essential terms of a warehouse receipt. others. And there must be no exemption exempting
Sec. 2. Form of receipts; essential terms. — the warehouseman from any liability for misdelivery
or negligence. So same discussion we had for
Warehouse receipts need not be in any
exemption of liability for example we had in the
particular form but every such receipt must
provisions of the lease of safety deposit box. Again
embody within its written or printed terms:
if is present for example here in a warehouse
(a) The location of the warehouse where the receipt, that stipulation will be considered void
goods are stored, because it would essentially making the
warehouseman or it is essentially saying that the
(b) The date of the issue of the receipt, warehouseman need not exercise any form of
(c) The consecutive number of the receipt, diligence.
Now, sections 4 and 5, you have therein the kinds

of warehouse receipt.

Sec. 4. Definition of non-negotiable receipt. — A Object of value is the Object of value refers to
receipt in which it is stated that the goods instrument itself the goods deposited
received will be delivered to the depositor or to There are parties No parties that are
any other specified person, is a non-negotiable secondarily liable secondarily liable
receipt. An original bearer An original bearer
instrument will always instrument subsequently
Sec. 5. Definition of negotiable receipt. — A be considered a bearer indorsed, it becomes an
receipt in which it is stated that the goods instrument, thus can be order instrument.
received will be delivered to the bearer or to the negotiated by mere
order of any person named in such receipt is a delivery.
negotiable receipt. There is a concept of There is no concept of
holder in due course holder in due course
Again it is a document of title that can be negotiable who has a better title
or non-negotiable. However, unlike sa negotiable than the transferor
instruments, we have section 1, the requisites to
consider whether the instrument is negotiable or Under Section 8, you have therein the obligations of
not. However, with regard to warehouse receipts, a warehouseman.
we consider it negotiable if the goods are delivered
to order or bearer. If there is a provision in the Sec. 8. Obligation of warehousemen to deliver.
negotiable warehouse receipt, usually the term — A warehouseman, in the absence of some
negotiable is written or printed on the face of the lawful excuse provided by this Act, is bound to
negotiable warehouse receipt. However, the failure deliver the goods upon a demand made either
to mark it as negotiable will not render it non- by the holder of a receipt for the goods or by
negotiable if it contains any of the words of the depositor; if such demand is accompanied
negotiability: bearer or order. with:
Now, it is non-negotiable if the words are (a) An offer to satisfy the warehouseman's lien;
deliverable to a depositor or any specified person. It
should be stamped on its face as non-negotiable. It (b) An offer to surrender the receipt, if
cannot be negotiated but can be transferred or negotiable, with such indorsements as would be
assigned. Mark them non-negotiable or not necessary for the negotiation of the receipt; and
negotiable otherwise, they shall be considered as (c) A readiness and willingness to sign, when
negotiable. However, take note that failure to mark the goods are delivered, an acknowledgment
negotiable will not render it non-negotiable again if that they have been delivered, if such signature
it contains words of negotiability. So essentially, is requested by the warehouseman.
how you determine the document is negotiable or
not, it contains the words bearer or order or any In case the warehouseman refuses or fails to
terms indicating that it is indeed negotiable. So isa deliver the goods in compliance with a demand
lang yung requirement unlike in negotiable by the holder or depositor so accompanied, the
instruments. burden shall be upon the warehouseman to
establish the existence of a lawful excuse for
Now, negotiable warehouse receipt if you say such refusal.
bearer document of title, negotiated by delivery.
However, take note when it comes to warehouse Obviously, to issue the warehouse receipt; to take
receipts, even if it is originally bearer warehouse good care of the goods; to deliver the goods to the
receipt, it is not always a bearer document of title if person lawfully entitled thereto; not to comingle the
it has been specially indorsed. (questions re: Nego) goods deposited unless fungible and same kind and
Dito, even if it is originally bearer, the last grade, so similar to an ordinary contract of deposit;
indorsement is a special indorsement, it will now be to insure the goods in covered circumstances; to
converted into an order instrument. You have this mark a non-negotiable warehouse receipt as such;
section in indorsement, I think section 40, to mark as such the duplicates of a warehouse
emphasizes that an originally bearer instrument receipt; give proper notice in case the sale of the
would still be considered as a bearer instrument goods; and pick up and cancel the warehouse
negotiated by mere delivery even if it is specially receipt whenever the goods are delivered. There
indorsed. Just take note of that distinction. would be no liability on the part of the
warehouseman if he does not or fails to deliver
Now, of course if it is an order document,
without the surrender of the warehouse receipt.
indorsement plus delivery for a valid negotiation.
Because again, here, the warehouse receipt, it is an
Now if non-negotiable, transferee must notify the
evidence for the receipt of goods, and as a rule, you
warehouseman of the transfer to him of such
have to surrender it to the warehouseman so that
receipt. Notice here is required, prior notice does
the warehouseman can release the goods to you.
not affect a writ of attachment or execution.
However, if it is negotiable, notice is not required Now Section 14.
because it is as if the subsequent transferee is the
person to whom the warehouseman directly issued Sec. 14. Lost or destroyed receipts. — Where a
the receipt. negotiable receipt has been lost or destroyed, a
court of competent jurisdiction may order the
NIL NWR delivery of the goods upon satisfactory proof of
Subject matter is money Subject matter is goods such loss or destruction and upon the giving of

a bond with sufficient sureties to be approved and expenses in relation to such goods, also for
by the court to protect the warehouseman from all reasonable charges and expenses for notice,
any liability or expense, which he or any person and advertisements of sale, and for sale of the
injured by such delivery may incur by reason of goods where default had been made in
the original receipt remaining outstanding. The satisfying the warehouseman's lien.
court may also in its discretion order the
payment of the warehouseman's reasonable Extent of the warehouseman’s lien. It is over the
costs and counsel fees. goods deposited to him is his security, just like in a
contract of pledge or mortgage. For the payment of
The delivery of the goods under an order of the charges, money advanced as provided in section
court as provided in this section, shall not 27.
relieve the warehouseman from liability to a
person to whom the negotiable receipt has been Then you have Section 30.
or shall be negotiated for value without notice
Sec. 30. Negotiable receipt must state charges
of the proceedings or of the delivery of the
for which the lien is claimed. — If a negotiable
goods.
receipt is issued for goods, the warehouseman
So yun ang exception sa rules sa surrender for shall have no lien thereon except for charges
delivery. for storage of goods subsequent to the date of
the receipt unless the receipt expressly
Section 25. enumerated other charges for which a lien is
claimed. In such case, there shall be a lien for
Sec. 25. Attachment or levy upon goods for the charges enumerated so far as they are
which a negotiable receipt has been issued. — If within the terms of section twenty-seven
goods are delivered to a warehouseman by the although the amount of the charges so
owner or by a person whose act in conveying enumerated is not stated in the receipt.
the title to them to a purchaser in good faith for
value would bind the owner, and a negotiable Unless the charges are so specified in the
receipt is issued for them, they can not negotiable receipt, then it is understood that the
thereafter, while in the possession of the warehouseman’s lien is limited to charges for
warehouseman, be attached by garnishment or storage of the goods subsequent to the date of
otherwise, or be levied upon under an execution receipt.
unless the receipt be first surrendered to the
warehouseman or its negotiation enjoined. The Also take note of Section 36.
warehouseman shall in no case be compelled to
Sec. 36. Effect of sale. — After goods have been
deliver up the actual possession of the goods
lawfully sold to satisfy a warehouseman's lien,
until the receipt is surrendered to him or
or have been lawfully sold or disposed of
impounded by the court.
because of their perishable or hazardous
Goods covered by the negotiable receipt cannot be nature, the warehouseman shall not thereafter
attached or levied upon directly. The creditors must be liable for failure to deliver the goods to the
resort to attaching or levying the receipt while in the depositor or owner of the goods or to a holder
hands of the debtor-transferor. Being in the hands of the receipt given for the goods when they
of the holder, it is freed from the legal attachment or were deposited, even if such receipt be
levy of transferor’s creditors. negotiable.
So here, the rights of the warehouseman are as Remedies available to a warehouseman for
follows: enforcing his lien. He can refuse to deliver the
goods until the lien has been satisfied. He can also
1. Obviously, he has to be paid because a cause the extrajudicial sale of the property and
warehouse receipt transaction is a contract applying the proceeds to the value of the lien. You
of deposit which is onerous in nature, there have there sections 33 and 34. Or he can file an
is a consideration; action for collection of unpaid charges or by way of
2. The warehouseman has the right to counterclaim in an action to recover the property
exercise his lien on the goods if not paid, so from him or such other remedies as allowed by law.
he can retain it;
3. To refuse delivery in proper legal Now you also have Section 41.
circumstances.
Sec. 41. Rights of person to whom a receipt has
Under Section 27. been negotiated. — A person to whom a
negotiable receipt has been duly negotiated
Sec. 27. What claims are included in the acquires thereby:
warehouseman's lien. — Subject to the
provisions of section thirty, a warehouseman (a) Such title to the goods as the person
shall have a lien on goods deposited or on the negotiating the receipt to him had or had ability
proceeds thereof in his hands, for all lawful to convey to a purchaser in good faith for value,
charges for storage and preservation of the and also such title to the goods as the depositor
goods; also for all lawful claims for money or person to whose order the goods were to be
advanced, interest, insurance, transportation, delivered by the terms of the receipt had or had
labor, weighing, coopering and other charges

ability to convey to a purchaser in good faith for (c) That he has knowledge of no fact which
value, and would impair the validity or worth of the receipt,
and
b) The direct obligation of the warehouseman to
hold possession of the goods for him according (d) That he has a right to transfer the title to the
to the terms of the receipt as fully as if the goods and that the goods are merchantable or
warehouseman and contracted directly with fit for a particular purpose whenever such
him. warranties would have been implied, if the
contract of the parties had been to transfer
Proper negotiation ipso jure grants to the holder not without a receipt of the goods represented
only the title to the transferor of the goods but also thereby.
the title of the depositor. The direct obligation of the
warehouseman who holds possession of the goods Now Section 45
for him without need of notice.
Sec. 45. Indorser not a guarantor. — The
And then Section 42. indorsement of a receipt shall not make the
indorser liable for any failure on the part of the
Sec. 42. Rights of person to whom receipt has warehouseman or previous indorsers of the
been transferred. — A person to whom a receipt receipt to fulfill their respective obligations.
has been transferred but not negotiated
acquires thereby, as against the transferor, the Indorsement of a negotiable receipt does not make
title of the goods subject to the terms of any an indorser liable for the failure of the
agreement with the transferor. warehouseman or previous indorsers to comply
with their obligations. So no warranty as to that
If the receipt is non-negotiable, such person
effect.
also acquires the right to notify the
warehouseman of the transfer to him of such Section 46.
receipt and thereby to acquire the direct
obligation of the warehouseman to hold Sec. 46. No warranty implied from accepting
possession of the goods for him according to payment of a debt. — A mortgagee, pledgee, or
the terms of the receipt. holder for security of a receipt who, in good
faith, demands or receives payment of the debt
Prior to the notification of the warehouseman by for which such receipt is security, whether from
the transferor or transferee of a non-negotiable a party to a draft drawn for such debt or from
receipt, the title of the transferee to the goods any other person, shall not, by so doing, be
and the right to acquire the obligation of the deemed to represent or to warrant the
warehouseman may be defeated by the levy of genuineness of such receipt or the quantity or
an attachment or execution upon the goods by quality of the goods therein described.
a creditor of the transferor or by a notification to
the warehouseman by the transferor or a A mortgagee, pledgee, or holder for security who
subsequent purchaser from the transferor of a demands or receives payment for the debt for which
subsequent sale of the goods by the transferor. such receipt is security such receipt of payment
shall not be deemed to represent or to warrant the
When an order receipt is delivered without genuineness of the receipt nor the quality or
indorsement nevertheless, mere delivery of the quantity of goods.
negotiable receipts transfers title to the goods to the
holder as against the transferor and it grants to the And then Section 49.
holder the right to compel transfer or indorse the
receipt but effects of negotiation shall be placed Sec. 49. Negotiation defeats vendor's lien. —
upon actual indorsement. Where a negotiable receipt has been issued for
goods, no seller's lien or right of stoppage in
Warranties. Kung may warranties ang indorser or transitu shall defeat the rights of any purchaser
the other parties in a negotiable instrument, we also for value in good faith to whom such receipt has
have warranties in case of sale of a warehouse been negotiated, whether such negotiation be
receipt, where the warehouse receipt is transferred prior or subsequent to the notification to the
or negotiated for value. The following are the warehouseman who issued such receipt of the
warranties for the transferor: seller's claim to a lien or right of stoppage in
transitu. Nor shall the warehouseman be
Sec. 44. Warranties of a sale of receipt. — A obliged to deliver or justified in delivering the
person who, for value, negotiates or transfers a goods to an unpaid seller unless the receipt is
receipt by indorsement or delivery, including first surrendered for cancellation.
one who assigns for value a claim secured by a
receipt, unless a contrary intention appears, Now take note here as to the question whether the
warrants: goods in possession of the warehouseman can be
subject of attachment or subject of execution will
(a) That the receipt is genuine, depend if the goods are subject of a negotiable
(b) That he has a legal right to negotiate or warehouse receipt or a non-negotiable warehouse
transfer it, receipt. Because if it is subject to a negotiable
warehouse receipt, the goods therein cannot just be
subject to attachment or execution. There must be

the surrender of the warehouse receipt itself, the (3) To regulate of trust receipts transactions in
negotiation of that warehouse receipt must be order to assure the protection of the rights
enjoined and that the warehouse receipt is and enforcement of obligations of the
impounded by the court. Because essentially what parties involved therein;
happens when you negotiate this negotiable (4) To declare the misuse and/or
warehouse receipt? Ikaw ang nagdeposit with the misappropriation of goods or proceeds
warehouseman.You negotiate the warehouse realized from the sale of goods, released
receipt to another person, delivery if it is bearer under trust receipts as a criminal offense
then indorsement plus delivery if it is an order punishable under the revised penal code.
instrument or document. Now what happens? You (art 315)
transfer title to the subsequent holder or transferee.
So essentially, who has the right over the goods? Under section 4 of the same law the trust receipt
need not be in any particular form however it must
Not you anymore as the depositor but the
substantially contain the following essential terms:
subsequent transferee of the negotiable warehouse
(a) a description of the goods, value of the
receipt. So kung ako may utang sa creditor who goods, undertaking or a commitment of the
filed a case against me, you can file an issuance for entrustee to hold in trust for the entruster
the writ of attachment or then found to be liable, so the goods;
a writ of execution, you cannot just go immediately (b) to dispose of them in the manner provided
have the goods subject of the attachment or for in the trust receipt; and
execution. Because in the first place, it is not mine (c) to turn over the proceeds of the sale of the
anymore. Second, the warehouseman knows that it goods
is subject to a negotiable warehouse receipt, at the
very least, makita niya na nasurrender sa kanya In a trust receipt transaction, no agency relationship
ang warehouse receipt. Because again here, the is established. However, as you have learned in
warehouse receipt is negotiable in nature. Criminal Law, an entrustee‘s breach of trust may
subject him to criminal liability like for estafa as well
Distinguish it if it is non-negotiable, it can be as civil liability.
attached with the absence of the prior notification to
the warehouseman of transfer. Remember, a non- What is the coverage of a trust receipt agreement?
negotiable warehouse receipt cannot be negotiated, It applies to items destined for sale, process as a
component of a product ultimately sold and
it can be assigned or transferred. Now, without prior
manufactured, and used to repair equipment used
notification to the warehouseman, as far as he to maintain in business. The trust receipt law does
knows, ako yung may title sa goods. So if it will be not cover the sale of goods, document or
subject of an attachment or execution which I am instruments by a person in the business of selling
the obligor or the debtor, then pwede ma-attach, goods, documents or instruments for profit who has
ma-execute. So that is one of the relevance general property rights in such goods documents or
between a negotiable warehouse receipt and a non- installments or sells the same to the buyer on credit
negotiable warehouse receipt. retaining title and other interest as security of the
payment of the purchase price.
*Chika about why Warehouse Receipts and Trust
Receipts has been included. There is no trust receipt transaction if the
agreement is for mere consignment of goods with
PART VI: TRUST RECEIPTS LAW. the obligation on the part of the person to whom it is
delivered to remit proceeds of the sale or return
Now, under The Trust Receipts Law you have
when unsold.
Section 4. Under section 4 of the trust receipt law
trust receipt is defined as a written document Distinguish a trust receipt transaction from a
signed by the trustee in favor of the entruster contract of pledge. In a trust receipt transaction,
whereby the latter releases the goods to the there is a person who is being financed, possesses
possession of the former upon the trustee‘s promise the property. In a contract of pledge, it is the
to hold the said goods in trust for the entruster (the financer that possesses the property as a form of
one who delivered the goods) to sell or dispose of security.
the goods and to return the proceeds thereof to the
extent of the amount owing to the entruster or to In a trust receipt transaction there is no contract of
return the goods if unsold or not otherwise sale. To be distinguished from a conditional
disposed. contract of sale. In a trust receipt, there is no lien
created over the goods that were delivered unlike
Purpose of the law: that of a chattel mortgage which subjects the
property to lien.
(1) To punish dishonesty and abuse of
confidence of one who tends in the In a trust receipts you have three parties. However
handling of money or goods to the the seller does not retain title to the property.
prejudice of the owner regardless of Compare it to consignment, you have the consignor
whether or not the latter is the owner. and the consignee, bipartite, where the consignor
(crime of estafa); retains ownership of the property.
(2) To encourage and promote the use of trust
So who are essentially the parties here? You have
receipts as an additional and convenient
the seller, entruster and entrustee. These three are
aid to commerce and trade;
the parties in a true trust receipt agreement.
However, the seller here is not strictly a party to a

trust receipt transaction but he is a party to the

contract of sale wherein he is the seller and who is
the buyer? It is the buyer/importer-entrustee. Now X- Philippines Y- Hong Kong
you have here the entruster. The entruster here is
the lender or the financier. He is the person holding
title over the goods. He holds title over the goods
but he is not the owner of the good but merely a
holder of security interest. On the other hand you Letter of Credit- BDO HSBC
have the entrustee, the borrower, the buyer, the
importer, to whom the goods are delivered for sale
or processing in trust with the obligation to return
the proceeds of the sale or to return the goods if
unsold. So essentially the entrustee here is
However take note, if you look at this, the purpose
considered as the owner of the goods. While the
for a trust receipt is merely for security of a contract
entruster holds title as a form of security. So the law
of loan. So it is not strictly the trust receipt
imposes on the entrustee the risk of loss of the
transaction or trust receipt agreement covered
goods. So take note here it is a unique
under the trust receipts law. That’s why you also
arrangement. As a general rule, res perit domino.
take into consideration one of the cases Land Bank
Owner bears the loss. But here, if you take into
of the Philippine vs Perez et al, GR No. 166884,
consideration the entruster holds title of the goods
June 13, 2012, wherein what is the effect thereof?
but you cannot say if the goods were lost due to a
There was a demand or in this case, a complaint
fortuitous event, the entruster would be the one who
was filed against the entrustee for estafa. But the
would suffer the loss.
Supreme Court held therein that this was not the
trust receipt agreement covered under the trust
Now in relation to that, just take note of this case
receipts law to be held liable for estafa. Because
Rosario Textile Mills Corp. vs Home Bankers
the arrangement here was that the trust receipt was
Savings and Trust Company, GR No. 137232, June
issued merely to secure the contract of loan by
29, 2005. I think in that case the trust receipt was
virtue of the letter of credit. So read that case for
defined as a security transaction intended to aid
financing importers and retail dealers who do not you to understand more when to make a person
liable for estafa under the trust receipt law and
have sufficient funds as resources to finance the
when is he not liable. Because, if you take into
importation or purchase of merchandise. Now in
consideration criminal liability for estafa for violation
that case, the Supreme Court held, here the trust
of the trust receipts law, the entrustee fails to turn
receipt was issued by the bank, so the bank was
over the proceeds of the sale of goods covered by
deemed the entruster/lender/financier. However,
the trust receipt to the entruster. Or the entrustee
the Supreme Court held in that case that to
fails to return the goods under the trust agreement if
consider the bank as the true owner from the
not disposed in accordance with the agreement of
inception of the transaction would be to disregard
the trust receipt. But if you take a look at the true
the loan feature thereof. Because again, the bank
nature of this kinds of transaction, on the part of X,
here is considered the holder of the title merely for
his obligation is not really to return the goods
purpose of security.
subject of the trust receipt if it is not sold or if it is
sold to remit the proceeds. His obligation is just to
Now recall our brief discussion with regard to letters
pay the loan and the trust receipt was issued as a
of credit. If you recall the cases that you have read
form of security-interest.
involving letters of credit, it is also possible that it
involves the issuance of a trust receipt. Let us say
So take note that in a true trust receipt agreement
you have X here who wants to purchase goods
covered by the trust receipts law, what are the
from Y. This is an international transaction. You
rights available to the entruster?
could not _______ if he is hesitant to pay prior to
delivery. On the part of Y as the supplier, of course
(1) Entitled to the proceeds
he would also be hesitant to deliver without
(2) Entitled to the return of the goods if unsold
payment. So what do they usually resort to? In this
(3) As against an innocent purchaser for value of
case, X will apply a letter of credit with the bank, let
the goods subject to a trust receipts agreement. As
us say BDO. Then BDO will be the one who will
against an innocent purchaser for value, the
transact with Y and in this instance, you are dealing
entruster is not preferred. As against the creditors
with a financial institution. So must stable siya and
of the entrustee, the entruster is preferred. (Section
less risky. And more often than not, a letter of credit
11)
transaction is bank to bank. So let us say there,
(4) The entruster has the right to transfer the trust
HSBC. So ano mangyari niyan? The goods will now
take possession of the goods and to sell the goods
be delivered in the name of BDO and it will release
in a public sale (Section 12)
it to X and then payment will be released by BDO to
(5) The entruster likewise has the right to purchase
Y through HSBC. Now what is the security here of
the same goods at the intended public sale (Section
the bank? More often than not, they will issue a
7)
trust receipt. As a form of security, because here,
when the letter of credit was issued it was actually
Obligations of an entruster
in the form of a loan. Wherein the bank is the
(1) to give possession of the goods to the entrustee
financier who will pay off Y in this illustration, and
and to give at least 5 day notice to the entrustee of
then, that would be for and behalf of the goods
purchased by X. In the meantime, kung hindi pa the intention to sell the goods at an intended public
sale. The entrustee on the other hand has the right
makabayad si X sa bank, the bank will release the
to receive the surplus in case of a public sale as
goods to X by virtue of what we have which is a
provided under section 7.
trust receipt.

(2) To have possession of the goods as a condition

for his liability.
Obligations of the entrustee

(1) To hold the goods or the sale proceeds;
(2) To return the goods in the event of non-sale or
upon demand of the entruster;
(3) To comply with his alternative obligation to
return the proceeds or the goods. The return of the
proceeds- entre garla. The obligation to return the
goods unsold- vevol vera;
(4) To ensure against loss of the goods;
(5) To keep the goods and sale proceeds separate
and identifiable;
(6) If there are other conditions provided under the
trust receipt, observe those conditions.
Continuous effort - not strength or intelligence -

is the key
to unlocking our potential.
Winston Churchill

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CREDIT TRANSACTIONS 2 SANCHEZ ROMAN- ATTY.

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

Let’s have specific provision In a contract of commodatum, one of the parties

What kind of contract is involved here?

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Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

Another good example is a wine, inexhibit ang wine ISSUES:

Mina vs Pascual 1. That it is a fact admitted by the litigating

It is, therefore, an essential feature of the

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Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

manner whatsoever act in contravention of the Commodatum is purely personal in character.

Although it is true that in a contract of Art. 1940.

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FACTS: So applying Art. 1942, did the Supreme Court say

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Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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ALS and Litonjua filed a civil case against BPIIC.

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Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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Now, if you take a look at that, we could say that

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Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

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Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo

defendant bank, the debtor" (Resolution, p.3; Rollo, immediately.

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payment thereof. writing. Furthermore, the interest due shall itself

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On May 8, 1996, the bidding invoving the properties

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In the instant case, however, there is no "surplus" to Factual circumstances to consider:

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DARIO NACAR vs GALLERY FRAMES AND/OR monetary consequences of the dismissal is

As to the payment of legal interest, the guidelines

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reasonably established at the time the demand is

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proceeds amounting to P14,920.00 were deposited executed against the provisions of a

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or alienate the same. Depositary returns the property to the legal

Contributors: Batacan, Cabangbang, Calatrava, Damalerio, Gementiza, Jala, Romero, Tongo