CREDIT TRANSACTION REVIEWER Articles 1933 - 1961

Title XI. LOAN Introductory Comment Credit refers to belief or trust by a person in anothers ability to comply with an obligation. Credit Transactions refers to the agreements based on said trust or credit. SCOPE OF CREDIT TRANSACTIONS contracts or

delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. In commodatum the bailor retains the ownership of the thing loaned, while in simple loan, ownership passes to the borrower. Two Kinds of Loans a. Mutuum or simple loan b. Commodatum

A. PRINCIPAL

CONTRACTS OF LOAN (Both commodatum and mutuum) and deposit (these are of course founded on belief or faith or trust). CONTRACTS which generally depend on the existence of the aforementioned contracts and which tends to strengthen said belief or trust because of the security given: 1.personal guaranty (a persons personal credit is involved as in guaranty proper and suretyship) 2. real guaranty (here the belief is strengthened with the use of property if real property, the contracts of real mortgage and antichresis; if personal property, the contracts of pledge and chattel mortgage).

B. ACCESSORY

MUTUUM a. equivalent amount to be returned (subject matter is fungible)

COMMODATUM a. same thing to be returned (subject matr is nonfungible)

C. PREFERENCE AND CONCURRENCE OF CREDITS. GENERAL PROVISIONS

b. may be gratuitous onerous (with interest)

or

Art. 1933. By the contract of loan, one of the parties

c. ownership goes to borrower or bailee. d. refers to personal

b. essentially gratuitous (if there is compensation it ceases to be commodatum. c. ownership retained by lender or bailor. d. may involve real and

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property only. e. referred to as loan for consumption. f. borrower, because of his ownership, bears risks of loss. g. can be generally obliged to pay only at end of period.

personal property. e. referred to as a loan for use or temporary possession. f. lender, because of his ownership, bears risk of loss.

unless there is delivery, the borrower in commodatum (for example) cannot exercise due diligence over the thing loaned. Consent of the Parties The borrower and the lender must of course consent either personally or through an authorized agent, as in every obligation founded upon a contact. However, the necessary acceptance need not be actual but may be implied from circumstances. Consensual Contract of Future Loans Aside from the real contracts of commodatum and loan, there can also be a consensual contract created by an accepted promise to deliver something by way of commodatum or simple loan.

h. not personal in character.

g. while generally obliged to return object at the end of period, still in some cases the return can be demanded even before the end of the period. h. personal in character.

Art. 1934. An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (n)

Example: A promised to lend P1,000,000 to B. The promise was accepted by B. This contract (consensual) is already binding upon the parties so that if A does not fulfill his promise, B has the right to demand compliance thereof. But note here that the real contract of loan does not yet exist.

Nature of the Contract of Loan Commodatum and loan are real contracts. They are perfected by the delivery of the object loaned. On the other hand, consensual contracts are perfected by mere consent. (Art. 1316, Civil Code) Need for Delivery To effect either a commodatum or a mutuum, a delivery, either real or constructive, is essential. This is so because Art. 1935. The bailee in commodatum acquires the used of the thing loaned but not its fruits; if any CHAPTER 1 COMMODATUM SECTION 1 - Nature of Commodatum

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compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. Commodatum a real, principal, essentially gratuitous and personal contract where one of the parties (called the bailor or lender) delivers to another (called the bailee or borrower) a non-consumable object, so that the latter may USE the same for a certain period and later return it.

Spanish Terms Comodatario bailor (lender) Comodante bailee (borrower) Art. 1936. Consumable goods may be the subject of commodatum if the purpose of the contract is not the consumption of the object, as when it is merely for exhibition. Subject matter of Commodatum Usually, only non-consumable goods may be the object of a commodatum for the thing itself should not be consumed and must be returned, but when a jar of vinegar is given merely for exhibition, the thing itself is not consumed. It is only use ad ostentationem. Note that the vinegar in this case is non-fungible, for the same vinegar must be returned. Art. 1937. Movable or immovable property may be the object of commodatum. Art. 1938. The bailor in commodatum need not be the owner of the thing loaned. Reason for the Law The contract of commodatum does not transfer ownership. All that is acquired is that the bailor has the right to the use of the property which he is lending, and that he be allowed to alienate this right to use. Hence, in lease, for example, a lessee may become a sub-lessor, unless he has been expressly prohibited to do so in the contract of lease. (Art. 1650, Civil Code)

The term is derived from the Latin commodum (usefulness) or commodo (particular usefulness to a borrower.)

Features or characteristics of Commodatum as a Contract a. Real (because perfected by delivery) b. Principal (because it can stand alone by itself) c. Gratuitous (otherwise, the contract is one of lease) d. Personal in Nature (because of the trust. What Bailee (Borrower) in Commodatum Acquires Commodatum gives the right to: The use (just utendi) And not to the fruits (jus fruendi) Otherwise, the contract may be one of usufruct. But of course a stipulation that the bailee may make use of the fruits of the thing loaned is valid. (Art. 1940) In such a case, however, the right to get the fruits is merely incidental and not the main cause of the contract.

CREDIT TRANSACTION REVIEWER Articles 1933 1961

Art. 1939. Commodatum character. Consequently:

is

purely

personal

in Reason for the Law

(1) The death of either the bailor or the bailee extinguishes the contract; (2) The bailee can neither lend nor lease the object of the contract to a third person. However, the members of the bailee's household may make use of the thing loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such use. Art. 1940. A stipulation that the bailee may make use of the fruits of the thing loaned is valid. Does bailee have right to use the fruits? a.As a rule, the bailee is not entitled to the fruits, otherwise the contract may be one of usufruct. It should be noted that the right to use is distinct from the right to enjoy the fruits, since under the law fruits should as a rule pertain to the owner of the thing producing the fruits. (Art. 441, Civil Code) b.However, to stipulate that the bailee makes use of the fruits would not destroy the essence of a commodatum, for liberality is still the actual cause or consideration of the contract. SECTION 2. - Obligations of the Bailee

The bailee is supposed to return the identical thing (Art. 1933), so he is obliged to take care of the thing with, as a rule, the diligence of a good father of a family. (Art. 1163). It follows necessarily that ordinary expenses for the use and preservation of the thing loaned must be borne the bailee. NOTE: The rule is different in the case of extraordinary expenses. Art. 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event: (1) If he devotes the thing to any purpose different from that for which it has been loaned; Reason for the Law - This amounts to bad faith or abuse of generosity considering the fact that commodatum is gratuitous.

(2) If he keeps it longer than the period

stipulated, or after the accomplishment of the use for which the commodatum has been constituted; Reason for the Law He is guilty of a certain kind of default. (mora) (3) If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exemption the bailee from responsibility in case of a fortuitous event;

Art. 1941. The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing loaned.

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Reason for the Law Evidently, the giving of the value was made to hold the bailee liable for after all this is not a sale, and neither is ownership transferred in commodatum. Exception when there is a stipulation to the contrary. It may in a sense be said that the appraisal converts the commodatum into a mutuum. (4) If he lends or leases the thing to a third person, who is not a member of his household; Reason for the Law This is prohibited by the law for it amounts to a violation of the personal character of a commodatum. (5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. Reason for the Law This amounts to an act of ingratitude and to a failure to exercise due diligence, considering the fact that commodatum is gratuitous.

Art. 1944. The bailee cannot retain the thing loaned on the ground that the bailor owes him something, even though it may be by reason of expenses. However, the bailee has a right of retention for damages mentioned in Article 1951. Generally, Borrower Cannot Retain. Reason for the Law Bailment implies a trust that as soon as the time has expired, or the purpose accomplished, the bailed property must be restored to the bailor. (Cobb v. Wallace) Art. 1945. When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. This is one more instance when solidary liability is imposed by law.

SECTION 3. - Obligations of the Bailor

Misuse or Abuse A misuse or abuse of the property is ordinarily a conversion for which the bailee is generally held responsible, to the full extent of the loss. (Fros v. Plumb) Art. 1943. The bailee does not answer for the deterioration of the thing loaned due only to the use thereof and without his fault. Non-liability for Deterioration without fault.

Art. 1946. The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use. In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession of the bailor.

CREDIT TRANSACTION REVIEWER Articles 1933 1961

Generally, Bailor cannot demand immediate return A commodatum is for a certain time. (art. 1933). This is the reason for the first sentence, first par. of Art. 1946. This is based on equitable ground for otherwise, the bailee may not be able to make proper use of the thing borrowed. Reason for Necessity) second sentence, first par. (Urgent

b. The possession of the borrower in precariumis precarious, that is, dependent on the lenders will, hence the name precarium.

Art. 1948. The bailor may demand the immediate return of the thing if the bailee commits any act of ingratitude specified in Article 765. Effect of Commission of Act of Ingratitude The bailor can demand IMMEDIATE RETURN. Art. 765. The donation may also be revoked at the instance of the donor, by reason of ingratitude in the following cases: (1) If the donee should commit some offense against the person, the honor or the property of the donor, or of his wife or children under his parental authority; (2) If the donee imputes to the donor any criminal offense, or any act involving moral turpitude, even though he should prove it, unless the crime or the act has been committed against the donee himself, his wife or children under his authority; (3) If he unduly refuses him support when the donee is legally or morally bound to give support to the donor. Art. 1949. The bailor shall refund the extraordinary expenses during the contract for the preservation of the thing loaned, provided the bailee brings the same to the knowledge of the bailor before incurring them, except when they are so urgent that the reply to the notification cannot be awaited without danger.

A bailor usually lends his property because he does not need. It. Hence, the reason for the exception. Note that the return may be only temporary, but it can also be permanent. Art. 1947. The bailor may demand the thing at will, and the contractual relation is called a precarium, in the following cases: (1) If neither the duration of the contract nor the use to which the thing loaned should be devoted, has been stipulated; or (2) If the use of the thing is merely tolerated by the owner. Precarium a. Precarium is a special form of commodatum. In a true commodatum, the possession of the borrower is more secure.

CREDIT TRANSACTION REVIEWER Articles 1933 1961

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary. Extraordinary Expenses a.As a rule, the extraordinary expenses should be paid by the bailor because it is he who profits by said expenses; otherwise, the thing borrowed would be destroyed. b.Generally, notice is required because the bailor should be given discretion as to what he wants to do with his own property. Reason for the second par. (Actual Use by Bailee) This is an equitable solution. The bailee pays one half because of the benefit derived from the use of the thing loaned to him, and the bailor pays the other half because he is the owner and the thing will be returned to him. Example: A borrowed a motorbike from B. While A was riding on it, he met an accident which greatly damaged the bike. A was not at fault for he was driving carefully. Both A and B should share equally in the extraordinary expenses unless there is a stipulation to the contrary. Art. 1950. If, for the purpose of making use of the thing, the bailee incurs expenses other than those referred to in Articles 1941 and 1949, he is not entitled to reimbursement. Example: (Other Expenses)

The borrower of a car buys an extra jack to be used as a reserve on a trip. Here, he is not entitled to reimbursement.

Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. When Bailor knows Flaws Example: A lent B a Fisher & Paykel, the electric connections of which were defective. If although he knows said defect, A does not inform B thereof, A will be liable in case B is injured by reason thereof. Reason for the Law When a person lends, he ought to confer a benefit, and not to do a mischief. If he does not reveal the flaws, he is liable for his bad faith. (Gagnon v. Dana) NOTE: But the obligation of a gratuitous lender goes no further than this, and he cannot therefore be made liable for not communicating anything which he did not know, whether he ought to have known it or not. (Gagnon v. Dana) Right of Retention For the damages spoken of in this Article, the bailee has the right of retention until paid of said damages. (Art. 1944, Civil Code) Nature of the Flaws

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It is evident that the flaws referred to in this Article are hidden defects, not obvious ones. Art. 1952. The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. Effect of Bailors Abandonment or Giving of the Object Example: For extraordinary expenses on As car, B the borrower spent 125,000. A cannot exempt himself from payment thereof by just giving B the thing borrowed. Reason for the Law The value of the thing borrowed might be less than the value of the expenses or damages.

his obligation to pay a generic thing money representing the loan with interest, because the account can still be paid from sources other than said mortgaged crops. (Carlos Gelano, et. al. v. CA) The conjugal partnership is liable under Art. 161 of the Civil code now Art. 121, last par. of the Family Code. It is wrong to say that the conjugal partnership is liable jointly and severally, for the conjugal partnership is a single entity. (Bonnevie v. CA) 1. A contract of loan is consensual (author believes it to be a real contract a borrower of money who has not yet been given the money is not yet a borrower; he is only a would-be borrower). 2. If a loan (money is given only some time after the execution of a mortgage, the mortgage is still valid. After all, the promissory note is only evidentiary of the debt. The late execution of the promissory note does not mean that the mortgage had no consideration. - Mutuum is similar to an abnormal usufruct. Bank Accounts (Gulas v. PNB) Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loans. Behest Loans (Presidential Ad Hoc Fact-Finding Committee on Behest Loans v. Hon. Aniano a. Desierto Recovery of Ill-Gotten Wealth) The behest nature of the loans could not be reasonably known by a mere eye examination of the mortgage contracts.

CHAPTER 2 SIMPLE LOAN OR MUTUUM

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. Ownership Passes in Mutuum Ownership passes to the borrower, but, of course, he must pay later.

(Republic v. Jose Grijaldo) The loss of the crops (destroyed as a result of enemy action) did not extinguish

CREDIT TRANSACTION REVIEWER Articles 1933 1961

Liability of Borrower of Money Behest loans are part of the ill-gotten wealth which former President Ferdinand E. Marcos and his cronies accumulated and which the Government thru the Presidential Commission on Good Government (PCGG) seeks to recover. Art. 1954. A contract whereby one person transfers the ownership of non-fungible things to another with the obligation on the part of the latter to give things of the same kind, quantity, and quality shall be considered a barter. Barter of Non-Consumable Things Here, the word non-fungible does not really mean non-fungible but non-consumable. Reason: If the thing were really non-fungible, the identical thing must be returned. Here, an equivalent thing is returned. a. Liability is governed by Arts. 1249 and 1250. b. Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. c. Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. 2. Example of Second Paragraph (Loan of Things other than Money) A borrowed from B five sacks of rice. At the time the loan was perfected, each sack cost P1,800. Even if at the time of payment the price would change, five sacks of the same kind and quality of rice should be returned. However, if it is impossible to deliver the same kind, P1,800 should be paid. Note that the value at the time of PERFECTION (not payment) applies. Art. 1956. No interest shall be due unless it has been expressly stipulated in writing. Formality for Interest (for use of the Money)

Example: A got a fountain pen from B and he (A) became the owner thereof, with the obligation of giving another pen of the same kind and quality. This shall be considered a barter. It is not a commodatum nor a mutuum. Art. 1955. The obligation of a person who borrows money shall be governed by the provisions of Articles 1249 and 1250 of this Code. If what was loaned is a fungible thing other than money, the debtor owes another thing of the same kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the same kind, its value at the time of the perfection of the loan shall be paid.

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The interest must be stipulated in WRITING.

Kinds of Interest Interest may be paid either as 1. Compensation for the use of the money (monetary interest); or as 2. Damages (compensatory interest). Art. 1956 refers to interest for use of the money.

shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum. (The rate now is 12% per annum.) Municipal Corporations are Liable for Interest (Zobel v. City of Manila) A municipal corporation does not enjoy immunity from liability for interest when assessed as damages for the non-payment of a debt, to the same extent as the national government. Interest during the Moratorium Laws (Warner, Barnes & Co. v. Yasay, et. al.) Interest ran during the moratorium laws. If debtors had wanted to avoid liability for all the interest falling due during the time that the moratorium laws were in effect, they could have renounced the benefits of the said laws and paid the debts, or in the very least paid the interest as they accrued. (Republic v. Grijaldo) What the moratorium laws suspended was the running of the period of prescription of actions. Interest during the war years however can be eliminated if the creditors were enemies of the Japanese, for their payment to them could not have been made. Computations for Compensatory Damages As already stated, this is interest not imposed for the use of the money, but to serve as penalty or damages for the breach of contractual obligations. This kind of interest need not be stipulated in writing, for the law gives the rate (6% per annum) in the absence of agreement as to the penalty. Art. 2209, Civil Code). In the following examples, legal interest was computed at 6% per annum. Note however that today the legal rate is 12% per annum. The examples must, therefore, be amended correspondingly.

How Interest Arises (Barreto v. Santa Marina) The right to interest arises only be virtue of a contract or by virtue of damages for delay or failure to pay principal on which interest is demanded. When Interest Earns Interest Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. (Art. 2212, Civil Code) Interest by Way of Damages (Lopez v. Del Rosario) In contracts for the payment of a sum of money, the measure of damages for delay is limited to the interest provided for by law. The deprivation of an opportunity for making money, which might have proved beneficial or might have been ruinous is of too uncertain a character to be weighed in the even balances of the law. Art. 2209 If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary,

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(Monzon, et. al. v. IC and Theo H. Davies & Co., Far East Ltd.) Eliminating the interest on the various damages from the date of the filing of the suit is clearly an unwarranted act. It must be borne in mind that interest begins to accrue upon demand, extrajudicial or judicial. A complain is a judicial demand. (Antonio Tan v. CA & Cultural Center) The stipulated 14% per annum interest change until full payment of the loan constitutes the monetary interest on the note and is allowed under Art. 1956. In the case at bar, the stipulated 2% per month penalty is in the form of a penalty charge which is separate and distinct from the monetary interest on the principal of the loan. Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be void. The borrower may recover in accordance with the laws on usury. Usury Law Should not be Circumvented. Art. 1958. In the determination of the interest, if it is payable in kind, its value shall be appraised at the current price of the products or goods at the time and place of payment. Determination of Interest if in Kind

When Accrued Interest Earns Interest The general rule is that accrued interest (interest due and unpaid) will not bear interest, BUT a. If there is agreement to this effect (Art. 1959). Pr b. If there is judicial demand. (Art. 2212) THEN, such accrued interest will bear interest at the legal rate (Art. 2212) unless, a different rate is stipulated. (Hodges v. Regalado) Compound Interest Compound Interest is interest on accrued interest. It is valid to charge compound interest, but there must be a written agreement to this effect; otherwise said compound interest should not be charged. (Nolan v. Majinay) unless it be the interest charged upon judicial demand. (Art. 2212) Usury Law not Violated (Villareal v. Alvayda) The interest on accrued or capitalized interest is not considered on the original principal, and should not be considered usurious, if, when added to the original interest, the sum should exceed the rated allowed by the Usury Law. When Compound Interest cannot be Damanded The agreement on compound interest must be expressly made. Reason why Compound Interest are not Allowed Except in the Cases provided for by Law

Value should be at time and place of PAYMENT.

Art. 1959. Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest.

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Debts would accumulate with a rapidity beyond all ordinary calculation and endurance. It would tend also to inflame the avarice and harden the heart of the creditor. Some allowance must be made for the indolence of mankind. Art. 1960. If the borrower pays interest when there has been no stipulation therefor, the provisions of this Code concerning solutio indebiti, or natural obligations, shall be applied, as the case may be. Payment of Interest when there is No Stipulation a. it, where ot A borrower borrowed money. No interest was stipulated. If by mistake he pays, then this will be a question of undue payment or solution indebiti. We should then apply the rules on the subject. b. If a borrower borrows money and orally agrees to pay legal interest at 10% per annum, there is really no obligation to pay since the interest was not agreed upon in writing. If he nevertheless pays because he considers it his moral obligation to pay said interest, he cannot recover the interest that he has given voluntarily. This will not be a natural obligation, and the provisions on said subject should apply. Art. 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code.

(U.S. v. Constantino) Act 2655 as amended is our Usury Law, and was enacted on Feb. 24, 1916. The law was passed to curb usury, since the taking of excessive interest for the loan of money has been regarded with abhorrence from the earliest times. Rules on Construction (Dickerman v. Pay) Since the Usury Law is penal in nature, it should be construed strictly. (U.S. v. Conde) Like other laws, prospective effect should be given to it, where such construct may be permitted. Laws adopted after the execution of a contract, changing or altering the rate of interest, cannot apply to such a contract without violating the provision of the Constitution which prohibits the adoption of a law impairing the obligations of a contract. When Usury Law does not Apply a.A contract for the lease of property is not a loan; hence, the rental paid is not governed by the Usury Law. (Tolentino v. Gonzales) b.The increase of the price of a thing sold on credit over its cash sale price is not interest within the purview of the Usury Law, if the sale is made in good faith and not as a mere pretext to cover a usurious loan. (Manila Trading v. Tamaraw). Such price is the selling price for a sale made on the installment plan.

Compound Interest Usury Law (Govt v. Conde) In one case, it was held that an express agreement to charge compound interest is not to be taken

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into consideration in determining whether or not the stipulated interest exceed the limit prescribed by the Usury Law. This was changed by a subsequent case which held that charging compound interest violates the Usury Law when the sums charged as such added to the stipulated interest exceeds the average rate of interest that may legally be charged for a loan. (Hodges v. Salas) In a still later case, the SC reverted to the ruling in the Conde Case. (Govt v. Calderon) Advance Interest (Hodges v. Salas) Charging interest in advance is permissible provided said interest does not correspond to interest for more than one year. Lawful Interest Rates Interest rates are now fixed from time to time by the Monetary Board. Central Bank Circular 416 Central Bank Circular No. 416, fixing the rate of interest at 12% per annum, deals with: 1. Loans; 2. Forbearance of any money, goods or credit; and 3. Judgments.

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