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CREDIT TRANSACTIONS PREMID 2016 commodatum; or money or other consumable thing, upon the condition
COURSE INTRODUCTION that the same amount of the same kind and quality shall be paid, in which
Last semester, we discussed only one contract- the contract of sales. In Credit case the contract is simply called a loan or mutuum.
Transactions, it involves several contracts. These involve: Commodatum is essentially gratuitous.
A. Loans, commodatum, mutuum
B. Deposits (voluntary, necessary deposit, legal pledge) Simple loan may be gratuitous or with a stipulation to pay interest.
C. Warehouse receipts in relation to deposit because the contract entered in
relation to deposit because the contract entered in warehouse receipt are In commodatum the bailor retains the ownership of the thing loaned,
contracts of deposit. Only the e vidence of the contract is a warehouse while in simple loan, ownership passes to the borrower. (1740a)
receipt because it was issued by a warehouse man, that’s why it’s
governed by the Warehouse Act. II. KINDS
D. Security undertaking A. Commodatum (loan for use)
a. 2 kinds: Bailor delivers to the bailee something not consumable so the latter may use
i. Personal Security Undertakings (guarantee and the same for a certain time and thereafter returns it. (i.e. identical thing).
suretyship) Commodatum is essentially gratuitous, if there is consideration paid-no
ii. Real security undertakings (pledge and mortgages -real matter how small, is is NOT commodatum anymore. The subject matter in
estate mortgage and chattel mortgage) commodatum is non-fungible – the identical thing delivered must be
E. Antichresis returned. Substitution is not allowed.
F. Concurrence and preference of credit
Kinds of commodatum:
1. Precarium – where the bailor may demand the thing loaned at will
I. BAILMENT, DEFINED since the use of the thing by the bailee depends on the pleasure of the
1 This is the delivery of property one person to another in trust for a specific bailor.
purpose, with a contract, express or implied, that the trust shall be faithfully 2. Ordinary commodatum –where the bailor cannot just demand the
executed and the property returned or duly accounted for when the special return of the thing at will since there is a period agreed upon.
purpose is accomplished or kept until the bailor reclaims it.
B. Mutuum (loan for consumption or simple loan)
II. PARTIES Lender delivers to the borrower money or other consumable thing subject to
A. Bailor- the one who gives or delivers the property bailed; also known as the condition that the same amount of the same amount of the same kind
commodatario or commodans and quality shall be paid.
B. Bailee- the one who receives the things delivered or bailed; also known
as comodante or commodatarius In mutuum, the subject matter is fungible. The identical thing delivered need
not be returned. Substitution of the thing with an equivalent is allowed.
III. EXAMPLES OF BAILMENTS
A bailment for the mutual benefit of the parties is created when there is an COMMODATUM v. MUTUUM
exchange of performances between the parties (e.g. a bailment for the repair of an Ba si s C ommoda tu m Mutuum
item when the owner is paying to have the repair accomplished). S ubject Mat t er Mo n ey or consu m a ble t hin g.
No n-co nsu m a ble t hing. Sa m e
The e q uivale nt a mo unt is t o be
t hing m ust be returned.
TITLE XI- LOAN ret urn ed
GENERAL PROVISIONS May b e grat uit ous or on ero us
Arts. 1933- 1934 Nat ur e Esse nt ially grat uit ous
(as wh en int erest is agre e d)
It is a loan for use or
Art. 1933. By the contract of loan, one of the parties delivers to another, Purpose Lo an f or cons u mpt ion
temporary
either something not consumable so that the latter may use the same for Possession (Art. 1935)
a certain time and return it, in which case the contract is called a

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Kind of property
Property involved is either real O nly perso n al prop ert y
involved
or personal
Risk of loss B ailor ret ains own ershi p of t h e Ownership is transmitted to the IV. DISTINCTIONS
property borrower FROM DEPOSIT
Ch aract er of t he P urely pers on al in char act er Loan De posi t
Not personal in character
cont ract (Art. 19 39) Le nd er gra nt s t he use of t he S af eke epin g of t he t hing
thing de posit ed
CONSUMABLE v. NON-CONSUMABLE Depositor an demand the
 Consumable – when it cannot be used in a manner appropriate to its Borrower pays at the end of the return
nature without being consumed. perio d of t he t hin g de posit e d anyt ime
 Non-consumable – when it can be used in a manner appropriate to its Co m pe nsat io n of credit s is Co m pe nsat io n not allowe d
nature without being consumed. ap plicable
Lender – borrower; creditor- Depositor-depositary
FUNGIBLE v. NON-FUNGIBLE debtor
 Fungible – where the parties have agreed to allow the substitution of the
thing delivered with an equivalent thing. FROM LEASE
 Non-fungible – where the parties have the intention of having the same
identical thing returned after the intended use. Loan Lea s e
O wn ers hip is t ransf err ed t o t he O wn er do es n ot lose his
Whether a thing is consumable or not depends upon the nature of the thing, borrower ow ners hip
2 while as to whether it is fungible or not, depends upon the intention of the Unilat er al co nt ract Bilateral contract
parties. (ex from Pineda: Rice is consumable. However, if the intention is just to Co nsu m abl e Non-consumable
display it in a rice e xhibition, it is still consumable per its nature, however, it is Le nd er- Borr o wer Lessor-Lessee
non-fungible per intention of the parties.)

III. CHARACTERISTICS
CHAPTER 1
A. Real contract – Loan is a contract perfected only upon delivery of the object COMMODATUM
of the contract.
SECTION 1- Nature of Commodatum
TN: Article 1934 – An accepted promise to deliver something by way of
Arts. 1935-1940
commodatum or simple loan is binding upon the parties, but the I. CONTRACT OF COMMODATUM
commodatum or simple loan itself shall not be perfected until the delivery of
the object of the contract. A. CONCEPT
Commodatum is essentially gratuitous. If compensation is present, the contract
B. Unilateral contract – Loan produces obligations only for the borrower. ceases to be a commodatum and becomes a lease contract.
Obligations of the lender are either incidental to ownership or consequences
of the borrower’s rights and duties. Q. To whom shall the fruits of the property pertain?
GR: The fruits belong to the owner. The bailee does not enjoy the fruits,
Q. What is the legal effect of promise to deliver?
otherwise, usufruct will result.
A promise to deliver by way of commodatum or mutuum if accepted, is binding
XPN: If there is a stipulation in the contract allowing the bailee to enjoy the fruits of
upon the promissor and promissee. In effect, the accepted promise to deliver the thing. Provided, that it must only be incidental to the use of the thing.
something by way of future loan becomes a consensual contract.
Q. Can consumable goods be the object of commodatum?

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GR: No, because the subject matter of commodatum must be non-consumable.
XPN: If the purpose is not to consume them as when they are merely for
exhibition purposes.
The object of commodatum is non-consumable but the law recognizes that there
are instances wherein consumable goods are to be the object of commodatum for
as long as the consumable goods is not to be consumed but only when the
purpose is only for exhibition purposes.
Q. Does the bailor need to be the owner of the property loaned?
No, the bailor need not be the owner since ownership is not transferred in
commodatum. It is enough that he has a possessory interest in the subject matter
or right to its use which he may assert against the bailee.
Q. Why is commodatum purely personal in character?
Because the death of either the bailor or bailee extinguishes the contract. Also,
the bailee can neither lend nor lease the object bailed to a third person.
XPN: The members of the bailee’s household may make use of the thing loaned,
unless there is a contrary stipulation.
Comments: In commodatum, ownership remains with the bailor or whoever owns
the property. Ownership is not transferred to the bailee, as such, the bailor or
3 whoever is the owner bares the risk of loss. There’s also another explanation why
the borrower bears the risk of loss- it is because a fungible thing is a generic thing.
And money is a generic thing; again, going back to ObliCon, genus nonquam perit
(generic thing never perishes).
Republic v. Bagtas
Commodatum is essentially gratuitous
Facts: Bagtas borrowed three bulls from the Bureau of Animal Industry for one
year for breeding purposes subject to payment of breeding fee of 10% of book
value of the bull. Upon expiration, Bagtas asked for renewal. The renewal was
granted only to one bull. Bagtas offered to buy the bulls at its book value less
depreciation but the Bureau refused. The Bureau said that Bagtas should either
return or buy it at book value. Bagtas proved that he already returned two of the
bulls, and the other bull died during a Huk raid, hence, oblig ation already
extinguished. He claims that the contract is a commodatum hence, loss through
fortuitous event should be borne by the owner.
Issue: WON Bagtas is liable for the death of the bull.
Held: Yes. Commodatum is essentially gratuitous. However, in this case, there is
a 10% charge. Thus, it is not a contract of commodatum. If this is considered
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compensation, then the case at bar is a lease. Lessee is liable as possessor in
bad faith because the period already lapsed.
Even if this is a commodatum, Bagtas is still liable because the fortuitous event
happened when he held the bull and the period stipulated already expired and he
is liable because the thing loaned was delivered with appraisal of value and there
was no contrary stipulation regarding his liability in case there is a fortuitous event.
Catholic Vicar v. CA
Effect of adverse possession for 11 years
Facts:
- 1962: Catholic Vicar Apostolic of the Mountain Province (Vicar), petitioner, filed
with the court an application for the registration of title over lots 1, 2, 3 and 4
situated in Poblacion Central, Benguet, said lots being used as sites of the
Catholic Church, building, convents, high school building, school gymnasium,
dormitories, social hall and stonewalls.
- 1963: Heirs of Juan Valdez and Heirs of Egmidio Octaviano claimed that they
have ownership over lots 1, 2 and 3. (2 separate civil cases)
- 1965: The land registration court confirmed the registrable title of Vicar to lots 1 ,
2, 3 and 4. Upon appeal by the private respondents (heirs), the decision of the
lower court was reversed. Title for lots 2 and 3 were cancelled.
- VIC AR filed with the Supreme Court a petition for review on certiorari of the
decision of the Court of Appeals dismissing his application for registration of Lo ts
2 and 3.
- During trial, the Heirs of Octaviano presented one (1) witness, who testified on
the alleged ownership of the land in question (Lot 3) by their predecessor-in-
interest, Egmidio Octaviano; his written demand to Vicar for the return of the land
to them; and the reasonable rentals for the use of the land at P10,000 per month.
On the other hand, Vicar presented the Register of Deeds for the Province of
Benguet, Atty. Sison, who testified that the land in question is not covered by any
title in the name of Egmidio Octaviano or any of the heirs. Vicar dispensed with
the testimony of Mons. Brasseur when the heirs admitted that the witness if called
to the witness stand, would testify that Vicar has been in possession of Lot 3, for
75 years continuous ly and peacefully and has constructed permanent structures
thereon.
Issue: WON Vicar had been in possession of lots 2 and 3 merely as bailee
borrower in commodatum, a gratuitous loan for use.
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Held: YES. Private respondents were able to prove that their predecessors'
house was borrowed by petitioner Vicar after the church and the convent were
destroyed. They never asked for the return of the house, but when they allowed its
free use, they became bailors in commodatum and the petitioner the bailee.
The bailees' failure to return the subject matter of commodatum to the bailor did
not mean adverse possession on the part of the borrower. The bailee held in trust
the property subject matter of commodatum. The adverse claim of petitioner came
only in 1951 when it declared the lots for taxation purposes. The action of
petitioner Vicar by such adverse claim could not ripen into title by way of ordinary
acquisitive prescription because of the absence of just title.
The Court of Appeals found that petitioner Vicar did not meet the requirement of
30 years possession for acquisitive prescription over Lots 2 and 3. Neither did it
satisfy the requirement of 10 years possession for ordinary acquisitive prescription
because of the absence of just title. The appellate court did not believe the
findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase
and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner
Vicar because there was absolutely no documentary evidence to support the
same and the alleged purchases were never mentioned in the application for
registration
4 Comments: In Catholic Vicar case, we are only interested here only in the
period prior to the adverse possession by the Catholic Vicar because actually this
was reversed by the SC. This was a 1988 case and in 1900 this was reversed. But
only respect to the possession, adverse possession for 10 years where
possessory right is lost according to SC after 10 years.
We are talking about the period prior to that adverse possession which was
actually more than 50 years. For our purpose, we only need to learn that no matter
how long the possession is of the bailee, for as long as he recognizes the trust on
a commodatum, he will never acquire ownership under acquisitive prescription
unless the trust is repudiated.
Republic v. CA
Effect of suspension of possessory rights for > 50 years.
FACTS: The Heirs of Domingo Baloy, herein private respondents, applied for a
registration of title for their land. Their claim is anchored on their possessory
information title acquired by Domingo Balay through the Spanish Mortgage Law,
coupled with their continous, adverse and public possession of the land in
question. The Director of Lands opposed the registration alleging that such land
became public land through the operation of Act 627 of the Philippine
Commission. On Nov 26, 1902, pursuant to the executi ve order of the President of
U.S., the area was declared within the US Naval Reservation.
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The trial court denied the registration. The Heirs of Domingo Baloy appealed to
the Court of Appeals. The appellate court reversed the decision of the trial court
thus approving the application for registration. Petitioners motion for
reconsideration was denied, hence this petition for review on certiorari.
ISSUE: WON the occupancy of the US Navy over the subject land is in the
concept of an owner, hence, such possess ion can be acquired by prescription.
RULING: the occupancy of the U.S. Navy was not in the concept of owner. It
partakes of the character of acommodatum. It cannot therefore militate against the
title of Domingo Baloy and his successors -in-interest. One's ownership of a thing
may be lost by prescription by reason of another's possession if such possession
be under claim of ownership, not where the possession is only intended to be
transient, as in the case of the U.S. Na vy's occupation of the land concerned, in
which case the owner is not divested of his title, although it cannot be exercised in
the meantime.
The finding of respondent court that during the interim of 57 years from November
26, 1902 to December 17, 1959 (when the U.S. Navy possessed the area) the
possessory rights of Baloy or heirs were merely suspended and not lost by
prescription. Hence, the disputed property is private land and this possession was
interrupted only by the occupation of the land by the U.S. Navy in 1945 for
recreational purposes. The U.S. Navy e ventually abandoned the premises. The
heirs of the late Domingo P. Baloy, are now in actual possession, and this has
been so since the abandonment by the U.S. Navy. A new recreation area is now
being used by the U.S. Navy personnel and this place is remote from the land in
question.
B. KINDS- COMMODATUM IS DIVIDED INTO
A. Ordinary commodatum – Contract of loan where the period of the use is
fixed or the purpose where commodatum is constituted is specific. Bailor
cannot just demand the return of the thing at will since there is a period
agreed upon.
B. Precarium – if the purpose is not stipulated, or the period is not stipulated
or the use is merely tolerated by the bailor, then the contract is called
precarium. Just like in the case of Quintos vs Beck or the Catholic Vicar
case where the use is merely tolerated.
Quintos v. Beck
If neither the duration of the contract nor use of the thing loaned is stipulated
FACTS: Quintos and Beck entered into a contract of lease, whereby the latter
occupied the former’s house. On Jan 14, 1936, the contract of lease was
novated, wherein the QUintos gratuitously granted to Beck the use of the furniture,
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subject to the condition that Beck should return the furnitures to Quintos upon
demand. Thereafter, Quintos sold the property to Maria and Rosario Lopez. Beck
was notified of the conveyance and given him 60 days to vacate the premises. IN
addition, Quintos required Beck to return all the furniture. Beck refused to return 3
gas heaters and 4 electric lamps since he would use them until the lease was due
to expire. Quintos refused to get the furniture since Beck had declined to return all
of them. Beck deposited all the furniture belonging to QUintos to the sheriff.
ISSUE: WON Beck complied with his obligation of returning the furnitures to
Quintos when it deposited the furnitures to the sheriff.
RULING: The contract entered into between the parties is one of commadatum,
because under it the plaintiff gratuitously granted the use of the furniture to the
defendant, reserving for herself the ownership thereof; by this contract the
defendant bound himself to return the furniture to the plaintiff, upon the latters
demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741
of the Civil Code). The obligation voluntarily assumed by the defendant to return
the furniture upon the plaintiff's demand, means that he should return all of them
to the plaintiff at the latter's residence or house. The defendant did not comply with
this obligation when he merely placed them at the disposal of the plaintiff,
retaining for his benefit the three gas heaters and the four eletric lamps.
As the defendant had voluntarily undertaken to return all the furniture to the
5 plaintiff, upon the latter's demand, the Court could not legally compel her to bear
the expenses occasioned by the deposit of the furniture at the defendant's behest.
The latter, as bailee, was nt entitled to place the furniture on deposit; nor was the
plaintiff under a duty to accept the offer to return the furniture, because the
defendant wanted to retain the three gas heaters and the four electric lamps.
Catholic Vicar v. CA, supra.
If the use of the thing is merely tolerated
Although the predecessors of respondents never asked for the return of the
house, but when they allowed its free use, they became bailors in commodatum
and Vicar, the bailee. The use of the property being merely tolerated, cannot ripen
into ownership.
C. PACTUM DE COMMODANDO (1934)
Art. 1934. An accepted promise to deliver something by way of
commodatum or 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. (n)
Q: Can there be a consensual contract with respect to a contract of loan?
Will there be an instance wherein a person is obliged to deliver in a contract
of loan?
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A: Yes, in pactum de commodando. This is an agreement to constitute a loan.
This is not the real contract of loan. This is the consensual contract to constitute a
loan.
REQUISITES OF COMMODATUM
A. Capacity – No special capacity needed. Bailor need not be the owner of the
property bailed. A lessee may even constitute a contract of commodatum. A thief
may even be a bailor.
B. Object – It must be non-consumable or non-fungible. If consumable, it must be
for exhibition purposes only.
C. Consideration – Gratuitous. If not, it ceases to be a commodatum.
D. Form – No special form required, provided the object is delivered.
CHARACTERISTICS OF COMMODATUM (AS A CONTRACT)
1. It is essentially gratuitous.
2. Its purpose is to transfer the temporary use of the thing loaned to the bailee
3. The use of the thing is for a certain time
4. It is a real contract since it is perfected only upon delivery
5. It is a principal contract
6. It is a unilateral contract since after the object is delivered, it creates
obligations to be performed by the bailee alone.
7. Purely personal because of the trust reposed on the bailee
Comments:
In a consensual contract to constitute a loan, the bailor is obliged to deliver
but when we talk on a real contract of loan, there is no obligation to deliver. WH Y?
Because there is delivery already. It is the delivery that perfects the contract.
Note:
THERE IS NO SPECIAL CAPACITY REQUIRED FOR A CONTRACT OF
COMMUDATUM.
Q:Is it required that the bailor is the owner?
A: NO! According to Manresa, in a commudatum you don’t transfer ownership,
you only transfer temporary usage of the thing.
Even if you are not the owner, you can enter into a commudatum. No special
capacity requirement by the parties, for as long the basic requirement under
OBLICON of LEGAL C APACITY is met. IOW, the parties must be legally
capacitated.
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2. He keeps it longer than the period stipulated or after the accomplishment

Arts. 1641- 1945
I. Rights and obligations of the parties
OBLIGATIONS/ DUTIES OF BAILEE
A. To preserve the thing
B. To pay for ordinary e xpenses for the use and preservation
C. To return the thing at the expiration of the contract
D. To answer for damages due to his fault
Q. What kind of expenses is the bailee ordinarily liable for?
Ordinary expenses for the use and preservation of the thing loaned. He must take
good care of the thing with the diligence of a good father.
Q. Is the bailee liable to answer for damages due to deterioration of the
thing loaned?
GR: No, if the deterioration is caused by the ordinary wear and tear.
XPN: If deterioration is due to his fault or negligence.
6 Q. Can the bailee retain the thing because he has the claim against the
bailor (ex. Extraordinary expenses for preservation or a claim for under
another contract)
NO. As soon as the time has expired, the bailed property must be restored to the
bailor. This is true even if the bailor owes the bailee something including claims for
extraordinary expenses.
of the use for the which the comm udatum has been constituted
3. The thing loaned has been delivered with appraisal of its value, unless
there is stipulation exempting the bailee from responsibility in case of
fortuitous event
4. If he lends or leases the thing to a 3rd person, who is NOT a member of
his household
TN: Commudatum is a personal contract, thus, he cannot lend it to
another person. GR: He is only allowed to lend the thing to members of
the household
XC: Unless otherwise stated. Also, if by the nature of the thing, it
prevents the use of the household member- like toothbrush, postitso,
bridal gown (IMO PAGAMITON IMO YAYA?)
5. If, being able to save either the thing borrowed of his own, he chooses
the latter.
TN: If the bailee could save either the thing borrowed or his property but
chose to save his own and as a result, the thing borrowed is lost then he
is liable for the loss because according to Paras that is an act of
ingratitutde.
Q. In case of plurality of the parties, is the obligation is joint or solidary?
It is joint. Because solidarity is not presumed, it arises when it is expressly
stipulated, provided by law and the nature of the obligation to require solidarity.
Meaning, anyone of them could be held liable. There is loss, then anyone of them
could be liable. When there are two or more bailees to whom a thing is loaned in
the same contract. Solidarity is provided to effectively safeguard the rights of the
bailor over the thing. Hence, in case of loss he can enforce his right against any
one of the bailees.

XPN: If bailee has claims for damages by reason of the hidden defects or flaws of
the thing bailed which he was not warned or informed about. However, the right of RIGHT OF THE BAILEE
retention is only until he is reimbursed. The bailee has the personal right to use the thing, but not to use its fruits unless
stipulated by the parties. He can neither lend nor lease the thing to a stranger who
Q: Can legal compensation be invoked? is not a member of his household because the contract is personal.
NO. Review ObliCon
Quintos v. Beck, supra
Q: Is the bailee liable for damages for loss of the thing? Effect of failure to return
NO. He is not liable if he is not in fault.
GR: The bailee is not liable for loss due to fortuitous event The contract between them is one of commodatum because Quintos gratuitously
EXEPTIONS: granted Beck the use of the furniture to which the latter bound himself to return
1. Devotes the thing for another purpose upon demand. The obligation voluntarily assumed by Beck to return the furniture
Example: I will lend you my car so that you can use this in coming to means that he should return all of them to Quintos at the latter's residence or
school, instead you used it to visit the Butanding in Oslob with your house. Beck did not comply with this obligation when he merely placed them at
friends the disposal of Quintos, retaining for his benefit the three gas heaters and the four

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electric lamps. His failure to return the property upon demand makes him liable for
the all the consequences – deposit fees, judicial fees and litigation costs.
Catholic Vicar v. CA, supra
Effect of failure to return
Although the predecessors of respondents never asked for the return of the
house, but when they allowed its free use, they became bailors in commodatum
and Vicar, the bailee. The bailee's failure to return the subject matter of
commodatum did not mean adverse possession. The bailee held in trust the
property subject matter of commodatum.
De los Santos v. Jarra
Effect of failure to return
Facts: Jimenea borrowed from Felix 10 first-class carabaos to be used at the
animal power mill of his hacienda under the sole condition that they be returned as
soon as the work at the mill was terminated. Four of carabaos died of rinderpest
and the six remaining ones have not been returned. Hence, this case.
Issue: Whether Jimenea is liable for damages.
Held: Yes. In a contract of commodatum whereby one of the parties thereto
7 delivers to the other a thing that is not perishable, to be used for a certain time and
afterwards returned, it is the imperative duty of the bailee, if he should be unable
to return the thing itself to the owner, to pay damages to the later if, through the
fault of the bailee, the thing loaned was lost or destroyed, inasmuch as the bailor
retains the ownership thereof.
The carabaos delivered to be used not being returned by the defendant upon
demand, there is no doubt that she is under obligation to indemnify the owner
thereof by paying him their value.
RIGHT OF THE BAILOR
A. To demand return of the thing for acts of ingratitutde
B. To demand return of the thing when loan is for unlawful purposes
OBLIGATIONS OF THE BAILOR
A. To allow the bailee the use and enjoyment of the thing loaned for the
duration of the period stipulated.
TN: This is why when the bailee could not use the thing because of its
defective nature which is known by the bailor and not of the bailee (hidden
defects), then the bailor is liable for the damages suffered by the bailee.
XPN: When the bailor has an urgent need of the thing, in which case, he
may demand its return OR temporary use (commodatum is merely
suspended)
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B. Liable to answer for damages for known hidden defects
C. To refund the bailee for the extraordinary expenses incurred by the latter but
only upon notification of the bailee
TN: Hence if no notification, the bailor is not automatically liable, because he
can opt not to shoulder the expenses of the thing depending on the
circumstances.
Q. When may the return of the thing loaned be demanded?
GR: Bailor may demand the return of the thing only after the expiration of the
period stipulated OR after the accomplishment of the use for which the
commodatum has been constituted.
TN: This is only true in cases of ordinary commodatum where there is a period
stipulated. In cases of precarium, the bailor may demand the thing loaned at will.
A. If the bailee should commit offenses against the person, honor or property of
the bailor, or of his wife or children under his parental authority.
B. If the bailee imputes to the bailor, any criminal offense, or any act invol ving
moral turpitude, even though he should prove it.
C. If the bailee unduly refuses the bailor support when the bailee is legally or
morally bound to give support to the bailor
Q: If the bailee suffers damage because of the defective nature of the thing
which was not communicated by him by the bailor. Can the bailor just upon
abandon the thing and not pa y them damages?
A: NO, he cannot.
Q. What are the requisites for liability of the bailor to pay damages for
known hidden defects?
1. There is flaw or defect in the thing loaned
2. That the flaw or defect is hidden
3. The bailor is aware of such flaw
4. He does not notify or advise the bailee of the same
5. The bailee suffers damage by reason of such flaw or defect
TN: If the defect or flaw is unknown to the bailor, he is not liable because
commodatum is essentially gratuitous. Also, if bailee knew of the defect, he is
deemed to have assumed the risk. Hence, bailor is not liable for damages.
Rationale: When a person lends a thing, he ought to confer benefit and not to do
mischief. Hence, if he does not reveal the flaws, he is liable for his bad faith.
Q. What is the rule with respect to extraordinary expenses?
GR: They shall be borne by the bailor. Hence, he shall fully refund the bailee of
the extraordinary expenses incurred by the latter.
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Provided, however: That the bailee notified the bailor before the expenses were
incurred, except when there is urgency in the repair that any delay will cause
danger to the property.
XPN: If the extraordinary expenses were incurred by the bailee out of his own
volition.
cannot use the thing without consuming it. The borrower cannot be charged for
estafa or misappropriation because you cannot misappropriate something that you
own.
Q. What is the cause in mutuum or simple loan?
As to the borrower, it is the acquisition of the thing.
As to the lender, it is the right to demand the return of the thing or its equivalent

TN: If the e xtraordinary expenses are incurred by the bailee on the occasion of the
actual use of the thing – the expenses shall be equally shared by the bailor and Chee Kiong v. Malik
bailee. Mutuum vs. commodatum

II. TERMINATION Facts: Rosalinda filed a case against Kiong and Kieng with Estafa through
A. CAUSES OF EXTINGUISHMENT misappropriation, but the complaint states on its face that the latter received the
amount as a loan.
1. Ordinary Commudatum - expiration of the period or accomplishment of the In this case, Liwanag could not dispose of the money as she pleased because it
purpose. was only delivered to her for a single purpose, namely, for the purchase of
2. Claim of the lender cigarettes, and if this was not possible then to return the money to Rosales. Since
Q. If there is permanent need on the part of the bailor, can the bailee in this case there was no transfer of ownership of the money delivered, Liwanag is
refuse? liable for conversion under Art. 315 of the Revised Penal Code.
A: NO. But if the urgent need is merely temporary then commudatum is in
the meantime suspended. Issue: Whether the complaints constitute Estafa.
8 3. Destruction of the thing
Q: If the thing is lost because of the fault of the bailee, is the thing Held: No. In order that a person can be convicted of Estafa, it must be proven that
extinguished? Or due to fortutitous event? he has the obligation to deliver or return the same money, goods or personal
A: Regardless of the cause of the loss, commudatum is extinguished property that he received. Petitioners had no such obligation to return the same
because there is nothing to use. But if is due to fault of the bailee, then he is money. This is so because as clearly stated in criminal complaints, the sums of
liable for damages. money that petitioners received were loans.

Since commudatum is a personal contract, meaning the baille only has a In a simple loan, the borrower acquires ownership of the money, goods or
personal right to use the thing, which he cannot transfer his right to another personal property borrowed. Being the owner, the borrower can dispose of the
person. thing borrowed and his act will not be considered misappropriation thereof.
2. Death of the borrower or lender, unless parties stipulated otherwise.
3. Ingratitude of the borrower JUDGE: In Chee Kiong Yang case, there was a complaint filed for estafa and the
MTC Judge who investigated the case found probable cause for estafa. SC said,
CHAPTER 2 there can be no estafa when the contract entered into is a mutuum because there
SIMPLE LOAN OR MUTUUM is transfer to the borrower. Unlike in commodatum, there is no transfer of
ownership. That’s why when the bailee cannot return, then he will be charged for
Arts. 1953- 1961 estafa.
I. SIMPLE LOAN (Mutuum, loan of consumption)

MUTUUM (loan of consumption) Tolentino v. Gonzales

A contract where the lender delivers to the borrower, money or other consumable Mutuum distinguished from lease
thing, with the condition that the same amount of the same kind and quantity be
paid. In Mutuum, ownership is transferred to the borrower, wherein the borrower

Langomez | Juba | Orapa | Peral | Elnas

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Issue: May a tenant charge his landlord with a violation of the Usury Law upon the
ground that the amount of rent he pays, based upon the real value of the property,
amounts to a usurious rate of interest?
Held: No. A contract for the lease of property is not a "loan." Under the Usury Law
the defense of usury cannot be based thereon. The Usury Law in this jurisdiction
prohibits a certain rate of interest on "loans."
In Tolentino vs Gonzales, the court distinguished between lease and loan,
Tolentino said, the rent he was paying as rent was usurious. So the court said,
when we talk about the contract of lease, the consideration paid by the lessee is
called rent. It is not interest, it is not covered by the usury law.
Like for instance, if you are renting an apartment which was built at the cost of 2M,
and you are renting it at 3m a month (2.5%), so the legal interest now is 6% per
annum, would you consider this usurious? NO
The court said, the consideration paid is not usurious, because the court said, this
is not a contract of loan, but a contract of lease. It lease, the compensati on paid is
called interest and that is covered by usury law.
MUTUUM vs. AGENCY
9
Liwanag v. CA
Mutuum distinguished from agency
Facts: Rosales constituted Liwanag and Tabligan as her agents in her cigarette
business. In their agreement, Rosales would give the money needed to buy
cigarettes while Liwanag and Tabligan would sell them, with corresponding 40%
commission if the goods are sold, otherwise, the money would be returned to
Rosales. Thus Rosales gave several cash advances to Liwanag and Tabligan.
They however never showed up to remit the proceeds of sale, nor returned the
money advanced. Liwanag was charged with Estafa. Liwanag alleged the contract
between her and Rosales was simple loan, hence there was no Estafa.
Issue: Whether Liwanag and Tabligan can be convicted of Estafa.
Held: Yes. The contract cannot be considered a loan, since in a contract of loan,
once the money is received by the debtor, ownership over the same is transferred.
Being the owner, the borrower can dispose of it for whatever purpose he may
deem proper.
In a contract of agency, the principal delivers something to the agency, in trust for
the agent to perform the trust, and for the agent to return the money or to account
for the money.
Langomez | Juba | Orapa | Peral | Elnas
Q: Does the agent becomes the owner the thing delivered by the principal?
A: NO. That’s why when the agent cannot account for the money received, or
cannot return from the principal, then the agent can be charged with estafa.
That’s what happened in the case Liwanag vs CA. Liwanag received m oney from
Rosales for them to buy cigarettes to sell such and remit the proceeds to Rosales.
Q: Was the agency able to account or remit?
A: NO. That’s why Rosales filed a case for estafa.
Q: Where they convicted?
A: Yes. Because the agreement was to purchase the cigarette and resell them
and to remit the proceed less your commission of 40. If you required to remit and
less the commission, then you are not the owner of the money. You did not borrow
the money from person who deliver it from you, you were merely an agent, and
failure to account, then you have committed the trust for misappropriation, then be
convicted of estafa.
KINDS OF MUTUUM
A. Gratuitous mutuum
B. Mutuum with interest
There is no presumption of payment of consideration in a simple loan. It is only
payment when it is stipulated and when it is in writing. These two must concur
Judge Emphasized that: In commodatum, there is no special capacity required,
because there is no transfer of ownership that is transferred to the bailee.
REQUISITES OF MUTUUM
A. Capacity of the parties – Lender must be the owner of the property lent
B. Object – Money or any other consumable/fungible things
Q: could a thing borrowed be not mone y?
A: Yes. Fungibles, e.g bugas, asin, etc. The object in mutumm is money
or other fungible thing, because in simple loan the borrower cannot use
the subject of the loan without consuming it.
C. Consideration – Gratuitous (liberality) or onerous (interest)
D. Form – No special form needed, provided the object is delivered.
TN: Promissory note is not required for the validity of the contract.
Although it comes in handy when you try to collect the debt. An accepted
promise to deliver something by way of simple loan may be subject to the
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Statute of Frauds if not to be performed within one year – consensual
contract.
Example A: We entered into a contract VERBALLY wherein I lend you money for
your Bar exam, payable after 2 years from today. At the time of collection, you
said to me “Wtf, wa ko y gipirmahan uy tangina. C u in court.”
Q. Can you refuse to pay?
A: Yes, you can refuse because the obligation is to be performed after one year.
When you studied unenforceable contracts, an obligation purely executory to be
performed must be writing to be enforceable. While we have perfected a
consensual contract to constitute a loan and that is perfectly valid and binding
between the two of us, however, it cannot be enforced if I invoke the enforceability
if the contract because it is performed after one year.
Example B: You borrowed one sack of rice on Aug 1, 2016 worth 2k. The price of
one sack of rice by October 2016 is now 4k.
How many sacks of rice shall be returned today?
What if there is no sack available because of a storm? What is the obligation of
the borrower? Pay the monetary obligation of the rice. How much, 2k or 4K?
A: 2k, the value at the time of the obligation.
10
NOTE: No matter what the price of the thing is at the time of the payment, if that
fungible thing is not available at the time of the payment, the obligation of the
borrower is converted into monetary obligation on which the basis is at the time
the contract is entered into or constituted.
If at the time of the obligation the price is 2k, but at the payment 4K per sack, the
obligation is return one sack, not one half which is the equivalent of 2K.
Saura Import and Export v. DBP
Accepted promise to deliver something b y way of simple loan
Facts: Saura Inc. applied to the RFC for an industrial loan of P500k, which was
approved, provided that a security be given. However, despite the formal
execution of the loan agreement, RFC reduced the loan from P500k to P3 00k and
circumstances occurred that resulted to the prolonged discharge of the loan. After
which, the loan was again restored to the original amount of P500k. Yet at one
point, the negotiations between the two parties came to a standstill, and so Saura
Inc. did not anymore pursue the matter and requested that RGC cancel the
mortgage.
Issues:
Langomez | Juba | Orapa | Peral | Elnas
1. Whether there was a perfected consensual contract between RFC and Saura
Inc.
2. Whether RFC is guilty of breach of contract of loan.
Held:
Yes. Where the application of Saura Inc. for a loan of P500k was approved by
resolution of the defendant, and the corresponding mortgage executed and
registered, there is undoubtedly o ff er and acceptance and there was indeed a
perfected consensual contract.
Art. 1954. 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
2. No. There was undoubtedly o ff er and acceptance in this case but this fact
alone falls short of resolving the basic claim that RFC failed to fulfill its obligation
and that the Saura Inc. is therefore entitled to recover damages. When RFC
turned down the request of Saura Inc., the negotiations reached an impasse.
Saura Inc., obviously was in no position to comply with RFC's conditions. So
instead of doing so and insisting that the loan be released as agreed upon, Saura
Inc. asked that the mortgage be cancelled. The action thus taken by both parties
was in the nature of mutual desistance which is a mode of extinguishing
obligations.
OBLIGATIONS OF THE BORROWER
A. To return the thing or amount borrowed at the period stipulated
B. To pay interest
Q. What are the rules with respect to payment of loan?
1. If what was loaned is money:
A. Payment must be made in the currency stipulated, or if impossible,
legal tender in the Philippines.
B. Bills of exchange and other mercantile documents – produce the
effect of payment only when encased or impaired through the fault of
the creditor.
C. In case of extraordinary inflation or deflation of the currency stipulated
– value of the currency at the time of the establishment of the
ob ligation.
2. If it is other consumable or fungible thing:
A. Debtor shall pay another thing of the same kind, quantity and quality
even if they should change in value.
B. If it is impossible to deliver the same kind – pay its value at the time of
the perfection (delivery) of the loan.
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C. Interest payable in kind – value at the time of payment
Rono v. Gomez
Rule if the thing b orrowed is money
Facts: Rono received a loan of P4,000 in Japanese fiat money from Gomez. He
agreed to pay one year after, in the currency that will be prevailing by the end of
the stipulated period of one year.
After the liberation, Roño was sued for payment. His main defense was that his
liability should not exceed the equivalent of 4,000 pesos "mickey mouse" money
— and could not be 4,000 pesos Philippine currency, because the contract would
be void as contrary to law, public order and good morals since on the basis of
calculations by Government experts, Roño only received the equivalent of P100
and now he is required to disgorge P4, 000.
Issue: Whether Rono is correct.
Held: No. He received P4, 000 and he is required to pay P4, 000 exactly. Th e
increased intrinsic value and purchasing power of the current money is
consequence of an event (change of currency) which at the time of the contract
neither party knew would certainly happen within the period of one year. They
11 both elected to subject their rights and obligations to that contingency. If within
one year another kind of currency became legal tender, Gomez would probably
get more for his ‘money. If the same Japanese currency continued, he would get
less, the value of Japanese money being then on the downgrade.
nd
Rono vs Gomes, this was a loan obtained during the 2 WW, Rono borrowed
money from Gomez, where he promised to pay the legal tender or medium of
exchange one year after the date of the loan, currency where the loan matures, at
the time he obtained the loan, the currency prevailing was Japanese currency or
the the mickey mouse money, he borrowed 4K in mickey mouse, but the intrinsic
value is 100 pesos that time. One year after he obtained the loan, it was already
the Liberation time, the currency is reverted back to Philippine pesos.
So Rono offered to pay 100 peso, but Gomez insisted that it should be 4K,
because the agreement was whatever the legal currency was when the loan
matures, hence 4K.
If its usury law applies, then it will be usury.
Was Gomez legally correct in collecting 4K?
A: Yes. That was their agreement. He was bound by his promise.
Is he morally justified?
Langomez | Juba | Orapa | Peral | Elnas
A: NO. He was not. Lend 100 then collect 4K after just one year.
We’re talking here of the autonomy of contracts. The court said, that both were
not certain that the war was ending.
Nepomuceno v. Narciso
Rule if the thing b orrowed is money
Facts: Nepomuceno executed a mortgage over a parcel of land in favor of
Narciso, as security of payment of a P24k loan in 7 years at 8% interest per
annum. By mutual agreement, the terms of the contract was novated and the
interest rate was reduced to 6% until the end of the war and by stipulating that the
mortgagor shall not pay and release the mortgage while the war went on.
Narciso offered to pay while the war was going on but Nepomuceno refus ed to
accept the same. Narciso alleged that the provision for non-redemption during the
war is against public policy and a restraint on the freedom of commerce.
Issue: Whether the said provision is against public policy as to render the contract
void.
Held: No. There is nothing immoral or violative of public order in the questioned
stipulation. The mortgagee apparently did not want to have their pre -war credit
paid with Japanese military notes, and the mortgagor voluntarily agreed not to do
so in consideration of the reduction of the rate of interest. It was a perfectly
equitable and valid transaction. Narciso were bound by said contract and
Nepomuceno were not obliged to receive payment before it was due. Hence, the
latter had reason not to accept the tender of payment made to them by the former.
Judgment affirmed.
JUDGE: During war time, they novated the contract, they agreed that no payment
shall be paid while the war was going on, but they lowered the interest. Why do
you think that the lender insisted that no payment should be made during the war.
Remember the money borrowed was in Philippine peso. If payment is during the
war, it will be mickey mouse.
Nepumuceno insisted that payment should be made during the war.
The court said no, you cannot insist that payment should be made during the war,
because of autonomy of contract, there was a stipulation, there was a novation of
contract that payment should not be made during the war.
CONTRACT WITH A PERIOD
- In can be favored to either or both of the party.
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In this case, the period was in favor of the creditor, it was in his favor that the
contract was novated, because if payment was allowed during the war, then he
will be receiving mickey mouse money.
Is it against public policy? NO. It was perfectly equitable and consistent with the
provision of the Civil Code.
Of course we said, that payment must be made in the the numerical value in the
currency stipulated unless there extraordinary inflation.
Requisite of extraordinary inflation:
1. There must be an official declaration by the Banko Central
2. Obligation is contractual
3. And the parties agreed to be bound with effects of extraordinary inflation or
deflation.
It will affect the obligations of the party, because the value of the money at the
time of the contract will be the basis of the payment of the obligation.
TRIVIA: We have ordinary fluctuation lang (3%)
Equitable PCI Bank v. Ngor
Rule if the thing b orrowed is money
12
Facts: Respondent filed an action for annulment and/or reformation of documents
against Equitable PCI Bank, alleging that Equitable induced them to avail of its
peso and dollar credit facilities by offering low interest rates so they accepted the
proposal and signed the bank’s pre-printed promissory notes, without knowing that
they contained escalation clauses granting Equitable authority to increase interest
rates without their consent.
Issue: Whether the said provision is against public policy as to render the contract
void.
Held: No. There is nothing immoral or violative of public order in the questioned
stipulation. The mortgagee apparently did not want to have their pre -war credit
paid with Japanese military notes, and the mortgagor voluntarily agreed not to do
so in consideration of the reduction of the rate of interest. It was a perfectly
equitable and valid transaction. Narciso were bound by said contract and
Nepomuceno were not obliged to receive payment before it was due. Hence, the
latter had reason not to accept the tender of payment made to them by the former.
Judgment affirmed.
PAYMENT OF INTEREST
Interest is the compensation agreed to be paid by the borrower for the use of the
money lent to him by the lender.
Q. When is payment of interest applicable?
Langomez | Juba | Orapa | Peral | Elnas
A. Applies only to interest for use of money and not to interest as
indemnity for damages.
B. Applies only when payment of interest is stipulated in writing.
Q. What are the three classes of interests?
 Simple interest – interest paid for the use of the principal at a certain rate
stipulated in writing.
 Compound interest – interest imposed upon the accrued interest or the
interest due and unpaid. Legal as long as the parties voluntarily agreed.
 Legal interest – interest which the law directs to be paid in the absence of
any agreement. 6% per annum
Q. Is payment of interest despite absence of stipulation valid?
GR: No, because the law says that payment of interest must be stipulated in
writing.
XPN: Voluntary payment. It is valid being proof of a tacit contract or a natural
obligation.
XPN to XPN: If it is proved that the interest was paid by error (solutio indebiti)
Q: When are we obligated to pay interest when we say that loan is naturally
gratuitous?
A: When it is expressly stipulated and in writing.
TN: There are two requirements before interest is payable.
First, it must be expressly stipulated; second, it must be in writing.
Comments:
 If it is not in writing, even if you expressly agreed that you will pay
interest, you cannot be compelled to pay interest.
 If you paid interest when one of the requisites is lacking, the presumption
is you voluntarily paid interest. The presumption is NOT payment by
mistake. Payment by mistake is the exception (Sigaan case).
Sigaan v. Villanue va
Effect if interest is paid even if not stipulated
Facts: Respondent claimed that petitioner approached her and o ff ered to loan her
P540k. Since she needed capital for her business transactions with the PNO, she
accepted petitioner's proposal. The loan agreement was not reduced in writing.
Also, there was no stipulation as to the payment of interest.
Respondent issued two checks worth P500k and P200k respectively for pa yment
of the loan. Petitioner told her that of the P700k, P160k would be applied as
 CREDIT TRANSACTIONS PREMID 2016
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interest. However, petitioner pestered her to pay additional interest. Respondent
now asks for reimbursement.
Issue: Whether respondent should be reimbursed.
Held: Yes. The law provides that “no interest shall be due unless it has been
expressly stipulated in writing”. The parties did not agree on the payment of
interest for loan, whether verbal or written. In which case, the principle of solutio
indebiti applies. If the borrower of loan pays interest when there has been no
stipulation therefore, the provis ions of the Civil Code concerning solutio indebiti
applies. Said provision provides that if something is received when there is no
right to demand it, and it was unduly delivered through mistake, the obligation to
return it arises.
Q. Is the usury law still applicable toda y?
No. The effectivity of the Usury Law was suspended by CB No. 905 adopted on
December 1982 which expressly removed the interest ceilings. Nevertheless,
lenders cannot charge unreasonable and unconscionable interests. The courts
may reduce the same. In which case, the lender may recover only the principal
and reasonable interest.
Pan Pacific v. Equitable PCI Bank
Requisites of payment of interest
13
Facts: Pan Pacific entered into a contract for mechanical works on air-conditioning
system with respondent in 1989. The contract stipulated that Pan Pacific shall be
entitled to a price adjustment in case of increase in labor costs and prices of
materials.
In 1990, labor costs and prices of materials escalated. Hence, Pan Pacific
requested for a price adjustment. However, respondent withheld the payment of
the price adjustment despite Pan Pacific's repeated demands. Instead, it o ff ered
Pan Pacific a loan of P1.8 million, which
Pan was constrained to accept since its operational capital was becoming
inadequate for the project.
When Pan’s debt became due, it refused to pay saying that it would not have
incurred the loan had respondent released the price adjustment on time and
maintained that the P1.8M was to be considered as an advance payment on the
price adjustment.
Court ordered respondent to pay Pan the unpaid balance of the price adjustment
with an interest at the legal rate of 12% per annum. Pan appealed the decision
claiming that the interest rate applicable should be the 18% bank lending rate.
Issue: What interest rate shall be applied?
Langomez | Juba | Orapa | Peral | Elnas
Held: 18%. It is settled that the agreement or the contract between the parties is
the formal expression of the parties' rights, duties, and obligations. It is the best
evidence of the intention of the parties. Thus, when the terms of an agreement
have been reduced to writing, it is considered as containing all the terms agreed
upon.
A re view of Section 2.6 of the Agreement and Section 60.10 of the General
Conditions shows that the consent of the respondent is not needed for the
imposition of interest at the current bank lending rate, which occurs upon any
delay in payment.
Article 1956 of the Civil Code specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing. Therefore, payment of monetary
interest is allowed only if:
(1) There was an express stipulation for the payment of interest, and
(2) The agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the payment of monetary
interest. 33 We agree with petitioners' interpretation that in case of default, the
consent of the respondent is not needed in order to impose interest at the current
bank lending rate.
Espiritu v. Landrito
Stipulation for legal interest b ut higher rate is charged
Facts: Spouses Landrito loaned from Espiritu P350k payable in 3 months and
executed a real estate mortgage as security for the loan. Of the P350k, P17.5k
was deducted as interest for the first month which is equivalent to 5% of the
principal debt and P7.5% was deducted as service fee. The agreement, however,
provided that the principal indebtedness earns "interest at the legal rate. When the
spouses failed to pay, their property was foreclosed.
Issue: Whether the interests collected were valid.
Held: No. The Real Estate Mortgage executed between the parties specified that
"the principal indebtedness shall earn interest at the legal rate." The agreement
contained no other provision on interest or any fees or charges incident to the
debt. The total interest and charges amounting to P559k on the original principal
of P350k was accumulated over only two years and one month. These charges
are not found in any written agreement between the parties.
The omission of the Spouses Espiritu in specifying in the contract the interest rate
which was actually imposed, in contravention of the law, manifested bad faith.
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Stipulations authorizing iniquitous or unconscionable interests are contrary to
morals, if not against the law. Under Article 1409 of the Civil Code, these contracts
are inexistent and void from the beginning.
Comments on Espiritu case:
This concerns annulment of a foreclosure of mortgage.
Mortgage is an accessory undertaking whereby real property is offered as
security. If the debtor fails to pay the principal obligation, the creditor may
foreclose the mortgage.
Since an incorrect amount that was not the overdue obligation of the debtor was
the basis of the foreclosure, then the basis of the foreclosure was also wrong. This
is why the SC NULLIFIED THE MORTGAGED. The mortgage was valid but in
effect, there was no violation of the provisions of the mortgage. There might have
been violations but the basis of the foreclosure was an incorrect amount.
Nacar v. Gallery frames
Legal interest
BSP-MMB Circular No. 799 effective July 1, 2013 provides that the rate of legal
rate of interest for loans or forbearance of any money, goods or credits and the
rate allowed in judgments shall now be 6% per annum. It should be noted,
14 nonetheless, that the new rate could only be applied prospectively and not
retroactively.
Consequently, the 12% per annum legal interest shall apply only until June 30,
2013. Come July 1, 2013, the new rate of 6% per annum shall be the prevailing
rate of interest when applicable.
Jardenil v. Solas
Liability for contractual or monetary interest after maturity of the promissory note
Facts: Salas issued a promissory note where it was clearly agreed that he will pay
interest only up to the date of maturity, or until March 31, 1934, and that payment
is extendable by one year but without mention of interest.
Issue: Is Salas bound to pay the stipulated interest only up to the date of maturity
as fixed in the promissory note, or up to the date payment is e ff ected?
Held: As the contract is silent as to whether after that date, in the event of non -
payment, the debtor would continue to pay interest, we cannot, in law, indulge in
any presumption as to such interest, otherwise, we would be imposing upon the
debtor an obligation that the parties have not chosen to agree upon. Article 1755
of the Civil Code provides that "interest shall be due only when it has been
expressly stipulated."
Langomez | Juba | Orapa | Peral | Elnas
Illustration by Judge of Jardenil case:
The amount loaned is 100k and the agreed interest rate is 10% for one year. This
means that the interest after one year is 10k.
Q: Is there default after one year?
A: No, because there was a provision for an automatic extension.
Q: How much is payable at the end of the second year?
A: SC said the payment of interest was only up to the end of the first year. There
was no stipulation for the payment of interest during the extended period. Thus, no
interest is payable during the extended period. The total payable amount at the
end of the second year is 110,000.00.
Let’s add additional facts. If at the second year, demand was made to the
borrower and the borrower failed to pay. And the borrower pays today (Nov. 17),
will there be interest from the end of the second year when demand was made up
to today? YES. There shall be payment of damages from the moment there is
default. When does default set in? When there is demand. From demand, debtor
or borrower is already in default and because of default, there will be damages in
the form of INTEREST because this is forbearance of money. We are now, not
talking about the monetary interest, which is the contractual interest agreed by the
parties but LEGAL INTEREST.
What amount will earn legal interest? 100k or 110k? The amount due at the time
of default will be the basis of the charging of interest. So, it will be 110k and this is
NOT compounding of interest. Compounding of interest is NOT presumed.
Prisma Construction v. Manchavez
Liab ility for contractual or monetary interest after maturity of the promissory note
***** This was a 2010 decision so the BSP Circular No. 799 was not in force
yet.***
Issue: Whether the parties agreed to the 4% monthly interest on the loan. If so,
does the rate of interest apply to the 6-month payment period only or until full
payment of the loan?
Held: The interest of P40k per month corresponds only to the six (6)-month period
of the loan, or from January 8, 1994 to June 8, 1994, as agreed upon by the
parties in the promissory note. Thereafter, the interest on the loan should be at the
legal interest rate of 12% per annum.
Comments on Prisma case:
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Parties can stipulate in the payment of interest a fixed amount NOT in a certain
percentage. It is not required that it must be fixed percentage like 6%. In the case
of Prisma, interest was fixed at 40,000.00 a month for 6 months. If there was
demand after 6 months, then it would be legal interest already. 40,000.00 was the
monetary interest agreed. After demand, where there is already defau lt, that is
where you start talking about compensatory interest.
Additional Comments:
 The court has recognized that when you purchase things on credit, price is
higher than cash sale. If you compute the difference between the cash
price and the credit price, would you consider that as interest? Such that
if the difference is so huge, you can consider it as usurious? NO. In the
old case of Manila Trading and Supply Company v. Tamaraw Plantation,
it is not interest in the purview of usury law.
 For example, you purchase home appliance on credit; then you will be
required to sign a promissory note saying that incase of default, you will
pay 25% for attorney’s fees, 5% surcharge a month, as well as costs of
litigation. If the price of the item you purchased is 100k and you default
until the payment has ballooned to more than 100k, can you go to court
and say that that is interest and it’s unconscionable? No, you cannot.
 Another example, you purchased something and you expressly agreed in
writing that you pay interest of 10% per annum and there is another
15 provision in the promissory note that if you default in the payment of said
note, you promise to pay penalty interest of 4% a month (in a year, a total
of 48%). And that’s in addition to the 10% per annum. A total amount of
58%, which is unconscionable. Can you challenge that the interest is
unconscionable? NO. Attorney’s fees and surcharges are payable only
after default. That is your penalty. You only talk of interest being
unconscionable and iniquitous when it is monetary interest.
Q. What is the rule if the interest is payable in kind?
If interest is payable in kind, its value shall be appraised at the current of the
products or goods at the time of payment.
COMPOUNDING OF INTEREST
Accrued interest is Interest due and remaining unpaid.
Accrued interest = interest due + remaining unpaid
Compound interest- The interest on the accrued interest.
Rules with respect to accrued interest
GR: Accrued interest shall not earn interest. Hence, compounding is not allowed.
XPNs:
1. When there is a written stipulation
2. When judicial demand has been made upon the borrower
Langomez | Juba | Orapa | Peral | Elnas
CIR v. Isabela Cultural Corp.
Compounding of interest
Only simple interest computation and not a compounded one should have been
applied by the BIR. There is no stipulation between the BIR and ICC on the
application of compounded interest. Under Article 1959 of the Civil Code, unless
there is a stipulation to the contrary, interest due should not further earn interest.
Carpo v. Chua
Effect of usurious or unconscionable interest
Facts: Petitioner obtained a loan and by way of security, executed a real estate
mortgage. Upon his failure to pay the loan, the property was foreclosed. He then
filed a case for the annulment of the mortgage and the consequent foreclosure
proceedings, contending that the agreed rate of interest of 6% per m onth or 72%
per annum is so excessive, iniquitous, unconscionable and exorbitant that it
should have been declared null and void. Consequently, the nullity of the agreed
interest rate a ff ects the validity of the real estate mortgage.
Issues:
Whether the interest rate is valid.
Whether the real estate mortgage and the consequent foreclosure proceedings
were valid.
Held:
1. No. It is apparent that the stipulated interest in the subject loan is excessive,
iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract
principle embodied in Article 1306 of the Civil Code, contracting parties may
establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy. In the ordinary course, the provision may be invoked to
annul the excessive stipulated interest.
2. Yes. A usurious loan transaction is not a complete nullity but defective only with
respect to the agreed interest. A contract of loan with usurious interest consists of
principal and accessory stipulations and said two stipulations are divisible in the
sense that the former can still stand without the latter. In this case, since the
mortgage contract derives its vitality from the validity of the principal obligation, the
invalid stipulation on interest rate is similarly insu fficient to render void the ancillary
mortgage contract.
Sentinel Insurance v. CA
What is not considered as interest
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GR: Accrued interest shall not earn interest. Hence, compounding is not allowed.
Damage dues in do not include and are not included in the computation of interest
as the two are of different categories and are distinct claims which may be
demanded separately, in the same manner that commissions, fines and penalties
are excluded in the computation of interest where the loan or forbearance is not
secured in whole or in part by real estate or an interest therein.
While interest forms part of the consideration of the contract itself, damage dues
(penalties, and so forth) are usually made payable only in case of default or non -
performance of the contract. 11 Also, although interest is subject to the provisions
of the Usury Law, 12 there is no policy or provision in such law preventing the
enforcement of damage dues although the e ff ect may be to increase the sum
payable beyond the prescribed ceiling rates.
E. BANK DEPOSITS
ATTENTION: JUDGE REVISED THIS PART OF THE SYLLABUS. GOPOCO
CASE AND CBP CASE ARE NOT INCLUDED ANYMORE.
When you deposit money in the bank, that is insured up to 500,00. In excess
16 of 500,00 it is uninsured.
Q: If the bank closes, depositors are paid up to 500,000 by the PDIC. What will
happen to the remainder?
 A:(judge wrote something on the board) This is the ceiling paid by
PDIC, so there is?
You call this uninsured deposit. Since we are talking about a simple
contract of loan between the bank and the depositor. This is an ordinary
credit and this should not enjoy preference.
But under the new law which took effect on June 11, 2016. This
now enjoys ORDINARY PREFERENCE. The same level as that
right of the PDIC to recover from the insolvent bank because if
the PDIC pays this, it will recover from the bank.
Ilangi baligya ang ass ets sa insolvent bank then try to realize,
so that’s the claim against the bank.
What about this one (judge points something sa board) This one is uninsured
deposit which does not enjoy any preference at all. Think about a bank going
bankrupt. Insolvent. So under the law, concurrence and preference of credits –
preferred creditors are paid first.
Q: What is an Insolvent Bank?
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A: A bank is closed usually because of insolvency. So when we talk about
insolvency here. Insolvency in the sense that its assets are much less than its
liability.
 Therefore, there are creditors that are not paid or will not be paid in full.
 Especially the stockholders. Because the stockholders are paid in last.
This one belongs to the ordinary creditor. This are paid last prior to June
11, 2016. Now, it has jumped the line. Karon after June 11, 2016 when the
amendatory law took effect. This now enjoys preference. In fact, the law says
No. 9. It is no 9 in 3034. While the contract, is an ordinary contract of loan.
Buy the uninsured portion of the deposit enjoys preference already.
In fact, it will be paid ahead of damages for debt and so on because
there is a specific provision of law, it will belong to number 9. That is why I will no
longer discuss Gopoco and Central Bank vs. Morphe – because in this cases,
the court said, they do not enjoy preference, now it does.
But in Serrano vs. Ce ntral Bank, since again the nature of the contract
between the depositor and the bank does not change. It remains to be mutuum.
The failure of the bank to return the deposit will not make the officers liable
specially if we look at it from the point of view of the DOCTRINE OF SEPARATE
ENTITY.
 Doctrine of Separate Entity-
o The personality of the corporation which is w juridical person
consider the person by law as different from the personality of
the stockholders. So if it’s the obligation of the Corporation
(hanging)
Serrano v. Central Bank
Nature of b ank deposits
Bank deposits are in the nature of irregular deposits. They are really loans
because they earn interest. All kinds of bank deposits, whether fixed, savings, or
current are to be treated as loans and are to be covered by the law on loans.
Current and savings deposits are loans to a bank because it can use the same.
The petitioner here in making time deposits that earn interests with respondent
Overseas Bank of Manila, was in reality a creditor of the respondent Bank and not
a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of the
respondent Bank to honor the time deposit is failure to pay its obligation as a
debtor and not a breach of trust arising from a depositary's failure to return the
subject matter of the deposit.
Facts:
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On October 13, 1966 and December 12, 1966, petitioner made a time
deposit, for one year with 6% interest, of One Hundred Fifty Thousand Pesos
(P150,000.00) with the respondent Overseas Bank of Manila.Concepcion Maneja
also made a time deposit, for one year with 6-1/2% interest, on March 6, 1967, of
Two Hundred Thousand Pesos (P200,000.00) with the same respondent
Overseas Bank of Manila.
On August 31, 1968, Concepcion Maneja, married to Felixberto
M. Serrano, assigned and conveyed to petitioner Manuel M. Serrano, her time
deposit of P200,000.00 with respondent Overseas Bank of Manila.
Notwithstanding series of demands for encashment of the
aforementioned time deposits from the respondent Overseas Bank of Manila,
dating from December 6, 1967 up to March 4, 1968, not a single one of the time
deposit certificates was honored by respondent Overseas Bank of Manila.
Serrano filed a motion for judgment in this case, praying for a decision on
the merits, adjudging respondent Central Bank jointly and severally liable with
respondent Overseas Bank of Manila to the petitioner for the P350,000 time
deposit made with the latter bank, with all interests due therein; and declaring all
assets assigned or mortgaged by the respondents Overseas Bank of Manila and
the Ramos groups in favor of the Central Bank as trust funds for the benefit of
petitioner and other depositors (on the ground that respondent Central Bank failed
17 in its duty to exercise strict supervision over respondent Overseas Bank of Manila
to protect depositors and the general pub lic).
Respondent Central Bank admits that it is charged with the duty of
administering the banking system of the Republic and it exercises supervision
over all doing business in the Philippines, but denies the petitioner's allegation that
the Central Bank has the duty to exercise a most rigid and stringent supervision of
banks, implying that respondent Central Bank has to watch every move or activity
of all banks, including respondent Overseas Bank of Manila.
Issues:
1. Is petitioner correct in filing actions for mandamus and prohibition in the
present case?
2. What is the nature of bank deposits applicable in this case?
Held:
1. No, petitioner is not correct in filing actions for mandamus and
prohibition in the present case.
By the very nature of the claims and causes of action against
respondents, they in reality are recovery of time deposits plus interest from
respondent Overseas Bank of Manila, and recovery of damages against
respondent Central Bank for its alleged failure to strictly supervise the acts of the
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other respondent Bank and protect the interests of its depositors by virtue of the
constructive trust created when respondent Central Bank required the other
respondent to increase its collaterals for its overdrafts and emergency loans, said
collaterals allegedly acquired through the use of depositors money. These claims
should be ventilated in the Court of First Instance of proper jurisdiction as the
Supreme Court already pointed out when this Court denied petitioner's motion to
intervene in G.R. No. L-29352.
2. Bank deposits are in the nature of irregular deposits.
Bank deposits are in the nature of irregular deposits. They are really
loans because they earn interest. All kinds of b ank deposits, whether fixed,
savings, or current are to be treated as loans and are to be covered b y the law on
loans. Current and savings deposits are loans to a bank because it can use the
same. The petitioner here in making time deposits that earn interests with
respondent Overseas Bank of Manila was in reality a creditor of the
respondent Bank and not a depositor. The respondent Bank was in turn a debtor
of petitioner. Failure of the respondent Bank to honor the time deposit is failure to
pay its obligation as a debtor and not a breach of trust arising from a depositary's
failure to return the subject matter of the deposit.
Comment:
When the bank receives the deposit, it enters into a contract of loan. It
is the obligation of the b ank to return that money to the depositor, a s a juridical
person. It’s not the obligation of the stockholdersor who own the b ank or the
officersto return that money unless it’s a corporation fiction (nor sure, inaudib le)
meaning if you can prove fraud on the part of the officers they maybe you can
hold them personally or solidary liab le with the bank. But if you can’t prove
fraud- the. You can nit hold them liable.
 So, if we said earlier that the bank becomes the owner of the money
deposited by the depositor and the employees of those bank steal the
money from the volt of the bank.
Q: Who should be the proper party complainant in filing the criminal
case for qualified theft (etc)?
A: The Bank, because in the case of Puig, the bank employees challenged
the personalty of the bank to bring/file a criminal case against them. And so,
the court has come to the occasion to discuss the nature of the contract
between the bank and the depositor. It’s a simple loan and in simple loan
ownership is transferred to the Bank. The Bank is the owner, then it is the
aggrieved party and has the personality to file the suit.
People v. Puig
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Bank as proper party in complaint for qualified theft
The bank acquires ownership of the money deposited by its clients. The
relationship between banks and depositors is that of a creditor and debtor.
The employees of the bank who are entrusted with the possession of the deposits
in the bank occupy positions of confidence by virtue of the confidence reposed in
them. It is not the depositor-client who is the real-party in interest in a case for
qualified theft filed by the bank against its employees who misappropriated the
money deposited in the bank, but the bank itself as it is now the owner of such
money.
TITLE XII- DEPOSIT
CHAPTER 1
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. Id the safekeeping of the things delivered is not the principal purpose of the
contract, there is no deposit but some other contract.
18 DEPOSIT
Contract of deposit is one whereby one party delivers the thing (depositor) to the
depository (for what?) for safekeeping.
- So it is an obligation of a depositary to return the thing
when demanded.
- So the depositor delivers a movable to the depositary for
safekeeping.
CHARACTERISTICS
A. It is a real contract
B. Naturally gratuitous, unless:
 The contrary is stipulated
 Depositary is engaged in the business of storing goods
C. Purpose is primarily for custody
D. Either unilateral or bilateral
E. Depositary cannot use the thing deposited, except:
 Express permission of the depositor
 Preservation of the thing requires its use but only for said purpose
F. Only movables can be the object of a contractual deposit TN: Only
applies to extrajudicial deposits.
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Q: When is deposit considered as a loan?
A: if there is a stipulaion as to payment of interest because interest can only arise
from a contract of loan.
Q: If the definition of deposit states that the depositor delivers a movable to
a depositary, what kind of contract is it?
A: Just like a contract of loan it is a real contract because it is perfected by
delivery.
There is no real contract of deposit if the agreement is merely to constitute a
deposit, although that is a valid consensual agreement between the parties.
Just like mutuum, deposit is naturally gratutous because there is no
compensation paid unless it is a business of storing goods. When the depositary
is engaged in a business of storing goods, he has a building to store his goods,
right?
Q: Most instances structure where he stores his goods is called a
warehouse. That’s why the depositary is called a warehouse man and
because you deposit your goods to the warehouse man for storage, the
warehouse man issues a receipt, the contract is called?
A: still a contract of deposit but govern by Warehouse Receipt Law
“The purpose of deposit is primarily for custody. The depositary is not allowed to
use the thing unless allowed or stipulated or requires the use thereof”
Ex. A car. You do not expect to lend your car to your friend without him using it.
What happens if you din’t use it from time to time? Magub a.
US v. Igpuara
Effect if b alance of commission is retained b y agent
The balance of a commission account remaining in possession of the agent at the
principal's disposal acquires at once the character of a deposit which the former
must return or restore to the latter at any time it is demanded, nor can he lawfully
dispose of it without incurring criminal responsibility for appropriating or diverting
to his own use author's property.
He undoubtedly commits the crime of estafa who, having in his possession a
certain amount of another's money on deposit at its owner's disposal, appropriates
or diverts it to his own use, with manifest damage to its owner, for he has not
restored it and has so acted wilfully and wrongfully in abuse of the confidence
reposed in him.
Q: What was the contract between Igpuara and Montilla?
A: Contract of Agency
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Q: What was the issue? What was the subject of the agreement between
Montilla and Igpuara?
A: A sale of sugar
Q: How can there is no mention of a deposit when the Ramirez and
Company represented by Igpuara and Montilla ?
-judge didn’t discuss the answer and the case-
Facts:
The defendant herein is charged with the crime of estafa, for having
swindled Juana Montilla and Eugenio Veraguth out of P2,498 Philippine
currency, which he had taken on deposit from the former to be at the latter's
disposal. The document setting forth the obligation reads:
"We hold at the disposal of Eugenio Veraguth the sum of two
thousand four hundred and ninety-eight pesos P2,498), the balance from
Juana Montilla's sugar. — Iloilo, June 26, 1911. — Jose Igpuara, for Ramirez
& Co."
There is no doubt that if Veraguth accepted the receipt for P2,498 it
was because at that time he agreed with the defendant to consider the
operation of sale on commission closed, leaving the collection of said sum until
later, which sum remained as a loan payable upon presentation of the receipt.
19
Issue:
WON the defendant is guilty of misappropriating the deposit under his custody.
Held:
It is also erroneous to assert that the sum of money set forth in said
certificate is, according to it, in the defendant's possession as a loan. In a loan
the lender transmits to the borrower the us e of the thing lent, while in a deposit
the use of the thing is not transmitted, but merely possession for its custody or
safe-keeping.
In order that the depositary may use or dispose of the things deposited, the
depositor's consent is required.
The defendant has shown no authorization whatsoever or the consent
of the depositary for using or disposing of the P2,498, which the certificate
acknowledges, or any contract entered into with the depositor to convert the
deposit into a loan, commission, or other contract.
It is unquestionable that in no sense did the P2,498 which he willfully
and wrongfully disposed of to the detriment of his principal, Juana Montilla,
and of the depositor, Eugenio Veraguth, belong to the defendant.
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Likewise erroneous is the construction apparently attempted to be
given to two decisions of this Supreme Court (U. S. vs. Dominguez, 2 Phil.
Rep., 580, and U. S. vs.Morales and Morco, 15 Phil. Rep., 236) as implying
that what constitutes estafa is not the disposal of money deposited, but denial
of having received same.
In this connection it was held that failure to return the thing deposited
was not sufficient, but that it was necessary to prove that the depositary had
appropriated it to himself or diverted the deposit to his own or another's
benefit. He was accused of refusing to restore, and it was held that the code
does not penalize refusal to restore but denial of having received. So much
for the crime of omission; now with reference to the crime of commission, it
was not held in that decision that appropriation or diversion of the thing
deposited would not constitute the crime of estafa.
In the second of said decisions, the accused "kept none of the
proceeds of the sales. Those, such as they were, he turned over the owner;"
and there being no proof of the appropriation, the agent could not be found
guilty of the crime of estafa.
BPI v. IAC
Effect if foreign currency deposited is sold b y the b ank
The contract states that the US$3,000.00 was received by the bank for
safekeeping. The subsequent acts of the parties also show that the intent of the
parties was really for the bank to safely keep the dollars and to return it to
Zshornack at a later time.
The parties did not intend to sell the US dollars to the Central Bank within one
business day from receipt. Otherwise, the contract of depositum would never have
been entered into all. However, since safekeeping of the greenbacks is prohibited,
both parties are in pari delicto and Zshornack cannot recover the amount.
Q: You remember that we discussed previously the nature and kind of contract
involve or perfected when a depositor, the bank client deposits money in a bank
right? What is the contract?
A: Contract of Loan.
But in BPI vs. IAC, there was a certain amount of money delivered but his former
(inaudible) to the bank for safekeeping. But which the bank sold and the proceeds
where credited to the amount of the client.
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Q: What is then the breach of obligation committed by the bank, considering
that as what you have said earlier the contact between them is a contract of
loan?
A: There is no breach of contract committed with respect to the $3,000 even if it is
against bank policy. But the fact that he accepted it, still there is no breach of
contract by thebank when it sold the dollars.
Q: I have certain valuables which I want to store in a safety deposit box in a
bank and so I went to the bank BPI, rented a safety deposit box. What is my
contract with the bank?
A: A special kind of depos it. Under the Civil Code, there is limit of control of the
safety deposit box, the bank cannot open it or has no control of what it inside it.
Q: In a contract of deposit, to whom is control and possession of the
movable transferred?
A: To the depositary
Q: When I rented to the bank a safety deposit box and I places valuable
inside it, to whom has the complete control and possession if the valuable
inside the box transferred?
A: Neither with the bank nor with the client because the bank has no absolute
possession. It may have possession of the valuables because it has in his
20 possession the safety deposit box but he do not have control over it because it
cannot be opened without the authorityof the depositor.
Q: Wh y is is not called a contract of lease, when I am the called a renter?
A: Because there is no absolute possession. (You don’t have the box with you, it’s
with the bank) In a contract of lease, the possession is transferred with the lessee,
that is the essence of a contract of lease. The case here is different.
The safety deposit box remains with the bank, but the renters pays for the use
of the box for the safekeeping of his valuables.
Q: Who uses the box?
A: The renters. While the renters uses the box. He does not have “ab solute
possession and control” of the box. That is why the court said it’s not strictly a
contract of lease because control and possession is not transferred to the lessee
although the lessee uses it. It is also neither a contract of deposit. The depositor
delivers and transfers possession to the depositary. Here, while things are
delivered to the bank, the bank has no absolute control and possession of the
valuables.
Q: Why does the bank has no absolute control
A: Because the bank cannot open it.
Q: Why not?
Langomez | Juba | Orapa | Peral | Elnas
A: Because they can only open the box with the presence of the renters.
CA Agro-Industrial v. CA
Nature of rental safety deposit b ox
The contract for the rent of the safety deposit box is not an ordinary contract of
lease. The same is also not a contract of deposit that is to be strictly governed by
the provisions in the Civil Code on deposit.
The contract in the case at bar is a special kind of deposit. It cannot be
characterized as an ordinary contract of lease because the full and absolute
possession and control of the safety deposit box was not given to the joint .The
guard key of the box remained with the respondent Bank, which without such key,
neither of the renters could open the box. On the other hand, the respondent Bank
could not likewise open the box without the renter's key.
Notes:
Q: Do you need the physical presence of the depositor of a safety deposit box
even if the bank has already been given the authority/consent to open the box?
A: No. Because even if authority/consent to open the box was already given to the
bank by the depositor, the bank does not have the depositor’s key.
There are two locks in a safety deposit box. To open the safety deposit box, both
the bank key and the depositor’s key is needed.
That is the reason why the bank does not have the absolute control over the items
deposited. It cannot just open it even with the authority/ consent of the depositor.
- It is not also a lease because in lease, absolute control and possession is
transferred to the lessee and yet here, the lessee cannot access the
contents of the box without the participation of the bank because it only
has one key. The renter’s key and the guard’s key which is in the
possession of the bank must be used.
- That’s why this is neither strictly a deposit nor strictly a lease but a
special kind of deposit leaning towards deposit because the bank is still
charged with safe keeping and the bank still has to exercise diligence not
in the contents because it has no access but at least the box.
Case (title was not mentioned by Judge)
This case involves the same bank in CA Agro.
Facts: The client rented a safety deposit box somewhere in Binondo to store his
Stamp Collection. Moving forward, he placed his Stamp collection in the safety
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deposit box. The box was positioned in the bottom most portion (mayb e looks like
the same as our school locker).
There was two years of rain and the rain water got into the premises of the bank.
The safety deposit box of the client got submerged by the rain water. The bank
didn’t notify the client. When the client visited the bank to check on his treasures,
he cannot open the albums anymore. And you can just imagine how valuab le
those stamps were for the client to place it in a safety deposit b ox.
The client sues the bank for damages. Because of the CA-Agro case, the court
said that it was really leaning towards deposit and the bank is charged with
diligence. But the bank was not proven to have been negligent because it was not
notified of the arrangement with the two renters who were given two keys. So, the
presumption of the bank was that either of the renters can go to the bank and
open the box. The court said, we cannot find negligence on the part of the bank
and charge them with negligence. So, no damages to be awarded to the renters.
Held: In this particular case, the court said that the bank was negligent for not
notifying the client that the safety deposit box was flooded and that the water slid
through the box. Had the client been immediately notified, it could have taken
remedial measures (diba di man dayon na magpilit after 1 rain lang. Kung
madugay na b asig naa panay pakapin lapok ato). So here, the client was awarded
21 with actual damages.
2 Characteristics of Deposit
A.) Unilateral – it is gratuitous because only one party is obliged to perform
after the contract is been perfected.
i. The party who is obliged to perform is the depositary
whose obligation is to preserve and to return the thing
upon the demand of the depositor.
B.) Bilateral – when it is onerous (when valuable compensation is given)
because even when it is unilateral, still there is consideration.
Consideration must always be present in a contract, otherwise there will
rd
be no contract to speak of. Because this is the 3 essential element of
the contract.
i. Elements of Contract
1. Consent
2. Object
3. Consideration
4.
When it is bilateral and onerous means that the depositor pays consideration. The
depositor pays consideration when: a.) Stipulated or b.) When it is necessary
The depositary cannot use the thing because the primary purpose of the deposit is
for safekeeping and not use or enjoyment.
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Exception:
1.) If he is allowed by the depositor (b ut safekeeping must be the primary
purpose of the deposit b ecause if use is the primary purpose then it is
another kind of contract and not a deposit).
Javellana v. Lim
Nature of agreement to extend payment of money deposited and to pay interest
Facts: Lim et al. obtained a loan from Javellana, the document embodying the
loan reads in part: “We have received from Angel Javellana, as a deposit without
interest, the sum of P2,600.”
When the obligation became due, Lim et al. begged Javellana for an extension of
time for one year and bound themselves to pay interest at the rate of 15% per
annum.
Issue: Whether the contract is a loan or deposit.
Held: The contract entered by the parties was a loan of money with interest. The
debtors were lawfully authorized to make use of the amount deposited, which they
have done, as subsequently shown by their asking for an extension of the time for
the return thereof. Acknowledging that they were not able to comply with what had
been stipulated, they engaged to pay interest to the creditor. Such conduct on the
part of the debtors is unquestionable evidence that the transaction entered into
between the interested parties was not a deposit, but a real contract of loan.
Where money, consisting of coins of legal tender is deposited with a person and
the latter is authorized by the depositor to use and dispose of the same, the
agreement thus entered into between the depositor and the depositary is not a
contract of deposit but a loan.
Q: What is the first initial contract entered into by the parties?
It was a loan from the start. The fact that the Lim’s were not able to return upon
demand and asked for an extension, only means that from the start, the Lim’s
were allowed to use the money. It was not a deposit which was novated into a
loan. Although, the parties called it a deposit.
Remember, a contract is what the law calls it to be and not what the parties call it
because it is what the law defines it to be.
DEPOSIT
Q: Can an intangible be an object in the contract of deposit?
There has to be actual delivery of the object that is why only movables can be the
object of voluntary deposit.
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Q: Can the documents evidencing ownership of an intangible thing be the
object of deposit?
Like the share of stock, you cannot see it but the tangible evidence of your
ownership of your share of stock is the stock certificate which you can deliver to
depositary for safekeeping but of course the shares you cannot deposit.
It is now settled that only movables can be the subject of voluntary deposit.
Q. Who are the parties in a contract of deposit?
A. Depositor – the one who deposits
B. Depositary – the one obligated to safe keep the deposit.
KINDS OF DEPOSITS
KINDS OF DEPOSIT
1. Judicial deposit – takes place when an attachment or seizure of the
property in litigation is ordered by the court.
2. Extrajudicial deposit
 Voluntary deposit – made by the will of the depositor with the consent of
22 the depositary.
 Necessary deposit – made in compliance with a legal obligation, or on
the occasion of a calamity.
Q. Is a contract to make a future deposit binding?
Yes. An offer to make a contract for future deposit is merely consensual, but
nevertheless, binding if the offer is accepted.
Q: How is deposit distinguished from simple loan?
In both instances, there is delivery. Both are real contracts but the purpose of
deposit is safekeeping and the purpose of loan is use or consumption.
Q: With respect to ownership, is there’s a transfer of ownership in deposit?
There is no transfer of ownership in deposit but there is transfer of ownership in
loan.
Q: What is returned by the depositary?
Generally, the very same thing deposited, in most instances.
Q: How about in loan?
Only the same value, kind and quality.
Q: How is deposit distinguished from sale or barter?
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In sale, there is transfer of ownership. In the deposit there is no transfer of
ownership.
Q: What about the kind of contract as to its perfection?
Sale is a consensual contract because you define sales whereby one party
obligates himself to transfer the ownership of and deliver a determinate thing, and
the other to pay therefore a price certain in money or its equivalent …while deposit
there is already delivery that is why deposit is a real contract while sale is a
consensual contract.
NATURE OF DEPOSIT
Q. What is the nature of a deposit?
A deposit is generally a gratuitous contract, unless:
A. The parties agreed that compensation be paid
B. The depositary is engaged in the business of storing goods.
Q. When is deposit considered a loan?
If there is a stipulation as to payment of interest because interest can only arise
from a contract of loan.
CHAPTER 2 – VOLUNTARY DEPOSIT
GENERAL CONCEPT
VOLUNTARY DEPOSIT
A contract where a thing is delivered at the will of a depositor to the depositary for
the purpose of safekeeping by the latter coupled with the obligation of returning it
upon demand.
Q. Is ownership required in deposit?
No, since ownership of the thing deposited is not transferred to the depositary.
Q. What are the two kinds of voluntary deposit?
A. Complete freedom – Where deposit is by will of the depositor
B. Conflicting adversarial claims – Where the deposit is by two
claimants, and the thing is to be delivered to the one found to be
entitled to it. The ownership is litigated here. Litigate between
themselves. And we call this litigation as “Interpleader”.
REQUISITE OF VOLUNTARY DEPOSIT
REQUISITES
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A. Capacity of the parties – No special capacity required. The depositor need The depositor can compel the depositary to return the price to the extent of which
not be the owner of the thing and may even be incapacitated. he was benefited.

B. Object – Corporeal and movable.
Extrajudicial deposit – the purpose of the contract is to ensure
restoration of the thing that may disappear
Judicial deposit – real or personal property may be include
C. Consideration – Gratuitous or onerous
D. Form – No special form needed, provided the object is delivered.
RULES IN CASE OF CAPACITY
DEPOSITOR INCAPACITATED
The depositary who accepts the deposit shall be subject to all obligations of a
depositary and may be compelled to return the thing by the guardian,
administrator or of the depositor if he acquires his capacity.
DEPOSITARY INCAPACITATED
The depositor can recover the thing deposited from the incapacitated depositary if
the thing deposited is still in his possession. If not, he can only recover the amount
by which the incapacitated depositary has been enriched or benefited OR from the
23 third person who acquired the thing in bad faith.
Q: Can there be a valid contract constituted if the depositor is
incapacitated?
Yes. If one of the contracting parties is incapacitated to give consent, the contract
is voidable.
Q: What is a voidable contract?
It is a contract that is valid until it is annulled.
Q: Can the depositor recover the thing to a third person?
A: It depends whether the third person acted in good faith or bad faith.
Q: What if the third person acted in good faith, but the depositary who’s
incapacitated acted in bad faith? Can the depositor recover damages from
the depositary?
No, precisely because the depositary is legally incapacitated thus you cannot
recover damages from him. It’s a presumption that he can’t distinguish between
right and wrong.
Q: In what form must deposit be for it to be valid?
In whatever form because this is a real contract and not a formal contract
OBLIGATIONS OF THE DEPOSITARY
1. To preserve the thing
TN: Degree of care required is diligence of a good father of a family, unless
a higher degree is stipulated.
2. To return the thing
Q. Is the depositary liable for loss due to fortuitous e vent?
GR: No. No person shall be responsible for those events which could not be
foreseen, or which, though foreseen were inevitable.
XPNs:

1. If it is so stipulated
Q: If at the time of demand, the depositor is incapacitated, can that 2. If he uses the thing without the depositor’s permission
incapacitated depositor compel the depositar y to return the thing to him? 3. If he delays its return
No. But he may return it to the guardian or to the administrator of the estate of the 4. If he allows others to use it, even though he himself may have been
incapacitated depositor or to the depositor himself when he regains capacity. authorized to use the same
Q: What if the depositary is incapacitated? Is the contract valid?
Yes. But it is voidable. OBLIGATION TO PRESERVE THE THING

Q: Can the depositor compel the depositary to return the thing to him?
While it is still in the possession of the depositary, he can be compelled to return.
Q: But what if he has disposed of the thing already?
USE OF THE THING DEPOSITED BY THE DEPOSITARY
Q. Can the depositary use the thing deposited?
GR: No. Deposit is for safekeeping and not for use.
XPNs:

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1. If the depositor expressly allows. In which case, the contract ceases to
be a deposit and becomes a loan or commodatum.
2. If the preservation of the thing requires its use, but only for such purpose.
Q. What is the effect of unauthorized use?
The depositary may be held liable for damages.
Q. What are the effects of authorized use?
1. If the thing deposited is a non-consumable thing – the contract loses the
character of a deposit and acquires that of a commodatum.
DEPOSIT TO A THIRD PERSON
Q. Is the depositary allowed to the deposit the thing with a third person?
GR: No. The depositary is not allowed to the deposit the thing with a third person.
XPN: If there is a stipulation to the contrary as when there is express permission
from the depositor.
XPN to XPN: If he deposits the thing with a person who is manifestly careless and
unfit.
Q. In what instances may the depositary be held liable?
24 The depositary is liable for loss or damage of the thing deposited when :
1. He transfers the deposit with a third person without authority
2. He deposits the thing with a third person who is manifestly careless or unfit,
even though authorized
3. The thing is lost through the negligence of his employees
-In connection with his obligation to preserve the thing, we learn previously that he
cannot use it unless he’s allowed although primary purpose is safekeeping or if
use of the thing is required for its preservation.
Q: Again in connection of his obligation to preserve the thing, can he
delegate custody? What is the effect if the depositary delegates custody?
He can be liable for damages for whatever reason for maybe loss of the thing
Q: When can he be exempt from liability if he delegates?
If he was authorized by the depositor.
-So that’s the exception. The general rule is that he is liable for loss of a thing if he
delegates custody but he is exempted in liability if the thing is lost if he is
authorized. The exception to the exception; if the third person whom the thing is
delegated custody is manifestly careless or unfit.
Q: Who determines that?
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A question of fact.
Q. When is the depositary exempted from liability?
When the thing is lost or damages through the negligence of the third person with
whom he was allowed to deposit the thing, if such person is not manifestly
careless or unfit.
CHANGE IN THE MANNER OF DEPOSIT
Q. May the depositary change the manner of deposit?
GR: No, the place of delivery and other conditions of the deposit cannot be
modified as a rule.
XPN: When the depositary may reasonably presume that the depositor would
agree to the modification if the depositor knew of the facts of the situation.
TN: Notice need to be sent to the depositor and await the latter’s decision, unless
time is of the essence to avoid danger.
Q: What if there is an imperative to change the manner and to transfer from
one warehouse to another because of typhoon Marci?
A: The depositary can, if it entails danger
PRESERVATION OF VALUE
Q. What is the rule if the thing deposited should earn interest?
The depositary is under obligation to:
1. Collect the interest as it falls due
2. Take steps to preserve its value and rights corresponding to it
TN: Depositary is bound to collect the capital and interest when due.
Q: What if the object is a pawn ticket as a result of your transaction with a
pawnshop, what’s the obligation of the depositary? Palawan pawnshop,
Lhuillier, RD etc.
A: To preserve the value of the thing pawned
Q: What will be the obligation of the depositor?
A: To renew the pawn by paying interest
-The only exception is if this security is placed in a safety deposit box, because of
course the depositary (e.g., the bank) has no access. The depositary is also
obliged to keep the secret of the deposit, except if by keeping the secret of the
deposit, it will make you liable as an accessory (e.g., marijuana, illegal drugs)
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Q: To whom must deposit be returned?
A: To the depositor or his successor. To whoever person designated by the
depositor in the contract where return must be made.
Q: If the depositary has a reasonable ground to belie ve that the depositor
did not lawfully acquire the thing deposited, can he refuse to return the
thing?
A: No, he cannot refuse. He has to return. He cannot refuse to return. But if you
have a reasonable ground to believe that the depositor did not lawfully acquire it,
you do not need to wait for the demand to return to thing. You can return even
without demand.
Q: But if you acquire knowledge that the thing is stolen, and you know who
the owner is, what are the requirements?
A: It is your obligation to immediately notify the owner. In the meantime you can
refuse to return the thing and wait for 1 month within which to claim the thing. If
the owner did not claim within one month then you can return to the depositor. In
the meantime, that is one of the instances wherein you can refuse to return. But
mere knowledge of the fact that it was unlawfully acquired by the depositor does
25 not justify you to refuse return of the thing. You must return.
Q: Now if there are two or more depositors, to whom will return be made?
A: Distinguish if the object of the deposit is divisible/divisible obligations, then
return their respective share, unless there is stipulation that the thing should be
returned to one of the depositors; or if the parties stipulates solidarity the any of
the depositor can demand return of all.
Q: If the thing deposited is indivisible and there are several debtors, what is
the rule in obligations and contracts? To whom return shall be made?
A: To any of the depositors. This is one of the instance wherein the law provides
for return to any of the depositors. An y of the depositors can demand except again
if there is a designated person.
Q: What if the object of the deposit of a specific thing, what must be
returned?
A: Of course the very same thing that is deposited, including accessories and
accessions.
If the thing is lost and replacement is given to the depositary, then the
replacement thing must be given to the depositor.
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Q: If the thing is sold by the heir upon death of the depositor, thinking that it
was owned by the depositor. Will there be a return?
A: Yes, the heir shall 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.
COMMINGLING OF GRAINS
Q. Is commingling of grains or articles allowed?
GR: Yes, if the items are of the same kind and quality. In which case, the different
depositors shall own a proportionate share in the mass of the things deposited.
XPN: If the items are not of the same kind and quality, the depositary must keep
them separately.
Q: What if its money. Eg., ten 1000 peso bill in series, delivered to you for
safekeeping. Can the depositor insist return of that very same series of peso
bill?
A: For generic goods, commingling is allowed. For money or other fungibles,
commingling is allowed unless a specific instruction is given with the very same
object or thing, then that falls to the exception. The general rule is that
commingling is allowed.
-So like if I deliver 100 kilos of palay to a warehouseman for safekeeping, then the
warehouseman can commingle the grains deposited. And I become a co -owner to
the extent of the portion of the quantity that I deposited.
SECRECY OF DEPOSIT
Q. What are the depositary’s obligations as regards closed and sealed
deposits?
1. Return the thing deposited when delivered closed and sealed in the same
condition
XPN: If safekeeping is still the principal purpose of the contract.
2. If the thing deposited is money or other consumable thing – the contract is
converted into a simple loan or mutuum.
XPN: If safekeeping is still the principal purpose of the contract, but it now
becomes an irregular deposit.
3. Pay for damages should the seal or lock be broken through his fault which is
presumed unless proven otherwise
4. Keep the secret of the deposit when the seal or lock is broken with or
without his fault.
COMMENT: If the thing is sealed and locked, then the obligation of the
depositary is to return it locked and sealed. If at the time of the return it is
already open and something is lost, then the pres umption is it was opened by
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the depositary. And if something is lost, then the depositary will liable for
payment of damages based on the value stated by the depositor unless the
depositary can prove otherwise.
-But of course if it is impossible to execute the orders of the depositor without
opening the sealed receptacle, then the depositary is presumed to have the
authority to open it
Q. In what instances is the depositary authorized to open closed and
sealed deposit?
A. When the key has been delivered to him
B. The depositor has instructions which could not be performed without
opening the box
C. Necessity
Q. To whom shall the depositary return the thing deposited?
1. To the depositor, his heirs or to the person who may have been
designated in the contract
2. If the depositor is incapacitated – To his legal representative.
WHAT IS TO BE RETURNED
A. If money – depositary has the obligation to pay interest on sums converted for
personal use.
B. If specific thing – obligation to return the products, accessories and
accessions.
C. If generic thing – see rule on commingling of goods.
PLACE OF RETURN

OWNERSHIP OF THE THING DEPOSITED Q. Where shall the thing be returned?

Q. Is the depositary allowed to demand that the depositor prove his 1. Place designated in the contract of deposit
ownership of the thing deposited? 2. If no place is designated – in the place where the things may be provided
No, because there is no transfer of ownership in a contract of deposit. there is no bad faith on the party of the depositary in changing the place.

Q. What is the rule should the depositary discover that the thing deposited Q. Who shall bear the expenses for transportation?
26 has been stolen? GR: The transportation expenses shall be borne by the depositor.
The rule would depend if the depositary knows the true owner of the thing XPN: If the depositary acted with malice in changing the place.
deposited.

A. If true owner is identified – depositary shall advise the latter of the deposit. TIME OF RETURN
The true owner has 30 days to claim the thing. Q. When shall the thing be returned?
TN: (1) Depositary is not allowed to return the thing to the alleged owner GR: The thing deposited must be returned upon demand, whether or not there is a
without the knowledge of the depositor. His duty is merely to advise. (2) If period fixed for the return.
true owner fails to claim within 30 days, depositary may return the thing to Rationale : This is because the period if agreed upon is for the benefit of the
the depositor. depositor. Hence, he can seek its return anytime.
XPNs:
B. True owner cannot be identified – depositor may return the thing to the 1. When the thing is judicially attached while in the depositary’s possession
depositor. 2. Depositary has been notified of the opposition of a third person to the return
or removal of the thing deposited.
3. When the thing is stolen and the period of 30 days from notice to the true
Q. Does the depositary ha ve the right to retain the thing deposited?
owner has not lapsed yet
Yes, if the true owner of the thing is identified. The depositary has the right to
retain the thing for 30 days. However, he has to inform the depositor of the legal
TN: The depositary must immediately inform the depositor of the attachment of
reason for the retention. opposition.
OBLIGATION TO RETURN THE THING
Q. Can the depositary return the thing even before the lapse of the period
TO WHOM stipulated?

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GR: Yes, if the depositary has justifiable reasons. Should the depositor refuse to
receive it, the depositary can consign the thing in court.
XPN: If the deposit is for valuable consideration. The depositary has to wait for
the period to lapse.
XPN to XPN: If there is force majeure.
FORM OR MANNER OF RETURN
Q. What are the rules when there are two or more depositors?
A. If joint depositors – each one may only demand the return of his
proportional share in the divisible thing deposited.
TN: If the thing is indivisible, the depositary has the right to compel all the
joint debtors to demand the return.
B. If solidary depositors – depositary may return the thing to any one of the
solidary debtors.
XPN: 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
27 designated.
RIGHT TO SET OFF BY BANKS
Banks can set-off the deposits in its hands for the payment of any indebtedness to
it on the part of the depositor. However, if the depositor is a mere indorser of a
check which was later dishonoured, the right of action does not accrue until a
notice of dishonour is given to him.
Gullas v. PNB
Right of b ank to apply a deposit to the deb t of a depositor
Facts: Atty. Gullas signed as one of the indorsers of a check issued by the
Treasury of the US payable to the order of Bacos. When the treasury warrant was
dishonoured, notice of dishonour was sent to Gullas’ address but was not received
by him since he already moved to Manila.
The Bank (PNB) applied Gullas’ outstanding balance for the payment of the check
that was dishonoured. Hence, Gullas’ account was emptied without his
knowledge. As a result, his insurance was not paid because his account was
emptied and his reputation was likewise tarnished as periodicals about him were
published.
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Issue: Whether PNB has the right to apply a deposit to the debt of a depositor to
the bank.
Held: Generally, yes. The bank’s right to set off is recognized. However, it has to
follow procedures to also afford the depositor due process. Prior to the mailing of
notice of dishonour and without waiting for any action by Gullas, the bank made
use of the money standing in his account to make good for the treasury warrant.
Notice of dishonour is necessary in order to charge an indorser and that right of
action against him does not accrue until the notice is given.
Associated Bank v. Tan
Right of b ank to apply a deposit to the deb t of a depositor
Facts: Vicente Tan is a businessman and a regular valued depositor of Associated
bank. In 1990, he deposited a post-dated UCPB bank for P101K. Balance of Tan
is P297K. By advice of the bank that the P101k already cleared, Tan withdrew the
P240k, leaving P57k. The day after, he deposited another P50k – balance is now
P107k. He paid his suppliers and business partners post-dated checks. But the
checks bounced because of insufficient funds. Tan filed a case for damages
against the bank – tainted reputation, moral damages, lost profits.
Issue:
1. Whether a bank has the right to debit the account of its client for a check
deposit which was dishonoured by the drawee bank.
2. Whether the right to set off has been properly exercised by the Bank.
Ruling:
1. Yes. A bank generally has a right of setoff over the deposits therein for the
payment of any withdrawals on the part of a depositor. The right of a collecting
bank to debit a client’s account for the value of a dishonoured check that has
previously been credited has fairly been established by jurisprudence, especially
that fixed, savings, and current deposits of money in banks and similar institutions
are governed by the provisions concerning simple loan.
2. No. The bank admitted that purportedly, as an act of accommodation to a
valued client, petitioner allowed the withdrawal of the face value of the deposited
check prior to its clearing. That act certainly disregarded the clearance
requirement of the banking system. Such a practice is unusual, because a check
is not legal tender or money and its value can properly be transferred to a
depositor’s account only after the check has been cleared by the drawee ban
BANK’S FAILURE TO RETURN AMOUNT
Claims F or recovery of time deposits plus interest from an insolvent bank shall be
filed before the liquidation proceedings in the proper court. Failure of bank to
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honor the time deposit is not a breach of trust arising from a depositary’s failure to
return the subject matter but a mere failure to pay its obligation as a debtor.
Guingona v. City Fiscal of Manila
Liability of failure to return b ank deposit
When private respondent David invested his money on time and savings deposits
with the aforesaid bank, the contract that was perfected was a contract of simple
loan or mutuum and not a contract of deposit governed by the provisions
concerning simple loan.
EARNEST MONEY
If a sale did not materialize, the earnest money is considered to be deposited.
-Now we enter into a contract of sell a certain car and then I am the buyer, you are
the seller, I paid you earnest money worth PhP100,000. Without my fault, you sold
it to another person and the certificate of registration was already in the name of
that third person who was not aware of the sale between us. Double sale.
Q: For rule on double sale, who has the right to possess?
A: First buyer/possession in good faith.
28 But I have paid you a PhP100,000. The court said, that partakes of a deposit that
you must return to me.
Compania Maritima v. CA
Ob ligation if sale did not materialize
The sum of P15,000 was tendered by Pan Oriental to Republic, which cover 15%
of the cost of the vessel as provided in the option granted in the bareboat contract.
This amount was accepted by the Administration as deposit. Since the purchase
did not eventually materialize for reasons attributable to Republic, it is but just that
the deposit be returned.
HEIR OF DEPOSITARY SOLD THE THING DEPOSITED
Q. What is the rule if the heir of the deceased depositary sold the thing
deposited?
The rule would depend on whether the heir sold the thing deposited in good faith
or bad faith.
A. If he sold in good faith:
Return the price
Assign his right of action against the buyer in case the price has not
yet been paid.
B. If he sold in bad faith:
Liable for the price with damages
Depositor can seek annulment of the contract on the basis of fraud
Ma y be held liable for Estafa through misappropriation
OF THE DEPOSITOR
OBLIGATIONS OF THE DEPOSITOR
1. To pay the compensation agreed upon
2. To reimburse the depositary for necessary expenses incurred by the latter
TN: Does not include useful expenses or those for mere luxury or pleasure
3. To indemnify the depositary for any loss or damages arising from the
character of the thing deposited
TN: This includes damages due to the defects of the thing and all others due
to the deposit, unless:
The depositor was not aware
The depositary was notified
The depositary knew even without notice
SECURITY OF THE DEPOSITARY
Hence, the relationship between the private respondent and the Nation Savings
and Loan Association is that of creditor and debtor. Consequently, the ownership
of the amount deposited was transmitted to the Bank upon the perfection of the
contract and it can make use of the amount deposited for its banking operations,
such as to pay interests on deposits and to pay withdrawals.
While the Bank has the obligation to return the amount deposited, it has, however,
no obligation to return or deliver the same money that was deposited. And, the
failure of the Bank to return the amount deposited will not constitute estafa
through misappropriation punishable under Article 315 of the Revised Penal Code,
but it will only give rise to civil liability.
Guingona v. City Fiscal of Manila
When b ank officials may b e guilty of Estafa
Held: If the bank entered in its records or books the amount of only P305,821.92
out of the deposits of P1,145,546, the bank officials may be guilty of estafa
through misappropriation.
Q. Can the depositary retain the thing deposited?
Yes, the depositary can retain the thing deposited until he is fully reimbursed by
the depositor. This is an instance of a legal pledge.
EXTINGUISHMENT
Q. What are the grounds for extinguishment of deposit?
1. General causes:

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A. Loss or destruction of the thing deposited Comment: Unlike in commodatum where the bailee can only retain the thing for
B. In case of gratuitous deposit – upon the death of either the depositor or claims for damages because of the defective nature of thing, in deposit, the
depositary depositary can retain the thing by way of legal pledge. In both instances these are
TN: If deposit for compensation – death does not extinguish the legal pledges. the depositary can retain the thing and refuse to return it to the
deposit because the rights are transmissible to the heirs. depistor for any claim it has against the despositor, whether it is for
2. Other causes: compensation, for reimbursement for expenses or indemnity for damages.
A. Demand at will of the depositor
B. Expiration of the period agreed upon EXTINGUISHMENT
C. Mutual withdrawal from the contract
D. Fulfillment of the purpose of the deposit Q. What are the grounds for extinguishment of deposit?
3. General causes:
A. Loss or destruction of the thing deposited
OBLIGATIONS OF THE DEPOSITOR B. In case of gratuitous deposit – upon the death of either the depositor or
 To pay the compensation agreed upon depositary
 To reimburse the depositary for necessary expenses incurred by the latter
TN: Does not include useful expenses or those for mere luxury or TN: If deposit for compensation – death does not extinguish the
pleasure deposit because the rights are transmissible to the heirs.
 To indemnify the depositary for any loss or damages arising from the
character of the thing deposited 4. Other causes:
TN: This includes damages due to the defects of the thing and all others A. Demand at will of the depositor
due to the deposit, unless: B. Expiration of the period agreed upon
o The depositor was not aware C. Mutual withdrawal from the contract
29 o The depositary was notified D. Fulfillment of the purpose of the deposit
o The depositary knew even without notice

Q: When is the depositor obliged to pa y compensation or valuable
consideration to the depositary
A: When they are
 Stipulated; or
 When depositary is engaged in the business of storage (onerous)
Q: When is the depositary entitled to reimbursement for the preservation of
the thing:
A: When the deposit is gratuitous. Also, you do not have to distinguish the kind of
expenses (ordinary or extraordinary). If it is onerous, then compensation paid
already covers for the expenses paid for preservation
SECURITY OF THE DEPOSITARY
Q. Can the depositary retain the thing deposited?
Yes, the depositary can retain the thing deposited until he is fully reimbursed by
the depositor. This is an instance of a legal pledge.
Q: What if the thing is lost because of the fault of the depositary? Is deposit
extinguished?
A: YES.
Art. 1995. A deposit is extinguished:
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either the depositor or
depositary
A depositary is engaged in the business of storage (onerous) and said depositary
dies before the extinguishment of the contract. Is the deposit extinguished? NO,
because death of either the depositor or depositary extinguishes the deposit only
in gratuitous contracts and not onerous ones.
NECESSARY DEPOSIT
Deposit is not made by the will of the depositor but created by force of the law or
on occasion of a calamity.

KINDS

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A. Those made in compliance with a legal obligation B. The guests observe the precautions prescribed by the inn or hotel keepers
B. Those which take place on the occasion of any calamity as to the care and vigilance over their effects

Example: If a property of a person is saved by another on the occasion of
conflagration, the property shall be considered as a necessary deposit in the
hands of the latter. Owner is bound to pay just compensation.
C. Those made by travellers in hotels or inns.
D. Those made with common carriers
Q. How is necessary deposit constituted?
Art 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such as fire, storm, flood,
pillage, shipwreck, or other similar events
Art. 1998. The deposit or effects made by travelers in hotels or inns shall also be
regarded as necessary. Xxx
Q. When does the liability of the hotel commence?
Liability commences as soon as there is an evident intention on the part of the
travellers to avail of the accommodations of the hotel or inn. It does not matter
whether compensation has already been paid or not or whether the guest has
already partaken of the food and drinks or not.
Q. Is the hotel keeper liable for the vehicles?
Yes. They are liable for the vehicles, animals and articles which have been
introduced or placed in the annexes of the hotel.
Q. When is the hotel-keeper liable for damages?
GR: A hotel-keeper is liable for damages arising from the loss or injury to the
personal effects of hotel guests caused by:
A. Negligence of its servants or employees
B. Loss or damage due to strangers

Fourth: those made with common carriers XPNs:

A. When the loss is due to force majeure
MADE IN COMPLIANCE WITH A LEGAL OBLIGATION B. When the loss is due to the acts of the guest himself, his family, servants or
30 Example: Art 2014 – The creditor cannot use the thing pledged without the visitors or if the loss arises from the character of the thing brought into the
authority of the owner, and if he should do so, or should misuse he thing in any hotel.
other way, the owner may ask that it be judicially or extra judicially deposited.
Q. Is the loss due to the act of thief or robber who entered the hotel
ON THE OCCASION OF ANY CALAMITY considered force majeure?
Example: If a property of a person is saved by another on the occasion of No, expect when the thief or robber used arms and irresistible force.
conflagration, the property shall be considered as a necessary deposit in the
hands of the latter. Q. What is the effect of notices of non-liability posted in hote ls or inns?
Nothing. Hotels or inns cannot free themselves from responsibility b y posting
TN: Owner is bound to pay just compensation. notices in the hotel that they are not liable for articles brought by the guests or
travellers. Any agreement for the suppression or diminution of responsibility is
BY TRANSIENTS void.
The deposit of travellers and guests of their effects in hotels or inns is regarded as
necessary deposit. Q. Does the hotel-keeper have a right to retain the things brought into the
hotel by the guests?
Q. Who are travellers?
Refer to transients and does not mean to include ordinary or regular boarders in Yes. If the tra veller or guest does not pay his hotel bills, the hotel -keeper has the
any apartment, house, inn or hotel. right to retain the said things as security for payment thereof. The guest may be
held liable for Estafa.
Q. What are the requisites to hold innkeeper or hotel liable?
A. Notice was given to them or their employees of the presence of the effects
or belongings

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YHT REALTY vs. CA
FACTS: Private respondent McLoughlin, an Australian businessman-
philanthropist, used to stay at Sheraton Hotel during his trips to the Philippines
prior to 1984 when he met Tan. Tan befriended McLoughlin by showing him
around, introducing him to important people, accompanying him in visiting
impoverished street children and assisting him in buying gifts for the children and
in distributing the same to charitable institutions for poor children. Tan convinced
McLoughlin to transfer from Sheraton Hotel to Tropicana where Lainez, Pa yam
and Danilo Lopez were employed. Lopez served as manager of the hotel while
Lainez and Payam had custody of the keys for the safety deposit boxes of
Tropicana. Tan took care of McLoughlins booking at the Tropicana where he
started staying during his trips to the Philippines from December 1984 to
September 1987.
In 1987, McLoughlin arrived from Australia and registered with Tropicana. He
rented a safety deposit box. He was aware of the procedure observed by
Tropicana relative to its safety deposit boxes. He allegedly placed in his safety
deposit box: Australian and American dollars, letters, credit cards, bankbooks,
checkbooks.
On this same year, he left for Hongkong, (short visit to HK). He only took one
envelope containing 5,000 US dollar and another envelope containing 10,000
31 AUS dollar, his passports, and his credit cards. He left the rest in the safety
deposit box. When he arrived in Hongkong, he discovered that the envelope
containing 5,000 US dollar (as he believed) only contained 3,000 US dollar. He
thought that it was just a result of bad accounting since he did not spend anything
from that envelope.
He went back to Tropicana but flew right away to Australia. When he arrived
in Australia, he discovered that the envelope with Ten Thousand US Dollars
(US$10,000.00) was short of Five Thousand US Dollars (US$5,000). He also
noticed that the jewelry which he bought in Hongkong and stored in the safety
deposit box upon his return to Tropicana was likewise missing, except for a
diamond bracelet.
When McLoughlin came back to the Philippines, he asked Lainez if some
money and/or jewelry which he had lost were found and returned to her or to the
management but Laauinez told him there was none. He again registered at
Tropicana and rented a safety deposit box. He then again placed therein AUS and
US dollars. But he noticed that his some of his money he placed in the envelope
(in the deposit box) were missing.
When McLoughlin discovered the loss, he immediately confronted Lainez
and Payam. As a result, they admitted that it was Tan who opened the safety
deposit box. Tan admitted that she had stolen McLoughlins key and was able to
open the safety deposit box with the assistance of Lopez, Payam and Lainez.
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Lopez also told McLoughlin that Tan stole the key assigned to McLoughlin while
the latter was asleep.
After the request for investigation did not proceed. Tan executed a
promissory note in favour of McLoughlins.
Lopez requested Tan to sign the promissory note which the latter did and Lopez
also signed as a witness. Despite the execution of promissory note by Tan,
McLoughlin insisted that it must be the hotel who must assume
responsibility for the loss he suffered. However, Lopez refused to accept the
responsibility relying on the conditions for renting the safety deposit box
entitled Undertaking For the Use Of Safety Deposit Box, specifically
paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA
APARTMENT HOTEL from any liability arising from any loss in the
contents and/or use of the said deposit box for any cause
whatsoever, including but not limited to the presentation or use
thereof by any other person should the key be lost;
4. To return the key and execute the RELEASE in fa vor of
TROPICAN A APARTMENT HOTEL upon giving up the use of the box.
McLoughlin: The stipulations are void for being violative of universal hotel
practices and customs. He filed a case but failed to receive notice of hearing.
However, it was dismissed for failure to prosecute. Mcloughlin requested the
reinstatement of the criminal charge for theft. In the meantime, his legal counsel
wrote letters of demand to those having responsibility to pay the damage.
Upon his return, he filed a complaint for damages against YHT Realty
Corporation, Lopez, Lainez, Payam and Tan (defendants) for the loss of
McLoughlins money which was discovered.
YHT: Such stipulations were not void because article 2002 of the NCC exempts
the hotel-keeper from liability if the loss is due to the acts of his guest, his family,
or visitors
ISSUE: It is whether a hotel may evade liability for the loss of items left with it for
safekeeping by its guests, by having these guests execute written waivers holding
the establishment or its employees free from blame for such loss in light of Article
2003 of the Civil Code which voids such waivers.
RULING: The petition is devoid of merit. The evidence reveals that two keys are
required to open the safety deposit boxes of Tropicana. One key is assigned to
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the guest while the other remains in the possession of the management. If the
guest desires to open his safety deposit box, he must request the management for
the other key to open the same. In other words, the guest alone cannot open the
safety deposit box without the assistance of the management or its employees.
With more reason that access to the safety deposit box should be denied if the
one requesting for the opening of the safety deposit box is a stranger. Thus, in
case of loss of any item deposited in the safety deposit b ox, it is inevitable
to conclude that the management had at least a hand in the consummation
of the taking, unless the reason for the loss is force majeure.
Under Article 1170 of the New Civil Code, those who, in the performance of their
obligations, are guilty of negligence, are liable for damages. As to who shall bear
the burden of paying damages, Article 2180, paragraph (4) of the same Code
provides that the owners and managers of an establishment or enterprise are
likewise responsible for damages caused by their employees in the service of the
branches in which the latter are employed or on the occasion of their functions.
Also, this Court has ruled that if an employee is found negligent, it is presumed
that the employer was negligent in selecting and/or supervising him for it is hard
for the victim to prove the negligence of such employer. Thus, since loss of
McLoughlins money was consummated through the negligence of Tropicanas
employees in allowing Tan to open the safety deposit box without the guests
consent (because the employees contended that they thought Tan was
32 McLoughlin’s wife, but the latter had never introduced Tan to the employees as his
wife), both the assisting employees and YHT Realty Corporation itself, as owner
and operator of Tropicana, should be held solidarily liable pursuant to Article 2193.
The issue of whether the Undertaking For The Use of Safety Deposit
Box executed by McLoughlin is tainted with nullity presents a legal question
appropriate for resolution in this petition.
The Court ruled that yes it is null and void.
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.
Reason: The hotel business like the common carriers bus iness is imbued with
public interest. Catering to the public, hotelkeepers are bound to provide not only
lodging for hotel guests and security to their persons and belongings. The twin
duty constitutes the essence of the business. The law in turn does not allow such
duty to the public to be negated or diluted by any contrary stipulation in so -called
undertakings that ordinarily appear in prepared forms imposed by hotel keepers
on guests for their signature.
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Paragraphs (2) and (4) of the undertaking manifestly contravene Article
2003 of the New Civil Code for they allow Tropicana to be released from
liability arising from any loss in the contents and/or use of the safety
deposit box for any cause whatsoever (whether or not they are guilty of
negligence). The New Civil Code is explicit that the responsibility of the
hotel-keeper shall extend to loss of, or injury to, the personal property of the
guests even if caused by servants or employees of the keepers of hotels or
inns as well as by strangers, except as it may proceed from any force
majeure. It is the loss through force majeure that may spare the hotel-keeper
from liability. In the case at bar, there is no showing that the act of the thief
or robber was done with the use of arms or through an irresistible force to
qualify the same as force majeure
Durban Apartments Corporation vs. Pioneer Insurance and Surety Corp.
Facts: Jeffre y See got his Suzuki Grand Vitara stolen while he was staying at City
Garden Hotel, a business ran by Durban Apartments Corporation (Durban). Prior
to the theft, See asked Justimbaste, a valet working for City Garden Hotel/Durban,
to park the car near the area. He was later on awaken by a telephone call that the
car was forcibly stolen and that Justimbaste was unable to stop the carnapper
from driving the car away.
Fortunately for See, the car was insured by by Pioneer Insurance and Surety
Corp. (Pioneer). After in vestigation, Pioneer decided to pay See P1,163,250.00 as
settlement and went after Durban for the amount. Pioneer alleged that See’s car
got stolen because of the alleged negligence of Durban and Justimbaste.
RTC and CA held Durban to be liable and asked it to pay Pioneer the said amount
plus attorney’s fees.
Issue: Whether or not Durban was liable for the loss of See’s vehicle
Ruling: YES, petition is dismissed.
In this case, respondent substantiated the allegations in its complaint, i.e., a
contract of necessary deposit existed between the insured See and petitioner.
The records Reveal that upon arrival at the City Garden Hotel, See gave notice to
the doorman and parking attendant of the said hotel, Justimbaste, about his Vitara
when he entrusted its ignition key to the latter. Justimbaste issued a valet parking
customer claim stub to See, parked the Vitara at the Equitable PCI Bank parking
area, and placed the ignition key inside a safety ke y box while See proceeded to
the hotel lobby to check in. The Equitable PCI Bank parking area became an
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annex of City Garden Hotel when the management of the said bank all owed the
parking of the vehicles of hotel guests thereat in the evening after banking hours.
Article 1962, in relation to Article 1998, of the Civil Code defines a contract of
deposit and a necessary deposit made by persons in hotels or inns:
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 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.
Art. 1998. The deposit of effects made by
travelers 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
33 the latter, they take the precautions which
said hotel-keepers or their substitutes advised
relative to the care and vigilance of their
effects.
Plainly, from the facts found by the lower courts, the insured See deposited his
vehicle for safekeeping with petitioner, through the latter’s employee, Justimbaste.
In turn, Justimbaste issued a claim stub to See. Thus, the contract of deposit was
perfected from Sees delivery, when he handed over to Justimbaste the keys to his
vehicle, which Justimbaste received with the obligation of safely keeping and
returning it. Ultimately, petitioner is liable for the loss of Sees vehicle
WAREHOUSE RECEIPTS ACT
Act 2137
I. THE ISSUE OF WAREHOUSE RECEIPTS
Q. What is a warehouse receipt?
It is a written acknowledgment by a warehouseman that he has received and
holds certain goods therein described in store for the person to whom it is issued.
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Also, a simple written contract between the owner (depositor) of the goods and the
warehouseman.
Q. Who may issue a warehouse receipt?
Only a warehouseman. (Sec. 1)
Q. What must a warehouse receipt contain?
No special form required, but every warehouse receipt must embody in its terms
the following:
A. Location of the warehouse
B. Date of issue of the receipt
C. Consecutive number of the receipt
D. Statement whether the goods will be delivered to the bearer, to a
specified person or to a specified person or his order
E. Rate of storage charges
F. Description of the goods
G. Signature of the warehouseman
H. Statement of the amount of advances made and of liabilities incurred for
which the warehouseman claims a lien.
TN: A warehouse man is liable for all damages caused by the omission from a
warehouse receipt of any of the above terms required. (Sec. 2)
There’s no particular form for a warehouse receipt for as long as certain data like
location, the date of issue of receipt is present; but even absence of any of these
will not affect the validity of the contract, it will affect the negotiability of the re ceipt
but the contract of deposit is not at all affected.
If the goods are deliverable to bearer or the order of a specified person or order,
the receipt is not a negotiable instrument, it is a negotiable document of title.
Again for the nth time, I want you to distinguish between a negotiable instrument
and negotiable document of title.
A negotiable document is a proof of the bilateral contract between the depositor
and the warehouseman who is actually the depositary. It is proof of possession of
the warehouseman of the goods and it authorizes the possessor of the document
to transfer or receive the goods.
Just like any document of title, a warehouse receipt can either be negotiable of
non-negotiable. A non-negotiable receipt is one where the goods are delivered
order to a specified person not necessarily the depositor. And the law requires
when it is non-negotiable receipt, the words “non-negotiable” or “not-negotiable”
must be stamped. Otherwise the transferee of the receipt may consider is
negotiable and may require the warehouseman so liable as if it is a negotiable
warehouse receipt.
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Q. What are two kinds of warehouse receipt?
1. Non-negotiable receipt – where it is stated that the goods received will be
delivered to the depositor or to any other specified person. (Sec.4)
2. Negotiable receipt - where it is stated that the goods received will be
delivered to the bearer or to the order of any person named in such receipt.
An y pro vision inserted in a negotiable receipt that it is non-negotiable is
VOID. (Sec. 5)
Q. What is the effect if the warehouseman failed to make the non-negotiable
receipt as “non-negotiable”?
The warehouseman must mark the non-negotiable receipt as “non-negotiable”.
Failure to do so would allow the holder of such receipt to treat the same as
negotiable had he purchased it for value supposing it to be negotiable. (Sec.7)
II. – OBLIGATIONS AND RIGHTS OF A WAREOUSEMAN UPON THEIR
RECEIPTS
Q: In a contract of deposit under the civil code, what are the obligations of
the depositary?
34 A: DEPOSITARY’S PRINCIPAL OBLIGATION
 To keep the thing safely
 To return the thing deposited when required, to the depositor or his heirs
and successors in interes t upon demand.
Q: How about in the “Warehouse Receipt Act”? Is it also the obligation of
the warehouse man to return the goods deposite d?
A: Yes. The obligation of the warehouseman is to
 deliver the goods upon demand made either by the lawfully entitled of
the receipt or by the depositor (Sec. 8)
 Take care of the goods
Q: So, if I deposit certain goods with you, you are the warehouseman, and
after 2 months, I demanded for the return, are you obliged to return?
A: As a warehouseman, I can only be considered as OBLIGED TO RETURN if
the demand is accompanied by;
 An offer to satisfy the warehouseman’s lien
 An offer to surrender the negotiable warehouse receipt properly
indorsed, if necessary; and
 A readiness and willingness to sign an acknowledgement receipt of the
fact of delivery if so requested by the warehouseman (Sec. 8)
Comment:
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So, unlike in an ordinary voluntary deposit where the depositary is
obliged to return upon demand, for goods deposited in a warehouse receipts’ act –
The warehouseman cannot be compelled to return the goods upon demand
unless the demand is accompanied by willingness to satisfy the
warehouseman’s lien, surrender the warehouse receipt if it is an order
receipt and willingness to sign an acknowledgement that he has received
the goods.
Q: To whom must the goods be returned?
A: Delivery must be made to
 To the person lawfully entitled to the goods or his agent
 What is lawfully entitled?
I. it refers to a person to whom a
competent court has ordered the
delivery of the goods.
II. attaching creditors
III. purchaser in case of sale of the goods
to enforce the warehouseman’s lien or
where the goods are perishable or
hazardous
 To the person entitled to delivery under a non-negotiable receipt
or with written authority.
 To the person in possession of the negotiable receipt. (Sec. 9)
Q: What if delivery was made to persons others than this enumerated by the
law?
A: Then there is MISDELIVERY. (Sec. 10)
Q: If there is misdelivery then what is the liability of the warehouseman?
A: The warehouse man shall be liable to the one who is lawfully entitles to the
goods.
Q: What is the nature of his liability?
A: He may be held criminally liable for conversion.
Conversion – unauthorized assumption and exercise of the right of ownership
over goods belonging to another through the alteration of their condition.
Q: What is an instance wherein you hold the warehouseman liable under a
negotiable receipt when there are only two obligations of the warehouseman
as pointed out earlier (i.e., to keep and to return)?
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Whether it is covered with a negotiable or non-negotiable receipt, the
warehouseman is liable for misdelivery if he delivers the goods not entitled of
delivery
-is it not that under negotiable receipt, the transferee of a duly negotiated receipt
acquires the direct obligation of the warehouseman to hold the goods for him, the
transferee of a non-negotiable receipt still has to notify the warehouseman. And if
the holder considers the receipt as negotiable then he need not notify the
warehouseman and he can hold the warehouseman liable to take care of the
goods for him.
-So that’s the issue between the holder and the warehouseman because
warehouse man may claim it’s non-negotiable. And the argument of the holder
may be will there’s no stamped “non-negotiable”, and on its face, its stated that
the goods are deliverable to “X bearer”. Is it negotiable or non-negotiable? Non-
negotiable. But you have the word of negotiability there. So the holder who is
unlettered in law, may consider it as negotiable; and once he acquires the receipt,
he can immediately hold the warehouseman liable to hold the goods for him.
-If the goods are deliverable to bearer, or to the order of a specified person, or a
specified person or order, then the document is a negotiable receipt. And there’s
no need to stamped negotiable on the face of the receipt. But if the words “non-
35 negotiable” or “not-negotiable” are stamped, this will not affect the negotiability of
the receipts.
-And when goods are covered by negotiable receipt, the warehouseman cannot
be compelled to surrender to goods unless the receipt is also surrendered.
Q. What must accompany the demand? (Sec. 8)
1. An offer to satisfy the warehouseman’s lien
2. An offer to surrender the receipt if negotiable
3. A readiness and willingness to sign as an acknowledgement that they
have been delivered, if such signature is requested by the
warehouseman.
Q. To whom delivery must be made? (Sec. 9)
1. A person lawfully entitled to the possession of the goods
a. A person to whom a competent court has ordered the delivery of the goods
b. An attaching creditor
c. Purchaser in case of sale of the goods by the warehouseman to enforce
his lien of where the goods are perishable.
2. A person who is either himself entitled to delivery by the terms of a non -
negotiable receipt issued for the goods, or has written authority from the
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person so entitled either indorsed upon the receipt or written upon another
paper. Oral authority is sufficient.
3. A person in possession of a negotiable receipt by the terms of which the
goods are deliverable to him or order, or to bearer, or which has been
indorsed to him or in blank by the person to whom delivery was promised
by the terms of the receipt or by his mediate or immediate indorser.
TN: The warehouseman is liable for misdelivery to a mere possessor of a
negotiable receipt by the terms of which the goods covered by it are
deliverable to the order of another, not being an indorsee thereon.
NEGOTIABLE RECEIPTS MUST BE CANCELLED WHEN GOODS DELIVERED
Q: When the warehouseman surrenders the goods, what must he do with
the receipts?
Cancel the receipt (Sec. 11)
Q: What is the effect if he does not cancel?
The warehouseman shall be liable for failure to deliver the goods to anyone who
purchases the receipt for value in good faith, regardless of whether the purchaser
acquired title to the receipt before or after the delivery of the goods by the
warehouseman.
He may be liable for non-existing goods if he does not cancel the receipt and it
goes again in circulation. (Sec. 11)
Q: What if there is only partial return of the goods.
Then the warehouseman must partially cancel the receipt also. (Sec.12)
ALTERED RECEIPTS
Q. Shall the alteration of a receipt excuse the warehouseman from any
liability?
No. The alteration of a receipt shall not excuse the warehouseman from any
liability if such alteration was (1) immaterial, (2) authorized, or (3) made without
fraudulent intent. In which case, the warehouseman is bound by the terms of the
altered receipt.
If alteration was authorized – liable according to the terms of the altered receipt.
Q: Can the goods be attached?
The goods represented by a negotiable receipt cannot be attached. That’s the
general rule unless
a. the receipt itself is surrendered or
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b. negotiation is enjoined by the court or
c. if the document itself is impounded by the court.
But even if the receipt is not surrendered, not negotiated, not enjoined nor
impounded by the court, the goods can still be attached if the person making the
deposit is not the real owner or not authorized by the owner to make the deposit.
Meaning the goods are stolen, in actions for delivery or manual recovery of the
goods; and when attachment is made before issuance of the negotiable document
of title because negotiability only takes effect upon converting the receipt into a
negotiable one.
If a negotiable receipt is duly negotiated, then the transferee acquires not only the
title over the goods but also the title of the depositor, the direct obligation of the
warehouseman to hold the goods for him.
Q: And if you have an order receipt, must it be a receipt where the
warehouseman undertakes to deliver the goods to the order of a specified
person or can it be a bearer receipt? How did we convert a bearer document
into an order document?
When the last negotiation was by endorsement to a specified person. When the
last endorsement is in blank or endorsement to bearer, then it still a bearer
document. If it’s endorsed to a specified person then it’s an order document.
36
For negotiable Instruments Law, once a bearer, always a bearer instrument. But
for negotiable documents, once a bearer document, not necessarily always be a
bearer document. If it’s endorsed to a specified person, the bearer document is
converted into an order document; it does not remain to be a bearer document
unlike a bearer instrument.
Q: You have an order document, delivered to another person; does his
transferee acquire any right?
-Yes, as against transferor but does he acquire the direct obligation of the
warehouseman to hold the goods for him?
-No. As far as the warehouseman is concern, he is holding the goods for his
transferor, and not for him. That’s why his (transferee) right is not against the
warehouseman but to compel the transferor to endorse the document to him.
-When you talk about non-negotiable receipt, the transferee just like a negotiable
receipt acquires title to the goods just against the transferor and the right to notify
the warehouseman that he is the new owner of the goods because prior to the
notification, the goods may be attached by the creditors of the transferor.
Q: What are the warranties of a person negotiating a receipt?
- That the receipt is genuine
- That he has a legal right to negotiate or transfer it
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- That he has knowledge of no fact which would impair the validity or worth
of the receipt, and
- That he has a right to transfer the title to the goods and that the goods
are merchantable or fit for a particular purpose whenever such warranties
would have been implied, if the contract of the parties had been to
transfer without a receipt of the goods represented thereby.
-There is no warranty on the part of the endorser to be subsidiarily liable if the
warehouseman fails to deliver the goods. No subsidiary liability for prior parties.
The liability to deliver the goods pertains only to the warehouseman, unless, the
endorser expressly warrants otherwise. If he does so and the warehouseman fails
to deliver, then he is also liable secondarily.
Q: Between an unpaid seller and a transferee of a duly negotiated receipt,
who has a better right of the goods?
-The transferee has a better right. As between the buyer and unpaid seller, the
buyer has a better right because delivery transfers ownership. Upon duly
negotiation of the receipt from the buyer to the transferee, the transferee acquires
the same right.
Q: What if you ha ve a non-negotiable receipt, and the tranferee or buyer did
not notify the warehouseman that the goods had been sold. Can the seller
attach the goods?
-Yes, the seller can attach because as far as the warehouseman is concern, the
buyer is still the owner of the goods.
-Just like any depositary, the warehouseman is obliged to take care of the goods
and to return it, not necessarily upon demand because demand not accompanied
by an undertaking to satisfy the warehouseman’s lien, then the warehouseman
cannot be compelled to surrender the goods to him.
-if the warehouseman’s lien is not satisfied, then the warehouseman is justified in
retaining the goods, just like in ordinary deposit.
Q. How may a warehouse lien be enforced?
A. By refusing to deliver the goods until the lien is satisfied
B. By causing the extrajudicial sale of the property and applying the
proceeds to the value of the lien
C. By filing a civil action for collection of the unpaid charges or by way of
counterclaim in an action to recover the property from him.
Q: What if the warehouseman delivers the goods despite existence of his
lien? Does it mean that he can no longer collect?
Only the lien is lost but he still can collect. There is no more security in his lien, but
just like any creditor he still has the right and actions available to an unpaid
creditor.
 CREDIT TRANSACTIONS PREMID 2016
EH 403

RIGHT TO A WAREHOUSEMAN LIEN
Q. What claims are included in the warehouseman’s lien?
1. Charges for storage and preservation of the goods
2. All lawful claims for money advanced, interest, insurance, transportation,
labor, weighing, coopering
3. Other charges and expenses in relation to such goods
4. All reasonable charges and expenses for notice, and advertisements of
sale, and for sale of the goods where default had been made in satisfying
the warehouseman's lien
Q. When may the lien be lost?
1. When the warehouseman surrenders possession thereof
B. By an y person to whom the possession or custody of the receipt has been
entrusted by the owner
RIGHTS OF PERSON TO WHOM A RECEIPT HAS BEEN NEGOTIATED (Sec.
41)
A. Such title to the goods as the person negotiating the receipt to him had
B. Such title to the goods as the depositor or person to whose order the goods
were to be delivered by the terms of the receipt had
C. The direct obligation of the warehouseman to hold possession of the goods
for him according to the terms of the receipt as fully as if the warehouseman
and contracted directly with him.

2. By refusing to deliver the goods when a demand is made with which he is RIGHTS OF PERSON TO WHOM RECEIPT HAS BEEN TRANSFERRED (Sec.
bound to comply 42)
A. Receipt has been transferred but not negotiated – Title of the goods subject
III. NEGOTIATION AND TRANSFER OF RECEIPTS to the terms of any agreement with the transferor.

HOW NEGOTIATED B. If the receipt is non-negotiable – right to notify the warehouseman of the
1. By delivery (Sec. 37) transfer to him of such receipt and thereby to acquire the direct obligation of
2. By indorsement (Sec. 38) the warehouseman to hold possession of the goods for him.
37
BY DELIVERY (Sec. 37)
1. Where, by terms of the receipt, the warehouseman undertakes to deliver
the goods to the bearer

2. Where, by the terms of the receipt, the warehouseman undertakes to

deliver the goods to the order of a specified person, and such person or a
subsequent indorsee of the receipt has indorsed it in blank or to bearer.

BY INDORSEMENT (Sec. 38)

A negotiable receipt may be negotiated by the indorsement of the person to
whose order the goods are deliverable. Such indorsement may be in blank, to
bearer, or to a specified person.
If indorsed in blank or to bearer – the document becomes negotiable by
delivery
If indorsed to a specified person – it may be again negotiated by the
indorsement of such person in blank, to bearer or to another specified
person. Delivery alone isn’t sufficient.

WHO MAY NEGOTIATE (Sec. 40)

A negotiable receipt may be negotiated by:
A. By the owner thereof, or

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