ARENOtes

CREDIT

Credit transactions
- include all transactions involving the purchase or loan of goods, services, or money in the
present with a promise to pay or deliver in the future.
-really contracts of security
-two kinds of credit transactions: (SU)
(1) secured transactions or contracts of real security – supported by collateral or encumbrance
of property
(2) unsecured transactions or contracts of personal security – the fulfillment of which by the
principal debtor is secured or supported only by a promise to pay or the personal commitment
of another such as guarantor or surety.
-credit transactions are made up of bailment contracts, the contracts of guaranty or suretyship,
mortgage, antichresis, and concurrence or preference of credit.

SECURITY
Security – given, deposited or serving as a means to ensure the fulfillment or enforcement of an
obligation or of protecting some interest in property.
May either be:
Personal security – when an individual becomes a surety or guarantor
Property or real security – such as when a mortgage, pledge, lien, charge or antichresis
or other device used to have property held, out of which a person to be made secure can
compensate for the loss.

BAILMENT
Bailment - delivery of property of one person to another in trust for a specific purpose, with a
contract, express or implied, that the trust shall be faithfully executed and the property
returned or duly accounted for when the special purpose is accomplished or kept until the
bailor reclaims it .
-contractual relation; must have elements of a valid contract; but agreement is not always
necessary in creating a bailment; it may be created by mere operation of law.

Parties in a bailment –
Bailor – giver; party who delivers the possession or custody of the thing bailed.
Bailee – the recipient; the party who receives the possession or custody of the thing
delivered.

Kinds of Contractual bailment

-several kinds of bailment creating different rights and obligations on the part of the
bailor and the bailee although the different kinds are of the same general character.

Classification:
(1) Those for the sole benefit of the bailor – gratuitous and mandatum; ailment of goods
without recompense where the mandatory or person to whom the property is delivered
undertakes to do some act with respect to the same; as simply to carry it, or keep it, or
otherwise to do something with respect to it gratuitously

(2) Those for the sole benefit of the bailee- we have commodatum and gratuitous simple loan
or mutuum

*the first two are gratuitous bailments; there is no consideration for they are considered more
as a favor by one party to the party benefited; but the law imposes definite obligations upon
both the bailor and the bailee.

(3) Those for the benefit of both parties- deposit for a compensation including involuntary
deposit pledge and bailments for hire; results from bailments involving business transactions.

Kinds of bailment for hire - Bailment for hire (locatio et conductio) arises when goods are left
with the bailee for some use or service by him and is always for some compensation .

(1) Hire of things (locatio rei). — where goods are delivered for the temporary use of the hirer
(i.e., lease, Arts. 1642, 1643.);
(2) Hire of service (locatio operis faciendi). — where goods are delivered for some work or labor
upon it by the bailee (i.e., contract for a piece of work, Art. 1713.);
(3) Hire for carriage of goods (locatio operis mercium vehendarum). — where goods are
delivered either to a common carrier (Art. 1732.) or to a private person for the purpose of being
carried from place to place (see 6 Am. Jur. 180-182.); and
(4) Hire of custody (locatio custodiae). — where goods are delivered for storage. (Arts. 1507-
1520; Act No. 2137 [The Warehouse Receipts Law].)

LOAN
ARTICLE 1933. By the contract of loan, one of the par- ties 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 commoda- tum; or money or other consumable thing, upon the con-
dition 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 ownerships of the thing loaned, while in simple loan,
ownership passes to the borrower

-defines two kinds of loan and gives their characteristics

- governed by the rules as to the requisites and validity of contracts in general
- loans are now primarily governed by the applicable articles (Arts. 1933-1961.) in Title XI, Book
IV, subject to its transitional provisions. (Arts. 2252-2269.)
The contract of loan is:
(1) a real contract - delivery of the thing loaned is necessary for the perfection of the contract
(Art. 1934; see also Art. 1316.); and
(2) a unilateral contract- once the subject matter has been delivered, it creates obligations on
the part of only one of the parties, i.e., the borrower.

In a contract of loan, the cause is:

(1) borrower - the acquisition of the thing
(2) lender - the right to demand its return or its equivalent

There are two kinds of loan:

(1) Commodatum. — where the bailor (lender) delivers to the bailee (borrower) a non-
consumable thing so that the latter may use it for a certain time and return the identical thing;
and
(2) Simple loan or mutuum. — where the lender delivers to the borrower money or other
consumable thing upon the condition that the latter shall pay the same amount of the same
kind and quality.
A thing is consumable when it is consumed when used in a manner appropriate to its purpose
or nature, like rice, gasoline, money, fruit, firewood, etc. (see Art. 418.)

Loan vs credit
Credit of an individual means his ability to borrow money or things by virtue of the confidence
or trust reposed by a lender that he will pay what he may promise within a specified period;
loan (mutuum) means the delivery by one party (lender/ creditor), and the receipt by the other
party (borrower/debtor) who become the owner, of a given sum of money or other
consumable thing upon an agreement, express or implied, to repay the same amount of the
same kind and quality.

Loan vs debt
“Credit” - a sum credited on the books of a company to a person who appears to be entitled to
it. It presupposes a creditor-debtor relationship, and may be said to imply ability, by reason of
property or estates, to make a promised payment. It is the correlative to debt or indebtedness,
and that which is due to any person as distinguished from that which he owes.

Commodatum vs mutuum
Commodatum Mutuum
-ordinarily involves something not -the subject matter is money or other
consumable consumable thing
-ownership of the thing loaned is retained by -ownership is transferred to the borrower;
the lender - may be gratuitous or it may be onerous,
- essentially gratuitous that is, with stipulation to pay interest
 - the borrower must return the same thing
loaned
- may involve real or personal property
- a loan for use or temporary possession
- the bailor may demand the return of the
thing loaned before the expiration of the
term in case of urgent need
- the loss of the subject matter is suffered by
the bailor since he is the owner
- the borrower need only pay the same
amount of the same kind and quality
- refers only to personal property
- loan for consumption
- lender may not demand its return before
the lapse of the term agreed upon
- the borrower suffers the loss even if caused
exclusively by a fortuitous event and he is
not, therefore, discharged from his duty to
pay

Kinds of commodatum

Commodatum is divided into:

(1) ordinary commodatum (Art. 1933.); and
(2) precarium. — one whereby the bailor may demand the thing loaned at will.

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

-necessary consequence of the fact that commodatum and mutuum are real contracts which
require the delivery of the subject matter thereof for their perfection; Delivery is necessary in
view of the purpose of the contract which is to transfer either the use or ownership of the thing
loaned.

An accepted promise to make a future loan is a consensual contract5 and, therefore, binding
upon the parties but it is only after delivery, will the real contract of loan arise.
Ex:
> Application for loan approved by corporation. — Where an application for a loan of
money was approved by resolution of the corporation (lender) and the corresponding
mortgage was executed and registered, there arises a perfected consensual contract of
loan. While a perfect contract of loan can give rise to an action for damages, said
contract does not constitute the real contract of loan
>Mortgage executed by virtue of loan granted. — Where the mortgage deed was
executed for and on condition of the loan granted to the mortgagors, the fact that the
latter did not collect from the mortgagee bank the consideration of the mortgage on the
 date it was executed but six (6) days later when the mortgagors and their co-maker
signed the promissory note is immaterial. A contract of loan being consensual, it was
perfected at the same time that the contract of mortgage was executed, the promissory
note being only an evidence of an indebtedness and did not indicate lack of
consideration of the mortgage at the time of its execution
>Only partial amount released under a loan agreement secured by mortgage- In
reciprocal obligations, the obligation or promise of each party is the consideration for
that of the other, and when one party has performed or is ready and willing to perform
his part of the contract, the other party who has not performed or is not ready and
willing to perform incurs in delay. (1169) And the mere fact of insolvency of a debtor
(bank) is never an excuse for the non-fulfillment of an obligation but instead it is taken
as a breach of the contract by him.

COMMODATUM
Nature of Commodatum

Commodatum - essentially gratuitous. Hence, the contract ceases to be a commodatum if any

compensation is to be paid by the borrower who acquires the use.
If the consideration is the rendering of some service, an innominate contract will result.
Commodatum is similar to a donation in that it confers a benefit to the recipient.

The right to use is limited to the thing loaned but not to its fruits unless there is a stipulation to
the contrary. (Art. 1940.) As owner of the thing loaned (Art. 1933, last par.), the bailor is
naturally entitled to its fruits.

The purpose of the contract of commodatum must be the temporary use of the thing loaned. If
the bailee is not entitled to the use of the thing, the contract may be a deposit (see Art. 1962.)
not a commodatum.
It is an essential feature of the contract of commodatum that the use of the property of
another shall be “for a certain time.”

ART. 1936. Consumable goods may be the subject of commodatum if the purpose of the
contract is not the con- sumption of the object, as when it is merely for exhibition. (n)

ART. 1937. Movable or immovable property may be the object of commodatum.

In commodatum, the subject matter is generally non-consumable things,2 whether real or

personal. This but conforms to reality, for the bailee cannot use and return something which is
consumed when used.
example of commodatum involving real property is when a person allowed another to build a
warehouse on the former’s land so that the latter may use the property for a certain period
without any payment of rentals. If no time for use of the land is specified, the contract would
be that specie of commodatum called “precarium” expressly recognized in Article 1947. If
rental is paid,the contrac twould be one of lease.
ART. 1938. The bailor in commodatum need not be the owner of the thing loaned.
-since by the loan, ownership does not pass to the borrower. Hence, a mere lessee of the thing
or the usufructuary may lend but the borrower or bailee himself may not lend nor lease the
thing loaned to him to a third person.
-It is sufficient if the bailor has such possessory interest in the subject matter or right to its use
which he may assert against the bailee and the third persons although not against the rightful
owner.
-a lessee may sublet the thing leased, when there is no express prohibition in the contract of
lease. If the lessee, by a contract of sublease, may transfer to another the enjoyment of the
thing leased for a consideration, there is no reason why he should be unable to cede
gratuitously its use by way of commodatum

ART. 1939. Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extin- guishes 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

-commodatum is a purely personal contract, the lender having in view the character, credit, and
conduct of the borrower. Hence, the death of either party terminates the contract unless by
stipulation, the commodatum is transmitted to the heirs of either or both parties.

-Article 1939 constitutes an exception to the general rule that all rights acquired in virtue of an
obligation are transmissible.

Right of bailee to lend thing loaned to third persons - the bailee can neither lend nor lease the
object of the contract to a third person, in the absence of some understanding or agreement to
that effect.
the use of the thing loaned may extend to the members of the bailee’s household (who are not,
therefore, considered third persons) except in two cases: (1) there is a stipulation to the
contrary; and (2) 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.
(n)

Contrary stipulation as to fruits- bailee is entitled only to the use of the thing loaned and not to
its fruits. The right to use a thing is distinct from the right to enjoy the fruits since, as a rule, the
fruits pertain to the owner of the thing producing the fruits. (see Art. 441.) Thus, where an
animal is the thing loaned, its young subsequently born is not included in the contract.
However, the parties may stipulate that the bailee may also make use of the fruits of the thing.
Such stipulation cannot be presumed.
The enjoyment of the fruits must only be incidental to the use of the thing itself for if it is the
main cause, the contract may be one of usufruct.