Art. 2088.
The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void.
Prohibition Against pactum commissorium
(1) Stipulation null and void. –
= a stipulation whereby the thing pledged or mortgaged
or under antichresis (Art. 2137) shall automatically
become the property of the creditor in the event of non-
payment of the debt within the term fixed is known as
pactum commissorium or pacto commisorio which is
forbidden by law and declared null and void. (Art. 2088).
= by such a stipulation, the creditor would be able to
acquire ownership of the property given as security
without need of public sale or foreclosure required by
law.
= this forfeiture clause has traditionally been outlawed
because it is contrary to good morals and public policy.
= the reason for the prohibition is that the amount of the
loan is oridinarily much less than the real value of the
thing pledged or mortgaged.
(2) Requisites. –
= there are two requisites or elements for pactum
commissorium to exist, namely:
a. There should be a pledge, mortgage, or antichresis of
property by way of security for the payment of the
principal obligation; and
b. There should be a stipulation for an automatic
appropriation by the creditor of the property on the
event of nonpayment of the obligation within the
stipulated period.
= it is immaterial that the questioned stipulation was
voluntarily and freely entered into, pactum commissorium
being void for being prohibited by law.
(3) Stipulation presupposes existence of security contract. –
= pactum commissorium referred to in Arts. 2088 and
2137, therefore, presupposes the existence of mortgage
or pledge or antichresis.
Art. 2088.
The creditor cannot appropriate the things
given by way of pledge or mortgage, or
dispose them. Any stipulation to the contrary
is null and void.
Art. 2137.
The creditor does not acquire the ownership of
the real estate for non-payment of the debt
within the period agreed upon.
Every stipulation to the contrary shall be void.
But the creditor may petition the court for the
payment of the debt or the sale of the real
property. In this case, the Rules of Court on
the foreclosure of mortgages shall apply.
= thus it has been held that there was no pactum
commissorium where pursuant to the contract of sale, the
sums already paid by the vendee were forfeited for his
failure to pay the stipulated installments in due time
considering that the person to whom the property was
forfeited (vendor) was the real and equitable owner of the
same because title would not pass until payment of the
last installment.
= there is also no pactum commissorium where the
alienation of the subject property was by way of secutiry
and not by way of satisfying or extinguishing the debt of
the debtor.
(4) Effect on security contract. –
= the vice of nullity which vitiates such a stipulation does
not affect substantially the principal contract of pledge,
mortgage, or antichresis with regard to its validity and
efficacy for the reason that the contract, having been
perfected, can subsist although the contracting parties
have not agreed as to manner the creditor can recover his
credit inasmuch as the law has expressly established the
procedure in order that he may recover the same, in case
the debtor does not comply with his obligation.
 = in short, the security contract remains valid; only the
prohibited stipulation is void.
Illustrative Cases:
(1) If the sum loaned is not paid, property of the debtor would be
considered as absolutely sold to the creditor for said sum.
Facts:
D borrowed money from C under the agreement that if, at the
expiration of the period stipulated, the sum loaned should not be
paid, it would be understood that the house and lot owned by D,
be considered as absolutely sold to C for the said sum. No
payment was made by D within the time fixed.
In view of the refusal of D to deliver the property, C brought
action to recover the property and a rents from D.
Issue:
Is the contract in question in the nature of pactum
commissorium?
Held:
No. We have in this case a contract of loan and a promise of
sale of property, the price of which should be the amount
loaned, if within a fixed period of time such amount should not
be paid by the debtor-vendor (D) of the property to the creditor-
vendee (C) of the same.
= The fact that the parties have agreed at the same time, in
such a manner that the fulfillment of the promise of sale would
depend upon the nonpayment or return of the amount loaned,
has not produced any change in the nature and legal conditions
of either contract or any essential defect which would tend to
nullify them.
= Pactum commissorium indicates the existence of the contract
of mortgage, or of pledge, or of antichresis, none of which has
coincided in the loan in question.
= the property does not appear mortgaged. Said property could
not be pledged, not being personal property, and
notwithstanding the said double contract the debtor (D)
continued in possession thereof and the said property had never
been occupied by the creditor (C). Neither was there any
contract of antichresis by reason of said contract of loan
inasmuch as C has never been in possession thereof, nor has
he enjoyed the said property nor for one moment ever received
its rents.
(2) Buyer executed a deed of assignment in favor of seller of
property sold, pursuant to a judgment rendered in an action for
specific performance filed by the seller.
Facts:
B and S agreed on the sale of trucks by the latter (S) to the
former (B). When B defaulted in the payment of the second and
third installments, S filed an action in court for specific
performance. The trial court rendered judgment for S and
ordered B to pay the balance of his obligation and in case of
failure to do so, to execute a deed of assignment pursuant to
the judgment.
Issue:
Is the deed of assignment in the nature of pactum
commissorium?
Held:
No. There was no contract of pledge or mortgage entered into
by the parties; nor a case of automatic appropriation of the
property by S because it took the intervention of the trial court to
exact fulfillment of the obligation, by which its very nature is
“....anathema to the concept of pacto commissorio.” And even
granting that the original agreement between the parties had the
badges of pactum commissorium, the deed of assignment does
not suffer the same fate as it was executed pursuant to a valid
judgment as can be gleaned from its very terms and conditions.
Prohibition refers to stipulation authorizing automatic
appropriation
What is prohibited by Art. 2088 in connection with pacto
commissorio is the automatic appropriation by the creditor of
the thing pledged or mortgaged upon failure of the debtor to
pay his debt within the period agreed upon by virtue of
authority or right previously given the creditor, thus:
(1) A stipulation providing that the mortgaged property
“shall be considered in full payment without further
action in court” in case of nonpayment is null and void
being in the form of pacto commissorio.
(2) A stipulation in a purported pacto de retro sale that the
owner that the ownership over the property sold would
automatically pass to the vendee in case of no
redemption was effected within the period stipulated, is
contrary to the nature of a true pacto de retro sale,
under which the vendee acquires ownership of the thing
 sold immediately upon the execution of the sale,
subject only to the vendor’s right of redemption.
= the said stipulation is a pactum commissorium which
enables the mortgagee to acquire ownership of the
mortgaged property without need of foreclosure.
= it is void. Its insertion in the contract is an avowal of
the intention of the mortgage, rather than to sell, the
property.
Permissible stipulations
(1) Subsequent modification of original contract. –
= the stipulations that are prohibited by Arts. 2088 and
2137 (antichresis) are those executed or made
simultaneously with the original contract, not those
subsequently entered into.
= the principle does not prohibit modification of the
contract by subsequent agreement such as the parties
may see fit to adopt.
(2) Subsequent voluntary cession of property. –
= the prohibition does not include s subsequent voluntary
act of the debtor making cession of the property
mortgaged in payment of the debt which amounts in its
legal effect to a novation of the original contract and to a
voluntary sale of the said property for the amount of the
debt.
(3) Promise to assign or sell. –
= neither is the prohibition applicable to a promise to
assign or sell said property in payment of the obligation if,
upon its maturity, it is not paid because the title thereto
remains with the debtor.
= the promise is merely a personal obligation of the
mortgagor and does not in any way bind the property.
(a) The mortgagor can validly sell the property to a third
person and if there should be any action accruing to
the mortgagee, it would be a personal action for
damages against the mortgagor.
(b) If the vendee contributed to the breach of the contract
by the mortgagor, the former, together with the latter,
may also be held liable for damages; or
= if the vendee was guilty of fraud which would be a
ground for rescission of the sale in his favor, the
mortgagor and not the mortgagee would be the party
entitled to bring the action of annulment.
Footnote:
(1) Page 355 (Dulay vs. Aquiatin and Maximo, 47 Phil. 951; 1925)
=Dissenting opinion, Justice Street said:
It is not to be denied that a mortgagor of property may transfer
the mortgaged property to the creditor in satisfaction of the
mortgage debt after the mortgage has fallen due. But such
transfer implies the independent exercise of the power vested
in the mortgagor, as owner....
= by virtue of this stipulation (to the effect that in case the
specified date should arrive and the debtor should be unable to
pay the amount due, it should be paid with the property
security), the debtor was bound to transfer the property to the
creditor in satisfaction of the mortgaged debt, the mortgagor
being unable at the time to pay the same.
= said stipulation should be declared invalid, as contrary to the
spirit, if not the letter of Art. Of 1859 (now Art. 2088), as well as
directly contrary to the general principles of jurisprudence
applicable to the relation of mortgagor and mortgagee.
= if a stipulation of this kind is valid, every mortgage in which
such stipulation is inserted will become self-executing and the
debtor, upon making default in the payment of the debt, will be
bound to transfer the property in satisfaction of the mortgage,
with the result that the right of redemption is lost from the mere
fact that the debtor is unable to pay at the date stipulated.
(4) Authority to take possession of property upon
foreclosure.-
= a stipulation authorizing the mortgagee, for the purpose
therein specified, to take possession of the mortgaged
premises upon foreclosure of a mortgage is not repugnant
to either Art. 2088 or Art. 2137.
= On the contrary, such a stipulation is in consonance with
or analogous to the provisions of Arts. 2132, et seq.
regarding antichresis and the provisions of the Rules of
Court (Rule 59) regarding the appointment of a receiver as
a convenient and feasible means of preserving and
administering the property in litigation.
Illustrative cases:
(1) Mortgagor appoints mortgagee in deed of assignment as
attorney-in-fact with authority to dispose of mortgage
 properties in case of default of mortgagor and to apply the
proceeds in the payment of loan.
Facts:
C, a grantee of a Fishpond Lease Agreement from the Gov’t,
obtained from DBP three separate loans, each of which was
covered by a promissory note. Simultaneous with the execution
of the notes was the execution of “Assignment of Leasehold
Rights” by C, as borrower of the mortgaged properties by way of
security in the payment of the loans.
Condition No. 12 provides for the appointment of DBP as
attorney-in-fact with authority, among other things, to sell or
otherwise dispose of the said real rights in case of default of C
and to apply the proceeds to the payment of the loan.
Issue:
(1) Whether the condition in question constitute pactum
commissorium.
(2) Whether the act of DBP in appropriating to itself C’s leasehold
rights without foreclosure proceedings was contrary to Art. 2088
and, therefore, invalid.
Held:
(1) Elements of pactum commissorium are not present.-
= Condition No, 12 did not provide that the ownership over the
leasehold rights would automatically pass to DBP upon Cuba’s
failure to pay the loan on time.
= This provision is standard condition in mortgage contracts and
is in conformity with Art. 2087 of the CC, which authorizes the
mortgagee to foreclose the mortgage and alienate the mortgage
property for the payment of the principal obligation.
(2) DBP exceeded the authority vested by condition.-
= However, DBP exceeded the authority vested by condition No.
12 for the Deed of Assignment. As admitted by it during the pre-
trial, it had, without foreclosure proceedings, whether judicial or
extrajudicial.... appropriated the leasehold rights of Cuba over
the fishpond in question.
= its contention that it limited itself to mere administration by
posing caretakers is further belied by the deed of conditional
sale it executed favor of Cuba. The deed stated:
“Whereas, the Vendor (DBP) by virtue of a deed of assignment
executed in its favor by the herein vendees (Sps. Cuba) the
former acquired all the rights and interest of the latter over the
above-described property;
“The title to the real estate property and all its improvements
thereon shall remain in the name of the vendor until after the
purchase price, advances and interest shall have been fully
paid.”
= it is obvious from the above-quoted paragraphs that DBP had
appropriated and taken ownership of Cuba’s leasehold rights
merely on the strength of the deed of assignment.
=DBP cannot take refuge in Condition No. 12 of the deed of
assignment to justify its act of appropriating the leasehold rights.
As stated earlier condition No. 12 did not provide that Cuba’s
default would operate to vest in DBP ownership of the rights.
=Besides, an assignment to guarantee an obligation as in the
present case, is virtually a mortgage and not an absolute
conveyance of title which confers ownership on the assignee.”
(1) The lender is given the option to buy at a certain price the
property given as collateral in the event the borrower fails
to pay.
Facts:
C (respondent) entered into a loan agreement with B (petitioner)
and her late husband, with the following terms and conditions:
a. The spouses would borrow P100K from C, for a period
of two years counted from Mar. 1, 1987;
b. Interest rate is 18% per annum;
c. To guaranty payment: put up as collateral 70sqm portion
of a parcel of land, inclusive of the apartment therein;
d. In the event the borrowers fail to pay, C has the option to
buy or purchase the mortgaged property for a total
consideration of P200K inclusive of the principal and
interest.
When the loan was about to mature on Mar. 1, 1989, C
proposed to buy at the pre-set price of P200K the collateral
given to guarantee the payment of the loan, but B refused to
sell. On Mar. 1, 1989, B tendered payment of the loan to C
which the latter refused to accept, insisting B’s signing a
prepared deed of absolute sale. C consigned the amount of
P47.5K with the trial court with which C filed a complaint for the
specific performance. In arriving at the amount deposited, C
considered the principal loan of P100K and 18% interest per
annum thereon, which amounted to P52.5K, leaving a balance
of P47.5K from the amount of P200K. On the other hand B filed
a petition for consignation and deposited the amount of P153K
with the trial court.
Issue:
Whether the stipulation in the loan contract was valid and automatic appropriation by C of the property in case of non-
enforceable. payment of the loan within the stipulated period.
Held:
1. The stipulation embraced in concept of pactum Risk of loss of property pledged or mortgaged
commissorium.
= B did not fail to pay the loan. When C refused to accept As the pledgee or mortgagee does not become the owner of
payment, B consigned the amount with the trial court. the property and the ownership thereof remains with the
= a scrutiny of the stipulation of the parties reveals a subtle debtor, therefore, under the maxim, res perit domino suo, the
intention of the creditor to acquire the property given as debtor-owner bears the loss of the property.
security for the loan. This is embraced in the concept of = The principal obligation is not extinguished by the loss of the
pactum commisssorium, which is proscribed by law. pledged or mortgaged property.
= the elements of pactum commissorium are as follows: (1)
there should be a property mortgaged by way of security for
the payment of the principal obligation; and (2) there should
be a stipulation for automatic appropriation by the creditor of
the thing mortgaged in case of nonpayment of the principal
obligation within the stipulated period.
2. Intent to appropriate property given as collateral appears to
be evident
= a significant task in contract interpretation is the
ascertainment of the intention of the parties and looking into
the words used by the parties to project that intention.
= In this case, the intent to appropriate the property given as
collateral in favor of the creditor appears to be evident, for
the debtor is obliged to dispose of the collateral at the pre-
agreed consideration amounting to practically the same
amount as the loan.
= In effect, the creditor acquires the collateral in the event of
non-payment of the loan. This is within the concept of
pactum commissorium. Such stipulation is void.
3. Duty of court to protect necessitious borrowers. –
= all persons in need of money are liable to enter into
contractual relationships whatever the condition if only to
alleviate their financial burden albeit temporarily.
= hence, courts are duty bound to exercise caution in the
interpretation and resolution of contracts lest the lenders
devour the borrowers like vultures do with their prey.
Note:
Here, the agreement between the parties was not a sale
with right to repurchase (pacto de retro sale), but a loan with
interest of 18% per annum for a period of 2 years and if B
fails to pay, C was given the option to purchase the property
given as collateral for P200K. There was no stipulation for