CREDIT

TRANSACTIONS

Fourth Year
First Session

TOPICS INCLUDED
1. SPECIAL CONTRACTS (CIVIL
CODE)
Loan
Deposit
Guaranty

and Suretyship

Pledge
Chattel

Mortgage
Real Mortgage
Antichresis
Preference and concurrence of credits

TOPICS
2. SPECIAL LAWS
Financial Rehabilitation and
Insolvency Law
Chattel Mortgage Law
Extrajudicial Foreclosure of Real
Mortgage

CREDIT
TRANSACTIONS
IN GENERAL

Concept

What makes an act, contract

transaction a credit transaction?

The concurrence of the following:

1.

2.

3.

or

RECEIPT OF GOODS OR MONEY BY THE

OBLIGOR FROM THE OBLIGEE IN THE
PRESENT;
TRUST OR FAITH IN THE OBLIGORS
CREDIT OR ABILITY TO PAY OR RETURN;
and
PAYMENT OR RETURN IN THE FUTURE.

OBLIGOR
Present receipt,
temporary increase
in his estate

OBLIGEE
Present payment or
delivery, temporary
decrease in his estate

Trust by the creditor Expectation that the

that he will pay
debtor in whom he
puts his trust will pay
or return
Future payment or
delivery, decrease in
his estate

Future receipt,
restores or increases
his estate

Characteristics of Credit
Transactions

There are always two parties involved.

Example 1: Bangs borrows Andis book. Andi
voluntarily lends it. This is a commodatum. Two
parties are involved.
Example 2: Bangs borrows Andis book without
Andis knowledge. This is theft. No trust or faith
is involved.
There is a time element (Obligor receives
something now but he must return the
same thing or its equivalent later).
Trust and faith must always attend the
transaction, which may take the form of a
security or guaranty.

Types of Contracts in CT

PRINCIPAL CONTRACTS or contracts

founded on trust, belief or credit. They
are contracts that can stand on their
own and which do not depend upon the
existence
of
other
contracts
to
themselves be valid. As distinguished
with preparatory contracts, principal
contracts are ends in themselves and
do not merely serve as precursors to
other contracts.

By the contract of agency a person binds

himself to render some service or to do
something in representation or on behalf of
another. A contract of agency is not an end in
itself. It is preparatory to the commencement of
another contractual relationship.

By the contract of partnership two or more

persons bind themselves to contribute money,
property, or industry to a common fund, with
the intention of dividing the profits among
themselves. The partners contribute money,
property or industry to a common fund but the
intention of dividing profits cannot be obtained
without doing something to their contributions.
The partners must necessarily enter into further
contracts to obtain profit.

The PRINCIPAL CONTRACTS/CREDIT

TRANSACTIONS
are
LOAN
and
DEPOSIT. They are also collectively
called BAILMENT CONTRACTS.

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 claims it.

PARTIES

BAILOR the one who lends a thing;

Need not be the owner but must have
possessory interest in the SM
Lessee (Article 1643, in relation to Article
1650)
Usufructuary (Article 562)

BAILEE the one who borrows the thing

Bar Question 2007

The parties to a bailment are:
A. bailor
B. bailee
C. comodatario
D. all of the above
E. letters A and B
Answer: E
NOTE: Comodatario is the agent to
whom property involved in a bailment
is delivered.

ACCESSORY CONTRACTS those which depend upon

the existence of PRINCIPAL CONTRACTS and which
tend to strengthen the said belief or trust because of
the security given. They may be further classified as
contracts of:

PERSONAL GUARANTY or SECURITY , where a persons

personal credit is involved as in guaranty proper and
suretyship;

REAL GUARANTY or SECURITY, where the debtor

reciprocates the trust given to him by the creditor by furnishing
the latter with security that consists in the use of property:

real mortgage and antichresis, if the property given is real

property; and
pledge and chattel mortgage, if the property given is personal
property.

This is the reason why the contracts of guaranty,

suretyship, pledge, mortgage and antichresis are also
called SECURITY CONTRACTS.

LOAN
(Articles 1933-1961)

Definition

By the contract of loan, one of

the parties 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

TWO KINDS OF LOANS

COMMODATUM is a contract of loan

whereby one of the parties delivers to
another something not consumable so that
the latter may use the same for a certain
time and return it, the former retaining the
ownership of the thing loaned.

MUTUUM is a contract of loan whereby one

of the parties delivers to another money or
other consumable thing, the ownership of
which passes to the latter, upon the condition
that the same amount of the same kind and
quality shall be paid.

COMMON
CHARACTERISTICS

Nominate given a particular name by

law;
Principal does not depend on the
existence or validity of other contracts;
Real perfected by delivery;
Unilateral - only one of the parties is
principally obliged;
Gratuitous per se consideration is
liberality;

LEGAL CONSEQUENCES

Nominate governed by specific provisions of law

Principal in contrast to an accessory contract
(ex. pledge, mortgage and antichresis), loan can
stand on its own and does not depend on another
contract for its validity or existence; in contrast to
a preparatory contract (ex. agency and
partnership) because it is an end in itself not as a
means through which future contracts or
transactions may be made.
Real perfected only by delivery so the
obligations of the bailee/borrower do not arise
until the subject matter is delivered.

Art. 1316. Real contracts, such as deposit,

pledge
and
commodatum,
are
not
perfected until the delivery of the object of
the obligation.

QUESTION: Only commodatum is mentioned in

Article 1316. Is mutuum also a real contract?
ANSWER: Yes, for two reasons:

Article 1316 is not an exclusive enumeration of what

are real contracts. Note the words such as.
The nature of mutuum as a real contract is revealed
by Article 1934 which provides that: Art. 1934.
XXX the commodatum or simple loan itself
shall not be perfected until the delivery of the
object of the contract.

Take note of the case of Bonnevie

versus Court of Appeals, GR No.
49101, October 24, 1983, where
the Supreme Court made an
aberrant pronouncement that: A
contract of loan being a consensual
contract, the herein contract of loan
was perfected at the same time the
contract of mortgage was executed.

BPI INVESTMENT CORPORATION

versus CA
G.R. No. 133632, February 15, 2002

Borrower entered into a contract of loan with mortgage

with BPI. The contract stipulates that the obligation to
pay monthly amortizations will begin after release of the
proceeds of the loan to the borrower. The loaned amount
was released in two batches: first part on March 31,
1981 and the remainder on September 13, 1982.
Borrower was not able to faithfully comply with his
amortization schedule. BPI foreclosed on the mortgage
and computed interest beginning May 1, 1981. The
Court of Appeals ruled that because a simple loan is
perfected upon the delivery of the object of the contract,
the loan contract in this case was perfected only on
September 13, 1982. BPI claims that a contract of loan is
a consensual contract, and a loan contract is perfected
at the time the contract of mortgage is executed
conformably with Bonnevie v. Court of Appeals, 125
SCRA 122.
ISSUE: When was the contract of loan perfected?

RULING: The loan contract was perfected only on

September 1982, the date of the second release of the loan.
Following the intentions of the parties on the
commencement of the monthly amortization, the
borrowers obligation to pay commenced only on October
13, 1982, a month after the perfection of the contract.

A contract of loan involves a reciprocal obligation, wherein

the obligation or promise of each party is the consideration
for that of the other. It is a basic principle that neither
party incurs in delay, if the other does not comply or is not
ready to comply in a proper manner with what is
incumbent upon him. Only when a party has performed his
part of the contract can he demand that the other party
also fulfills his own obligation. Consequently, petitioner
could only demand for the payment of the monthly
amortization after September 13, 1982 for it was only then
when it complied with its obligation under the loan
contract. Therefore, in computing the amount due as of the
date when BPI extrajudicially caused the foreclosure of the
mortgage, the starting date is October 13, 1982 (one month
after the loan was delivered in full) and not May 1, 1981
(one month after the mortgage was executed).

In addition to the three elements, delivery is

required in the principal contracts of bailment.
Why? Because it is only after delivery that a
party can begin fulfilling his obligations.

In commodatum, the borrower is obliged to exercise

due diligence over the thing loaned. This obligation
cannot be done unless the thing subject of the loan is
delivered to him.
In mutuum, the borrower is obliged to return the
money that was borrowed. This obligation does not
arise unless there is a debt in the first place.
In deposit, the depositary is obliged to keep the
object safely. This obligation cannot be done unless
the thing subject of the deposit is delivered to him.
ANOTHER EXAMPLE is contract of carriage, because
unless the carrier is actually used, the carrier cannot
be said to have already assumed his obligations.

QUESTION: A promised to lend B his

book (COMMODATUM) on January 14.
On January 14, A refused to deliver the
book. May B sue A for damages?

ANSWER: YES, but not for breach of

contract of commodatum because it was
not yet perfected. B may sue A for
breach of the consensual contract to
make a commodatum which is perfected
by mere consent (see Article 1934).

UNILATERAL - once the subject matter

has been delivered, it creates obligations
on the part of only one of the parties,
namely the borrower.

GRATUITOUS - Under Article 1933,

commodatum is essentially gratuitous
while simple loan may be gratuitous or
with a stipulation to pay interest. This
means that mutuum is not gratuitous
only when the parties agree that, in
addition to the return of the money,
interest is also to be computed and paid.

Consideration

A asks B if he could borrow the latters fountain pen. B

agrees and gives his pen to A but tells A to return the
same within one week.

QUESTION: What is the consideration of the contract

insofar as B is concerned?
ANSWER: Pure liberality. B receives nothing.

QUESTION: What if, before B lends his pen to A, B asks

him to pay P50 and to return the pen within one week?
ANSWER: No more commodatum because commodatum is
essentially gratuitous. Once valuable consideration other
than liberality is imposed, the transaction becomes
another contract. Because of the obligation to return, the
contract is a lease. If there is payment with no obligation
to return, then the contract is a sale. Without the
obligation to return and without valuable consideration,
the contract is a donation.

CONSEQUENCE

Art. 1378. When it is absolutely

impossible to settle doubts by the rules
established in the preceding articles, and
the
doubts
refer
to
incidental
circumstances of a gratuitous contract,
the least transmission of rights and
interests shall prevail. If the contract is
onerous, the doubt shall be settled in
favor of the greatest reciprocity of
interests.

DISTINCTIONS COMMODATUM AND

MUTUUM
(BAR
2004)
COMMODATU
MUTUUM
M

As to
object

Involves
something not
consumable
(exception is Art.
1936)

Involves money
or other
consumable
thing (Art.1933)

As to kind
of object

May involve real

and personal
property (Art.
1937)

Involves
personal
property only.

As to
transfer of

Ownership of the Ownership of

thing is retained the thing loaned

COMMODATU
M

MUTUUM

As to risk
of loss

The
lender
bears the risk
of loss because
he
retains
ownership
of
the
thing
loaned
(Arts.
1942 & 1174)

The borrower
bears the risk
of loss because
ownership over
the thing
loaned passes
to him

As to
obligation
to return

The borrower
must return the
same thing
loaned.

The borrower
need only pay
the same
amount of the
same kind and

As to the
ability to
demand
return

COMMODATU
M

MUTUUM

The lender may

demand the
return of the
thing loaned
before expiration
of the term in
case of urgent
need (Art. 1946)

The lender may

not demand its
return before the
lapse of the term
agreed upon

Essentially
As to
considerati gratuitous
on
As to
nature

Purely personal

May be
gratuitous or with
a stipulation to
pay interest
Not purely
personal

PRODUCERS BANK versus CA

G.R. No. 115324, Feb 19, 2003

FACTS: Sometime in 1979, Vives was asked by his neighbor and friend
Sanchez to help her friend and townmate, Doronilla, in incorporating his
business, Sterela Marketing and Services. Sanchez asked Vives to deposit
in a bank a certain amount of money in the bank account of Sterela for
purposes of its incorporation. She assured private respondent that he
could withdraw his money from said account within a months time.
Relying on the assurances and representations of Sanchez and Doronilla,
Franklin Vives issued a check in the amount of P200,000.00 in favor of
Sterela. When Vives went to the bank to verify if the money was still
intact, the bank informed them that part of the money had been
withdrawn by Doronilla, and that only P90,000.00 remained therein. On
June 29, 1979, Vives received a letter from Doronilla, assuring him that
his money was intact and would be returned to him. On August 13, 1979,
Doronilla issued a postdated check for Two Hundred Twelve Thousand
Pesos (P212,000.00) in favor of Vives. However, upon presentment
thereof, the check was dishonored.

NOTE: Petitioner contends that the transaction between private

respondent and Doronilla is a simple loan or mutuum since all the
elements of a mutuum are present: first, what was delivered was money,
a consumable thing; and second, the transaction was onerous as
Doronilla was obliged to pay interest, as evidenced by the check issued
by Doronilla in the amount of P212,000.00, or P12,000 more than what
was deposited in Sterelas bank account .

The transaction was a commodatum, not a mutuum.

Article 1933 implies that if the subject of the contract is
a consumable thing, such as money, the contract would
be a mutuum. However, there are instances where a
commodatum may have for its object a consumable
thing. Article 1936 of the Civil Code provides that
consumable goods may be the subject of
commodatum if the purpose is not the consumption
of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes
of exhibition, or when the intention of the parties is to
lend consumable goods and to have the very same goods
returned at the end of the period agreed upon, the loan
is a commodatum.

The rule is that the intention of the parties shall be

accorded primordial consideration in determining the
true character of a contract. The evidence shows that
Vives agreed to deposit his money in the savings account
of Sterela specifically for the purpose of making it
appear "that said firm had sufficient capitalization for
incorporation, with the promise that the amount shall be
returned within thirty (30) days."

Doronillas attempts to return to the

amount of P200,000.00 together with an
additional
P12,000.00,
allegedly
representing interest on the mutuum, did
not convert the transaction from a
commodatum into a mutuum. Article 1935
of the Civil Code expressly states that
"[t]he bailee in commodatum acquires the
use of the thing loaned but not its fruits."
Hence, it was only proper for Doronilla to
remit to private respondent the interest
accruing to the money deposited.

COMMODATUM

Art. 1935. The bailee in commodatum

acquires the use of the thing loaned but not
its fruits; if any compensation is to be paid by
him who acquires the use, the contract ceases
to be a commodatum.

As to fruits, Art. 1940 provides that the

parties may stipulate that the bailee may

make use of the fruits of the thing loaned
(See PRODUCERS BANK case)

If there is compensation, the contract is one of

LEASE.

Art. 1936. Consumable goods may be the

Art. 1939. Commodatum is purely personal in

character. Consequently:
(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.

NOTE: Commodatum is purely personal in character

which means that rights acquired by virtue of the
same could not be transmitted to another. This
makes perfect sense inasmuch as the bailor relies
on the character, credit and conduct of the bailee
when he contracts with the latter gratuitously.

Death of the Bailee

Homer lends Patty his car gratuitously until the

end of 2012. Should Homer die before the end
of 2012, the commodatum is extinguished and
Homers heirs can already demand from Patty to
return the car even before the expiration of the
period. In the same vein, should Patty die prior
to the end of 2008, Homer can demand
immediately the return of the car even before
the expiration of the period agreed upon. This is
because the bailors trust and confidence is
exclusive to the bailee and does not extend to
the bailees heirs or assigns.

If there are two or more borrowers, the death of

one does not extinguish the commodatum as to
the other, unless there is a stipulation to the
contrary.

PROHIBITIONS AS TO
USE

Homer lends Patty his laptop computer. Patty

cannot lend or lease this to her boyfriend,
Domeng.
But Pattys children and other
members of her household may make use of the
thing loaned unless there is a stipulation to the
contrary.

However, the laptop cannot be used by either

Patty or the members of her household as a
pillow, because the nature of the laptop forbids
its use as such. Finally, Patty can use the laptop
as paperweight because the nature of the laptop
does not really prohibit its use as such for as
long as such use does not lead to possible.

Art. 1937. Movable or immovable property

may be the object of commodatum.

This
provision
makes
commodatum
dissimilar to mutuum but similar to lease.

Art. 1938. The bailor in commodatum

need not be the owner of the thing
loaned.

Rationale: There is no transfer of ownership

in commodatum.

OBLIGATIONS OF THE
BAILEE
1.
2.

3.

4.

The bailee is obliged to return the thing loaned

upon the expiration of the period.
In relation to the obligation to return, the bailee
is obliged not to retain the thing loaned even if
the bailor has outstanding liabilities to the
bailee;
The bailee is obliged to take care of and safely
keep the thing loaned while in his possession,
exercising the diligence of a good father of a
family;
In relation to the immediately preceding
obligation, the bailee is obliged to pay for the
ordinary expenses for the use and preservation
of the thing loaned (Article 1941);

Suppose that A borrowed Bs jeep. A is obliged to pay for

expenses to have the jeep washed, lubricants, oil, gas, etc.

For extraordinary expenses, Article 1949 is the governing

rule:
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.
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. (1751a)

Using the same example, A can have B reimburse

expenses of having the engine repaired if required.

But take note of Article 1950 which bars

reimbursement on account of expenses that are
not covered by either Article 1941 and 1949. Thus:
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. (n)

Thus, if A installs a sound system on the jeep for

his better use, he shall not be entitled to
reimbursement.

5.

The bailee is obliged to pay for damages under the

circumstances provided in Article 1942 of the Civil
Code.

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;
(2) If he keeps it longer than the period stipulated,
or after the accomplishment of the use for which
the commodatum has been constituted;
(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;
(4) If he lends or leases the thing to a third
person, who is not a member of his household;
(5) If, being able to save either the thing borrowed
or his own thing, he chose to save the latter.

Art. 1943. The bailee does not answer for the

deterioration of the thing loaned due only to
the use thereof and without his fault.

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.

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.

Art. 1945. When there are two or more bailees

to whom a thing is loaned in the same
contract, they are liable solidarily. (1748a)

OBLIGATIONS OF THE
BAILOR

Take note that since commodatum is a

unilateral contract, the obligations of the
bailor are mere incidental ones.

Thus, the obligations of the bailor are the

following:
1.

2.
3.

Obligation to respect the duration of the loan or

the period of the contract;
Obligation to refund extraordinary expenses; and
Obligation to pay damages for hidden flaws.

OBLIGATION TO RESPECT
PERIOD

As a rule, the bailor must respect the period and

cannot require the premature return of the thing
loaned.
RATIONALE:
Art. 1196. Whenever in an obligation a period is
designated, it is presumed to have been
established for the
benefit of both the creditor
and the debtor, unless from the tenor of the
same or other circumstances it should appear that
the period has been established in favor of one or
of the other.
Since commodatum is gratuitous, the period is
deemed to have been designated in favor of the
debtor, who in this case is the bailee.

RIGHT TO REQUIRE
RETURN

The bailor can demand the return of the thing:

1.

Upon expiration of the period or after the

accomplishment of the use for which the
commodatum has been constituted (Article
1946);

2.

For temporary use in case of urgent need but

the contract, and, by implication, the
performance of the obligations of the bailee, are
suspended in the meantime (Article 1946);

3.

Right to demand the return of the thing at will

in the case of precarium (Article 1947); and

4.

Right to demand the return of the thing for acts

of ingratitude committed by the bailee (Article
1948, in relation to Article 765);

Article 765 applies to commodatum because both

commodatum and donation are gratuitous contracts.

ACTS OF INGRATITUDE IN COMMODATUM. The

bailor may demand the immediate return of the
thing:

If the bailee should commit some offense against the

person, the honor or the property of the bailor, or of his
wife or children under his parental authority;
If the bailee imputes to the bailor 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 bailee himself, his wife or children under his
authority; and
If the bailee unduly refuses the bailor support when the
bailee is legally or morally bound to give support to the
bailor.

COMMODATUM versus
DONATION
As to
considerati
on
As to effect
of
ingratitude
As to
nature

COMMODATU
DONATION
M
Both contracts are gratuitous.

Ingratitude revokes either

contract.
A contract

An act of
liberality, a
contract, and a
mode of

COMMODATU
M

DONATION

As to
obligations

Bailee is obliged Donee is not

to return
obliged to
return unless
donation is
revoked

As to
perfection

Delivery perfects The donation is

the contract.
perfected from
the moment the
donor knows of
the acceptance
by the donee.

As to type
of contract

It is a real
contract (Art.
1934).

It is a formal
contract (Art.
734).

As
to
effect of
presence
of
valuable
considera
tion

COMMODATU
M
In
commodatum,
the presence of
valuable
consideration
transforms the
contract into
some other
contract such
as lease. (Art.
1935)

DONATION
In donation, the
presence of
valuable
consideration
makes the
donation
onerous but it is
still a donation.
However, it will
now be governed
by the law of
contracts
(Article 733).

SUMMARY

INSTANCES WHEN BAILOR MAY DEMAND

RETURN IMMEDIATELY

Urgent need; (URGENCY)

No stipulation as to duration; (DURATION)
No stipulation as to purpose for use; (PURPOSE)
Acts of ingratitude; (UNGRATEFULNESS)
Expiration of period; (TERM) and
Accomplishment of the purpose.
(ACCOMPLISHMENT)

Art. 1952. The bailor cannot

exempt
himself
from
the
payment
of
expenses
or
damages by abandoning the
thing to the bailee. (n)

Bar 2005

A left his adventure van to B before he left to

work abroad. The parties agreed that B can
use the van for 1 year. A did not tell B that
the vans brakes are faulty. B had the brakes
repaired and the van tuned up, spending
P15,000.
B discovered that the van
consumed too much fuel. Hence, he leased
the van to C. Two months later, A returned
and asked B to return the van. However, the
van was damaged while B was using it,
without his fault.

Bar 2005
(a)

Who shall bear the P15,000 spent

for van repair?

(b)

Who shall bear the cost of the vans

fuel?

(c)

Does A have the right to get the

van before the lapse of one year?

ANSWER
(a) Brakes (extraordinary) A
Tuneup (ordinary) B
(b) Fuel (ordinary) B
(c) A cannot demand return before
the period unless he has urgent
need of the van.

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. (1753a)

An essential characteristic of mutuum is that there

is a transfer of ownership from the lender to the
borrower.
The
legal
consequences
of
this
characteristic are as follows:

The obligation of the borrower is to PAY and NOT TO

RETURN because the consumption is the object of
mutuum;
Due to the transfer of ownership, the rule in
commodatum that the lender need not be the owner of
the thing loaned does not apply. Nemo dat quod non
habet. No one can give what one does not have;
As there is transfer of ownership, there can be no

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. (n)

Art. 1638. By the contract of barter or

exchange one of the parties binds
himself to give one thing in
consideration of the other's promise to
give another thing. (1538a)

EXAMPLES

MUTUUM OF MONEY ===> A loans B P50,000

payable in one month.

MUTUUM OF GOODS ===> A loans B 2 sacks of

NFA rice (fungible, for consumption) for a period
of 2 months. After two months, B is obliged to
give 2 sacks of rice of the same kind and quality.

ARTICLE 1954 ===> A gives B a Mitsubishi

Evolution VIII, an imported Japanese car because
B will participate in a race. However, as a
condition, B is obligated to give A another
Mitsubishi Evolution VIII car to replace the car of
A after the race. (This is now considered a barter)

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. (1754a)

INTEREST
GENERAL

RULE: Article 1956

no interest shall be due
unless it has been expressly
stipulated in writing and is
lawful

EXCEPTIONS

Indemnity for damages debtor in

delay must pay legal interest even if
there is no stipulation

Interest accruing from unpaid

interest interest due shall earn
interest from the time it is judicially
demanded although the obligation may
be silent on this point (Article 2212)

Indemnity for Damages

6% per annum transactions other

than loans/forbearance of money

e.g. Monetary award arising from a

contract for a piece of work, unpaid
purchase price (Crismina Garments
v. CA)

Example

A purchased a car from B

The price shall be paid in 30 days

A delayed paying for one year

A will be liable for 6% interest per

annum for the delay in paying the
price

Indemnity for Damages

12%

per annum delay in

paying loans, forbearance of
money, judgments involving
loans
or
forbearance
in
absence
of
stipulation
computed from date of default
(CB Circular 416)

Example

A obtained a P1,000 loan from B

payable in 30 days

A delayed in paying for one year

A will be liable for 12% interest

since she delayed in paying the loan

Interest accruing from unpaid

interest

A borrowed P5,000 from B

Loan has 12% annual interest

A fails to pay P5,000 and the

interest

Interest accruing from unpaid

interest

One year after due date, there is a judicial

demand for payment of P5,000 and 12%
annual interest within 30 days from
judgment

pays 1 month after the 30-day period

The 12% interest will earn 12% annual

legal interest (forbearance already) or 1%
for each month of delay

Interest accruing from unpaid

interest
ORIGINAL LOAN = P5,000 + 12% (per
annum)
= P5,000 + P600
= P5,600
FORBEARANCE = 12% per annum or 1%
a month of delay from judicial order
= P5,600 + 1% (P56.00)
= P6,160

Bar 2002
Carlo

sues Dino for

(a) collection on a promissory note for a loan, with

NO agreement on interest on which Dino defaulted

(b) damages caused by Dino on Carlos priceless

painting on which Dino accidentally spilled acid
while transporting it.

The

court finds Dino liable for both obligations. What

rates of interests may the court impose?

Answer

With respect to the amount covered by a

promissory note, an interest of 12% per annum
may be imposed since it arose from a contract
of loan

With respect to damages, it is 6% from the time

of final demand until finality of judgment and
12% of the amount from final judgment until
the debt is fully paid

INTEREST

Contracting parties may stipulate

freely on any adjustment in the interest
rate on a loan or forbearance of money.

However, the law does not authorize

increase of interest rate by one party
without the other partys consent.

Any change of interest must

mutually agreed by the parties

be

Bar 2001

A obtained a P300,000 housing loan from

X Bank at 18% per annum interest. The
promissory note provides that X reserves
the right to increase the interest within
the limits allowed by law.
X Bank
increased the interest to 48% per annum.
When A questioned the increase in
court, X argued that the usury law is
already legally suspended. Will the action
prosper? Why?

Answer

The action will prosper. While it is true that interest

ceilings set by the Usury law are no longer in force, the
court may still reduce interests which are unconscionable.

Contracting parties may stipulate freely on any adjustment

in the interest rate on a loan or forbearance of money.

However, the law does not authorize increase of interest

rate by one party without the other partys consent.

Any change of interest must be mutually agreed by the

parties

INTEREST

Article 1960 - If the debtor pays

interest
when
there
is
no
stipulation therefor, the provisions
on solutio indebiti or natural
obligations will apply (debtor may
recover)

KINDS OF INTEREST
SIMPLE

principal
fixed or
parties

paid for
at a certain
stipulated by

the
rate
the

KINDS OF INTEREST

COMPOUND that which is imposed

upon interest due and unpaid. The
accrued interest is added to the
principal sum and the whole
(principal and interest) is treated as
the new principal upon which the
interest for the new period is
calculated

DEPOSIT

Article
1962.
A
deposit
is
constituted from the moment a
person receives a thing belonging
to another, with the obligation of
safely keeping it and returning the
same.
If the safekeeping of the thing is
not the principal purpose of the
contract, there is NO deposit but
some other contract.

The PARTIES are:

DEPOSITOR, or the person who turns over

possession and custody of the thing to another;
DEPOSITARY, or the person who receives the
thing under obligations to safely keep and
preserve it.

CHARACTERISTICS OF DEPOSIT:

It is a nominate contract;
It is a real contract;
It is a principal contract;
It can be gratuitous and, when gratuitous, it is a
unilateral contract; and
It can be for compensation and, when for
compensation, it is a bilateral contract.

SAFEKEEPING MUST BE THE

PRIMARY PURPOSE

Under Article 1962, the safekeeping of the

thing loaned is the principal purpose of the
contract of deposit. If the safekeeping of the
thing delivered is not the principal purpose of
the contract, there is no deposit but some
other contract.

If a contract is therefore constituted and

deposit is made as an accessory or
preparatory contract, the principal purpose
would no longer be safe-keeping.

A wants to sell his car. He deposits the car to B so

that B can sell it to prospective buyers. Here, there
exists a contract of agency and deposit is simply an
accessory obligation. The act of depositing the car
is merely preparatory to the ultimate contract
which is an agency to sell the car.

A delivers to B his laptop computer so that B may

repair it. While there is an obligation to safely
keep and preserve the thing while B is repairing it,
the principal purpose is repair. The contract
therefore is one for labor or for a piece of work.

Therefore, with respect to deposit, the effect of

Article 1962 (providing that the safekeeping of the
thing loaned must be the principal purpose of the
contract of deposit; otherwise, there is no deposit
but some other contract) seems to be that deposit
has to be constituted as a principal contract . If it
is constituted as a mere preparatory contract or
accessory contract, custody and preservation
would no longer be the principal end.

Deposit is a real
contract
Article
1963.
An
agreement to constitute
a deposit is binding but
the
deposit
is
NOT
perfected
until
the
delivery of the thing

Nature of Deposit Based on

Consideration

Art. 1965. A deposit is a gratuitous contract, except

when there is an agreement to the contrary, or
unless the depositary is engaged in the business of
storing goods.

If gratuitous, it is a unilateral contract because only

one of the parties (the depositary) is principally
obliged.

If onerous, it is a bilateral contract because the

undertaking of the depositary to safely keep the
thing is the reason why the depositor pays
compensation.

Subject Matter
As

a general rule, only

movable things may be the
object of a deposit (Article
1966).

Judicial

deposit, however, may

cover immovable or movable
things (Articles 2005-2009)

Form and Constitution

Art. 1969. A contract of deposit

may be entered into orally or in
writing.

Art. 1964. A deposit may be

constituted
judicially
or
extrajudicially.

Judicial by means of an order by the

court

JUDICIAL DEPOSIT
Also

known as sequestration

Primary

purpose: to maintain
status
quo
during
the
pendency of litigation or to
insure the rights of parties to
property.

Judicial
Deposit/Sequestration

Art. 2005. A judicial deposit or

sequestration takes place when
an attachment or seizure of
property
in
litigation
is
ordered. (1785)

Art. 2006. Movable as well as

immovable property may be the
object of sequestration. (1786)

Art. 2007. The depositary of property

or objects sequestrated cannot be
relieved of his responsibility until the
controversy which gave rise thereto
has come to an end, unless the court
so orders. (1787a)

Art. 2008. The depositary of property

sequestrated is bound to comply, with
respect to the same, with all the
obligations of a good father of a
family.

Examples of Judicial Deposit

Rule
57
(Preliminary
attachment by sheriff
complaint.

attachment)
upon filing

of

Rule 59 (Receivership) - a receiver may be

appointed by the court to administer and
preserve the property in litigation.

Rule 60 (Replevin) - personal property may

be seized by sheriffs in suits of replevin or
manual delivery of personal property.

Rule 127 attachment in criminal cases.

NECESSARY DEPOSIT

Art. 1996. A deposit is necessary:

(1) When it is made in compliance
with a legal obligation;
(2) When it takes place on the
occasion of any calamity, such as
fire, storm, flood, pillage, shipwreck,
or other similar events.

OTHER INSTANCES

When travellers deposit effects in

hotels or inns (Article 1998)

When made by passengers of

common carriers when entering into
a contract of carriage of persons.

Deposit is necessary when

made in compliance with a
legal obligation

Art. 538. Possession as a fact cannot be

recognized at the same time in two
different personalities except in the cases
of co-possession. Should a question arise
regarding the fact of possession, the
present possessor shall be preferred; if
there are two possessors, the one longer in
possession; if the dates of the possession
are the same, the one who presents a title;
and if all these conditions are equal, the
thing shall be placed in judicial deposit
pending determination of its possession or
ownership through proper proceedings.

Deposit is necessary when

made in compliance with a
legal obligation

Art. 2104. The creditor cannot use the

thing pledged, without the authority of
the owner, and if he should do so, or
should misuse the thing in any other
way, the owner may ask that it be
judicially or extrajudicially deposited .
When the preservation of the thing
pledged requires its use, it must be
used by the creditor but only for that
purpose.

On the occasion of a
calamity

When during a fire, flood, storm, or

other calamity a property is saved
from destruction by another person
without the knowledge of the owner,
the latter is bound to pay the former
just compensation (Article 2168)

Possession passes by accident from

one person to another and the law
imposes
on
the
recipient
the
obligations of a bailee

When made by travellers

The keepers of hotels on inns shall

be responsible as depositaries for
effects deposited by guests provided:
Notice was given to them about the
effects
Guests
have
taken
precautions
prescribed regarding their safekeeping
(Article 1998)

Art. 1999. The hotel-keeper is

liable for the vehicles, animals
and articles which have been

 Liable

for

loss

or

injury

through:
Acts
of
servants
or
employees of the keeper
Acts of strangers
Acts
of
robbers
UNATTENDED by use of
arms or irresistible force

NOT liable for loss or injury

through:
Force majeure
Acts of robbers with arms or
using irresistible force
Acts
of guests, his family,
servants or visitors
Character
of
the
thing
deposited

Art. 2003. The hotel-keeper cannot

free himself from responsibility by
posting notices to the effect that he is
not liable for the articles brought by
the guest. Any stipulation between the
hotel-keeper and the guest whereby
the responsibility of the former as set
forth in articles 1998 to 2001 is
suppressed or diminished shall be
void.

Art. 2004. The hotel-keeper has a

right to retain the things brought into
the hotel by the guest, as a security

VOLUNTARY DEPOSIT

CONCEPT

Article 1968 - Delivery of the

thing is made by the will of the
depositor or by two or more
persons each of whom believes
himself entitled to the thing
deposited

DIFFERENCE
NECESSARY

WITH
DEPOSIT:
The

Obligations of the
Depositary

A depositary has a LOT of

obligations,
which
can
be
grouped into the following:
Obligations

relative

to

preservation;
Obligations
relative
to
information or notice; and
Obligations relative to delivery
and return.

AS TO PRESERVATION

The depositary is obliged to keep the thing safely

and to return it, when required, to the depositor, or
to his heirs and successors, or to the person who
may have been designated in the contract (Art.
1972).

When the thing deposited consists in securities,

the depositary is obliged to take such steps in
order that the same may preserve their value (Art.
1975).

The
depositary
holding
certificates,
bonds,
securities or instruments which earn interest shall
be bound to collect the latter when it becomes due
(Art. 1975).

The depositary is obliged to use the thing

deposited if its preservation requires its use . It
must be used but only for that purpose (Art. 1977).

AS TO INFORMATION

The depositary is obliged to notify the depositor

and wait for the latters decision in case the former
changes the way of the deposit (Art. 1974).

When the thing deposited is delivered closed and

sealed but its seal or lock is broken, the depositary
shall keep the secret of the deposit (Art. 1981).

The depositary, who discovers that the thing

deposited has been stolen and who its true owner
is, must advise the latter of the deposit (Art. 1984).

The depositary is obliged to immediately inform the

depositor if the thing deposited is judicially
attached or if its return or removal is opposed by a
third person (Art. 1988).

AS TO RETURN

When the thing deposited is delivered closed

and sealed, the depositary is obliged to
return it in the same condition (Art. 1981).

The depositary is obliged to return the thing

deposited with all its products, accessories
and accessions (Art. 1983).

In a deposit with multiple depositors with

stipulation that the thing should be returned
to one of them, the depositary is obliged to
return it only to the person designated (Art.
1985).

The depositary is obliged to take the thing

deposited to the place designated for the
return of the thing. If no place has been
designated for the return, the depositary is
obliged to take the thing deposited to the place
where the thing deposited may be (Art. 1987).

The depositary is obliged to return the thing

deposited to the depositor upon demand, even
if a specified period for such return had been
fixed (Art. 1988).

The depositary who, by force majeure or

government order, loses the thing and receives
money or another thing in its place, must
deliver the sum or other thing to the depositor
(Art. 1990).

PROHIBITIONS AND LIMITATIONS

ON THE DEPOSITARY

The depositary cannot deposit the thing with a

third person, unless there is a stipulation to the
contrary (Art. 1972).

The depositary cannot make use of the thing

deposited without the express permission of the
depositor. (Art. 1977).

The depositary cannot demand that the depositor

prove his ownership of the thing deposited (Art.
1984).

If the depositor becomes incapacitated to

contract after having made the deposit, the
depositary cannot return the thing except to the
administrators of his property and rights (Art.
1986).

LIABILITIES
The depositary is liable for acts of third
persons in the following cases:

If deposit with a third person is allowed, the

depositary is liable for the loss if he
deposited the thing with a person who is
manifestly careless or unfit.
The depositary is responsible for the
negligence of his employees (Art. 1973).
The depositary makes use of the thing
deposited without the express permission of
the depositor is liable for damages. (Art.
1977).

The depositary is liable for the loss of the thing

through a fortuitous event:

If it is so stipulated;
If he uses the thing without the depositor's permission;
If he delays its return;
If he allows others to use it, even though he himself
may have been authorized to use the same.

When the thing is delivered closed and sealed, the

depositary shall be liable for damages should the
seal or lock be broken through his fault. Fault on the
part of the depositary is presumed, unless there is
proof to the contrary (Art. 1981).

If the deposit consists in sums of money, the

depositary is liable to pay interest on the sums he
has applied to his own use from the day on which he
did so, and on those which he still owes after the
extinguishment of the deposit (Arts. 1896 and 1983).

RIGHTS OF THE
DEPOSITARY

If there is a stipulation or if the depositary is engaged

in the business of storing goods, the depositary is
entitled to adequate compensation for his services
(Art. 1965).

The depositary may change the way of the deposit if

under the circumstances he may reasonably presume
that the depositor would consent to the change if he
knew of the facts of the situation (Art. 1974).

Unless there is a stipulation to the contrary, the

depositary may commingle grain or other articles of
the same kind and quality, in which case the various
depositors shall own or have a proportionate interest
in the mass (Art. 1976).

The depositary may open a locked box or receptacle if

the key has been delivered to him or when the
instructions of the depositor as regards the deposit
cannot be executed without opening the box or
receptacle (Art. 1982).

The depositary, who discovers that the thing deposited

has been stolen and who advises the true owner of the
deposit, shall be relieved of responsibility by returning
the thing deposited to the depositor if the owner does
not claim it within the period of one month (Art. 1984).

If the depositary has reasonable grounds to believe

that the thing has not been lawfully acquired by the
depositor, the former may return the same (Art. 1984).

In case of gratuitous deposit, if he has justifiable

reasons for not keeping the thing may, even before the
time designated, return it to the depositor (Art. 1989).

If the depositor refuses to receive the thing, the

depositary may secure its consignation from the court
(Art. 1989).

The depositary may retain the thing in pledge until the

full payment of what may be due him by reason of the
deposit (Art. 1994).

OBLIGATIONS OF THE
DEPOSITOR

If at the time the deposit was made a

place was designated for the return of
the thing, the depositary must take
the thing deposited to such place but
the expenses for transportation shall
be borne by the depositor (Art. 1987).

If the deposit is gratuitous, the

depositor is obliged to reimburse the
depositary for the expenses he may
have incurred for the preservation of
the thing deposited (Art. 1992)

If the deposit is not gratuitous, the depositor

is obliged to pay compensation to the
depositary. Should the depositor fail to pay, the
depositary may retain the thing in pledge until
the full payment of what may be due him by
reason of the deposit (Art. 1994).

The depositor shall reimburse the depositary

for any loss arising from the character of the
thing deposited, except in the following cases:

If at the time of the constitution of the

deposit the former was not aware of, or was
not expected to know the dangerous
character of the thing; or

If he notified the depositary of the same, or

the latter was aware of it without advice
from the depositor (Art. 1993).

Extinguishment of Voluntary
Deposit
Art. 1995. A deposit its extinguished:
(1) Upon the loss or destruction of the
thing deposited;
(2) In case of a gratuitous deposit, upon
the death of either the depositor or the
depositary.

NOTE:
Other
causes
(novation,
merger, expiration of the term,
fulfillment of resolutory condition)

Bar 2007

A deposit made in compliance with

a legal obligation is:
(a) an extrajudicial deposit
(b) a voluntary deposit
(c) a necessary deposit
(d) a deposit with a warehouseman
(e) letters a and b

ANSWER: C

Judicial Deposit vs. Extrajudicial

Deposit
ORIGIN: will of the ORIGIN: will of the
court
parties
PURPOSE: to secure PURPOSE:
the right of a party to safekeeping
recover
Movable or
Movable
immovable
Always
remunerated
Held in behalf of
prevailing party

May be gratuitous
or onerous
Held in behalf of
depositor