CREDIT TRANSACTIONS Refers to personal property only May involve real and personal property

Summary Outline (objects are consumable/fungible only)

(based on the book authored by Justice Paras) Referred to as loan for consumption Referred to as loan for use or
temporary possession
 “Credit” – refers to the belief or trust by a person in another’s ability to comply with Borrower, because of his ownership, Lender, because of his ownership,
an obligation; the ability to borrow money or thing by virtue of the confidence or trust bears risks of loss bears risks of loss
reposed by a lender that the borrower will pay what he may promise. Can be generally obliged to pay only at While generally obliged to return
 “Credit Transactions” – refers to the contracts or agreements based on said trust or the end of period object at the end of period, still in
credit. (generally for the benefit of both parties) some cases the return can be
 Scope of Credit Transactions, it involves: demanded even before the end of the
a. Principal contracts of loan (both commodatum and mutuum) and deposit period
(founded in belief or faith or trust); Not personal in character Personal in character
b. Accessory contracts (which generally depend on the existence of the
aforementioned contracts and which tends to strengthen said belief or trust  Consumable/Non-consumable – depends on the use of a movable in a
because of the security given: manner appropriate to its nature with or without it being consumed.
1. Personal guaranty  Fungible/Non-fungible – basis of classification is simply the intention of
2. Real guaranty the parties, whether or not a movable can be replaced by another of the
3. Surety same kind.
c. Secured transactions – those supported by collateral/encumbrance of
property; and  BAILMENT – the delivery of property by one person to another in trust for a
d. Unsecured transactions – those the fulfillment of which is secured or specific purpose, with a contract, express or implied, that the first shall be
supported by only a promise to pay or the personal commitment of another. faithfully executed and the property returned or duly accounted for when the
special purpose is accomplished or kept until bailor reclaims it.
LOAN o To the borrower, the cause is the acquisition of the thing; to the lender,
it is the right to require the same thing or its equivalent.
Art. 1933. By the contract of loan, one of the parties delivers to another, either o The parties to a bailment:
something not consumable so that the latter may use the same for a certain  BAILOR – the giver; the party who delivers the thing.
time and return it, in which case the contract is called a commodatum; or  BAILEE – the recipient; the party who receives the thing thus
money or other consumable thing, upon the condition that the same amount delivered.
of the same kind and quality shall be paid, in which case the contract is o Bailment may be contractual or created by operation of law.
simply called a loan or mutuum. o In every bailment, there is an obligation on the part of the bailee to
Commodatum is essentially gratuitous. restore the subject of the bailment in the same or in altered form or to
Simple loan may be gratuitous or with a stipulation to pay interest. account therefor.
In commodatum the bailor retains the ownership of the thing loaned, while in o Kinds of contractual bailment:
simple loan, ownership passes to the borrower.  Those for the sole benefit of the bailor (e.g. gratuitous deposit);
 Those for the sole benefit of the bailee (e.g.commodatum and
 Distinctions between commodatum and mutuum: gratuitous loan);
 Those for the benefit of both (e.g. deposit for compensation,
MUTUUM COMMODATUM pledge and bailments).
Equivalent amount to be returned Same thing to be returned (subject
(subject matter is fungible) matter is non-fungible)  A loan is distinguished from rent/lease with respect to the ownership of the
May be gratuitous or onerous (with Essentially gratuitous (if there is subject property: whereas, the owner of the thing loses his ownership in the
interest) compensation it ceases to be former but not in the latter.
commodatum)
Ownership goes to borrower or bailee Ownership retained by lender or bailor

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  A loan is distinguished from “discounting of paper” with respect to the timing of are more than 730 days as of the effectivity of the law or regulation authorizing such
collection of interest: whereas, in the former interest is taken at the expiration of an increase. (Insular Bank v. Salazar, GR 82082)
a credit while interest is deducted in advance in the latter.
Art. 1934. An accepted promise to deliver something by way of commodatum or
 A loan is also distinguished from deposit with respect to the following: 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.
LOAN DEPOSIT
Purpose – to grant its Safekeeping by depositary (who  As real contracts, commodatum and mutuum are perfected by the delivery of the
consumption or use to borrower generally cannot use) object loaned.
Generally, the borrower pays only The return of deposited things can be
at the end of period demanded by the depositor at any time  Delivery, either real or constructive, is essential because unless there is delivery,
Relationship is that of lender and Relationship is that of depositor and the borrower cannot exercise due diligence over the thing loaned.
borrower depositary
There can be compensation of No compensation of things deposited  An accepted promise to make a future loan is a consensual contract and, therefore,
credits with each other (Except by mutual binding upon the parties but it is only after the delivery, will the real contract of loan
agreement) arise.
 Significance: the failure to return a thing deposited rendered the
depositary liable (In Re: Guardianship of Tamboco, et al 36 Phil 939). NATURE OF COMMODATUM
 An agent who uses for his own ends money or property of the principal
is a depositary of said funds and would be liable in case of failure to  Characteristics of Commodatum as a contract:
return. He cannot claim that only a “loan” was involved for this would a. REAL, perfected by delivery;
require the principal’s consent. (US vs. Igpuara, 27 Phil 619) b. PRINCIPAL, can stand alone by itself;
c. GRATUITOUS, otherwise the contract is one of lease
 A loan is distinguished from sale with respect to the following: (a) loan is a real d. PERSONAL IN NATURE, because of trust.
contract while sale is consensual contract; (b) loan is generally unilateral because
only the borrower has obligations while the contract of sale is bilateral and Art. 1935. (GENERAL RULE) The bailee in commodatum acquires the use of the thing
reciprocal. loaned (if the bailee is not entitled to the use of the thing, the contract may be a
 When the price is comparatively small, the property is sold but the real deposit) but not its fruits (EXCEPTION to the general rule, Art. 1940); if any
intent is only to give the object as a security for a debt – there really is a compensation is to be paid by him who acquires the use, the contract ceases
contract of loan, with an “equitable mortgage”. (Jayme vs. Salvador 55 to be a commodatum. (JUS UTENDI)
Phil. 540)
 GENERAL RULE: only non-consumable may be the subject of commodatum)
 Where there was no date fixed for the return and there would be no interest or profit Art. 1936. Consumable goods may be the subject of commodatum if the purpose of
till after the principal had been paid, the money was given as an investment and not the contract is not the consumption of the object, as when it is merely for
as a loan. (Gov’t vs. Phil. Sugar Estate Dev. Co. 38 Phil. 15) exhibition. (thus, only non-fungible goods may be subject to the contract of
commodatum, regardless of it being consumable or non-consumable)
 A loan must be in the form of money or something circulating as money. It must be
repayable absolutely and in all events (Herrera v. Petrophil Corp. GR 48349) Art. 1937. Movable or immovable property may be the object of commodatum.
 The subject-matter is generally non-consumable and the purpose is only
 Escalation clause maintains the fiscal stability and retains the value of money in use of the thing loaned and not its consumption, as in mutuum.
long-term contracts, however, its validity is subject to the following: (a) the increased
rate imposed by the lender does not exceed the ceiling fixed by law or the monetary Art. 1938. The bailor in commodatum need not be the owner of the thing loaned.
board; (b) the increase is made effective not earlier than the effectivity of the law or  REASON: the contract of commodatum does not transfer of ownership. The
regulation authorizing such increase; and (c) the remaining maturities of the loans bailor need only be allowed to alienate the right to use.

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  Art. 1939 constitutes an exception to the general rule that all rights acquired by
virtue of an obligation are transmissible (Art. 1178)
Art. 1939. Commodatum is purely personal in character. Consequently:
(1) The death of either the bailor or the bailee extinguishes the
contract;
(2) (GENERAL RULE) The bailee can neither lend nor lease the object
of the contract to a third person. (exception to the general rule) However,
the members of the bailee's household may make use of the thing
loaned, (exception to the exception) unless 1there is a stipulation to the
contrary, or unless 2the 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.
 The right to use the 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 (Art. 441).
 The stipulation as to the use of the fruits must be limited to its enjoyment as
mere incidental to the use of the thing itself, for if it is the main cause, the
contract may be one of usufruct.
OBLIGATIONS OF THE BAILEE
Art. 1941. The bailee is obliged to pay for the ordinary expenses for the use and
preservation of the thing loaned.
 REASON: the bailee or borrower is supposed to return the identical thing,
so he is obliged to take care of the thing with, as a rule, the diligence of a
good father of a family.
 GENERAL RULE: Bailee is not liable for loss through fortuitous events
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; (amounts to bad faith or abuse of generosity)
(2) If he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has been constituted;
(guilty of default)
(3) If the thing loaned has been delivered with appraisal of its value, unless
there is a stipulation exempting 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; (violation of the personal character of commodatum)
(5) If, being able to save either the thing borrowed or his own thing, he chose
to save the latter. (amounts to an act of ingratitude and to a failure to exercise due
diligence)
Art. 1943. The bailee does not answer for the deterioration of the thing loaned due
only to the use thereof and without his fault.
 REASON: the parties to the contract know that the thing borrowed cannot
be used without deterioration due to ordinary wear and tear.
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.
 REASON: bailment implies trust that as soon as the time has expired or the
purpose accomplished, the bailed property must be restored to the bailor.
Art. 1945. When there are two or more bailees to whom a thing is loaned in the same
contract, they are liable solidarily.
 REASON: to guarantee the efficacy of the rights of the lender. The law
presumes that the bailor takes into account the personal integrity and
responsibility of all the bailees and that, therefore, he would not have
constituted the commodatum if there were only one bailee.
OBLIGATIONS OF THE BAILOR
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. (return may be temporary or permanent – the gratuitous use by the borrower
must yield the necessity of the lender)
In case of temporary use by the bailor, the contract of commodatum is
suspended while the thing is in the possession of the bailor.
Art. 1947. The bailor may demand the thing at will, and the contractual relation is
called a precarium, in the following cases (two kinds of precarium):
(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 (bailor).
Art. 1948. The bailor may demand the immediate return of the thing if the bailee
commits any act of ingratitude specified in Article 765.
 Article 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.
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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.
 REASON: it is the bailor who profits by said expenses, being the owner of
the thing.
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.
 REASON: equitable solution.
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. (refers to expenses other than those necessary for the
preservation and use of the thing of the thing loaned)
Art. 1951. The bailor who, knowing the flaws (must be hidden) 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.
 REASON: when a person lends, he ought to confer a benefit, and not to do
a mischief. He is in bad faith for not revealing the flaws, thus, he is liable.
‘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)
 Bailee has the right of retention until paid of said damages. (Art. 1944)
Art. 1952. The bailor cannot exempt himself from the payment of expenses or
damages by abandoning the thing to the bailee.
 REASON: the value of the thing borrowed might be less than the value of
the expenses or damages.
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.
 In mutuum, ownership passes to the borrower, binding him to pay the
lender.
 Fixed, savings and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loans.
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.
 By the contract of barter, one of the parties binds himself to give one thing in
consideration of the other’s promise to give another thing. (Art. 1638, NCC)
 The word non-fungible really means fungible non-consumable, where it shall be
considered as a barter because it is neither a mutuum nor commodatum.
Art. 1955. The obligation of a person who borrows money shall be governed by the
provisions of Articles 1249 and 1250 of this Code.
“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.
In the meantime, the action derived from the original obligation shall be
held in the abeyance.
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”
If what was loaned is a fungible thing other than money, the debtor owes
another thing of 1the same kind, quantity and quality, even if it should change
in value. In case it is impossible to deliver the same kind, 2 its value at the time
of the perfection of the loan shall be paid.
 INTEREST – is the compensation allowed by law or fixed by the parties for the
loan or forbearance of money, goods, or credits.
Art. 1956. (GENERAL RULE) No interest shall be due unless it has been expressly
stipulated in writing. (refers to interest for use of money)
 EXCEPTIONS:
o The debtor in delay is liable to pay legal interest as indemnity for
damages even in the absence of stipulation. (Art. 2209)
o Interest due shall earn legal interest from the time it is judicially
demanded although the obligation may be silent upon this point. (Art.
2212)
 The right to interest arises only:
a. By virtue of a contract; or
b. By virtue of damages for delay or failure to pay the principal on
which interest is demanded.
(Baretto v. Santa Marina 37 Phil 568)
 Interest by way of damages
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  When the debtor is in default, regardless of the stipulation “the first
installment shall have no interest”. (Zobel v. City of Manila 47 Phil 169)
The right to interest with respect to the installment is different from the
right to interest after default.
 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 –
because the deprivation of opportunity for making money is too
uncertain a character. (Lopez v. Del Rosario 44 Phil 98)
 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, 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. (legal interest is now at 12% p.a.)
 The interest begins to accrue upon demand, extrajudicial or judicial.
 A complaint is a judicial demand (Monzon v. IAC, GR 72828)
 Even if in a judgment, where there is neither a loan or a forbearance, no
interest is actually being imposed, the delay in the payment of such
judgment will cause the imposition of interest.
 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.
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.
 Elements of Usury:
o A loan express or implied;
o Understanding between parties that the money lent shall or may be
returned;
o For such loan a greater rate of interest that is allowed by law shall be
paid or agreed to be paid as the case may be; and
o Corrupt intent to take more than the legal rate for the use of money.
 CB circular 905 has repealed the Usury Law, thus, there is no more maximum
rate of interest. The rate will just depend on the mutual agreement of the parties
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.
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.
“Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.”
 General Rule: accrued interest (due and unpaid) will not bear interest, EXCEPT,
o If the agreement to this effect; or
o If there is judicial demand,
 When such accrued interest will bear interest at the legal rate
unless, a different rate is stipulated.
 Compound interest is valid only upon written agreement to the effect, unless it
be the interest charged upon judicial demand.
 MAY INTEREST ON PENALTIES BE VALIDLY IMPOSED? (Tan vs. CA GR
116285) The compounding of the penalty or compensatory interest is
sanctioned by and allowed pursuant to the following:
o That there is express stipulation in the promissory note permitting the
compounding of interest; and
o As expressly provided under Article 2212.
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.
 Where unstipulated interest (it is, therefore, not due) is paid by mistake, the
debtor may recover, as this would be a case of solutio indebiti or undue
payment. (Art. 2154)
 Where the unstipulated interest is paid voluntarily because the debtor feels
morally obliged to do so, there can be no recovery as in the case of natural
obligations. (Art. 1425)
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.
 CB Circular 416, fixing the rate of interest at 12% p.a., deals with: (a) loans; (b)
forbearance of any money, goods or credit; and (c) judgments
DEPOSIT
DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS
Art. 1962. A deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and of returning
the same. If the safekeeping of the thing delivered is not the principal purpose
of the contract, there is no deposit but some other contract.
 Characteristics of the Contract of Deposit:
a. REAL contract – perfected by delivery.
b. Principal PURPOSE – is the safekeeping of the thing delivered.
c. The depositary CANNOT USE the thing deposited, except;
 With the express permission of the depositor; or
 When the preservation of the thing deposited requires its use.
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 d. Only MOVABLE things can be the object of a deposit. (except in ii. on the occasion of calamity;
JUDICIAL deposit) iii. made by travelers in hotels or inns; or
e. It is a GRATUITOUS contract, except when there is an agreement to iv. made by travellers with common carrier.
the contrary or unless the depositary is engaged in the business of
storing goods.  Distinctions:
f. The contract is either UNILATERAL or BILATERAL, according to JUDICIAL EXTRAJUDICIAL
whether it is gratuitous or compensated (onerous) ORIGIN The will of the court The will of the parties
STATUS No contract There is a contract
 Deposit is distinguished from Sale/Barter with respect to the following: (a) PURPOSE To guarantee the right of Custody and safekeeping
ownership of the object of the contract is not transferred in the former, while in the plaintiff in case of a of the thing for the benefit
the latter, ownership is transferred upon delivery; (b) the former is a real favorable judgment of the depositor
contract, while the latter is consensual; (c) the first is generally gratuitous, the CAUSE Onerous Gratuitous, as a rule
latter is always onerous. SUBJECT Either movable or Always movable property
MATTER immovable property, but
 Deposit is distinguished from Commodatum: (a) the first may be gratuitous and generally, immovable
the principal purpose is safekeeping; while (b) the latter is essentially and IN WHOSE In behalf of the winner In behalf of the depositor
always gratuitous and the principal purpose is the use of the thing. BEHALF IT IS
HELD
 Deposit is also distinguished from Agency: (a) the purpose of the latter is the
representation by the agent of the principal’s affairs; (b) the custody of the
things is principal and essential reason for the former, while it is merely Art. 1965. (GENERAL RULE) A deposit is a gratuitous contract, [except] (1) when there
incidental to the latter; and (c) agency is generally onerous or for compensation. is an agreement to the contrary, or unless (2) the depositary is engaged in the
 NOTE: the account remaining in the possession of an agent at the business of storing goods.
principal’s disposal acquires at once the character of a deposit which  When the thing delivered can be used by the depositary and he is obliged to pay
the former must return or restore to the latter at any time it is interest for said use, it follows that the contract is a loan or mutuum, for it is the
demanded. (U.S. v. Igpuara, Ibid) depositary who pays interest or remuneration. (Aquino v. Deala, 63 Phil 582)
 A partial deposit of an advance payment in sales is not a deposit contemplated Art. 1966. Only movable things may be the object of a deposit. (GENERAL RULE)
in Art. 1962. It is really an advance payment, and ownership is transferred to the  REASON: the object of a deposit is for safekeeping, for without such
seller once given (Cruz v. Aud-Gen, May 30, 1959) safekeeping it may be lost or it may disappear or be stolen. This will not happen
in real property.
Art. 1963. An agreement to constitute a deposit is binding, but the deposit itself is not  JUDICIAL DEPOSIT, however, may cover movable as well as immovable
perfected until the delivery of the thing. property its purpose being to protect the things of parties to a suit. (Art. 2005)
 A deposit is a real contract and is, therefore, perfected only upon the delivery of
the object of the contract, BUT a contract of future deposit is consensual, hence, Art. 1967. An extrajudicial deposit is either voluntary or necessary.
binding upon mere consent.
VOLUNTARY DEPOSIT
Art. 1964. A deposit may be constituted judicially or extrajudicially.
 Kinds of Deposit: Art. 1968. A voluntary deposit is that wherein the delivery is made by the will of the
 JUDICIAL – or sequestration – when an attachment or seizure of property in depositor (definition). A deposit may also be made by two or more persons
litigation is ordered. each of whom believes himself entitled to the thing deposited with a third
 EXTRAJUDICIAL – may be: person, who shall deliver it in a proper case to the one to whom it belongs.
a. VOLUNTARY – made by the will of the depositor.  There is a complete freedom of action.
b. NECESSARY:
 Generally, the depositor must be the owner of the thing deposited. But it may
i. made in compliance with a legal obligation;
belong to a person other than the depositor (i.e. carrier, commission agent,
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 lessee, etc.) considering that the contract of deposit does not transfer
ownership.
 Further, Art. 1984(1) provides, “depositary cannot demand that the depositor
prove his ownership over the thing deposited”.
 INTERPLEADER – the nature of action to compel the depositors to settle their
conflicting claims among themselves, such as, when two or more persons each
claiming to be entitled to a thing may deposit the same with a third person who
assumes the obligation to deliver to the one to whom it belongs (Sec. 1, Rule
63, RRC)
Art. 1969. A contract of deposit may be entered into orally or in writing. (Forms)
 Above article follows the general rule: contracts shall be obligatory in whatever
form they may have been entered into provided all essential requisites for their
validity are present (Art. 1356).
 Thus, except for the delivery of the thing, there are no other formalities required
for its existence (Art. 1963).
Art. 1970. If a person having capacity to contract accepts a deposit made by one who
is incapacitated, the former shall be subject to all the obligations of a
depositary, and may be compelled to return the thing by 1the guardian, or
2
administrator, of the person who made the deposit, or by 3the latter himself if
he should acquire capacity. (Rule when depositor is incapacitated and depositary
is capacitated)
 The contract entered into under above article is VOIDABLE.
 The depositary is subject to all his obligations under the contract. “Persons who
are capable cannot allege the incapacity of those with whom they contracted”
(Art. 1379, NCC)
Art. 1971. If the deposit has been made by a capacitated person with another who is
not, the (1) depositor shall only have an action to recover the thing deposited
while it is still in the possession of the depositary, or (2) to compel the latter
to pay him the amount by which he may have enriched or benefited himself
with the thing or its price (subject to the right of any third person who acquired the
thing in good faith). However, (3) if a third person who acquired the thing acted
in bad faith, the depositor may bring an action against him for its recovery.
(Rule when depositary is incapacitated and depositor is capacitated)
 The contract entered into under above article is VOIDABLE.
 The insane depositary, because of insanity, does not incur the obligations of a
depositary
OBLIGATIONS OF THE DEPOSITARY
Art. 1972. The depositary is obliged (Principal obligation) to 1keep the thing safely and
to 2return it, when required, to the depositor, or to his heirs and successors,
or to the person who may have been designated in the contract. His
responsibility, with regard to the safekeeping and the loss of the thing, shall
be governed by the provisions of [Title I of this Book] – refers to
“obligations&contracts”.
 Duty of Safekeeping:
a) If the contract dos not state the diligence which is to be observed in the
performance, that of a good father of a family shall be required. [see Art.
1175(2)]
b) The depositary is responsible if the loss occurs through his fault (Art.
1172) but as a rule, not if the loss is through fortuitous event (Art. 1174).
Thus, in case of non-fault on the part of the depositary, the deposit-
owner bears the loss because of the maxim “res perit domino”.
If the deposit is gratuitous, this fact shall be taken into account in determining
the degree of care that the depositary must observe.
 Even if gratuitous, care must still be exercised but more care is required if the
deposit is for a compensation.
 The thing bailed must be returned to the depositor upon demand, even though a
specified term or time for such return may have been stipulated.
Art. 1973. (Exception) Unless there is a stipulation to the contrary, (General Rule) the
depositary cannot deposit the thing with a third person. 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. (Rule on deposit by the
depositary of the thing deposited to him, with a third person)
 When is the depositary liable for loss?
a) If he transfers the deposit with a third person without authority although
there is no negligence on his part and the third person;
b) If he deposited the thing with a person who is MANIFESTLY careless or
unfit; and
c) He is always responsible for the negligence of his employees,
regardless of the manifest carelessness and unfitness of the latter.
 The depositor is not liable or responsible in case the thing is lost without the
negligence of the third person with whom he was allowed to deposit the thing, if
such third person is not “manifestly careless or unfit”
Art. 1974. 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. However, before the
depositary may make such change, he shall notify the depositor thereof and
wait for his decision, unless delay would cause danger.
 REASON: in accordance with the rule that generally, the depositary must take
care of the thing with the diligence of a good father of a family.
Art. 1975. The depositary holding certificates, bonds, securities or instruments which
earn interest shall be bound to 1collect the latter when it becomes due, and to
7
 2take such steps as may be necessary in order that the securities may
preserve their value and the rights corresponding to them according to law.
 The depositary is obliged to collect, when due, not only the interest but also the
capital itself and to return whatever may have been received or collected, to the
depositor.
The above provision shall not apply to contracts for the rent of safety deposit
boxes.
 REASON: since the renter of the box is supposed to have control over the box
and the contents thereof, the real owner of said box does not have the duty
imposed in the first paragraph. This is really a lease of a thing (the box) and not
a contract of deposit.
Art. 1976. (Exception) Unless there is a stipulation to the contrary, (General Rule) 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. (Co-ownership over commingled articles)
 REASON: as soon as the goods are intermingled, each person’s portion loses
its identity and can no longer be distinguished or separated from the common
mass.
Art. 1977. The (general rule) [depositary cannot make use of the thing deposited]
without the (1) express permission of the depositor. (relate to Art. 1978[1])
Otherwise, he shall be liable for damages.
However, when (2) the preservation of the thing deposited requires its use, it
must be used but only for that purpose.
 This provision provides the two exceptions to the general rule that depositary
cannot use the thing deposited.
 The unauthorized use by the depositary would make him liable for damages.
 But, the depositary may make use of the thing deposited even without the
express permission of the depositor where such use is necessary for its
preservation but in such case the use is limited for that purpose only.
Art. 1978. When the depositary has permission to use the thing deposited, the
contract loses the concept of a deposit and becomes a loan or commodatum,
except where safekeeping is still the principal purpose of the contract.
 Rule of thumb: PRINCIPAL PURPOSE
 Effect if permission to use is given: (unless if the principal purpose is still
safekeeping)
 If the thing deposited is non-consumable, the contract becomes a
commodatum.
 If it is money or other non-consumable, the permission to use will result
in its consumption and therefore, the contract becomes a mutuum.
 IRREGULAR DEPOSIT – is concerned in consumable things, which are given
by weight, number or measure and is demandable at the will of the depositor for
whose benefit the deposit has been constituted. The depositary is authorized to
use the thing but safekeeping is still the principal purpose.
 A deposit of money is really a loan where (a) money is deposited with a person
and the latter is authorized to use and dispose of the same; and (b) there’s
evidence of interest offered as compensation for the use of money deposited.
 The right to demand the return of the thing deposited does not prescribe
because the possession of the depositary is not adverse to that of the depositor
for the former cannot claim that there was transfer of ownership.
The permission shall not be presumed, and its existence must be proved.
 Presumption is present when the use is needed for the preservation of the thing.
 The burden of proving is on the depositary.
Art. 1979. The depositary is liable for the loss of the thing (even if) through a
fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission; 

(3) If he delays its return; (if thing is unreturned after demand)
(4) If he allows others to use it, even though he himself may have been
authorized to use the same.
 Exceptions to the general rule that depositary is not liable for loss due to
fortuitous events.
Art. 1980. Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan.
 Deposits of money in banks whether fixed, savings or current are really loans to
a bank because the bank can use the same for its ordinary transactions and for
the banking business in which it is engaged (Tian Tiong Tok v. American
Apothecaries, 65 Phil 417). While the bank has obligation to return the amount
deposited it has, however, no obligation to return or deliver the same money
that was deposited.
 BANK DEPOSITS:
a) A bank can compensate a debtor’s debt with a debtor’s deposit because
insofar as the deposit is concerned, the relationship between them is
that of debtor and creditor, nor depositary and depositor. (Gullas v. PNB
62 Phil 619) while in a true deposit, compensation is not allowed;
b) A depositor is disputably presumed to be the owner of the funds
standing in his name in a bank deposit. (Fulton Iron Works v. Chinabank
55 Phil 208);
c) If a depositor incurs an overdraft, the same cannot be charged against
an account placed under his name that has a notation that it is held in
trust for another. (Fulton Iron Works v. Chinabank 55 Phil 208);
d) If a trustee of some funds in a bank withdraws them and
misappropriates the same, the bank cannot be liable if it acted in good
faith. (7 C.J. 644);
8
 e) Current and savings deposits are loans to a bank because it can use
the same.
Art. 1981. When the thing deposited is delivered closed and sealed, the depositary
must return it in the same condition, and he 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.
As regards the value of the thing deposited, the statement of the depositor
shall be accepted, when the forcible opening is imputable to the depositary,
should there be no proof to the contrary. However, the courts may pass upon
the credibility of the depositor with respect to the value claimed by him.
When the seal or lock is broken, with or without the depositary's fault, he shall
keep the secret of the deposit.
Art. 1982. When it becomes necessary to open a locked box or receptacle, the
[depositary is presumed authorized to do so], (1) if the key has been delivered
to him; or (2) when the instructions of the depositor as regards the deposit
cannot be executed without opening the box or receptacle.
 Obligations of depositary where the thing deposited was delivered closed and
sealed:
a) Return the thing deposited in the same condition;
b) Pay for damages should the seal or lock be broken through his fault,
which is presumed unless proved otherwise;
c) Keep the secret of the deposit when the seal or lock is broken with or
without his fault.
 REASON: without the rule, irresponsible depositaries may violate their trusts.
 When is the depositary justified to open?
a) When there is necessity; and
b) When there is presumed authority.
Art. 1983. The thing deposited shall be returned with all its products, accessories and
accessions.
Should the deposit consist of money, the provisions relative to agents in
article 1896 shall be applied to the depositary.
 Reason: the depositor is the owner or at least represents the owner of the thing
deposited. Thus, the depositary is bound to return not only the thing itself but
also all its products, accessories and accessions, which are a consequence of
ownership.
 Article 1896 provides, “The agent owes 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 agency”.
Art. 1984. The depositary cannot demand that the depositor prove his ownership of
the thing deposited.
Nevertheless, 1should he discover that the thing has been stolen and who its
true owner is, he must advise the latter of the deposit. (thus, if the thing was lost
by causes other than being stolen from the true owner, this rule does not apply)
If the owner, in spite of such information, does not claim it within the period of
one month, the depositary shall be relieved of all responsibility by returning
the thing deposited to the depositor.
2
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.
 To constitute a deposit, it is not essential that the depositor be the owner of the
thing deposited.
 Furthermore, to require proof of ownership may open the door to fraud and bad
faith for the depositary, on the pretense of requiring proof of ownership, may be
able to retain the thing.
Art. 1985. When there are two or more depositors, if they are not solidary, and the
thing admits of division, each one cannot demand more than his share.
When there is solidarity or the thing does not admit of division, the provisions
of Articles 1212 and 1214 shall govern. However, if there is a stipulation that
the thing should be returned to one of the depositors, the depositary shall
return it only to the person designated.
 Rule when there are two or more depositors:
a) If the thing deposited is DIVISIBLE and the rights of the depositors over
the thing are not solidary, each one can demand only his proportionate
share.
b) If the obligation to return the thing is solidary or if the thing is not
divisible, each of the solidary depositors may do whatever may be
useful to the others but not prejudicial (Art. 1212) and the depositary
may return the thing to any one of the solidary depositors unless a
demand, judicial or extra-judicial, for its return has been made by one of
them in which case delivery should be made to him. (Art. 1214)
c) If the return to one of the depositors is stipulated, the depositary is
bound to return it only to the person designated although he has not
made any demand for its return.
Art. 1986. If the depositor should lose his capacity to contract after having made the
deposit, the thing cannot be returned except to the persons who may have the
administration of his property and rights. (Rule if depositor becomes insane)
 Persons to whom return must be made:
a) The depositary is obliged to return the thing deposited when required, to
the depositor, to his heirs and successors, or to the person who may
have been designated in the contract. (Art. 1972)
b) If depositor is incapacitated at the time of making the deposit, the
property must be returned to his guardian or administrator or the person
9
 who made the deposit or to the depositor himself should he acquire
capacity. (Art. 1970)
c) Even if the depositor had capacity at the time of making the deposit but
he subsequently loses his capacity during the deposit, the thing must be
returned to his legal representative. (Art. 1986)
 If the depositary returns the thing deposited to an insane depositor, the former is
discharged from his obligation only (a) if the insane depositor has kept the thing
delivered or (b) insofar as delivery has been beneficial to such insane depositor.
(Art. 1241, NCC)
 PLACE OF RETURN OF THING DEPOSITED
Art. 1987. If at the time the deposit was made (1) 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.
(2) If no place has been designated for the return, it shall be made where the
thing deposited may be, even if it should not be the same place where the
deposit was made, provided that there was no malice on the part of the
depositary.
Art. 1988. (General Rule) The thing deposited must be [returned to the depositor upon
demand], even though a specified period or time for such return may have
been fixed.
 REASON: the term is for the sole benefit of the depositor. However, if the
deposit is for compensation, where the term is for the benefit of both, the
depositor should pay the depositary the corresponding indemnity.
(Exceptions) This (1) provision shall not apply when the thing is judicially
attached while in the depositary’s possession (property is subject to judicial
orders or attachment), or (2) should he have been notified of the opposition of a
third person to the return or the removal of the thing deposited (the oppositor
may claim to be the owner). In these cases, the depositary must immediately
inform the depositor of the attachment or opposition.
 Should the depositary return the thing despite the attachment or the opposition,
he should respond for damages. He should therefore not return in the above two
cases.
Art. 1989. Unless the deposit is for a valuable consideration, the depositary who may
have justifiable reasons for not keeping the thing deposited may, even before
the time designated, return it to the depositor; and if the latter should refuse
to receive it, the depositary may secure its consignation from the court.
 Right of the depositary to return the thing deposited:
 In case the deposit is gratuitous and justifiable reasons exist for its
return – the depositary may return notwithstanding that a period has
been fixed for the deposit.
 In case the deposit is for a valuable consideration – the depositary has
no right to return the thing deposited before the expiration of the term
even if he is inconvenienced in the process, unless he should return a
proportional reduction in the compensation made.
 Consignation – is the act of depositing things due at the disposal of judicial
authority.
Art. 1990. If the depositary by force majeure or government order loses the thing and
receives money or another thing in its place, he shall deliver the sum or other
thing to the depositor.
 General Rule: the depositary has the obligation to return the thing deposited.
 Exception: he is not liable for loss of the thing by force majeure or government
order.
 He is obliged to deliver anything he has received in its place, otherwise, he
would enrich himself at the expense of the depositor.
Art. 1991. The [depositor's] heir who in good faith may have sold the thing which he
did not know was deposited, shall only be bound to return the price he may
have received or to assign his right of action against the buyer in case the
price has not been paid him.
 “depositor’s” should be read as “depositary’s”.
 The above article envisions a situation where the depositary dies and the object
of deposit is left with his heir who sells it.
 If both the seller and the third-party buyer are in bad faith, the property sold may
be recovered.
 If in bad faith, the sale or appropriation of a thing deposited constitutes estafa
(Art. 315[b], RPC)
OBLIGATIONS OF THE DEPOSITOR
Art. 1992. 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. (only necessary expenses)
 Generally, if the deposit is for a valuable consideration (onerous), the expenses
of preservation are borne by the depositary because they are deemed included
in the compensation. An exception is when there is a stipulation to the contrary.
Art. 1993. (General Rule) The depositor shall reimburse the depositary for any loss
arising from the character of the thing deposited, (exceptions) (1) unless 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 (2) unless he
notified the depositary of the same, or (3) the latter was aware of it (even)
without advice from the depositor.
Art. 1994. The depositary may retain the thing in pledge until the full payment of what
may be due him by reason of the deposit. (depositary’s right of retention)
 This is an example of pledge created by operation of law.
10
  The thing retained serves as security for the payment of what was due to the
depositary by reason of the deposit.
Art. 1995. A deposit is extinguished: (really means that the depositary need not be a
depositary any longer, subject to the obligations as such)
(1) Upon the loss or destruction of the thing deposited; (no more object)
(2) In case of a gratuitous deposit, upon the death of either the depositor or
the depositary. (but the thing deposited must still be returned)
 Gratuitous deposits are personal in nature.
 Suppose the deposit is for compensation, the death of either does not
extinguish the deposit, unless it is terminated by the respective heirs. The rights
and obligations arising therefrom are transmissible to the respective heirs
 The cases in Art.1995 are not exclusive. Other grounds for the extinguishment
of a deposit include – the expiration of the term, demand at will of the depositor
in case of gratuitous deposit subject to certain exceptions (see. Art. 1988),
termination of the purpose of the fulfillment of the resolutory condition, or mutual
withdrawal from the contract.
NECESSARY DEPOSIT
Art. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
 Examples:
 Cash deposits to be made by certain officers or officials.
 Deposits to be made by those who desire to use firearms.
(2) When it takes place on the occasion of any calamity, such as fire, storm,
flood, pillage, shipwreck, or other similar events. (the possession of
movable passes from one person to another)
(3) those made by travellers in hotels or inns (Art. 1998 to 2004)
(4) those made by passengers with common carriers (Art. 1754:..baggage in the
personal custody… the rules concerning responsibility of hotel-keepers shall be
applicable)
Art. 1997. The deposit referred to in No. 1 of the preceding article shall be governed
by the provisions of the law establishing it, and in case of its deficiency, by
the rules on voluntary deposit.
The deposit mentioned in No. 2 of the preceding article shall be regulated by
the provisions concerning voluntary deposit and by Article 2168.
 Article 2168: “when during a fire, flood, storm, or other calamity, property is
saved from destruction by another person without the knowledge of the owner,
the latter is bound to pay the former just compensation”. (quasi-contract)
Art. 1998. The deposit of effects made by the travellers in hotels or inns shall also be
regarded as necessary. The keepers of hotels or inns shall be responsible for
them as depositaries, provided that notice was given to them, or to their
employees, of the effects brought by the guests and that, on the part of the
latter, they take the precautions which said hotel-keepers or their substitutes
advised relative to the care and vigilance of their effects.
 Innkeeper is the keeper of an inn for the lodging of travellers and passengers for
a reasonable compensation.
 Traveller refers to transient and was certainly not meant to include ordinary or
regular boarders in any apartment, house, inn, or hotel.
 Effects mean all kinds of personal property, like jewelry, fountain pens, cash,
etc.
 The following elements must concur, before keepers may be held responsible
for the effects of their guests:
a) They have been previously informed about the effects brought by the
guests, and
b) That the guest has taken the precautions prescribed regarding their
safekeeping.
 Reason for the liability:
 It is a good policy to encourage travel;
 Travellers and strangers must of necessity trust in the honesty and
vigilance of the innkeeper and those in his employ;
 The opportunity and temptation to connive with evil-disposed persons
and to afford facilities in stealing the goods of those in his house;
 The innkeeper is as a rule better able to protect himself against loss
than the guest who is practically helpless to enforce his rights.
 Liability begins as soon as there is an evident intention on the part of the
travellers to avail himself of the accomodations of the hotel or inn.
Art. 1999. The hotel-keeper is liable for the vehicles, animals and articles which have
been introduced or placed in the annexes of the hotel. (e.g. of annexes, such as
garage)
Art. 2000. The responsibility referred to in the two preceding articles shall include the
loss of, or injury to the personal property of the guests caused by the
servants or employees of the keepers of hotels or inns as well as strangers;
but not that which may proceed from any force majeure. The fact that
travellers are constrained to rely on the vigilance of the keeper of the hotels or
inns shall be considered in determining the degree of care required of him.
 Rules for liability:
a) The master is responsible for the acts of servants or employees of the
hotel provided of course that notice has been given and the proper
precautions taken.
b) The master is also liable for the acts of strangers, like malicious
mischief or theft.
c) However, the master is exempted in the following cases:
 If there has, for example, been robbery by force or intimidation
of persons, or
11
  A fortuitous event, like flood.
 Loss is due to the acts of the guest, his family, servants, or
visitors. (Art. 2002)
 Loss arises from the character of the things brought into the
hotel. (Art. 2002)
Art. 2001. The act of a thief or robber, who has entered the hotel is not deemed force
majeure, unless it is done with the use of arms or through an irresistible force.
 REASON: the innkeeper is bound to keep his house safe from the intrusion of
thieves, day and night, and if they are allowed to gain access to the house, and
specially without the use of such force as will show its marks upon the house, it
is fairly presumable that the innkeeper is at fault.
Art. 2002. The hotel-keeper is not liable for compensation 1if the loss is due to the
acts of the guest, his family, servants or visitors (may include acts which
resulted from either a voluntary malicious act or simply of negligence), or 2if the
loss arises from the character of the things brought into the hotel.
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. (such stipulation is contrary to law, morals and public policy)
Art. 2004. The hotel-keeper has a right to retain the things brought into the hotel by
the guest, as a security for credits on account of lodging, and supplies
usually furnished to hotel guests. (hotel-keepers right of retention, in the nature
of pledge)
 REASON: to compensate the innkeeper for the extraordinary liabilities imposed
upon him by the law.
SEQUESTRATION OR JUDICIAL DEPOSIT
Art. 2005. A judicial deposit or sequestration takes place when an attachment or
seizure of property in litigation is ordered.
 The deposit is judicial because it is auxiliary to a case pending in court.
 PURPOSE: to maintain the status quo during the pendency of the litigation or to
insure the right of the parties in case of favorable judgment.
 Garnishment – of property to satisfy a writ of execution, “operates as an
attachment and fastens upon the property a lien which the property is brought
under the jurisdiction of the court issuing the writ. The property is brought into
the custodia legis, under the court when it has been seized by an officer either
under a writ of attachment on mesne process or under a writ of execution. A
court which has control of such property, exercises exclusive jurisdiction over
the same.
Art. 2006. Movable as well as immovable property may be the object of sequestration.
Art. 2007. (General Rule) 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, (exception) unless the court so orders.
 The depositary of sequestrated property is the person appointed by the court.
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.
Art. 2009. As to matters not provided for in this Code, judicial sequestration shall be
governed by the Rules of Court. (Suppletory)
GUARANTY
 Guaranty may be (a) PERSONAL or (b) REAL.
 Personal guaranty may be in the form of:
a. GUARANTY – properly so-called or guaranty in the strict sense.
b. SURETYSHIP – one where the surety binds himself solidarily, not
subsidiarily, with the principal debtor.
 Real guaranty pertains to property:
a. Real property – guaranty may be in the form (a) a real mortgage or (b)
antichresis.
b. Personal Property – guaranty may be in the form of (a) pledge or (c) chattel
mortgage.
NATURE AND EXTENT OF GUARANTY
Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do
so. (defines a contract of guaranty)
 The contract between the debtor and the guarantor is a contract of indemnity.
 Characteristics:
a. It is a contract between the guarantor and the creditor (parties);
 A guarantor cannot be held criminally liable (only civilly), when the
principal debtor is convicted for estafa. (Vizconde v. IAC, GR 74231)
 A guarantor is distinct from the debtor in that while the former is
subsidiarily liable, the latter is principally liable.
b. There must be a meeting of the minds between the parties;
c. It is consensual, nominate, accessory, unilateral – only the guarantor is
obligated to the creditor and not vice versa.
d. It is governed by the Statute of Frauds, hence an oral promise of guaranty is
not enforceable.
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  Art. 1403 (2.b): “A special promise to answer for the debt, default, or
miscarriage of another.”
If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book (Solidary obligations) shall be
observed. In such case the contract is called a suretyship.
 Distinctions:
GUARANTOR SURETY
Subsidiary liability Principal liability
Pays if debtor cannot Pays if debtor does not
Insurer of the debtor’s solvency Insurer of the debt
 A surety is almost the same as a solidary debtor, except that the latter is himself
a principal debtor.
 The relationship between an “accommodation party” and an “accommodated
party” is one of principal and surety – the former being the surety.
Art. 2048. (General Rule) A guaranty is gratuitous, (Exception) unless there is a
stipulation to the contrary.
Art. 2049. A married woman may guarantee an obligation without the husband's
consent (only corresponds with her paraphernal property), but shall not thereby
bind the conjugal partnership, except in cases provided by law.
Art. 2050. If a guaranty is entered into (a) without the knowledge or consent, or (b)
against the will of the principal debtor, the provisions of Articles 1236 and
1237 shall apply.
 Art. 1236: “The creditor is not bound to accept payment or performance by a
third person who has no interest in the fulfillment of the obligation, unless there
is a stipulation to the contrary.
Whoever pays for another may demand from the debtor, what he has
paid, except that if he paid without the knowledge or against the will of the
debtor, he can recover only in so far as the payment has been beneficial to the
debtor.”
 Art. 1237: “Whoever pays on behalf of the debtor without the knowledge or
against the will of the latter, cannot compel the creditor to subrogate him in his
rights, such as those arising from a mortgage, guaranty, or penalty.”
 A guarantor can recover from the debtor what the former had to pay the creditor,
even if the guaranty was without the debtor’s consent or against his will, but the
recovery will only be to the extent that the debtor had been benefited. (De
Guzman v. Santos, 68 Phil 371)
Art. 2051. A guaranty may be (a) conventional (by agreement), (b) legal (required by law)
or (c) judicial (required by the court as when an attachment is to be lifted), (d)
gratuitous, or (e) by onerous title.
It may also be constituted, not only in favor of the principal debtor, but also in
favor of the other guarantor (sub-guaranty), with the latter's consent, or without
his knowledge, or even over his objection.
Art. 2052. A guaranty cannot exist without a valid obligation (being merely an accessory
contract).
Nevertheless, a guaranty may be constituted to guarantee the performance of
a voidable or an unenforceable contract. It may also guarantee a natural
obligation.
 VOIDABLE (valid and enforceable until annulled)
o Those where one of the contracting parties is incapable of giving
consent;
o Those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.
 UNENFORCEABLE (valid but unenforceable unless ratified)
o Those executed by one in the name of another without any
authority or in excess of such authority;
o Those that do not comply with the Statute of Frauds;
o Those were both parties are incapable of giving consent.
 NATURAL OBLIGATIONS – those based on equity and natural law, which
are not enforceable by means of a court action but which, after voluntary
fulfillment by the obligee of what has been delivered or rendered by reason
thereof.
Art. 2053. A guaranty may also be given as security for future debts, the amount of
which is not yet known; there can be no claim against the guarantor until the
debt is liquidated. A conditional obligation may also be secured.
 Example: a bond posted to secure additional credit that the principal debtor had
applied for is not void just because the said bond was signed and filed before
the additional credit was extended by the creditor. (Naric v. Fodas, L-11517)
 Liquidated debt – when it is for the price fixed in a contract for the delivery of
future goods and the seller is now ready to deliver said goods within the period
stipulated.
Art. 2054. A guarantor may bind himself for less, but not for more than the principal
debtor, both as regards the amount and the onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be reduced to
the limits of that of the debtor.
 When the liability of the surety is limited to a lesser amount than that due from
the principal debtor, any such payment as the latter may have on account of
such obligation, must be applied first to the unsecured portion of the debt, for,
as regards the principal debtor, the obligation is more onerous as to the amount
secured – applying the rule of on application of payments. (HSBC v. Aldanese,
48 Phil 990)
13
  When a person has two debts, one as a sole debtor,a nd another as
solidary co-debtor, his more onerous obligation to which first payment is
to be applied, is the debt as sole debtor.
 If the indebtedness is increased without the guarantor’s consent, he is
completely released from the obligation as guarantor or surety. (Nat. Bank v.
Veraguth, 50 Phil 253)
 If a guarantor upon demand fails to pay, he can be held liable for interest. The
increased liability is not because of the contract but because of the default and
necessity of judicial collection – thus, the interest runs from the time the
complaint is filed, not from the time the debt becomes due and demandable.
(Tagana v. Aldanese, 43 Phil 582)
 In case of a violation of a condition, upon which a surety bond has a penalty
clause, said penalty may be demanded in the proper case.
Art. 2055. A guaranty is not presumed; it must be express (and in writing) and cannot
extend to more than what is stipulated therein.
If it be simple (no period specified) or indefinite (no amount fixed), it shall
compromise not only the principal obligation, but also all its accessories,
including the judicial costs, provided with respect to the latter, (provided) that
the guarantor shall only be liable for those costs incurred after he has been
judicially required to pay.
 A guaranty is strictly construed against the creditor and in favor of the guarantor
or surety. The creditor must resort to several steps before guarantor may be
held liable.
 The contract of guaranty must be in writing to be enforceable, unless waived by
the guarantor, because it is “a special promise to answer for the debt, default, or
miscarriage of another”, as required by the Statute of Frauds [Art. 1403 (2b)].
Art. 2056. (Qualifications of a Guarantor, which must be present at the time of perfection of
the contract) One who is obliged to furnish a guarantor shall present (a) a
person who possesses integrity, (b) capacity to bind himself, and (c) sufficient
property to answer for the obligation which he guarantees. The guarantor
shall be subject to the jurisdiction of the court of the place where this
obligation is to be complied with (place of performance).
Art. 2057. If the guarantor should be convicted in first instance of a crime involving
dishonesty or should become insolvent, (general rule) the creditor may
demand another (substitute) who has all the qualifications required in the
preceding article. The case is excepted (exception) where the creditor has
required and stipulated that a specified person should be the guarantor.
 Thus, subsequent loss of integrity or insolvency generally does not end the
guaranty, as creditor is given the right to demand substitution of guarantor.
 The contract of guaranty is not purely personal because all the creditor is
interested in is the recovery of money, regardless of its giver – if the guarantor
dies; his heirs are still liable to the extent of the value of inheritance.
EFFECTS OF GUARANTY
SECTION 1: Effects of Guaranty Between the Guarantor and the Creditor
In general, the effects between the guarantor and the creditor are the following:
1. The guarantor is entitled to the benefit of exhaustion of the debtor’s properties
except in cases mentioned under Art. 2059, and provided that the guarantor follows
Art. 2060.
2. A compromise between the creditor and the principal debtor benefits but does not
prejudice the guarantor. (Art. 2063)
3. If there should be several guarantors, they are in general entitled to the benefit of
division- pro rata liability. (Art. 2065)
Art. 2058. The guarantor cannot be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has resorted to all the legal
remedies against the debtor.
 Generally, a guarantor has the right to demand exhaustion of the debtor’s
assets, provided:
a. He sets it up as a defense before judgment is rendered against himself
(guarantor) (Saavedra v. Price, 68 Phil 699);
b. He has not pledged or mortgaged his own property to the creditor for the
satisfaction of the principal for clearly, a mortgagor is not entitled to the
benefit of exhaustion. (Southern Motors, Inc. v. Barbosa, 99 Phil 263);
c. He does not fall in the cases enumerated in Art. 2059 (Jaucian v. Querol, 38
Phil 707);
d. He complies with Art. 2060 (Garcia v. Lianco, C.A., 50 O.G. 1145).
 EXCUSSION – means the right of the guarantor to have all the properties of the
debtor and all legal remedies against him first exhausted before he can be
compelled to pay the creditor.
 A mortgagor, however, is not entitled to the benefit of excussion of the property
of the principal debtor (Saavedra v. Price) – as he is bound by a different
contract, that is, a contract of mortgage.
 To hold the guarantor liable, the CREDITOR must do the following:
a. Exhaust all the property of the debtor (Art. 2058) unless the guarantor is
not entitled to such benefit under Art. 2059;
b. Resort to all the legal remedies against the debtor – including suit
against the debtor;
c. Prove that the debtor is still unable to pay;
d. Notify the guarantor of the debtor’s liability to pay, otherwise if the
guarantor is prejudiced by lack of notice, he cannot be made to pay,
unless of course there is a waiver on the part of the guarantor.
14
Art. 2059. The excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor (surety);
(3) In case of insolvency of the debtor;
(4) When he (debtor) has absconded, or cannot be sued within the Philippines
unless he has left a manager or representative;
(5) If it may be presumed that an execution on the property of the principal
debtor would not result in the satisfaction of the obligation.
 Additional instances:
(6) If the guaranty is in a judicial bond (Art. 2084);
(7) If Art. 2060 is not complied with;
(8) If the principal debt is a natural, voidable, or unenforceable obligation (Art. 2062)
– where there can still be a guaranty but generally the principal debtor would not be
liable.
Art. 2060. In order that the guarantor may make use of the benefit of excussion
(requisites), (a) he must set it up against the creditor upon the latter's demand
for payment from him, and (b) point out to the creditor available (not things in
litigation or encumbered ones) property of the debtor within Philippine territory,
sufficient to cover the amount of the debt.
 The demand by the creditor can be made only after a judgment has been
rendered against the principal debtor. Just because the guarantor was sued at
the same time as the debtor this does not mean that the creditor has already
made the demand on the guarantor. (Vda. De Syquia v. Jacinto, 60 Phil 861)
Art. 2061. The guarantor having fulfilled all the conditions required in the preceding
article, the creditor who is negligent in exhausting the property pointed out
shall suffer the loss, to the extent of said property, for the insolvency of the
debtor resulting from such negligence.
Art. 2062. In every action by the creditor, which must be against the principal debtor
alone, except in the cases mentioned in Article 2059, the former (creditor) shall
ask the court to notify the guarantor of the action. The guarantor may appear
so that he may, if he so desire, (reason for notifying guarantor) set up such
defenses as are granted him by law. The benefit of excussion mentioned in
Article 2058 shall always be unimpaired, even if judgment should be rendered
against the principal debtor and the guarantor in case of appearance by the
latter.
 The creditor must generally sue ONLY the principal debtor (except when the
guarantor is not entitled to the benefit of excussion).
 No writ of execution could be issued against the guarantor’s properties, unless
the principal debtor was really unable to pay.
 The notification of the action to the guarantor is OBLIGATORY.
Art. 2063. A compromise between the creditor and the principal debtor benefits the
guarantor but does not prejudice him. That which is entered into between the
guarantor and the creditor benefits but does not prejudice the principal
debtor.
 Thus, a compromise entered into by either the guarantor or the principal debtor
shall benefit but not prejudice the other.
Art. 2064. The guarantor of a guarantor (sub-guarantor) shall enjoy the benefit of
excussion, both with respect to the guarantor and to the principal debtor.
Art. 2065. Should there be several guarantors (co-guarantors) of only one debtor and
for the same debt, the obligation to answer for the same is divided among all
(joint). The creditor cannot claim from the guarantors except the shares which
they are respectively bound to pay, unless solidarity has been expressly
stipulated.
The benefit of division against the co-guarantors ceases in the same cases
and for the same reasons as the benefit of excussion against the principal
debtor.
 The guaranty of several persons is presumed joint and solidarity must be
expressly stipulated.
 Article is applicable only when there has been no payment yet, in contrast to
article Art. 2073.
SECTION 2: Effects of Guaranty Between the Debtor and the Guarantor
Art. 2066. The guarantor who pays for a debtor must be indemnified by the latter.
(Right of guarantor after payment)
The indemnity comprises:
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment was made known to
the debtor, even though it did not earn interest for the creditor;
(3) The expenses incurred by the guarantor after having notified the debtor
that payment had been demanded of him;
(4) Damages, if they are due.
 A guaranty is a strict indemnity, therefore, he can recover only what was paid
plus losses and damages, including costs and interest.
Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the rights
which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot demand of the
debtor more than what he has really paid.
 SUBROGATION – transfers to the person subrogated, the credit with all the
rights thereto appertaining, either against the debtor or against third persons, be
they guarantors or possessors of mortgages, subject to the stipulation in a
conventional subrogation. (Art. 1212)
15
  Right of guarantor to subrogation:
 Results by operation of law, from the act of payment – and there is no
necessity for the guarantor to ask the creditor to expressly assign his rights
of action. The right is based on natural justice.
 PURPOSE: to enable guarantor to enforce the indemnity given in Art. 2066.
 It may be availed of only by a guarantor who became such with the
knowledge and consent of the principal debtor. Now then, as long as
consent to the guaranty was obtained, the right of subrogation is absolute
even if the debtor refuses the subrogation.
 While the guarantor is subrogated to the rights of the creditor, he is not
subrogated to the rights of the debtor.
Art. 2068. If the guarantor should pay without notifying the debtor, (effect) the latter
may enforce against him all the defenses which he could have set up against
the creditor at the time the payment was made.
 REASON: the liability of the guarantor being merely subsidiary, he should really
wait until after the debtor has tried to comply. The guarantor should not, thru his
own fault or negligence, be allowed to jeopardize the rights of the debtor. By
paying the debt without first notifying the debtor, the guarantor deprives the
debtor of the opportunity to set up defenses against the creditor.
Art. 2069. If the debt was for a period and the guarantor paid it before it became due,
he cannot demand reimbursement of the debtor until the expiration of the
period [unless] the payment has been ratified (express or implied) by the
debtor.
Art. 2070. (Payment by both the guarantor and the debtor) If the guarantor has paid
without notifying the debtor, and the latter not being aware of the payment,
repeats the payment, the former has no remedy whatever against the debtor,
but only against the creditor. Nevertheless, [in case of a gratuitous guaranty],
if the (a) guarantor was prevented by a fortuitous event from advising the
debtor of the payment, and (b) the creditor becomes insolvent, the debtor
shall reimburse the guarantor for the amount paid.
 Article is applicable only when the debtor had not previously authorized the
guarantor to pay.
 In case of gratuitous guaranty – the law favors the guarantor because he
receives nothing extra for his efforts and obligations, and it would rather be
unfair if under the premises given, he cannot recover from the principal debtor,
who should not indeed unjustly enrich himself at the expense of another.
Art. 2071. The guarantor, even before having paid, may proceed against the principal
debtor: (Rights of guarantor before payment)
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from the guaranty within
a specified period, and this period has expired;
(4) When the debt has become demandable, by reason of the expiration of the
period for payment;
(5) After the lapse of ten years, when the principal obligation has no fixed
period for its maturity, unless it be of such nature that it cannot be
extinguished except within a period longer than ten years;
(6) If there are reasonable grounds to fear that the principal debtor intends to
abscond;
(7) If the principal debtor is in imminent danger of becoming insolvent.
In all these cases, the action of the guarantor is (1) to obtain release from the
guaranty, or (2) to demand a security that shall protect him from any
proceedings by the creditor and from the danger of insolvency of the debtor.
 The purpose is certainly not to recover money, since the guarantor has not yet
paid.
 This article is in the nature of a preliminary remedy.
 PURPOSE: to give guarantor or surety a remedy in anticipation of the payment
of the debt, which debt being one he could be called upon to pay at any time.
 In the event that the creditor failed to make demand upon the principal debtor
although the debt was already due, the fearful guarantor has no right to go
against and compel said creditor to make demand upon the principal debtor,
because his right is only as against the debtor.
 The remedies provided in this article are alternative in favor of the guarantor at
his election.
 Also applicable to sureties.
Art. 2072. If one, at the request of another, becomes a guarantor for the debt of a third
person who is not present, the guarantor who satisfies the debt may sue
either (1) the person so requesting or (2) the debtor for reimbursement.
SECTION 3: Effects of Guaranty as Between Co-Guarantors
Art. 2073. When there are two or more guarantors of the same debtor and for the
same debt, the one among them who has paid may demand of each of the
others the share which is proportionally owing from him (joint).
If any of the guarantors should be insolvent, his share shall be borne by the
others, including the payer, in the same proportion.
(Applicability) The provisions of this article shall not be applicable, unless the
payment has been made (a) by virtue of a judicial demand or (b) unless the
principal debtor is insolvent.
 This article should be distinguished from the benefit of division among
guarantors – for in Art. 2065, there has been no payment as yet, while in
this article, the payment must have been made because of judicial
proceedings or because the principal debtor was insolvent.
16
Art. 2074. In the case of the preceding article, the co-guarantors may set up against
the one who paid, the same defenses which would have pertained to the
principal debtor against the creditor, and which are not purely personal to the
debtor.
Art. 2075. A sub-guarantor, in case of the insolvency of the guarantor for whom he
bound himself, is responsible to the co-guarantors in the same terms as the
guarantor.
EXTINGUISHMENT OF GUARANTY
Art. 2076. The obligation of the guarantor is extinguished at the same time as that of
the debtor, and for the same causes as all other obligations.
 Two causes:
a. DIRECT – when the guaranty itself is extinguished, independently of the
principal obligation.
b. INDIRECT – when the principal obligation ends, the accessory obligation of
guaranty naturally ends.
 Effect of novation:
o If a contract is novated without the guarantor’s consent, the guaranty
ends.
o Therefore, a novation where the debtor is substituted or where the
credit is increased, releases the guarantor who did not consent thereto.
Consent, however, on the part of the guarantor may be given expressly
or implicitly before or after the novation.
o If the interest rates are increased without the guarantor’s consent, he is
not liable for the increase, but is liable still for the principal obligation
and the original rate of interest.
Art. 2077. If the creditor voluntarily accepts immovable or other property in payment
of the debt (dacion en pago), even if he should afterwards lose the same
through eviction, the guarantor is released.
 Dacion en pago – is a mode of extinguishing an obligation whereby the debtor
alienates property in favor of the creditor for a satisfaction of monetary
obligation. In short, the payment is property.
 Eviction revives the principal obligation, nut not the guaranty, for the creditor
here took the risk.
Art. 2078. A release made by the creditor in favor of one of the guarantors, without the
consent of the others, benefits all to the extent of the share of the guarantor to
whom it has been granted.
 Ex.: A, B, C, and D are co-guarantors for P1.0M. If A is released without the
consent of his co-guarantors, then B, C, and D will each be responsible for only
P250T.
Art. 2079. An extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty. The mere failure on the part of the
creditor to demand payment after the debt has become due does not of itself
constitute any extension of time referred to herein.
 REASON: if the payment is delayed on account of the extension, the principal
debtor may become insolvent and the guarantor’s right to reimbursement would
be rendered useless.
 2nd sentence: failure of the creditor to demand payment would not prejudice the
guarantor since the latter’s recourse would be to avail himself of the right
granted under Art. 2071.
 Where a guarantor is liable for different payments such as installments of rent,
or upon series of promissory notes, an extension of time as to one or more will
not affect the liability of the guarantor for the others.
 The neglect of a creditor to sue or attempt to collect a debt after it falls due does
not discharge the guarantors from their liability notwithstanding the fact that the
principal became insolvent, subsequent to the maturity of the debt.
Art. 2080. The guarantors, even though they be solidary, are released from their
obligation whenever by some act (or inaction) of the creditor they cannot be
subrogated to the rights, mortgages, and preference of the latter.
 REASON: it is possible that the guarantor became one only because of the
presence of rights, mortgages, and preferences of the creditor – to all of which
he expected to be subrogated.
 There can be no subrogation under this article, when the guarantor is at fault.
 Applicable only during the proceeding against the guarantor for payment not
before, nor after rendition of judgment.
Art. 2081. The guarantor may set up against the creditor all the defenses which
pertain to the principal debtor and are inherent in the debt; but not those that
are personal to the debtor.
 Defenses available to the guarantor:
a. Those inherent in the principal obligation (e.g. prescription, res judicata,
payment, illegality of cause);
b. Those ordinarily personal to the principal debtor, but are inherent in the debt
(e.g. vitiated consent);
c. Defenses of the guarantor himself (e.g. vitiated consent on his part,
compensation between debtor and creditor, remission of the principal
obligation or of the guaranty, merger of the person of debtor and creditor.
 Extinguishment of the principal obligation extinguishes the guaranty.
17
LEGAL AND JUDICIAL BONDS Third persons who are not parties to the principal obligation may secure the
latter by pledging or mortgaging their own property.
Art. 2082. The bondsman who is to be offered in virtue of a provision of law or of a  The pledgor or mortgagor need not be the debtor or borrower; thus, one
judicial order shall have the qualifications prescribed in Article 2056 and in who owns property can pledge or mortgage it to secure another’s debt.
special laws.  One who mortgages his property to guaranty another’s debt, without
 Special law – Rule 114 on Bail, Revised Rules of Court: expressly assuming personal liability for such debt, CANNOT be compelled
to pay the deficiency remaining after the mortgage has been foreclosed.
Art. 2083. If the person bound to give a bond in the cases of the preceding article,
should not be able to do so, a pledge or mortgage considered sufficient to  Essential Requisites:
cover his obligation shall be admitted in lieu thereof.
PLEDGE MORTGAGE
Art. 2084. A judicial bondsman cannot demand the exhaustion of the property of the (a) accessory contract – made to (a) accessory contract – made to
principal debtor. secure fulfillment of the principal secure fulfillment of the principal
A sub-surety in the same case, cannot demand the exhaustion of the property obligation. obligation.
of the debtor of the surety. (b) pledgor must be absolute (b) mortgagor must be absolute
 A judicial bondsman is a surety, thus, is not entitled to the benefit of excussion. owner of property pledged. owner of property mortgaged.
 A surety is still liable even if the creditor was negligent in collecting from the (c) pledgor must have free (c) mortgagor must have free
debtor, being solidarily liable. disposal or be authorized. disposal or be authorized.
 A violation by the creditor of the terms of the surety agreement entitles the (d) thing pledged may be (d) mortgaged property may be
surety to be released therefrom. alienated when principal becomes alienated when the principal
 Even when a surety’s performance of the bond is rendered impossible (i.e. thru due for payment to the creditor obligation becomes due for
fortuitous event, by an act of the oblige or of the law), it is still his duty to inform (Art. 2087). payment to the creditor (Art. 2087).
the court of the happening of the event so that it may take action or decree in (e) thing pledged must be placed
the discharge of the surety. Thus, if the surety took no such steps, it is equally in the possession of the creditor,
chargeable with negligence in this connection. or of a third person by common
agreement (Art. 2093).
PLEDGE, MORTGAGE AND ANTICHRESIS
 Distinctions:
PROVISIONS COMMON TO PLEDGE AND MORTGAGE REAL ESTATE
PLEDGE CHATTEL MORTGAGE
MORTGAGE
Art. 2085. The following requisites are essential to the contracts of pledge and OBJECT
Personal or movable Personal or movable
Real or immovable property
mortgage: property property
Can be sold even w/o Cannot sell w/o the Can sell even without the
(1) That they be constituted to secure the fulfillment of a principal obligation; pledgee’s consent. But to consent of the creditor, consent of the mortgagee.
 Pledges and mortgages are accessory contracts; therefore, their RIGHT TO
transfer ownership to the which must be in writing
SELL
consideration is the same as the consideration of the principal obligation. buyer, pledgee’s consent, and annotated on the
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged written or oral is required instrument.
Description of the thing There must be an affidavit Recorded in the Registry of
or mortgaged; EFFECT TO
pledged and the date of of good faith and must be Property.
 Future property, therefore, cannot be mortgaged or pledged because of lack THIRD
pledge must appear in a recorded in the chattel
PERSONS
of ownership. public instrument mortgage registry.
 An agent cannot pledge or mortgage in his own name the property of the a. If it is more: creditor a. More: creditor cannot a. More: creditor cannot
is entitled to the be entitled to excess. be entitled to excess.
principal. excess unless b. Less: can recover the b. Less: can recover the
(3) That the persons constituting the pledge or mortgage have the free EFFECT OF otherwise stipulated. deficiency. deficiency.
disposal of their property, and in the absence thereof, that they be legally SALE b. If it is less: creditor
authorized for the purpose. cannot recover the
deficiency even if
there is stipulation.
18
Art. 2086. The provisions of Article 2052 are applicable to a pledge or mortgage.
Art. 2087. It is also of the essence of these contracts that when the principal
obligation becomes due, the things in which the pledge or mortgage consists
may be alienated for the payment to the creditor.
 The creditor does not automatically become the owner if at the time the debt
falls due the debt is still unpaid. The article only means that the property
pledged or mortgaged may be sold (to anybody including the creditor) so that
the proceeds of such alienation the debt might be paid.
 As a rule, the mortgage can b foreclosed only when the debt remains unpaid at
the time it is due, but the violation of certain conditions in the mortgage may
authorize immediate foreclosure.
 Just because the price is considered inadequate does not mean that the
foreclosure sale should be cancelled.
 The fact that the debt is secured by a mortgage does not preclude the creditor
from maintaining a personal action for the recovery of debt.
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.
 Two (2) things prohibited under this article:
a. The appropriation by the creditor of the things given by way of pledge or
mortgage; and
b. The disposition thereof by the creditor.
 PACTUM COMMISSORIUM – a stipulation in a contract of pledge or mortgage
whereby the thing pledged or mortgaged shall be become the property of the
creditor in the event that the debt is not paid on maturity. This stipulation is
VOID.
o The only exception is in the case of pledge – if the debtor is unable to
pay his obligation, the creditor has a right to have the thing pledged sold
at a public auction for the payment of his credit. If the thing is not sold,
then he may appropriate the thing (Art. 2112).
o What pactum commisssorium prohibits is only automatic appropriation.
Thus, if the agreement entered into is that the pledgee or mortgagee
could purchase the thing pledged or mortgaged at the current price if
the debt is not paid on time, the agreement is valid because this is not
automatic appropriation.
o This prohibition on automatic appropriation does not include subsequent
voluntary act of the debtor transferring ownership of the thing pledged in
favor of the creditor (dation in payment).
 However, should there be stipulation in a contract of mortgage (not pledge)
regarding installment sale, and the object sold is mortgaged back to the seller to
answer the unpaid installment; or upon failure to pay installment sue, all
installment shall become due and payable, the mortgagee is given the right to
foreclose and sell the property at public auction to recover the unpaid balance.
 The mortgagee cannot sell the mortgaged property during the existence of
principal obligation because this would certainly be an act of disposition, even if
such is authorized by the contract.
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided
among the successors in interest of the debtor or of the creditor.
EFFECTS:
Therefore, (a) the debtor's heir who has paid a part of the debt cannot ask for
the proportionate extinguishment of the pledge or mortgage as long as the
debt is not completely satisfied. (a pledge or mortgage is indivisible, but the
principal obligation may be divisible)
Neither can (b) the creditor's heir who received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of the other heirs who have
not been paid.
(Exception) From these provisions is expected the case in which, there being
several things given in mortgage or pledge, each one of them guarantees only
a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge
or mortgage as the portion of the debt for which each thing is specially
answerable is satisfied.
Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the
debtors are not solidarily liable.
 The indivisibility referred to in this article is to the security given and not to
the liability of the debtors. It does necessary give rise to solidarity.
Art. 2091. The contract of pledge or mortgage may secure all kinds of obligations, be
they pure or subject to a suspensive or resolutory condition.
 PURE – one without a condition or a term, therefore, demandable at once.
 SUSPENSIVE – one which suspends the effectivity of the obligation until
the condition is fulfilled. It is the fulfillment of the condition that produces the
efficacy of the obligation. No fulfillment, no obligation.
 RESOLUTORY – one which extinguishes the obligation upon the happening
of the condition. The obligation takes effect at once, but will terminate upon
the happening of the event.
Art. 2092. A promise to constitute a pledge or mortgage gives rise only to a personal
action between the contracting parties, without prejudice to the criminal
responsibility incurred by him who defrauds another, by offering in pledge or
mortgage as unencumbered, things which he knew were subject to some
burden, or by misrepresenting himself to be the owner of the same.
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  The debtor who made the promise can be compelled to fulfill his promise by
requiring him to execute the pledge or mortgage.
 In one case, the Supreme Court did not require the debtor to execute the
mortgage, but instead stated that there is a lien over such property in favor of
the creditor under the principle of equity (Laplana v. Garchitorena, 48 Phil 163)
 Criminal Liabilities:
o Art. 316, RPC, “person who pretending to be the owner of any real
property, shall convey, sell encumber or mortgage the same; or any
person who, knowing that real property is encumbered, shall dispose of
the same, although such encumbrance be not recorder”, shall be
criminally liable.
o Art. 319, RPC, “the penalty of arresto mayor or a fine amounting to
twice the value of the property shall be imposed upon: any persons who
shall knowingly remove any personal property mortgaged under the
Chattel mortgage law, without the written consent of the mortgagee; or
any mortgagor who sell or pledge personal property already pledged, or
any part thereof, without the consent of the mortgagee..”. Subsequent
payment of the debt will not erase criminal responsibility.
PLEDGE
 Pledge is a contract by virtue of which the debtor delivers to the creditor or to a third
person, movable property, or instrument evidencing corporeal rights, the purpose o
which is to secure the fulfillment of a principal obligation with an understanding that
when the obligation is fulfilled the thing delivered shall be returned with all its fruits
and accessions.
Art. 2093. In addition to the requisites prescribed in Article 2085, it is necessary, in
order to constitute the contract of pledge, that the thing pledged be placed in
the possession of the creditor, or of a third person by common agreement.
 Until the delivery of the thing, the whole rests in an executor contract, however
strong may be the engagement to deliver it, and the “pledgee” acquires no right
over the thing.
 If the pledgee fails or neglects to take the property into his possession, he is
presumed to have waived the right granted him by the contract.
o Mere taking of the possession is insufficient to continue pledge. The
pledgee must continue in possession.
o Mere symbolical delivery is insufficient. There must be actual
possession – actual delivery.
 Effectivity as against third persons – the description of the thing pledged and the
date of the pledge must appear in a public instrument (Art. 2096).
Art. 2094. All movables which are within commerce may be pledged, provided they
are susceptible of possession.
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading,
shares of stock, bonds, warehouse receipts and similar documents may also
be pledged. The instrument proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed.
 OBJECT: only movables susceptible of possession, including incorporeal rights,
may be pledged.
 Real property cannot be pledged. A pledge cannot include a lien on real
property.
Art. 2096. (Requisites to bind third persons) A pledge shall not take effect against third
persons if (a) a description of the thing pledged and (b) the date of the pledge
do not appear in a public instrument.
 REASON: a debtor in bad faith may attempt to conceal his property by
simulating a pledge thereof with an accomplice.
Art. 2097. (RULE) With the consent of the pledgee, the thing pledged may be alienated
by the pledgor or owner, subject to the pledge. (Effect) The ownership of the
thing pledged is transmitted to the vendee or transferee as soon as the
pledgee consents to the alienation, but the latter shall continue in possession.
 The pledgor remains to be the owner of the thing pledged, thus, he can sell the
same, provided, the pledgee consents to the sale.
 Ownership over the thing pledged shall be transferred to the vendee only after
such consent is given, subject to the rights of the pledgee.
 Pledgee may alienate the thing to satisfy the obligation (Art. 2112);
 Pledgee must continue in possession during the existence of the pledge
(Arts 2093, 2098).
Art. 2098. The contract of pledge gives a right to the creditor to retain the thing in his
possession or in that of a third person to whom it has been delivered, until the
debt is paid.
 Pledgee’s right of retention: this is so because pledge is a security contract and
the purpose is to secure the principal obligation. This right of retention can be
waived by remission or renunciation of the thing pledged to the pledgor, but the
principal obligation still exists.
 NO DOUBLE PLEDGE – the property which has been lawfully pledged to a
creditor cannot be pledged to another as long as the first one subsists.
Art. 2099. The creditor shall take care of the thing pledged with the diligence of a
good father of a family; he has a (a) right to the reimbursement of the
expenses made for its preservation, and is (b) liable for its loss or
deterioration, in conformity with the provisions of this Code.
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Art. 2100. (General Rule) The pledgee cannot deposit the thing pledged with a third
person, (exception) unless there is a stipulation authorizing him to do so.
The pledgee is responsible for the acts of his agents or employees (master-
and-servant rule) with respect to the thing pledged.
Art. 2101. The pledgor has the same responsibility as a bailor in commodatum in the
case under 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
(Right of pledgee to compensate earnings of pledge with debt)
Art. 2102. If the pledge earns or produces fruits, income, dividends, or interests, the
creditor shall compensate what he receives with those which are owing him;
but if none are owing him, or insofar as the amount may exceed that which is
due, he shall apply it to the principal. Unless there is a stipulation to the
contrary, the pledge shall extend to the interest and earnings of the right
pledged.
In case of a pledge of animals, their offspring shall pertain to the pledgor or
owner of animals pledged, but shall be subject to the pledge, if there is no
stipulation to the contrary.
 The pledgee has no right to use the thing pledged or to appropriate the fruits
thereof without the authority of the owner (Art 2104). But the pledgee can apply
the fruits, income, dividends, or interests earned or produced by the thing
pledged to the payment of interest, if owing, and thereafter to the principal of his
credit.
 Unless there is a stipulation to the contrary, the interest and earnings of the right
pledged and in case of animals, their offsprings, are included in the pledge.
(Right of pledgee against third persons)
Art. 2103. (Exception) Unless the thing pledged is expropriated, the (general rule)
debtor continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain to the owner of
the thing pledged in order to recover it from, or defend it against a third
person.
 The creditor to whom the property pledged has been delivered is obliged to take
care of it with the diligence of a good father of a family (Art. 2099). Hence, he is
authorized to bring such actions as pertain to the owner in order to recover it or
defend it against claims of third persons. Furthermore, unless given the right,
the creditor might be prejudiced by the negligence of the owner.
 The right of a pledgee is a real right enforceable against third persons provided
the requisites embodied in Art. 2096 is complied with.
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 (remedy) 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.
 The creditor although in possession of the thing pledged has no right to use the
thing unless required by its preservation.
 This is in consequence of the fact that the pledgor, in parting with his property,
transmits only possession but not ownership.
(Right of the debtor to demand return of the thing pledged)
Art. 2105. (General Rule) The debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he has paid the debt and its
interest, with expenses in a proper case.
 When debtor can ask for the return of the thing pledged:
a. When he has paid the debt secured by the pledge, including any
interest and expenses in the proper case.
b. When he has reimbursed expenses for the preservation of the
thing.
 Exception: the pledgor is allowed to substitute the thing pledged which is in
danger of destruction or impairment with another thing of the same kind and
quality (Art. 2107).
Art. 2106. If through the negligence or willful act of the pledgee, the thing pledged is
in danger of being lost or impaired, the pledgor may require that it be
deposited with a third person.
 The pledgee has the duty to preserve the thing pledged with the diligence of a
good father of a family (Art. 2099)
 Pledgor’s right to require the thing to be deposited:
a. In case the pledgee used the thing pledged without authority or
misused the same, the pledgor may ask that it be judicially or
extrajudicially deposited (Art. 2104).
b. If through the negligence or willful act of the pledgee, the thing
pledged becomes in danger of being lost or impaired, the pledgor
may require that it be deposited with a third person (Art. 2106).
(Right of pledgor to substitute thing pledged)
Art. 2107. If there are reasonable grounds to fear the destruction or impairment of the
thing pledged, without the fault of the pledgee, the pledgor may demand the
return of the thing, upon offering another thing in pledge, provided the latter
is of the same kind as the former and not of inferior quality, and without
prejudice to the right of the pledgee under the provisions of the following
article.
The pledgee is bound to advise the pledgor, without delay, of any danger to
the thing pledged.
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(Right of pledgee to cause sale of thing pledged)
Art. 2108. If, without the fault of the pledgee, there is danger of destruction,
impairment, or diminution in value of the thing pledged, he may cause the
same to be sold at a public sale. The proceeds of the auction shall be a
security for the principal obligation in the same manner as the thing originally
pledged.
 Articles 2107 and 2108 is applicable if the danger arises without fault or
negligence on the part of the pledgee.
 Remedies:
o PLEDGOR – demand the return but there must be a substitute.
o PLEDGEE – he may cause the same to be sold at a public sale. The
pledge continues on the proceeds.
 The pledgee’s right to have the thing pledged sold at public sale granted in Art.
2108, is superior to that given to the pledgor to substitute the thing pledged
under Art. 2107.
Art. 2109. If the creditor is deceived on the substance or quality of the thing pledged,
(remedies) (a) he may either claim another thing in its stead, or (b) demand
immediate payment of the principal obligation.
Art. 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the
pledge is extinguished. Any stipulation to the contrary shall be void.
 It is essential in a contract of pledge that the object be placed in the possession
of the creditor, or of a third person by common agreement (Art. 2093).
 Extinguishment of pledge:
o DIRECT causes – when the pledge is extinguished independent of the
principal obligation.
i. Return of the thing pledged by the pledgee to the pledgor.
ii. Abandonment of pledge in writing.
iii. Sale of the thing pledged.
iv. Appropriation of the thing pledged by the pledgee.
o INDIRECT cause – the extinguishment of the principal obligation carries
with it the extinguishment of the contract of pledge.
If subsequent to the perfection of the pledge, the thing is in the possession of
the pledgor or owner, there is a prima facie presumption that the same has
been returned by the pledgee. This same presumption exists if the thing
pledged is in the possession of a third person who has received it from the
pledgor or owner after the constitution of the pledge.
 The presumption may be rebutted by evidence to the contrary, for example, that
the return was merely for the substitution of the thing pledged, or that the
substitution of the thing was stolen and given by the thief to the pledgor or
owner.
Art. 2111. A statement in writing by the pledgee that he renounces or abandons the
pledge is sufficient to extinguish the pledge. For this purpose, neither the
acceptance by the pledgor or owner, nor the return of the thing pledged is
necessary, the pledgee becoming a depositary.
 The pledge is a personal right of the pledgee which may be waived. Under this
article, renunciation or abandonment must be in writing to extinguish pledge,
and such renunciation is not conditioned upon the acceptance by the pledgor or
owner nor upon the return of the thing pledged.
(Right of creditor to sell if credit is not satisfied)
Art. 2112. The creditor to whom the credit has not been satisfied in due time, may
proceed before a Notary Public to the sale of the thing pledged. This sale shall
be made at a public auction, and with notification to the debtor and the owner
of the thing pledged in a proper case, stating the amount for which the public
sale is to be held. If at the first auction the thing is not sold, a second one with
the same formalities shall be held; and if at the second auction there is no
sale either, the creditor may appropriate the thing pledged. In this case he
shall be obliged to give an acquittance for his entire claim.
 Under Art. 2087, the law says that it is of the essence of the contract of pledge
that when the principal obligation becomes due, the things in which the pledge
consists may be alienated for the payment to the creditor.
 Formalities Required:
a. The debt is already due;
b. There must be the intervention of a notary public.
c. There must be a public auction (if at first, it is not sold, a second
auction must be held with the same formalities).
d. Notice to debtor or owner stating the amount due, that is, the
amount for which the public sale is to be held.
 The pledgee has the right to appropriate the thing only after the second auction.
 The appropriation shall be considered as (full) payment for the entire claim.
Thus, if the thing pledged is worth much more than the principal debt, the
pledgee is not obliged to return the excess to the pledgor because his is the
right to get the whole value of the thing; and if it happens to be less, he is not
entitled to any deficiency judgment.
 If the contract authorized to sell upon default and the conditions of the sale are
set forth already in the contract, the requirements under the above article do not
have to be observed (Tan Chun Tic v. West Coast Life, 54 Phil 361).
Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreover,
have a better right if he should offer the same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is the only
bidder.
 If the debt is not paid and a public sale takes place, BOTH the pledgor and the
pledgee may bid:
 Pledgor’s right to bid is given preference, provided he should offer the same
terms as the highest bidder.
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  Pledgee’s right to bid is not valid if he is the only bidder, except if he is given
the right to appropriate the thing for failure to sell on 2 auctions sales.
Art. 2114. All bids at the public auction shall offer to pay the purchase price at once. If
any other bid is accepted, the pledgee is deemed to have been received the
purchase price, as far as the pledgor or owner is concerned.
 All bids must be for CASH. If the pledgee accepts a bid other than for cash, the
pledgor has the right to consider that the pledgee has received the purchase
price in cash.
Art. 2115. The sale of the thing pledged shall extinguish the principal obligation,
whether or not the proceeds of the sale are equal to the amount of the
principal obligation, interest and expenses in a proper case. If the price of the
sale is more than said amount, the debtor shall not be entitled to the excess,
unless it is otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding any stipulation
to the contrary.
 Effect of sale after foreclosure:
a. The principal obligation is extinguished.
b. If the price is less than the debt: the creditor is not entitled to
recover the deficiency, even if agreed or stipulated, because such
stipulation is void. The reason is to compel the creditor to hold an
honest public sale.
 The creditor may sue on the principal obligation instead of
electing to sell the thing pledged, and in such case, he may
recover the deficiency from the debtor.
c. If the price of sale is more than the debt: the creditor is entitled to
the excess, unless otherwise stipulated.
Art. 2116. After the public auction, the pledgee shall promptly advise the pledgor or
owner of the result thereof.
 REASON: to enable the pledgor or owner to take steps for the protection of his
rights where he has reasonable grounds to believe that the sale was not an
honest one.
(Right of third person to satisfy obligation)
 The creditor is not bound to accept payment or performance by a third person who
has no interest in the fulfillment of the obligation.
Art. 2117. Any third person who has any right in or to the thing pledged (as when
pledgor has contracted to sell to him) may satisfy the principal obligation as
soon as the latter becomes due and demandable, and the creditor cannot refuse
to accept the payment.
Art. 2118. If a credit which has been pledged becomes due before it is redeemed, the
pledgee may collect and receive the amount due. He shall (a) apply the same
to the payment of his claim, and (b) deliver the surplus, should there be any,
to the pledgor.
 It would seem that under this article, it is not obligatory for the pledgee to collect
and receive the amount due on the credit pledged. But in view of Art. 2099,
which imposes upon the obligation to take care of the thing pledged with the
diligence of a good father of a family, he has the duty to collect if delay would
endanger the recovery of the credit.
Art. 2119. If two or more things are pledged, the (general rule) pledgee may choose
which he will cause to be sold, (exception) unless there is a stipulation to the
contrary. He may demand the sale of only as many of the things as are
necessary for the payment of the debt.
 The right of choice given to the pledgee as to which of the things pledged he
shall cause to be sold is limited only by stipulation.
Art. 2120. If a third party secures an obligation by pledging his own movable property
under the provisions of Article 2085 he shall have the same rights as a
guarantor under Articles 2066 to 2070, and Articles 2077 to 2081. He is not
prejudiced by any waiver of defense by the principal obligor.
 Rights of third person against third person after payment:
a. Right to be subrogated to all the rights of the creditor.
b. Right of reimbursement against the debtor.
(Right of Retention in “Legal Pledge”)
Art. 2121. Pledges created by operation of law, such as those referred to in Articles
546, 1731, and 1994, are governed by the foregoing articles on the
possession, care and sale of the thing as well as on the termination of the
pledge. However, after payment of the debt and expenses, the remainder of
the price of the sale shall be delivered to the obligor.
 Art. 546. Necessary expenses shall be refunded to every possessor; but only the
possessor in good faith may retain the thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good faith with the same right
of retention, the person who has defeated him in the possession having the option of
refunding the amount of the expenses or of paying the increase in value which the thing
may have acquired by reason thereof.
 Art. 1731. He who has executed work upon a movable has a right to retain it by way of
pledge until he is paid.
 Art. 1994. The depositary may retain the thing in pledge until the full payment of what
may be due him by reason of the deposit.
 Other pledges created by operation of law:
 Art. 1707. The laborer's wages shall be a lien on the goods manufactured or the work
done
 Art. 1914. The agent may retain in pledge the things which are the object of the agency
until the principal effects the reimbursement and pays the indemnity set forth in the two
preceding articles.
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  Art. 2004. The hotel-keeper has a right to retain the things brought into the hotel by the
guest, as a security for credits on account of lodging, and supplies usually furnished to
hotel guests.
Art. 2122. A thing under a pledge by operation of law may be sold only after demand
of the amount for which the thing is retained. The public auction shall take
place within one month after such demand. If, without just grounds, the
creditor does not cause the public sale to be held within such period, the
debtor may require the return of the thing.
 RULES in case of pledge by operation of law:
a. The provisions on possession (Art. 2098), care (Art. 2099), and sale of the
thing pledged (Art. 2112) as well as on the extinguishment of the pledge
(Art. 2110, 2111) governing conventional pledges are applicable to pledges
created by operation of law. Unlike, however, in conventional pledge, the
debtor is not entitled to the excess unless it is otherwise agreed (Art. 2115).
In legal pledge, the remainder of the price of the sale after payment of the
debt and expenses SHALL be delivered to the debtor (Art. 2121).
b. In legal pledge, there is no definite period for the payment of the principal
obligation. The pledgee must, therefore, make a demand for the payment of
the amount due him. Without such demand, he cannot exercise the right of
sale at public auction (Art. 2112). The pledgee must proceed with the sale
within one month after demand otherwise the debtor may require him to
return the thing retained (Art. 2122).
Art. 2123. With regard to pawnshops and other establishments, which are engaged in
making loans secured by pledges, the special laws and regulations
concerning them shall be observed, and subsidiarily, the provisions of this
Title.
MORTGAGE (Real Estate)
 REAL ESTATE MORTGAGE – is a contract in which the debtor guarantees to the
creditor the fulfillment of a principal obligation, subjecting for the faithful compliance
therewith a real property in case of non-fulfillment of said obligation at the time
stipulated.
 Characteristics:
a. A real right – its binds a purchaser who knows of its existence or if the
mortgage was registered.
b. An accessory contract – if the principal obligation is void, the mortgage is
also void; except if the mortgage is void because it was not made by the
owner of the property, in which case the principal contract of loan may still
be valid.
c. Indivisible – as long as the principal obligation remains unpaid, the real
estate mortgage will continue to subsist. It is indivisible even though the
debt may be divided among the successors in interest of the debtor or of the
creditor.
d. Inseparable – it adheres to the property, regardless of who its owner may
subsequently be.
e. A real property – a mortgage on real property is by itself real property also.
f. A limitation to ownership – a mortgage encumbers, but does not end
ownership; it may thus be foreclosed.
g. Can secure all kinds of obligations.
h. Property cannot be appropriated.
i. A lien.
Art. 2124. Only the following property may be the object of a contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed upon
immovables.
Nevertheless, movables may be the object of a chattel mortgage.
 Art. 415. The following are immovable property:
1. Land, buildings, roads and constructions of all kinds adhered to the soil;
2. Trees, plants, and growing fruits, while they are attached to the land or form an integral
part of an immovable;
3. Everything attached to an immovable in a fixed manner, in such a way that it cannot be
separated therefrom without breaking the material or deterioration of the object;
4. Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or
on lands by the owner of the immovable in such a manner that it reveals the intention to
attach them permanently to the tenements;
5. Machinery, receptacles, instruments or implements intended by the owner of the
tenement for an industry or works which may be carried on in a building or on a piece of
land, and which tend directly to meet the needs of the said industry or works;
6. Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar nature,
in case their owner has placed them or preserves them with the intention to have them
permanently attached to the land, and forming a permanent part of it; the animals in these
places are included;
7. Fertilizer actually used on a piece of land;
8. Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and
waters either running or stagnant;
9. Docks and structures which, though floating, are intended by their nature and object to
remain at a fixed place on a river, lake, or coast;
10. Contracts for public works, and servitudes and other real rights over immovable property.
 Kinds:
a. VOLUNTARY or CONVENTIONAL – created by the parties.
b. LEGAL – one required by law to guarantee performance.
c. EQUITABLE – one which reveals an intent to make the property a security,
even if the contract lacks the proper formalities of a real estate mortage.
o Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the
following cases:
a. When the price of a sale with right to repurchase is unusually inadequate;
b. When the vendor remains in possession as lessee or otherwise;
c. When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
d. When the purchaser retains for himself a part of the purchase price; 

e. When the vendor binds himself to pay the taxes on the thing sold; 

24
 f. In any other case where it may be fairly inferred that the real intention of the
parties is that the transaction shall secure the payment of a debt or the
performance of any other obligation.
(Additional requirements of Real Estate Mortgage)
Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in
order that a mortgage may be validly constituted, that the document in which
it appears be recorded in the Registry of Property. If the instrument is not
recorded, the mortgage is nevertheless binding between the parties.
 Registration – a contract of mortgage must be in a public instrument or
document and recorded in the registry of Property of the province or city where
the thing is situated.
The persons in whose favor the law establishes a mortgage have no other
right than to demand the execution and the recording of the document in
which the mortgage is formalized. (refers to legal mortgages)
 Effect of unregistered mortgage:
o Between the parties – even if the mortgage is not registered, the
mortgage is nevertheless binding between the parties.
o Against third persons:
 Without knowledge – does not affect innocent third persons.
 With knowledge – they are bound because as to them,
knowledge of a prior unregistered mortgage is the equivalent of
registration.
o The mortgagee may demand from the mortgagor to put the mortgage in
a public instrument and have registered. As soon as the public
instrument is executed, the mortgagee may cause the registration even
without the consent of the mortgagor.
Art. 2126. The mortgage directly and immediately subjects the property upon which it
is imposed, whoever the possessor may be, to the fulfillment of the obligation
for whose security it was constituted.
 The article applies even if the mortgagor is not the principal debtor.
 Effect of mortgage:
o Creates a REAL RIGHT – which is enforceable against the whole world.
It follows the property wherever it goes. Therefore, if a mortgagor sells
the property, the buyer must respect the mortgage (if registered or if he
knows of its existence).
o Creates merely an ENCUMBRANCE – does not extinguish the title of
the debtor who does not lose his principal attribute as owner, that is, the
right to dispose. Indeed, the law considers void any stipulation
forbidding the owner from alienating the mortgaged immovable (Art.
2130).
(Extent of Mortgage)
 A mortgage constituted on immovable property is not limited to the property itself.
Art. 2127. The mortgage extends to the natural accessions, to the improvements,
growing fruits, and the rents or income not yet received when the obligation
becomes due, and to the amount of the indemnity granted or owing to the
proprietor from the insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations, amplifications and
limitations established by law, whether the estate remains in the possession
of the mortgagor, or it passes into the hands of a third person.
a) Natural accessions – thus, if a land bordering a river is mortgaged and its area
is increased by alluvial deposits or sediments, the increase in area is likewise
subject to the mortgage.
b) Improvements – thus, present and future houses on the land mortgaged are
subject to the mortgage, unless otherwise stipulated. If the old house on the
land mortgaged was demolished and a new one was constructed, the newly
constructed house is subject to the mortgage, unless otherwise stipulated.
c) Growing fruits – thus, a mortgage upon real estate includes all fruits of the
mortgaged property not collected when the obligation falls due. It does not,
however, include fruits already harvested before the obligation falls due. Neither
are pending fruits included when the mortgaged premises pass into the hands of
third persons, except the net proceeds of the growing crops after deducting the
expenses made for the production, gathering and preservation.
d) Compensation paid or payable by the government that has taken the property
mortgaged for public use in the exercise of the right of eminent domain.
e) Machineries and accessories on the mortgaged property, under the principle,
accessory follows the principal..
f) Rents and income not yet received when the obligation falls due.
g) Indemnity owing or granted to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use (Art. 2127).
o Therefore, all objects permanently attached to a mortgaged land or
building, although they may have been placed there after the execution
of the mortgage are also included. To exclude them, it is necessary that
there be an express stipulation to that effect.
Art. 2128. The mortgage credit (a real right of the mortgagee) may be alienated or
assigned to a third person, in whole or in part, with the formalities required by
law. (This is because the mortagee is the owner of the right)
 Even if alienation is not registered, it would still be valid as between parties.
Registration is needed only to affect third parties.
 Validity to third persons:
a. Public document and registration in the Registry of Property.
b. Notice of the assignment to the debtor. Thus if the debtor is not given
notice, and the debtor who before having knowledge of the assignment,
pays his creditor shall be released from the obligation (Art. 1626).
(Right of creditor against transferee of mortgaged property)
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Art. 2129. The creditor may claim from a third person in possession of the mortgaged
property, the payment of the part of the credit secured by the property which
said third person possesses, in the terms and with the formalities which the
law establishes.
 The mortgage credit being a real right which follows the property, the creditor
may demand from any possessor the payment only of the part of the credit
secured by said property. It is necessary, however, that prior demand for
payment must have been made on the debtor and the latter failed to pay.
Art. 2130. A stipulation forbidding the owner from alienating the immovable
mortgaged shall be void.
 REASON: such a prohibition would be contrary to the public good, inasmuch as
the transmission of property should not be unduly impeded.
 However, if the mortgagor alienates the property, the transferee is bound to
respect the encumbrance because being a real right, the property remains
subject to the fulfillment of the obligation for whose guaranty it was constituted
(Art. 2126).
 Effect of second, third, fourth mortgages and so forth – although the parties may
validly stipulate that the consent of the mortgagee must first be sought before
the mortgagor may enter into a second or subsequent mortgage, it doesn’t
mean that in case of violation the second mortgage will be void. Both mortgages
are valid. Only, the first mortgage has a superior right.
Art. 2131. The form, extent and consequences of a mortgage, both as to its
constitution, modification and extinguishment, and as to other matters not
included in this Chapter, shall be governed by the provisions of the Mortgage
Law and of the Land Registration Law.
 A stipulation fixing the price (upset price) of the property mortgaged in the
foreclosure proceedings is VOID. The property foreclosed must be sold to the
highest bidder.
 Insurance – both the mortgagee and the mortgagor have insurable interest in
the property, and therefore they may insure the same.
o The mortgagors insurable interest covers the full value of the property,
even though the mortgage debt is equivalent to the full value of the
property.
o The mortgagee’s insurable interest is to the extent of the debt but
cannot be more than the value of the mortgaged property.
 FORECLOSURE – a proceeding by which the creditor subjects the thing
mortgaged for the payment of the obligation secured.
o Kinds:
 JUDICIAL – by bringing an action for the foreclosure of the
mortgage in the RTC of the province or city where the real
property or any part thereof lies (Rule 68, Revised Rules of
Court).
 If there be a balance due to the mortgagee after applying
the proceeds of the sale ordered by the court, the
mortgagee is entitled to recover the deficiency and if this is
embodied in a judgment, it is referred to as deficiency
judgment (Art 2115).
 Where a third person is the mortgagor, he is not liable for
any deficiency in the absence of a contrary stipulation. The
action for recovery of such deficiency must be directed
against the debtor.
 The proceeds of the sale shall be applied to the payment of
the costs of the sale, the amount due to the mortgagee,
claims of persons holding subsequent mortgages in the
order of their priority, and the balance, if any, shall be paid
to the mortgagor.
 EXTRAJUDICIAL – where there is a stipulation in the contract
giving the mortgagee the power, upon default of the debtor, to
foreclose the mortgage by an extrajudicial sale of the
mortgaged property (Act. 3155, as amended by Act 4118).
 Place of sale : in the municipal building of the municipality
in which the property or part thereof is situated.
o Grounds:
 Non-payment of the principal obligation on maturity,
 Violation of any condition, stipulation or warranty by the
mortgagor.
 REDEMPTION – a transaction through which, the mortgagor, or one claiming in
his right, by means of a payment or the performance of a condition, reacquires
or buy back the value of the title which may have passed under the mortgage, or
divests the mortgaged premises of the lien which the mortgage may have
created.
o Kinds:
 EQUITY REDEMPTION – the right of the mortgagor to redeem
the property mortgaged after his default but before the property
is sold.
 RIGHT OF REDEMPTION – the right of the mortgagor to
redeem or repurchase the property sold for the payment of the
mortgage debt.
 Distinction: The first is the right of the mortgagor after judgment
in a judicial foreclosure to redeem the property by paying to the
court the amount of the judgment debt before the sale or
confirmation of the sale. The latter, on the other hand, is the
right of the mortgagor to redeem the property sold at an
extrajudicial foreclosure by paying the buyer in the foreclosure
sale the amount paid by the buyer within one year from such
sale.
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  Remedies of mortgagee where the mortgagor subsequently dies:
a. He may abandon his security and share in the general distribution of the
estate; or
b. He may foreclose, secure a deficiency judgment and prove his
deficiency judgment before the committee on claims; or
c. He may rely upon his security alone, in which case he can receive no
share in the distribution of the assets of the estate.
CHATTEL MORTGAGE
Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel
Mortgage Register as a security for the performance of an obligation. If the
movable, instead of being recorded, is delivered to the creditor or a third
person, the contract is a pledge and not a chattel mortgage.
 Chattel Mortgage is a contract whereby personal property is recorded in the
Chattel Mortgage Registry as a security for the performance of an obligation.
Art. 2141. The provisions of this Code on pledge, insofar as they are not in conflict
with the Chattel Mortgage Law shall be applicable to chattel mortgages.
 The Chattel Mortgage Law (Act No. 1508)
 Purpose: it is designed to promote business and trade, and to give impetus to
the economic development of the country.
 Objects covered: only personal property,
o Shares of stocks.
o Growing crops.
o Interest in business.
o Vessels.
o Large cattle.
o Under Arts. 416-417, NCC:
1. Those movables susceptible of appropriation which are not included in
the preceding article;
2. Real property which by any special provision of law is considered as
personal property;
3. Forces of nature which are brought under control by science; and
4. In general, all things which can be transported from place to place
without impairment of the real property to which they are fixed.
5. Obligations and actions which have for their object movables or
demandable sums; and
6. Shares of stock of agricultural, commercial and industrial entities,
although they may have real estate.
 Chattel mortgage on buildings – A building is an immovable property,
irrespective of whether or not said building and the land on which it is adhered
to belong to the same owner.
o However, in the case of Navarro vs. Pineda (L-18456, 11/30/63), the
court held, that the parties may stipulate to treat the building as a
movable property and as a subject of chattel mortgage but this shall not
in any way prejudice third persons (estoppel).
 Machinery placed by a tenant in a plant belonging to another may be subject of
a chattel mortgage. Machinery is movable in its nature and becomes
immobilized only when placed in a plant by the owner of the property or plant.
 An unregistered chattel mortgage is valid and binding upon the parties but void
as to innocent third persons.
 As a rule, future property may not be covered by chattel mortgage. But when
such property is a renewal of, or in substitution for goods on hand when the
mortgage was executed, or is purchased with the proceed of sale of such
goods; said property may then be covered by chattel mortgage. (E.g. goods or
articles in stores which are constantly sold and substituted with new stock)
 The property mortgaged must be described to enable the parties to the
mortgage, or any other persons, after reasonable inquiry and investigation, to
identify the same.
 The owner may dispose the thing mortgaged but is subject to criminal liability
under Art. 319, RPC.
 If the thing is foreclosed and there is a deficiency, the mortgagee may maintain
an action against the debtor for the recovery of that deficiency. However, if the
thing foreclosed is a thing acquired and mortgaged under the Installment Sales
Law, the seller cannot recover the deficiency from the buyer.
ANTICHRESIS
Art. 2132. By the contract of antichresis (definition) the creditor acquires the right to
receive the fruits of an immovable of his debtor, with the obligation to apply
them to the payment of the interest, if owing, and thereafter to the principal of
his credit.
 Characteristics:
o Accessory contract.
o It gives a real right.
o Formal contract, which must be in writing.
 Antichresis requires the delivery by the debtor of the property given as security
in order that the creditor may receive the fruits.
Art. 2133. The actual market value of the fruits at the time of the application thereof to
the interest and principal shall be the measure of such application.
 REASON: to forestall the use of antichresis for purposes of usury.
Art. 2134. The amount of the principal and of the interest shall be specified in writing;
otherwise, the contract of antichresis shall be void.
 Even if the antichresis is void, the principal obligation may still be valid
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(Obligations of the antichretic creditor)  In case of excessive interest, the excess shall be applied to the principal.
 The creditor acquires, by virtue of the contract of antichresis, the right to enjoy
the fruits of the property delivered to him. This right carries two obligations Art. 2139. The last paragraph of Article 2085, and Articles 2089 to 2091 are applicable
which are necessary consequences of the contract because they arise from its to this contract.
very nature.
Art. 2135. The creditor, unless there is a stipulation to the contrary, is (a) obliged to
pay the taxes and charges upon the estate.
(b) He is also bound to bear the expenses necessary for its preservation and
repair.
The sums spent for the purposes stated in this article shall be deducted from
the fruits.
 Hence, if the creditor does not pay the taxes, he is by law required to pay
indemnity for damages to the debtor
 The sums spent by the creditor in the fulfillment of the obligations shall be
charged against the fruits of the property.
 Another obligation of the creditor is to apply the fruits after receiving them to the
interest if owing and thereafter to the principal (Art. 2132)

(Obligation of the antichretic debtor)

Art. 2136. The debtor cannot reacquire the enjoyment of the immovable without first
having totally paid what he owes the creditor.
But the latter, in order to exempt himself from the obligations imposed upon
him by the preceding article, may always compel the debtor to enter again
upon the enjoyment of the property, except when there is a stipulation to the
contrary.
 If the creditor does not want to pay the taxes and incur the expenses necessary
for the preservation and repair of the property, he may compel the debtor to
reacquire the enjoyment of the same except when there is a contrary stipulation.

Art. 2137. The creditor does not acquire the ownership of the real estate for non-
payment of the debt within the period agreed upon. (prohibition against pactum
commissorium)
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.
 Remedies of creditor in case of non-payment of debt:
a) To bring an action for specific performance; or
b) To petition for the sale of the real property as in a judicial
foreclosure of mortgage.

Art. 2138. The contracting parties may stipulate that the interest upon the debt be
compensated with the fruits of the property which is the object of the
antichresis, provided that if the value of the fruits should exceed the amount
of interest allowed by the laws against usury, the excess shall be applied to
the principal.
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