LAW 5 FINALS PERIOD HANDOUTS

Atty. Jose L. Ngo

Law on Loan and Other Credit Transaction Contracts

A. Credit Transaction Contracts Enumerated (D. L.P.G. C.A.R.)
1. D Deposit
2. L Loan: (Mutuum and Commodatum)
3. P Pledge
4. G Guaranty
5. C Chattel Mortgage
6. A Antichresis
7. R Real Mortgage

B. Loan as a Credit Transaction Contract:

1. Meaning of Loan: “By the contract of loan, one of the parties delivers to another, either s0omething not consumable, so that
the latter may use the same for a certain time and return it, in which case the contract is called commodatum; or money or
other consumable thing, upon the condition that same amount of the same kind and quality shall be paid, in which case, the
contract is simply called a loan or mutuum. (Article 1933)

2. Kinds of Loan
Comparison
 The thing borrowed
 Ownership over the thing
borrowed
 Reason for borrowing
 Thing to be returned
afterwards
 Consideration that the lender
gets from the borrower
 Transmissibility
Mutuum Commodatum
Money or consumables Non-consumables
Acquired by the borrower Borrower does not become the owner
Consumption For use only
An equivalent thing of the same kind The very same thing must be returned
and quality and no other thing
Onerous if there is payment of interest Gratuitous, without any consideration
but should there be none, gratuitous (Note: Should there be any, the
contract cases to be a loan)
Transmissible Non-transmissible because it is purely
personal in character

3. Further Classification of Loans

a. Secured
b. Unsecured

4. Security Contracts of Loan

a. Pledge
b. Guaranty
c. Chattel Mortgage
d. Antichresis
e. Real Mortgage

5. Comparison between Loan, Deposit, and the Security Contracts

Loan Chattel Real

Deposit Mutuum Commodatum Pledge Guaranty Mortgage Antichresis Mortgage
PURPOSE
Safekeeping, Borrow, Borrow, use, Ensure Ensure payment Ensure Ensure Ensure
not to use Consume and and return the payment of of the loan payment of payment of payment of
Return an very same thing the loan (security the loan the loan the loan
Equivalent (security contract) (security (security (security
contract) contract) contract) contract)
PARTIES
Depositor and Lender and Bailor and Pledgor and Guarantor, Mortgagor Antichretic Mortgagor
Depositary Borrower Bailee Pledgee Principal Debtor and Debtor and and
and Creditor Mortgagee antichretic Mortgagee
creditor
MANNER OF PERFECTION
Thru the Thru the Thru the delivery Thru the Must be in Must be in a Must be in Must be in a
delivery of the delivery of the of the thing delivery of the writing or else, if public writing public
thing to be thing loaned loaned (Real thing pledged verbal, the instrument, (Formal instrument
deposited (Real contract) (Real contract is registered contract) and
(Real Contract) contract) unenforceable and with an registered
Contract) (Covered by affidavit of (formal
Statute of good faith contract)
Fraud) (formal
contract)
CHARACTERISTICS
Principal Principal Principal Accessory Accessory Accessory Accessory Accessory
Unilateral Unilateral Bilateral Unilateral Unilateral Unilateral Unilateral Unilateral
Bilateral Real Real Real Formal Formal Formal Formal
Either for Either for Gratuitous Either for a Either for Either for Either for Either for
consideration consideration consideration consideration or consideration consideration consideration
or gratuitous or gratuitous of gratuitous gratuitous or gratuitous or gratuitous or gratuitous
Real
 Loan Chattel Real
Deposit Mutuum Commodatum Pledge Guaranty Mortgage Antichresis Mortgage
MANNER OF CREATION
By contract By contract Either by By contract By contract By contract By contract
contract or by
operation of
law
OBJECT
Movable Money or Non- Movable Personal Movable Immovable Immovable
consumables consumable commitment to (its use)
(movable or pay subsidiarily
immovable)
BINDING EFFECTS OF THIRD PERSONS
Binding only Binding only on To be binding Must be in Must be Must be Must be
on the parties, the parties and on third writing or else, registered to registered to registered to
there assigns not on their persons, the unenforceable. produce be binding to produce
and heirs. assigns and contract must Found in the binding third persons. binding
heirs, as well, as appear in a Statute of Fraud effects on effects on
third persons public (Art. 1403) third persons. third persons.
(purely instrument, under the
personal) describing the heading (b) A If not If not
thing pledged special promise registered, registered,
Death of either and bearing to answer for valid as to the valid as to the
bailor or bailee the date of the debt, parties but parties but
extinguishes the the pledge. default, or void as to void as to
contract miscarriage of third persons. third persons
Registration is another.
not a
requirement
to bind third
persons.
MOST IMPORTANT CONCEPT/S
(a) Meaning (a) an (a) (a) (a) Benefit or (a) Concept (a) Meaning (a) concept
of deposit obligation to characteristics Characteristics right of of Pactum of antichresis of pactum
pay interest of of pledge, excussion of the Commissorium commissorium
(b) on a loan if commodatum, specifically, its guarantor (Art. as a void (b) Basic
characteristics not in writing more being – 2058) agreement characteristics (b)
and kinds (not stipulated particularly tis (1) a security as a contract registration
is void [Art. being – contract (b) Nature and (b) requirement
(c) effects of 1956] and if (1) real contract (2) an extent of liability Registration (c) difference to bind third
fortuitous still paid may – perfected by accessory of the requirement from real persons
events on the result in solutio the delivery of contract and guarantor to bind third mortgage
contract of indebiti or the thing (3) a real should the persons (c)
deposit natural loaned and contract principal debtor foreclosure
obligation (2) its being defaults in (c) Affidavit of sale rules
[Art. 1960]) purely personal (b) When is tis payment good faith as (1) if in excess
(death of either contract an additional (2) if deficient
(b) Meaning party results in binding on (c) Difference requirement
of mutuum its third persons from suretyship (d) Stipulation
extinguishment) (d) prohibiting
(c) difference (c) basic Foreclosure sale of the
from (b) Meaning of difference Sale Rules immovable
commodatum commodatum from (1) if in excess while still
mortgage (2) if deficient subject to
(c) Difference mortgage
from mutuum (d) Rule in (e) Sale of the
foreclosure thing
sale mortgaged
(1) as to while the
excess mortgage is
(2) as to still effective.
deficiency

(e) concept of
pactum
commissorium
as a void
stipulation in
pledge

(f)

(g) Concept
of Legal
Pledge

Law on Mutuum
I. Meaning of Mutuum
 A contract of loan, whereby one of the parties delivers to another, money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid. (Art. 1933)
II. Characteristics of Mutuum as Contract
1. Either gratuitous or onerous, depending on whether or not there is a stipulated agreement to pay interest. Third paragraph of
Art. 1933: “Simple loan may be gratuitous or with a stipulation to pay interest.”
2. A real contract (perfected by the delivery of the thing loaned). Art. 1934: An accepted promise to deliver something by way
of commodatum or simple loan is binding upon the parties but the commodatum or simple loan itself shall not be perfected
until the delivery of the object of the contract.
3. A unilateral contract. Once its object is delivered, only the borrower would have obligations.
4. It is a principal contract. It can stand on its own and can exist independently from other contracts.
5. It is a nominate contract. It has a special name that distinguishes it from other contracts.
6. It is not a purely personal contract. Death does not extinguish the obligation to pay.

III. Essential Elements

1. Consent, plus delivery of the thing loaned
 Acceptance of the offer to lend or the offer to borrow money or consumable
 This must be coupled with the delivery of the thing loaned.

2. Object – thing loaned which must be either money or consumable

 The borrower becomes the owner of the money or consumable he loan upon delivery to him
 Art 1953: A person who receives a loan of money or any other fungible thing acquires ownership thereof and is
bound to pay to the creditor an equal amount of the same kind and quality.
 Second paragraph of Art. 1955: If what was loaned is a fungible thing other than money, the debtor owes another
thing of the same kind, quantity and quality, even if it should change in value. In case it is impossible to deliver the
same kind, its value at the time of the perfection of the loan shall be paid.

3. Consideration
 With stipulation to pay interest on the loan – onerous
 No stipulation to pay interest on the loan – gratuitous

IV. Obligation to Pay Interest

A. If there is stipulation to pay interest
 A valid obligation to pay interest is created (Article 1956)
 If paid, the payment is valid.
 Art. 1956: No interest shall be due unless it has been expressly stipulated in writing.
B. If there is no stipulation to pay interest
 There is no valid obligation to pay interest exist even if there is a verbal agreement to do so
 If the obligation is verbal and the payment is made, the payment is void and results in solutio indebiti (Art. 1960)
 Art. 1960: If the borrower pays interest when there has been no stipulation thereof, the provisions of this code
concerning solutio indebiti or natural obligations shall be applied as the case may be.

Law on Commodatum
I. Meaning of Commodatum as a Contract of Loan
 In this kind of loan, one of the parties delivers to another either something not consumable so that the latter may use the
same for a certain time and return it (Art. 1933, the opening sentence).

II. Characteristics of Commodatum

1. It is gratuitous (free: no consideration for the use of the thing borrowed)
 “Commodatum is essentially gratuitous” (Art. 1933, second sentence)
 If any compensation is to be paid by him who acquires the use, the contract ceases to be a commodatum. (Art.
1935). Note: It ceases to be a loan and becomes a contract of lease.

2. It is a real contract (no delivery, no contract)

 Art. 1934: An accepted promise to deliver something by way of commodatum or simple loan is binding upon the
parties but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the
contract.
 Art. 1936: Real contracts, such as deposit, pledge and commmodatum, are not perfected until the delivery of the
object of the obligation.

3. It is purely personal (death ends the contract)

 Art. 1939. Commodatum is purely personal in character. Consequently:
i. The death of either the bailor or the bailee extinguishes the contract.
ii. The bailee can neither lend nor lease the object of the contract to a third person. However, the members of
the bailee’s household may make use of the thing loaned, unless there is a stipulation to the contrary or
unless the nature of the thing forbids such use.

4. It is nominate. It has a special name that differentiates it from other contracts.

5. It is a principal contract. It can exist independently unlike pledge and mortgage.

6. It is a bialteral contract. Both bailee and bailor have obligations.

III. Essential Elements

1. Consent plus delivery of the thing loaned
 Acceptance of the offer to lend or offer to borrow coupled with the delivery of the thing lent or borrowed.
 The bailer need not be the owner of the thing loaned. (Art. 1938)
 2. Object – The sue of the thing borrowed which must be non-consumable
 The object may either be movable or immovable (Art. 1937)
 If consumable, it must be merely for exhibition (Art. 1936)
 Extends only to the use of the principal object and not tis fruits unless there is a stipulation extending the ude to tis
fruits.

3. Consideration
 Mere benevolence or liberality (No material consideration); free

IV. Kinds of Commodatum

1. Ordinary Commodatum
 For a fixed term or one which
 Ends upon accomplishment of the purpose for its use.

2. Precarium (Art. 1947) (At will)

 Neither the duration of the contract nor the sue to which the thing loaned should be devoted has been stipulated or
 The use of the thing is merely tolerated by the owner.

V. Obligations of the Bailee and of the Bailor in Commodatum

 Obligations of the Bailee (P.S. R.E.T.U.R.N.)
o (P) Pay for the ordinary expenses, for the use and preservation of the thing loaned.
 Art. 1941: The bailee is obliged to pay for the ordinary expenses for the use and preservation of the thing
loaned.
o (S) Solidarily be liable with his co-bailees should there be 2 or more bailees to whom a thing is loaned in the same
contract.
 Art. 1945: When there are two or more bailees to whom a thing in loaned in the same contract, they are
liable solidarily.
o (R) Return the thing loaned to the bailor after the expiration of the period stipulated or after the accomplishment of
the use, for which the commodatum has been constituted.
o (E) Excuse himself from liability for loss of the thing loaned through fortuitous event except if it fails under any of the
five situations (A.L.D.U.B.)
1. (A) Able to save either the thing borrowed or his own thing and he chose to save the latter.
2. (L) Lends or leases the thing to a third person who is not a member of his household
3. (D) Delivery of the thing loaned with appraisal of tis values, unless there is a stipulation exempting the
bailee from responsibility in case of a fortuitous event.
4. (U) Uses or devotes the thing to any purpose different from that for which it has been loaned.
5. (B) Being kept or retained longer than the period stipulated or after the accomplishment of the use for
which the commodatum has been constituted. (Art. 1942)
o (T) Terminate the contract of commodatum upon the death of the bailor.
 Art. 1939: Commodatum is purely personal in character. Consequently:
 The death of either the bailor or the bailee extinguishes the contract
o (U) Use the principal thing loaned but not its fruits unless there be a stipulation allowing the bailee to make use of the
thing loan.
 Art. 1935: The bailee in commodatum requires the use of the thing loaned but not tis fruits; if any
compensation is to be paid by him who acquires the use, the contract ceases to be commodatum.
 Art. 1940: A stipulation that the bailee make use of the fruits of the thing loaned is valid.
o (R) Retention of the thing loaned on the ground that the bailor owes him something, even though it may be by
reason of expenses is prohibited. Unless the right of retention is in connection with damages provided for in article
1951.
 Art. 1941: The bailee cannot refrain the thing loaned on the ground that the bailor woes him something, even
though it may b by reason of expenses. However, the bailee has a right of retention for damages mentioned
in Art. 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.
o (N) Not to lend nor lease the object of the contract to a third person
 Exception:
 The members of the bailee’s household may make use of the thing loaned.
 Exception:
o Should there be a stipulation to the contrary prohibiting such use or in case the nature of the
thing forbids such use.
 Art. 1939: Commodatum is purely personal in character. Consequently:
o The bailee can neither lend nor lease the object of the contract to a third person. However,
the member of the bailee’s household may make use of the thing loaned, unless there is a
stipulation to the contrary or unless the nature of the thing forbids such use.
 Art. 1942: The bailee is liable for the loss of the thing even if tis should be through fortuitous event.
o If he lends or leases the thing to a third person who is not a member of his household.

 Obligations of the Bailor (D. R.I.N.G.)

o (D) Demand the return of the thing loaned only until after the expiration of the period stipulated or after the
accomplishment of the use for which the commodatum has been constituted.
 Exceptions:
 In case of urgent need of the bailor:
o Art. 1946: The bailor cannot demand the return of the thing loaned until the expiration of the
period stipulated or after the accomplishment of the use for which the commdoatum has
been constituted. However, if in the meantime, he should have urgent need of the thing, he
may demand its return or temporary use. In case of temporary use by the bailor, the
contract of commodatum is suspended while the thing is in the possession of the bailor.
  In case of precarium or bailment at will:
o Art. 1947: The bailor may demand the thing at will and the contractual relation is called a
precarium in the following cases:
(1) If neither the duration of the contract nor the use to which the thing loaned should be
devoted has been stipulated
(2) If the use of the thing is merely tolerated by the owner
 In case of act of ingratitude
o Art. 1948: The bailor may demand the immediate return of the thing if the bailee commits
any act of ingratitude specified in Article 765.
o (R) 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 waited without danger.
 If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though
he acted without fault, they shall be borne equally by both the bailor and bailee unless there is a stipulation
the contrary. (Art. 1949)
o (I) Indemnify the bailee for damages he incurred in case the bailor, knowing the flaws of the thing loaned, does nto
advise the bailee of the same and the bailee suffered damages as a result of such omission.
o (N) No right of abandonment of the thing loaned for payment of expenses or damages.
 Art. 1952: The bailor cannot exempt himself from the payment of expenses or damages by abandoning the
thing to the bailee.
o (G) Get back the thing loaned to the bailee only upon expiration of the term of the loan or accomplishment of its
objectives.
 Art. 1946; The bailor cannot demand the return of the thing loaned until after the expiration of the period
stipulated, or after the accomplishment of the use for which the commodatum has been constituted.
 Exceptions:
 In case of urgent need of the bailor.
o Art. 1946: However, if in the meantime, he should have urgent need of the thing, he may
demand its return or temporary use. In case of temporary use by the bailor, the contract of
commodatum is suspended while the thing is in the possession of the bailor.
 If the commodatum is in the form of precarium
o Art. 1947: The bailor may demand the thing at will and the contractual relation is called a
precarium in the following cases.
(1) If neither the duration of the contract nor the use to which the thing loaned should be
devoted, has been stipulated or
(2) if the use of thing is merely tolerated by the owner.
 Should there be acts of ingratitude on the part of the bailee
o Art. 1946: The bailor may demand the immediate return of the thing if the bailee commits
any act of ingratitude specified in Article 765.
 The following are acts of ingratitude as provided for in Article 765 of the New Civil Code:
 If the bailee commits some offense against the person, the honor or property of the bailor, of his wife
or children under his parental authority;
 If the bailee imputes to the bailor any criminal offense or any act involving moral turpitude even
though he should prove it unless the crime or the act has been committed against the bailee
himself, his wife or children under parental authority.
 If the bailee unduly refuses his support when the bailee is legally or morally bound to give support to
the bailor.

Law on Deposit
I. Meaning of Deposit as a Contract
 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.

II. Subject Matter of Deposit

 Only Movables
o Art. 1966: Only movable things may be the object of a deposit

 Not to be used but only for safekeeping

o Art. 1962: If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but
some other contract.

III. Characteristics of a Contract

1. A real contract. It is perfected upon delivery of the thing for safekeeping.
2. Generally, a gratuitous contract. (Art. 1965) Except when there is an agreement to the contrary, or unless the depositary is
engaged in the business of storing goods.
3. A unilateral contract because generally, it is gratuitous. Exception: If however, compensation is to be paid for such
safekeeping services, then it becomes bilateral.
4. It is nominate obviously because it is given a special name that differentiates it from other contracts.

IV. Distinguishing Features as a Contract

1. A thing is delivered to another person
2. The thing is movable
3. It is delivered to him only for safekeeping
4. He has an obligation to return it later on.
V. Kinds of Deposit
1. Judicial Deposit (or Sequestration) Thru the court
a) Meaning of Judicial Deposit (Art. 2005)
 Takes place when an attachment or seizure of property in litigation is ordered by a court.
b) Object of the judicial deposit or sequestration (Art. 2007)
 Movable or Immovable
c) Purpose of Judicial Deposit
 Ensure the effective performance of a right sued for in case of a favorable court judgment.
d) Obligation of the Depositary in Case of Judicial Deposit (Art. 2008)
 Compliance with the observance of the diligence of a good father of a family in taking care of the thing
deposited.

2. Extrajudicial Deposit (“Extra” (Outside) plus “Judicial” (Referring to court)

a) Meaning of Extrajudicial deposit
 This form of deposit takes place either by agreement of the parties (voluntary deposit) or by operation of law
(Necessary deposit)
b) Kinds of Extrajudicial Deposit
1. Voluntary Deposit – by agreement of the parties, depositor and depositary meaning by contract.
2. Necessary Deposit – by operation of law in any of the following four situations (P.I.O.T.):
a. (P) Passengers of common carriers (Public Transportation – Art. 1734)
b. (L) Legal obligation is being complied with (Art. 1996)
c. (O) On occasion of a calamity (Art. 1996) and
d. (T) Travelers in hotel and Inns (Art. 1998)

3. Basic Concepts in Relation to Voluntary Deposit

a) Rules in Case of Incapacity of the Parties
If both are incapacitated
Contract is unenforceable
If only the depositor is incapacitated
Depositary shall be subject to all the
obligations of a depositary and may be
compelled to return the thing by the
guardian, or administrator, of the person
who made the deposit or by the latter
himself if he should acquire capacity.
If only the depositary is incapacitated
Incapacitated depositary does not incur
the obligations of a depositary and he is
liable to return the thing deposited while
still in his possession and to pay the
depositor the amount by which he may
have benefited himself with the thing or
tis price subject to the right of any third
person who acquire the thing in good
faith. (Art. 1971)

b) Form of Voluntary Deposit

 May be entered into orally or in writing (Art. 1969)

c) Two obligations of the Depositary Not to Do

1. Obligation not to make use of the thing, but only to keep it safe or preserve the thing (Art. 1977)
 The depositary cannot make use of the thing deposited
 Exceptions:
o If he has the express permission of the depositor to do so or
o In case the preservation of the thing necessitation its use by the depositary. Qualification: Only
for that purpose.
 Effects if he violates this negative obligation (not to use)
o The depositary shall be liable for damages (Second paragraph of Art. 1977)
o If expressly permitted by the depositor to do so, the contract becomes a loan, or commodatum
and no longer a deposit.
Exception: If safekeeping, notwithstanding its use, remains the principal purpose of the contract.
o The depositary remains liable if later on the thing deposited is lost due to fortuitous event.
Art. 1979: The depositary is liable for the loss of the thing through a fortuitous event: (1) if it is so
stipulated, (2) if he sues the thing without the depository’s permission (3) if he delays its return (4)
if he allows others to use it even though he, himself, may have been authorized to use the same.
(Art. 1979)

2. Obligations not to deposit the thing with a third person

 The depositary cannot deposit the thing with a third person (Art. 1973)
 Exception: If there is a stipulation allowing such deposit to 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 unit. The depositary is responsible for the negligence of his
employees. (Art. 1973)

d) Liability of the depositary if thing is lost due to fortuitous event (Art. 1979)
 The depositary is liable for the loss of the thing through a fortuitous event (U.D.A.S.)
1. (U) Uses the thing without depositor’s permission.
2. (D) Delays its return
3. (A) Allows others to use it, even though he himself may have been authorized to use the same
4. (S) Stipulated that he is liable if the thing is lost due to fortuitous event.

Law on Guaranty
I. Preliminary Considerations
A. Meaning of Guaranty (Art. 2047)
1. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor
in case the latter failed to do so.
 B. Parties to a Contract of Guaranty
1. Creditor – who extended the loan
2. Principal Debtor – the one to whom the loan was extended
3. Guarantor (Secondary Debtor) – the one who binds himself to pay in the event the principal debtor cannot pay.

C. Kinds of Guaranty
1. Broadly classified:
 Personal Guaranty – object is the credit extended by the guarantor
 Real Guaranty – object is property. Hence, if immovable, it may partake the form of real mortgage or
antichresis and if movable, chattel mortgage.
2. As to Origin
 Conventional Guaranty – by agreement or contract
 Legal Guaranty – by operation of law
 Judicial Guaranty – required by a court to secure the satisfaction of a claim under litigation should it be
favorably ruled upon
3. As to consideration
 Gratuitous guaranty – free and no consideration is received by the guarantor
 Onerous – guarantor receives valuable consideration
4. As to the Identity of the Person Guaranteed
 Single Guaranty – solely for the principal obligation
 Double Guaranty – to secure a prior guaranty (guarantor’s guarantor)
5. As to extent
 Definite Guaranty – up to the principal obligation
 Indefinite Guaranty – extends to its accessories including judicial cause.

D. Difference from Suretyship

Guaranty Suretyship
Insurer of the solvency of the debtor (binds himself to pay if the Insurer of the debt (Binds himself to pay if the principal debtor
principal debtor cannot pay) does not pay)
Secondary promissor (secondarily liable) Original promissor (Primary liable)
Right of Excussion applies Right of excussion has no application

E. Concept of Right of Excussion

1. This is the right given by law to the guarantor which states that he cannot be legally compelled to pay the creditor
for the debt he guaranteed unless and until all the properties of the principal debtor has been exhausted and the
creditor had already resorted to all of the legal remedies against such debtor.

F. Characteristics of a Contract of Guaranty

1. Accessory contract – it is intended to secure the satisfaction of a debt in a contract of loan. It exists because there is
a loan.
2. Subsidiary Contract – it is effective only if the loan was not paid and after all properties of the debtor has been
exhausted and all remedies resorted to but to no avail.
3. Unilateral Contract – only one obligation is created and it is on the part of the guarantor.
4. Covered by the statute of frauds – hence if not in writing, it is unenforceable and cannot be sued upon in court for its
enforcement.
5. Gratuitous contract – unless there is a stipulation to the contrary (art. 2048)

G. Rights of Guarantor
Before Paying (Article 2071) After Paying (Article 2066-2067)
The guarantor, even before having paid may proceed against The guarantor who pays for a debtor must be indemnified by
the principal debtor: the latter. The indemnity comprises:
1. When is sued for the payment 1. Total amount of the debt
2. In case of insolvency of the principal debtor 2. Legal interest thereon from the time the payment was
3. When the debtor has bound himself to relieve him from made known to the debtor even though it did not earn
the guaranty within a specified period and this period interest for the creditor
has expired 3. The expenses incurred by the guarantor after having
4. When the debt has become demandable by reason of notified the debtor that payment had been demanded
expiration of the period for payment. of him.
5. After the lapse of ten years, when the principal 4. Damages, if they are due
obligation has no fixed period for its maturity, unless it The guarantor who pays is subrogated by virtue thereof to all
be of such nature that it cannot be extinguished except the rights which the creditor had against the debtor (Art. 2067)
within a period longer than 10 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.
Note: In all these seven cases, the action of the guarantor is to
obtain release from the guaranty or to demand a security that
shall protection from any proceedings by the creditor and from
the danger of insolvency of the debtor (Art. 2071)

H. Extinguishment of Guaranty
1. Thru any of the causes for extinguishing obligations in general (Art. 2076) such as payment, condonation,
compensation or novation.
2. Accepting voluntarily immovable or other property in payment of a debt (Dacion e pago Art. 2077)
3. Release by the creditor of one of the guarantors. This act benefits all to the extent of the share of the guarantor
released. (Art. 2078)
4. Extension granted by the creditor to the debtor without the guarantor’s consent.
 5. Release of solidary guarantors whenever by some act of the creditor they cannot be subrogated to the right,
mortgages and preferences of the latter.

I. Right of Excussion of the Guarantor

1. Meaning of Right of Excussion
 The right of the guarantor not to be compelled to pay the creditor unless and until the creditor has
exhausted all the property of the debtor and has resorted to all the legal remedies against the debtor.
2. Instances when the Guarantor is not entitled to Right of Excussion (I.S.C.A.P.E) (Art. 2059)
 (I) Insolvency of the debtor
 (S) Solidarily bind himself (guarantor) with the debtor
 (C) Cannot be sued within the Philippines unless he has left a manager or representative.
 (A) Absconded
 (P) Presumed that an execution on the property of the principal would no result in the satisfaction of the
obligation.
 (E) Express renunciation of the guarantor of the guaranty.

J. Other Concepts Related to Right of Excussion

1. Pre-requisite for the guarantor to avail of the benefit of excussion
 Art. 2060: In order that the guarantor may make use of the benefit of excussion, he must set it up against the
creditor upon the latter’s demand for payment from him and point out to the creditor available property of
the debtor within Philippine territory sufficient to cover the amount of the debt.
2. Effect of the creditor’s negligence in exhausting the debtor’s property
 Art. 2061: The guarantor having fulfilled al 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.
3. Notice of the suit against the principal debtor to the guarantor
 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 shall ask the court to notify the
guarantor of the action. The guarantor may appear so that he may, if he so desire, 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
4. Right of excussion of the guarantor’s guarantor
 Art. 2064: The guarantor of a guarantor shall enjoy the benefit of excussion, both with respect to
the guarantor and to the principal debtor.

Law on Credit Transaction: study Outline Emphasizing Outline on Actual CPA Board
Examinations (1971-1988)
I. Loan as Principal Contract of Pledge and Mortgage
A. Meaning of Loan (Art. 1933) – Act of borrowing with a duty to return.
B. Kinds of Loan:
1. Mutuum (e.g. bank savings account)
2. Commodatum (object is non-consumable)
C. Mutuum and Commodatum Basic Distinctions
Comparison Mutuum Commodatum
1. Object borrowed Money or consumable Non-consumables
2. Borrower’s ownership of the thing Borrower becomes the owner Borrower does not become the owner
borrowed
3. Justification or reason for borrowing For consumption For use only
4. Equivalent or the very same thing An equivalent thing is to be returned The very thing borrowed must be returned
borrowed is to be returned
5. Consideration Onerous, if interest is to be paid and Always gratuitous
gratuitous if no interest is to be paid
6. Transmissibility Transmissible Non-transmissible

II. Pledge and Mortgage as Accessory Contracts of a Contract of Loan

A. Similarities of Pledge and Mortgage (S.A.N.L.A.)
1. (S) Security and (S) subsidiary contract
2. (A) Accessory contract and (A) Absolute ownership of the pledgor or mortgagor of the thing pledged or mortgaged.
3. (N) Non-divisibility from the contract of loan
4. (L) Legal authority to pledge or mortgage if the pledgor or mortgagor has no free disposal of the thing pledged or
mortgaged
5. (A) Automatic appropriation by the creditor (pactum commissorium) is prohibited

B. Differences of pledge, real mortgage and chattel mortgage

Standard Distinctions Pledge Real Mortgage Chattel Mortgage
1. Delivery of the Object Required Not required Not required
2. Manner of perfection Real contact Formal contract Formal contract
3. Object of contract Movable Immovable Movable
4. Validity if not registered Registration is not a If not registered, valid as to the If not registered, valid as to the
requirement for its validity parties but void as to third parties but void as to third
persons (Registry of Deeds as persons (Chattel Mortgage
office of registration) Register is its office of
registration.
5. Arises from From contract and from law From contract From contract
 Standard Distinctions
6. Binding effect on third
persons
7. Less or Deficient Proceeds
from the foreclosure sale
8. Excess of the Proceeds from
the Foreclosure Sale
9. Sale of the object while the
mortgage or pledge subsists
Pledge
Must appear in a public
instrument describing the thing
pledged and stating the date
of the pledge
Deficiency can no longer be
recovered from the debtor
even if there is a stipulation
allowing such recovery of
deficiency.
Goes to and retained by the
creditor (Exception: Legal
Pledge)
Allowed if the pledge gives his
consent but the pledge
remains and the pledge
continues in possession.
Real Mortgage
Must be registered with the
Registry of Deeds where the
property is located.
Deficiency can still be
recovered from the debtor.
Goes to the debtor
Allowed and a stipulation
disallowing such alienation or
sale is void.
Chattel Mortgage
Must be registered with the
Chattel Mortgage Register
and there must be an affidavit
of good faith
Deficiency can still be
recovered from the debtor
Goes to the debtor
Must be with the written
consent of the creditor or else,
the debtor can be sued
criminally.

C. Pledge as an Accessory Contract of Loan

1. Meaning of Pledge
2. Characteristics of Pledge
a. Real Contract – delivery of the object to the creditor is required
b. Unilateral Contract – creditor’s obligation to return the object once the loan is paid
c. Subsidiary Contract – if the loan is not paid on time, the object will be sold and the proceeds thereof to be
used in its payment
d. Accessory Contract – intended to secure the payment of the loan
e. Nominate – with a special name differentiating it from other contracts.
3. Kinds of Pledge
a. Voluntary or Conventional Pledge
b. Legal Pledge
 Mechanic’s lien
 Hotel innkeeper’s lien
 Agent’s right to retain the object of the agency until he is reimbursed by his principal.
 Possessor in good faith’s right to retain the thing until reimbursement of his necessary expenses.
 Depositary’s right to retain the object of the deposit until he is paid what is due to him.
4. Rules in Case of Legal Pledge
a. Foreclosure Sale
 To be sold in a public auction with one month after demand for payment was made.
b. Disposition of Proceeds
 Apply first in payment of the expenses of the sale and the remaining to the claims of the creditor.
 If there be excess, the excess goes to the debtor
 If there be deficiency, it is recoverable from the debtor. (Note: Similarity with mortgage)
5. Principal Rights of the Pledgee (P.R.E.N.D.A.)
a. (P) Payment of the loan once it becomes due otherwise he may sell the thing pledged for the payment of
said debt (Art. 2087).
b. (R) Reimbursement for the expenses in preserving the object (Art. 2099).
c. (E) Entrust or deposit the object with a third person only if there be a stipulation allowing such (Art. 2100)
d. (N) Not to return the object until he is paid (Art. 2105)
e. (D) Demand replacement of the object should he be deceived on its substance or quality (Art. 2109)
f. (A) Apply the object’s fruits to the payment of the interests and afterwards to the principal (Art. 2102)
6. Principal Obligation of the Pledgee
a. Take care of the thing pledged with the diligence of a good father of a family (Art. 2099).
b. Inform the pledgor, without delay, of any danger to the thing pledged (art. 2107).
c. Answer and be liable for:
 Acts of his agents or employees with respect to the thing pledged (Art. 2100).
 The loss or deterioration of the thing pledged in conformity with the provisions of the New Civil Code
(Art. 2099).
d. Return the object pledged to the pledgor once the loan is paid
e. Not to use the thing pledged without tis owner’s authorization (Art. 2104) except if tis preservation requires its
use.
f. Not to automatically appropriate the thing pledged once the debt is not paid (pactum commissorium)
except if after two successive auctions, there be no buyer.
7. Extinguishment of pledge
a. When the principal obligation or loan is paid
b. When the thing pledged is returned by the pledgee to the pledgor (Art. 2110)
c. Abandonment of the pledge in writing (Art. 2111)
d. Sale of the thing pledged (Art. 2115)
e. Appropriation of the thing pledged by the pledgee (Art. 2112)

D. Mortgage as an Accessory Contract to Loan

1. Meaning of Mortgage
2. Characteristics of Mortgage
a. Formal Contract (Requires documentation and registration)
b. Unilateral contract
c. Subsidiary Contract
d. Accessory Contract
e. Nominate Contract
 3. Kinds of Mortgage
a. Real Mortgage – object is immovable
b. Chattel Mortgage – object is movable
4. Rights of the Mortgagee
a. To have the mortgage registered to bind third persons
b. To foreclose the mortgage if the debtor fails to pay
c. To demand from the debtor the deficiency if the proceeds of the foreclosure sale turns out to be insufficient
to cover the payment of the mortgage debt
d. To demand inclusion, as part of the mortgage, the object’s natural accessions, improvements, growing fruits,
and the rents or income (Art. 2127)
e. To alienate or assign to a third person the mortgage credit in whole or in part (Art. 2125)
f. To demand advanced payment should the object be lost due to fortuitous event.
5. Obligations of the Mortgagee
a. To give to the debtor the excess if the proceeds of the foreclosure sale turns out to be more than the
mortgage to be paid
b. Not to appropriate the thing mortgaged in the event the debtor fails to pay
6. Rights of the Mortgagor
a. To extinguish the mortgage by paying the principal debt once it becomes due
b. To sell the object of the mortgage before the debt becomes due
Real Mortgage Chattel Mortgage
 Even without the consent of the mortgagor  Must be with the written authorization of the mortgagee
 Notwithstanding that there is a stipulation disallowing otherwise such sale or alienation would be a crime.
such sale or alienation is void.
c. To demand the excess if the proceeds of the foreclosure sale turns out to be more than the principal
amount to be paid as debt.
d. In case of real mortgage, to redeem the immovable property
 Before it is sold in the foreclosure sale (Equity of Redemption)
 If judicial foreclosure, any time before the sale is confirmed by the court
 If extrajudicial foreclosure, within one year from and after the date of the registration of the sale
(Note; Not from the time of sale but from the registration of sale)

Law of Antichresis
I. Meaning of Antichresis
 Art. 2132: By the contract of antichresis, 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 t the principal of his credit.

II. Features of Antichresis

A. Existence of Loan
B. As security for the payment of the loan, an immovable property is delivered to the creditor by the debtor for the creditor to
use.
C. In using the immovable, the fruits will be applied first in the payment of the interest and the remaining in payment of the
amount of the principal debt.

III. Characteristics of Antichresis

A. Formal contract
 Art. 2134: The amount of the principal and of the interest shall be specified in writing; otherwise the contract of
antichresis shall be void.
B. Accessory Contract
 Existing only because there is a loan
C. Nominate
 Given a special name that differentiates it from other contracts
D. Consensual
 Although delivery of the immovable to the creditor is a legal requirement for this kind of security contract, its
perfection however requires only mere consent.
E. Security Contract
 It ensures the payment of a loan

IV. Differences from Contract of Real Mortgage

Contract of Antichresis Contract of Real Mortgage
 Immovable is delivered to the creditor  Immovable is not delivered to the creditor. It is retained
by the debtor.
 Creditor acquires right to the fruits of the immovable.  The creditor does not acquire right over the fruits of the
immovable
 Unless there be stipulation to the contrary, the creditor  The creditor does not pay taxes and charges on the
pays the taxes and charges on said immovable. immovable.
 Perfected by mere consent  Requires that it must be in a public instrument
 Creditor cannot sell the immovable. He may, however, 
petition the court for the sale of said real property.

V. Other Concepts Related to Antichresis

A. Determination of the Value of the Fruits to be Applied
 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.

B. Effect if the amount of the principal and of the interest are not specified in writing
 Art. 2134: The amount of the principal and of the interest shall be specified in writing, otherwise, the contract of
antichresis shall be void.
C. Obligation to pay taxes and charges on the immovable subject of an antichretic contract (Creditor’s obligation)
 Art. 2135: The creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes and charges upon the
estate.

D. Obligation to pay for the expenses necessary for the preservation and repair of the immovable
 Art. 2135: The creditor is also bound to bear the expenses necessary for its preservation and repair.

E. Rights of the Creditor if he pay taxes and charges on the immovable, as well as necessary expenses for its repair and
preservation
 Art.2135: The sum spent for the purpose stated in this article shall be deducted from the fruits.

F. Right of the Antichretic debtor to reacquire the Immovable

 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.

G. Right of the Antichretic Creditor to Acquire the Immovable for the non-payment of the debt within the period agreed upon
 Art 2137: The creditor does not acquire the ownership of the real estate for non-payment of the debt within the
period agreed upon.
 Any 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 mortgage shall apply.

H. Effect if the Interest Applied Exceeds that allowed by the Usury Law
 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 still be applied to the principal.