CREDIT TRANSACTIONS

What is credit?

A: It is a persons ability to borrow

money by virtue of confidence or trust
reposed in him by the lender that he
will pay what he may promise.

What is credit transaction?

A: It refers to agreement based on trust

or belief of someone on the ability of
another person to comply with his
obligations.

Arts. 1933-1934.

There are two kinds of loans:

(a) mutuum or simple loan, and
(b) commodatum.

Consumable and Non-consumable

Distinguished
(a) Consumable a movable which cannot
be used in a manner appropriate to its
nature without its being consumed.
(Art. 418). Example: gasoline.
(b) Non-consumable a movable which
can be used ina manner appropriate to its
nature without its being consumed. (Art.
418). Example: a book.

Fungible and Non-Fungible

Distinguished
(a) Fungible if the intention is to allow a
substitution of the thing given.
(b) Non-fungible if the intention is to
compel a return of the identical thing
given.

Bailment
It is the delivery of a personal property for
some particular use, or on mere deposit,
upon a contract, express or implied, that
after the purpose has been fulfilled, it shall
be redelivered to the person who delivered it,
or otherwise dealt with according to his
directions, or kept until he reclaims it, as the
case may be.

Parties in a Bailment
(a) Bailor the giver; and
(b) Bailee the recipient of the
thing bailed.

What are the kinds of credit

transactions?
As contracts of security
a. Contracts of real security These are
contracts supported by collateral/s or
burdened by an encumbrance on property
such as mortgage and pledge.

b. Contracts of personal security These are

contracts where performance by the principal
debtor is not supported by collateral/s but
only by a promise to pay or by the personal
undertaking or commitment of another
person such as in surety or guaranty.

As to their existence
a. Principal contracts They can exist
alone. Their existence does not depend
on the existence of another contract. (e.g.
commodatum and mutuum)

b. Accessory contracts They have to

depend on another contract. These
accessory contracts depend on the
existence of a principal contract of loan.
(e.g. guaranty proper, suretyship,
pledge, mortgage and antichresis)

As to their consideration
a. Onerous This is a contract where there is
consideration or burden imposed like
interest.
b. Gratuitous This is a contract where there
is no consideration or burden imposed. (e.g.
commodatum)

COMMODATUM

Art. 1935. The bailee in commodatum

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

Commodatum
is a real, principal, essentially gratuitous, and
personal contract where one of the parties
(called the bailor or lender) delivers to
another (called the bailee or borrower) a
non-consumable object, so that the latter
may USE the same for a certain period and
later return it.

Characteristics of Commodatum as a
Contract
(a) real (because perfected by delivery)
(b) principal (because it can stand alone by
itself)
(c) gratuitous (otherwise, the contract is one of
lease)
(d) personal in nature (because of the trust).

Art. 1936. Consumable goods may

be the subject of commodatum if
the purpose of the contract is not
the consumption of the object, as
when it is merely for exhibition.

Art. 1937. Movable or

immovable property may be
the object of commodatum.

Art. 1938. The bailor in commodatum

need not be the owner of the thing
loaned.
Example:
Market Vendor

Art. 1939. Commodatum is purely

personal in character.
Consequently:
(1) The death of either the bailor or the
bailee extinguishes the contract;

(2) The bailee can neither lend nor lease

the object of the contract to a third
person. However, the members of the
bailees household may make use of
the thing loaned, unless there is a
stipulation to the contrary, or unless
the nature of the thing forbids such
use.

Example:
A loaned to B, C, D, E, the formers car by
way of commodatum. C died. Is the
contract of commodatum extinguish?
What if B lease it to third person? What
if C let his household members use the
object?

Art. 1940. A stipulation that the

bailee may make use of the
fruits of the thing loaned is
valid.

Example:
D is the bailee in commodatum of Bs
land. Can D enjoy the mango fruits in
Bs land?

OBLIGATIONS OF THE BAILEE

Art. 1941. The bailee is obliged to

pay for the ordinary expenses
for the use and preservation of
the thing loaned.

C borrowed a motorcycle from A

by way of commodatum. Who is
responsible for the gasoline?
How about the wheel
replacement?

Art. 1942. The bailee is liable for the loss

of the thing, even if it should be
through a fortuitous event:
(1) If he devotes the thing to any purpose
different from that for which it has been
loaned;

(2) If he keeps it longer than the

period stipulated, or after the
accomplishment of the use for
which commodatum has been
constituted;

(3) If the thing loaned has been

delivered with appraisal of its
value, unless there is a stipulation
exempting the bailee from
responsibility in case of a
fortuitous event;

(4) If he lends or leases the thing to a

third person, who is not a member of
his household;
(5) If, being able to save either the
thing borrowed or his own thing, he
chose to save the latter.

Art. 1943. The bailee does not

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

Art. 1944. The bailee cannot retain the thing

loaned on
the ground that the bailor owes him
something, even though it may be by
reason of expenses. However, the bailee
has a right of retention for damages
mentioned in Article 1951.

Example:
A is indebted to B for P200,000. B
later borrowed As car but refused to
return it on the ground that A owed
him some money. Is Bs action
correct?

Art. 1945. When there are two

or more bailees to whom a
thing is loaned in the same
contract, they are liable
solidarily.

OBLIGATIONS OF THE BAILOR

Art. 1946. The bailor cannot demand the

return of the thing loaned till after the
expiration of the period stipulated, or
after the accomplishment of the use for
which the commodatum has been
constituted. However, if in the meantime,
he should have urgent need of the thing,
he may demand its return or temporary
use.

In case of temporary use by the

bailor, the contract of
commodatum is suspended while
the thing is in the possession of
the bailor.

Example:
A borrowed the laptop of B by way of
commodatum stipulating that the laptop
will be in the possession of A until Feb. 22,
2016. However, B needs the laptop due to
an urgent demand of his employer. Can B
rightfully get the laptop? What happened
to the contract of commodatum? What if
there is no stipulation as to time?

Art. 1947. The bailor may demand the thing at

will, and the contractual relation is called
a precarium, in the following cases:
(1) If neither the duration of the contract nor
the use to which the thing loaned should
be devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated
by the owner.

Art. 1948. The bailor may

demand the immediate return
of the thing if the bailee
commits any act of ingratitude
specifi ed in Article 765.

Article 765 provides:

The donation may also be revoked at the
instance of the donor, by reason of
ingratitude in the following cases:
(1) If the donee should commit some offense
against
the person, the honor or the property of the
donor, or of his wife or children under his
parental authority;

(2) If the donee imputes to the donor any

criminal offense, or any act involving moral
turpitude, even though he should prove it,
unless the crime or the act has been
committed against the donee himself, his
wife or children under
his authority;

(3) If he unduly refuses him support when

the donee
is legally or morally bound to give support to
the donor.

Art. 1949. The bailor shall refund the

extraordinary
expenses during the contract for the
preservation of the
thing loaned, provided the bailee brings the
same to the
knowledge of the bailor before incurring
them, except when they are so urgent that
the reply to the notifi cation cannot be
awaited without danger.

If the extraordinary expenses arise on the

occasion of
the actual use of the thing by the bailee,
even though he
acted without fault, they shall be borne
equally by both
the bailor and the bailee, unless there is a
stipulation to the contrary.

Example:
A borrowed Bs car. While A was
riding on it, he met an accident
which greatly damaged the car.
Who is liable for the repair?

Art. 1950. If, for the purpose of

making use of the thing, the
bailee incurs expenses other
than those referred to in Articles
1941 and 1949, he is not entitled
to reimbursement.

Example:
The borrower of a car buys an extra jack
to be used as a reserve on a trip. Here,
he is not entitled to reimbursement.

Art. 1951. The bailor who, knowing the

fl aws of the thing loaned, does not
advise the bailee of the same, shall
be liable to the latter for the damages
which he may suffer by reason
thereof.

Example:
A lent B an iron which A knew that the
electric connections were defective. Is
A the lender liable if damages occurs
by reason of the defect? What if A did
not comply his liability?

Art. 1952. The bailor cannot

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

Example:
For extraordinary expenses
on As car, B the borrower
spent P125,000. A abandoned the car to B
as payment of the expenses. Is As action
correct?

SIMPLE LOAN OR MUTUUM

Art. 1953. A person who receives a

loan of money or any other
fungible thing acquires the
ownership thereof, and is bound
to pay to the creditor an equal
amount of the same kind and
quality.

Exercise:
A borrowed 100,000 from B
secured by a chattel mortgage on
the standing crops on his land.
The crops were destroyed by a
typhoon. May A the borrower still
pay?

Art. 1954. A contract whereby one

person transfers the ownership of
non-fungible things to another
with the obligation on the part of
the latter to give things of the
same kind, quantity, and quality
be considered a barter.

Example
A got a fountain pen from B and he
(A) became the owner thereof, with
the obligation of giving another pen
of the same kind and quality. This
shall be considered a barter. It is not
a commodatum nor a mutuum.

Art. 1955. The obligation of a person who

borrows money shall be governed by the
provisions of Articles 1249 and 1250 of
this Code.
If what was loaned is a fungible thing other
than money, the debtor owes another
thing of the same kind, quantity and
quality, even if it should change in value.
In case it is impossible to deliver the
same kind, its value at the time of the
perfection of the loan shall be paid.

Example:
A borrowed from B five sacks of
rice. At the time the loan was
perfected, each sack cost P1,800.
At the time of payment the price of
each sack of rice is 2,000. How
much would A pay to B if he is not
able to return the five sacks of
rice?

Art. 1956. No interest shall be

due unless it has been
expressly stipulated in
writing.

What is interest?
A: It is nothing more than the
compensation to be paid by
the borrower for the use of the
money lent to him by the
lender.

What is the rule on interests?

A: GR: No interest shall be due
unless it is stipulated in writing.
(Art. 1956, NCC)
XPN: In case of interest on
damages or indemnity for
damages, it need not be in
writing.

What are the classes of interest?

A:
1. Simple interest which is paid for the use of the
money, at a certain rate stipulated in writing by the
parties.
2. Compound interest which is imposed upon
accrued interest, that is, the interest due and
unpaid.
3. Legal that interest which the law directs to be
paid in the absence of any agreement as to the
rate.

What is the rule on compounding of interest?

A:
GR: Accrued interest (interest due and unpaid)
shall not earn interest.
XPN: When:
1. judicially demanded; or
2. there is express stipulation made by the
parties that the interest due and unpaid shall
be added to the principal obligation and the
resulting total amount shall earn interest.

What is floating interest?

A: It is the interest stipulated by
banks which is not fixed and
made to depend upon the
prevailing market conditions,
considering the fluctuating
economic conditions.
Is a stipulation for floating interest
valid?

Example
A borrowed P1,000,000 from B. There
was no mention as to interest. Can B
impose interest to A? What if interest
had been stipulated, can it be done
orally or in writing?

Examples:
B borrowed from C P1,000,000
for one year. No interest was
agreed upon in writing. At the
end of one year, C demanded
payment, but B was unable or
refused to pay. After two more
years, B was ready to pay. Is B
liable for interest?

Example:
Sabugo granted a loan to Samilin. The
loan agreement was not reduced in
writing. Thereafter, Sabugo demanded
additional interest which was paid by
Samilin in cash and checks. Upon
advice of her lawyer, Samilin demanded
for the return of the amount of interest
paid. Is the payment of interest valid?

Art. 1957. Contracts and

stipulations, under any cloak or
device whatever, intended to
circumvent the laws against
usury shall be void. The
borrower may recover in
accordance with the laws on
usury.

What Constitutes Usury?

To constitute usury, there must be
a loan or forbearance. And
something must be exacted for
the use of money in excess of and
in addition to interest allowed by
law.

The elements of usury are:

1. a loan express or implied
2. understanding between the parties that the money
lent shall or may be returned
3. for such loan a greater rate of interest that is
allowed by law shall be paid or agreed to be paid
as the case may be
4. corrupt intent to take more than the legal rate for
the use of money.

Must the principal debt still be

paid in usurious transactions?
A: Yes. Under the Usury Law,
notwithstanding stipulations of
usurious interest, the debtor must
still pay the principal debt (Lopez
v. El Hogar Filipino, No. 22678,
Jan. 12, 1925).

Art. 1958. In the determination

of the interest, if it is payable in
kind, its value shall be
appraised at the current price
of the products or goods at the
time and place of payment.

Art. 1959. Without prejudice to the

provisions of Article 2212, interest
due and unpaid shall not earn
interest. However, the contracting
parties may by stipulation
capitalize the interest due and
unpaid, which as added principal,
shall earn new interest.

The general rule is that accrued

interest (interest due and unpaid)
will not bear interest, BUT:
(a) if there is agreement to this effect
(Art. 1959), or
(b) if there is judicial demand. (Art.
2212).

Art. 1960. If the borrower pays

interest when there has been no
stipulation therefor, the provisions
of this Code concerning solutio
indebiti, or natural obligations,
shall be applied as the case may
be.

Example:
A borrowed money from B. No interest
was stipulated in writing. However, A paid
interest to B? Can A demand for the return
of the money?
What if the agreement with regard to
interest is made orally, and A paid the
interest. Can A demand for the return of
the money?

Art. 1961. Usurious contracts

shall be governed by the
Usury Law and other special
laws, so far as they are not
inconsistent with this Code.

DEPOSIT

What is deposit?
A: It is a contract whereby a person
(depositor) delivers a thing to
another (depositary), for the
principal purpose of safekeeping
it, with the obligation of returning
it when demanded.

Art. 1962. A deposit is constituted

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

 When Contract of Deposit is

Perfected
A deposit, being a real contract, is
perfected by delivery (Art. 1316,
Civil Code), but an agreement to
constitute a deposit is merely
consensual, and is therefore
binding upon mere consent. (Art.
1963, Civil Code).

What are the characteristics of

contract of deposit?
1. Real contract because it can only
be perfected by the delivery of the
object of the contract.
2. Object of the contract must be a
movable property. However, in cases
of judicial deposit, the subject matter
may be a real property.

3. Purpose is for the safekeeping of the

thing deposited. This must be the
principal purpose and not only
secondary.
4. It is gratuitous, unless there is a:
a. Contrary agreement; or
b. The depositary is engaged in the
business of storing goods, like a
warehouseman.

5. The depositary cannot use the

thing deposited, unless:
a. Permitted by the depositor; or
b. Preservation of the thing requires
its use, but only for said purpose.
May be made orally or in writing.

Purposes of the Contract

The principal purpose of a deposit is
the safekeeping of the thing
delivered (Art. 1962), but this does
not mean that the depositary can
never use it. He can, in two
instances:
(a) with the express permission of the
depositor;

(b) when the preservation of the

thing deposited requires its use, it
must be used but only for that
purpose. (Art. 1977, Civil Code).

Kinds of Deposits
(a) Judicial (sequestration) When an
attachment or seizure of property in
litigation is ordered. (Art. 2005, Civil
Code).
(b) Extrajudicial
1) voluntary made by the will of the
depositor. (Art. 1968, Civil Code).

2) necessary
a) made in compliance with a legal
obligation. (Art. 1966, Civil Code).
b) on the occasion of a calamity. (Art.
1996, Civil Code).
c) made by travelers in hotels or inns.
(Art. 1998, Civil Code)
d) made by travelers with common
carrier. (Art. 1736, Civil Code).

DEPOSIT

MUTUUM
Purpose

Safekeeping/custody

Consumption
When to return

Upon demand of the depositor

Upon expiration of the term

granted to the borrower

Subject Matter
Movable (extrajudicial) or may be
immovable (judicial)

Money or other fungible thing

Relationship
Depositordepositary

Lenderborrower
Compensation

No compensation of things
deposited with each other (except
by mutual agreement)

There can be compensation of

credits

In whose behalf it is held

Depositor or third person
designated

Person who has a right

DEPOSIT

COMMODATUM
Purpose

Safekeeping/custody

Transfer of use
Purpose

May be gratuitous or onerous

Always gratuitous

DEPOSIT

AGENCY
Purpose
Representation of the principal by
the agent

Safekeeping/custody

Reason for custody of the thing

The custody of the thing is the
principal and essential reason for
the deposit

It is merely an incidental obligation

of the agent

Nature
Essentially gratuitous

It is generally onerous or for

compensation

DEPOSIT

LEASE
Purpose

Safekeeping/cust
Use of the thing
ody
When to return
Upon demand of
the depositor

Upon termination
of the lease
contract.

DEPOSIT

SALE

Ownership
Retained by
depositor.

Transferred to
buyer.

 Art. 1963. An agreement to

constitute a deposit is
binding, but the deposit
itself is not perfected until
the delivery of the thing.

Consensual Contract to Constitute

a Deposit
A deposit is a real contract and is not
perfected until the delivery of the
object of the obligation. (Art. 1316,
Civil Code). Where there has been
no delivery, there is merely an
agreement to deposit, a personal
obligation to do. Hence, it has been
truly said that a contract of future
deposit is merely consensual. Such
contract is, however, binding.

Art. 1964. A deposit may be

constituted judicially or
extrajudicially.

JUDICIAL

EXTRAJUDICIAL
Creation

Will of the court

Will of the contracting parties

Purpose

Security or to ensure the right of a

party to property or to recover in
case of favorable judgment

Custody and safekeeping

Subject Matter
Movables or immovables but
generally immovables

Movables only
Cause
Generally gratuitous but may be
compensated

Always onerous

When must the thing be returned

Upon order of the court or when
litigation is ended

Upon demand of depositor

In whose behalf it is held

Person who has a right

Depositor or third person

designated

Art. 1965. A deposit is a

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

Generally, deposit is
GRATUITOUS.
Exceptions:
(a) when there is a contrary
agreement;
(b) when the depositary is
engaged in the business of
storing goods.

Problem
John deposited his goods with
Jose. They agreed on the
compensation. However, the
rate was not fixed. How much
should be the rate?

Art. 1966. Only movable things

may be the object of a deposit.

Art. 1967. An extrajudicial

deposit is either voluntary or
necessary.

Kinds of Extrajudicial Deposit

(a) Voluntary as when there is
mutual consent.
(b) Necessary when there is a
deposit because of a calamity
(depositum miserable).

VOLUNTARY DEPOSIT

Art. 1968. A voluntary deposit is that

wherein the delivery is made by the
will of the depositor. A deposit may
also be made by two or more
persons each of whom believes
himself entitled to the thing
deposited with a third person, who
shall deliver it in a proper case to
the one to whom it belongs.

Voluntary Deposit Defined:

A voluntary deposit is one wherein
the delivery of the object is made
by the will of the depositor.

Problem:
Mark deposited his bag containing
valuables with Maria. The latter
demands proof of ownership of
the bag. May Maria compel Mark
to prove the ownership of the
bag?

Problem:
John and Jose are claiming
to be the sole owner of a
thing deposited with Maria.
To whom should Maria
deliver the thing?

Art. 1969. A contract of deposit may

be entered into orally or in writing.
Form of the Contract of Deposit
(a) oral
(b) written

Art. 1970. If a person having

capacity to contract accepts a
deposit made by one who is
incapacitated, the former shall be
subject to all the obligations of a
depositary, and may be compelled
to return the thing by the
guardian, or administrator, of the
person who made the deposit, or
by the latter himself if he could
acquire capacity.

Example:
John accepted a deposit from
Maria, an insane individual.
Can Jose the guardian of
Maria compel John to return
the object?

Art. 1971. If the deposit has been made by

a capacitate person with another who is
not, the depositor shall only have an
action to recover the thing deposited
while it is still in the possession of the
depositary, or to compel the latter to pay
him the amount by which he may have
enriched or benefited himself with the
thing or its price. However, if a third
person who acquired the thing acted in
bad faith, the depositor may bring an
action against him for its recovery.

Example:
A deposited his laptop with B,
who is insane. B in turn disposed
of it in favor of C. Can A go
against C?

When is a voluntary deposit

extinguished?
A:
1. Loss or destruction of thing
deposited;
2. In gratuitous deposit, upon death of
either depositor or depositary; or
3. Other causes (e.g. return of thing,
novation, expiration of the term,
fulfillment of resolutory condition)

Q: What are the obligations of

depositary in voluntary deposit?
Art. 1972
1. To keep the thing safely and return it
2. Exercise same diligence as he would
exercise over his own property

Art. 1973
3. Not to deposit the thing with a 3rd person
unless expressly authorized by stipulation
Note: Depositary is liable for the loss if:
a. He deposits the thing to a 3rd person
without authority, even though the loss is
due to fortuitous events
b. Deposits the thing to a 3rd person who is
manifestly careless or unfit although there
is authority.

Art. 1974
Q: May the depositary change the
manner of the deposit?
A: Yes, if he may reasonably presume that
the depositor would consent to the
change if he knew of the facts of the
situation. However, before the depositary
may make such change, he shall notify
the depositor thereof and wait for his
decision, unless delay would cause
danger.

Art. 1975
4. If the thing should earn
interest:
a. collect interest as it falls due
b. take steps to preserve the
value and rights corresponding
to it

Art. 1976
5. Not to commingle things if so stipulated
Art. 1977
6. GR: Not to make use of the thing
deposited
XPNs:
a. When preservation of thing deposited
requires its use
b. When authorized by depositor

Art. 1978
c. GR: In such case it is no
longer a deposit but a contract
of loan or commodatum, as
the case may be.
d. XPN: Principal reason for the
contract is still safekeeping, it
is still deposit.

Art. 1979
8. GR: Pay for any loss or damage that may arise due
to his fault
XPN: Liability of loss through fortuitous event
XPNs to XPN: Even in case of loss through fortuitous
event, still liable if:
a. Stipulated
b. he Uses thing w/o depositors permission
c. he Delays its return
d. he Allows others to use it (even if he himself is
authorized to use it)

Art. 1981
7. When the thing deposited is
delivered sealed and closed:
a. return the thing in the same condition
b. pay damages if seal be broken
through his fault
c. keep the secret of the deposit when
seal is broken w/ or w/o his fault

Art. 1982
d. However, the depositary is
authorized to open the seal or lock
when:
a. there is presumed authority
b. out of necessity

Art. 1983
9. Return the thing deposited with
all its fruits, accessions, and
accessories
10. Pay interest on sums converted
to personal use if the deposit
consists of money

Q: Under Art. 1983, what is included in

the term products, accessories and
accessions?
A: The depositors ownership over the
thing carries with it the right to the fruits
and all accessions thereto including:
1. Natural fruits
2. Industrial fruits
3. Civil fruits (Art. 441, NCC)

OBLIGATIONS OF THE
DEPOSITOR

Q: What are the obligations of depositor?

Art. 1992
1. Payment for necessary expenses for
preservation
a. If the deposit is gratuitous reimburse
depositary
b. With compensation no need for
reimbursement; expenses borne by
depositary

Art. 1993
2. GR: Pay losses incurred by depositary
due to the character of the thing
deposited.
XPNs:
a. When at the time of deposit, the
depositor was not aware of the
dangerous character of the thing or was
not expected to know it;
b. When the depositor notified the
depositary; or
c. When the depositary was aware of it
without advice from the depositor.

3. In case of an onerous deposit, to

pay the compensation agreed
upon as consideration for the
deposit.

NECESSARY DEPOSIT

Art. 1996
When is deposit considered as necessary?
1. When it is in compliance with a legal
obligation;
2. It takes place on the occasion of any
calamity, such as fire, storm, flood, pillage,
shipwreck, or other similar events;
3. Made by passengers with common carriers;
or
4. Made by travelers in hotels or inns.

Art. 1998
Q: When can the keepers of hotels or
inns be held responsible for loss of
thing in case of deposit?
A: When both are present:
1. they have been previously informed by
guest about the effects the latter brought
in; and
2. the guest has taken precautions
prescribed for their safekeeping.

Note: They are liable regardless of

the degree of care exercised
when:
a. loss or injury is caused by his
employees or even by strangers;
or
b. loss is caused by act of thief or
robber when there is no use of
arms or irresistible force.

Art. 2000 - 2002

Q: What are the instances when the
keepers of hotels or inns are not liable
for loss of thing in case of deposit?
A: They are not liable when:
1. loss or injury is caused by force
majeure;
2. loss due to the acts of guests, his family,
his employees, or visitors; and
3. loss arises from the character of the
goods.

Art. 2003
Q: Are hotel or inn keepers still liable
regardless of the posting of notices
exempting themselves from any
liability?
A: Yes. Hotel/Innkeepers cannot escape or
limit liability by stipulation or the posting
of notices. Any stipulation between the
hotel keeper and the guest whereby the
responsibility of the former is suppressed
or diminished shall be void.

Art. 2004
Q: Can the keepers of the hotels or
inns exercise the right of
retention?
A: Yes, as security for credits incident
to the stay at the hotel (in the nature
of a pledge created by operation of
law).

Q: What is the extent of the liability

of the hotel keepers in case of
loss?
1. It covers liability in hotel rooms
which come under the term
baggage or articles such as
clothing as are ordinarily used by
travelers.
2. It includes lost or damages in hotels
annexes such as vehicles in the
hotels garage.

JUDICIAL DEPOSIT

Art. 2005
Q: When does judicial deposit
(sequestration) take place?
A: When an attachment or
seizure of property in litigation
is ordered by a court.

Art. 2006
Q: What may be the object of Judicial
sequestration?
A: Movables and immovables

Q: When will the properties

sequestered cease to be in
custodia legis?
A: When the insolvency proceedings
of a partnership terminated because
the assignee in insolvency has
returned the remaining assets to the
firm, said properties cease to be in
custodia legis

NATURE AND EXTENT

OF GUARANTY

Art. 2047
Q: What is guaranty?
A: It is a contract where a
person called the guarantor
binds himself to the creditor to
fulfill the obligation of the
principal debtor in case the
latter should fail to do so.

Q: What is suretyship?
A: It is a contract where a
person binds himself
solidarily with principal
debtor.

GUARANTY

SURETYSHIP

Collateral undertaking

Surety is an original
promissory

Guarantorsecondarily
liable

Suretyprimarily liable

Guarantor binds himself to Surety undertakes to pay if

principal
pay if the principal cannot
pay
does not pay
Insurer of solvency of
debtor

Insurer of the debt

Guarantor can avail of the

benefit of excussion and
division in case creditor
proceeds against him

Surety cannot avail of the

benefit of excussion and
division

GUARANTY

WARRANTY

an undertaking that
the title, quality or
a contract by which a
quantity of the
person is bound to
subject matter of a
another for the
contract is what it is
fulfillment of a
represented to be,
promise or
and relates to some
undertaking of a third
agreement made
person
ordinarily by the
party who makes the
warranty

Q: What are the characteristics

of guaranty and suretyship?
1. Accessory
2. Consensual
3. Conditional
4. Unilateral
5. Nominate
6. Cannot be presumed
7. Covered by the Statute of Frauds

Q: What are the kinds of

guaranty?
1. General classification
a. Personal guaranty where an
individual personally assumes the
fulfillment of the principal
obligation;
b. Real guaranty is property,
movable, or immovable.

2. As to its origin (Art. 2051)

a. Conventional constituted
by agreement of the parties
b. Legal imposed by virtue of
a provision of law
c. Judicial required by a court
to guarantee the eventual
right of the parties in a case.

3. As to consideration
a. Gratuitous guarantor does not
receive any price or remuneration
for acting as such. (Art. 2048)
b. Onerous one where the
guarantor receives valuable
consideration for his guaranty

4. As to person
a. Single constituted solely to
guarantee or secure
performance by the debtor of
the principal obligation.
b. Double or subguaranty
constituted to secure the
fulfillment of the obligation of a
guarantor by a subguarantor

5. As to scope and extent (Art.

2055)
a. Definite where the guaranty is
limited to the principal obligation
only, or to a specific portion thereof.
b. Indefinite or simple where the
guaranty included all the accessory
obligations of the principal, e.g.
costs, including judicial costs.

Art. 2049
Q: What is the rule when a married woman is
a guarantor?
GR: Binds only her separate property.
XPNs:
1. If with her husbands consent, it binds the
community or conjugal partnership property.
2. Without husbands consent, in cases provided
for by law, such as when the guaranty has
redounded to the benefit of the family.

Art. 2052
Q: What are the obligations that may be
secured in a contract of guaranty?
1. Valid obligations
2. Voidable obligations
3. Unenforceable obligations
4. Natural obligations When the debtor
himself offers a guaranty for his natural
obligation, he impliedly recognizes his
liability, thereby transforming the obligation
from a natural into a civil one.

5. Conditional obligations only

in case of suspensive
condition because it gives rise
to the principal and hence,
gives rise also to the
accessory obligation.

EFFECTS OF GUARANTY

BENEFIT OF EXCUSSION (Arts. 2058)

Q: What is the benefit of excussion?

A: It is a right by which the guarantor
cannot be compelled to pay the
creditor unless the latter has
exhausted all the properties of the
principal debtor and has resorted to
all legal remedies against such
debtor.

Art. 2060
Q: What are the requisites of benefit of
exhaustion or excussion?
1. The guarantor must set up the right of
excussion against the creditor upon the
latters demand for payment from him; and
2. He must point out to the creditor the
available property of the debtor (not
exempted from execution) found within the
Philippine territory.

Q: When is there no benefit of

excussion?
Art. 2059
1. Guarantor has expressly renounced it.
2. Guarantor has bound himself solidarily with
the Debtor.
3. Debtor is insolvent.
4. Guarantor has absconded, or cannot be
sued within the Philippines unless he left a
manager or representative.
5. If it may be presumed that an execution on
the property of the Debtor cannot satisfy the
obligation.

Art. 2060
6. Guarantor does not invoke the
benefit against Creditor upon
demand to him for payment and
he does not point out available
property of the Debtor within the
Philippines sufficient to cover the
obligation.

BENEFIT OF DIVISION

Art. 2065
Q: What is the principle of benefit
of division?
A: Should there be several
guarantors of only one debtor for
the same debt, the obligation to
answer for the same is divided
among all. (Joint liability)

Note:
GR: Creditor can claim from the
guarantors only up to the
extent they are respectively
bound to pay.
XPN: When solidarity has been
stipulated.

Art. 2063
Q: What is the effect of
compromise between the creditor
and the debtor to the guarantor?
A: If the compromise is beneficial to
the guarantor, it is valid; otherwise,
it is not binding upon him (1st
sentence, Art. 2063).

Q: What is the effect of compromise

between the creditor and the
guarantor to the principal debtor?
A: If compromise is beneficial to the
principal debtor, it is valid; otherwise,
it is not binding upon him (2nd
sentence, Art. 2063, NCC). To be
binding, it must benefit both the
guarantor and the debtor.

Art. 2066
Q: What is the rule on the right of indemnity and
reimbursement of the guarantor who paid the
debt?
GR: Guarantor is entitled to be reimbursed by Debtor for:
1. total amount of the debt paid;
2. legal interest from the time payment was made known
to the debtor;
3. expenses incurred after notifying debtor that demand
to pay was made upon him; and
4. damages in accordance with law.

XPNs:
1. Guaranty is constituted without the
knowledge or against the will of the
debtor.
Effect: Guarantor may only recover only
so much as was beneficial to the debtor.
2. Payment by 3rd persons who does not
intend to be reimbursed.
Effect: deemed a donation and as such
requires the consent of debtor.

Art. 2067
Q: What is the right of the
guarantor after the payment of
the debt is made to the creditor?
A: Right of subrogation. The
guarantor is subrogated to all
the rights which the creditor had
against the debtor.

Art. 2068
Q: What happens when guarantor
pays without notice to the debtor?
A: The debtor may interpose against
the guarantor defenses available to
the debtor as against the creditor at
the time payment was made.

Note: (Art. 2070)

GR: Guarantor must 1st notify the
debtor before paying, otherwise, if
the debtor pays again, the
guarantor can only collect from
the creditor and guarantor will
have no cause of action against
the debtor even if the creditor
becomes insolvent.

XPN: Guarantor may still recover

from debtor if the following
circumstances concur:
1. Guaranty is gratuitous;
2. Guarantor was prevented by
fortuitous event from notifying the
debtor; and
3. Creditor was insolvent.

Art. 2071
Q: Can the guarantor proceed against the
principal debtor even before having paid the
creditor?
GR: No.
XPNs:
1. When he is sued for payment;
2. In case of insolvency of the principal debtor;
3. When the debtor has bound himself to relieve
him from the guaranty within a specified period,
and this period has expired.

4. When the debt has become demandable

by reason of the expiration of the period
of payment;
5. After the lapse of ten years, when the
principal obligation has no fixed period for
its maturity, unless it be of such nature
that it cannot be extinguished except
within a period longer than ten years;
6. If there are reasonable grounds to fear
that the principal debtor intends to
abscond; or
7. If the principal debtor is in imminent
danger of becoming insolvent.

Art. 2072
Q: What is the remedy of a person
who becomes a guarantor at the
request of another for the debt of
a third person who is not present?
A: He has the option of suing either
the principal debtor or the
requesting party.

Art. 2075
Q: What is double or subguaranty?
A: It is one constituted to guarantee the
obligation of the guarantor.
Note: In case of insolvency of the
guarantor for whom he bound himself,
he is responsible to the coguarantors in
the same terms as the guarantors.

Art.2064
Q: Is a subguarantor entitled to
the right of excussion?
A: Yes, both with respect to the
guarantor and to the principal
debtor.

CONTINUING GUARANTY
GR: It is not limited to a single transaction but
contemplates a future course of dealings,
covering a series of transactions generally
for an indefinite time or until revoked.
XPN: A chattel mortgage can only cover
obligations existing at the time the mortgage
is constituted and not to obligations
subsequent to the execution of the
mortgage.
XPN to the XPN: In case of stocks in
department stores, drug stores etc.

Q: What is the test of continuing

guaranty?
A: A guaranty shall be construed as
continuing when by the terms thereof it
is evident that the object is to give a
standing credit to the principal debtor to
be used from time to time either
indefinitely or until a certain period,
especially if the right to recall the
guaranty is expressly reserved (Dino v.
CA, G.R. No. 89775, Nov. 26, 1995)

Q: May guaranty secure future debts?

A: Yes. A guaranty may be given to secure
even future debts, the amount of which may
not be known at the time the guaranty is
executed. This is the basis for contracts
denominated as continuing guaranty or
suretyship. It is one which covers all
transactions, including those arising in the
future, which are within the description or
contemplation of the contract of guaranty,
until the expiration or termination thereof.
(Dino v. CA, G.R. No. 89775, Nov. 26, 1995)

LEGAL AND JUDICIAL

BONDS

Q: What is a Bond?
A: A bond, when required by law, is
commonly understood to mean an
undertaking that is sufficiently
secured, and not cash or currency.
Whatever surety bonds are
submitted are subject to any
objections as to their sufficiency or
as to the solvency of the bondsman.

Q: What is a Bondsman?
A: A bondsman is a surety
offered in virtue of a provision
of law or a judicial order. He
must have the qualifications
required of a guarantor and in
special laws like the Rules of
Court.

Q: What are the qualifications to a property

bond?
A: The necessary qualifications of sureties to a
property bond shall be as follows:
1. Each of them must be a resident owner of real
estate with in the Philippines;
2. Where there is only one surety, his real estate must
be worth at least the amount of the undertaking;
3. In case there are two or more sureties, they may
justify severally in amounts lass than that
expressed in the undertaking, if the entire sum
justified to is equivalent to the whole amount of bail
demanded. (Sec. 12, Rule 114, Rules of Court)

Art. 2084
Q: Is the right of excussion available to a
bondsman?
A: No. A judicial bondsman and the sub
surety are not entitled to the benefit of
excussion because they are not mere
guarantors, but sureties whose liabilities is
primary and solidary.

EXTINGUISHMENT OF
GUARANTY

Q: What are the grounds for

extinguishing a contract of guaranty?
A:
1. Principal obligation is extinguished
2. Same causes as all other obligations
3. If creditor voluntarily accepts immovable
or other properties in payment of the debt
(even if he should afterwards lose the
same through eviction or conveyance of
property)

4. Release in favor of one of the guarantors, w/o

consent of the others, benefits all to the extent of
the share of the guarantor to whom it has been
granted
5. Extension granted to debtor by creditor without
consent of guarantor
6. When by some act of the creditor, the guarantors
even though they are solidarily liable cannot be
subrogated to the rights, mortgages, and
preferences of the former

PLEDGE, MORTGAGE,
AND ANTICHRESIS

PLEDGE
An accessory contract whereby a debtor
delivers to the creditor or a third person
a movable or personal property, or
document evidencing incorporeal rights,
to secure the fulfillment of a principal
obligation with the condition that when
the obligation is satisfied, the thing
delivered shall be returned to the
pledgor with all its fruits and accessions,
if any.

MORTGAGE (Real)
It is a contract whereby the debtor
secures to the creditor the fulfillment
of a principal obligation, specially
subjecting to such security,
immovable property or real rights
over immovable property, in case
the principal obligation is not paid or
complied with at the time stipulated.

ANTICHRESIS
A contract whereby the CR
acquires the right to receive the
fruits of an immovable of the
dedtor, with the obligation to apply
them to the payment of interest, if
owing, and thereafter to the
principal of his credit.

Q: What are the kinds of

pledge?
A:
1. Conventional by agreement
of parties
2. Legal by operation of law

Art. 2085
Q: What rules are common to pledge
and mortgage?
1. Constituted to secure the fulfillment
of a valid principal obligation.
2. Pledgor or mortgagor must be the
absolute owner of the thing pledged
or mortgaged.

3. They must have the free

disposal of their property, and
in the absence thereof, that
they be legally authorized for
such purpose.
4. Debtor retains ownership of
the thing given as a security.

Q: What are the similarities of

pledge and mortgage?
1. Both are accessory contracts;
2. Both pledgor and mortgagor
must be the absolute owner of
the property;

3. Both pledgor and mortgagor must

have the free disposal of their
property or be authorized to do so;
and
4. In both, the thing proffered as
security may be sold at public
auction, when the principal
obligation becomes due and no
payment is made by the debtor.

ACCOMMODATION MORTGAGE
Q: Who is an accommodation
mortgagor?
A: He is a third person who is not a
party to a principal obligation and
secures the latter by mortgaging or
pledging his own property.

Q: What is the extent of the

liability of an accommodation
mortgagor?
A: It extends up to the loan
value of their mortgaged
property and not to the entire
loan itself.

PACTUM COMMISSORIUM

Art. 2088
Q: What is pactum commisorium?
A: It is a stipulation whereby the thing
pledged or mortgaged or subject of
antichresis shall automatically become
the property of the creditor in the event of
nonpayment of the debt within the term
fixed. Such stipulation is null and void.

Q: What are the elements of pactum

commissorium?
1. There is a pledge, mortgage or
antichresis of a property by way of
security; and
2. There is an express stipulation for the
automatic appropriation by the creditor
of the property in case of nonpayment

Art. 2089
Q: Are the contracts of pledge, mortgage or
antichresis indivisible?
GR: A pledge, mortgage or antichresis is
indivisible.
XPNs:
1. Where each one of several things
guarantees determinate portion of the credit
2. Where only a portion of the loan was
released
3. Where there was failure of consideration

Q: Is constructive or symbolic delivery of

the thing sufficient to constitute pledge?
GR: No.
XPN: If the pledge consists of goods
stored in a warehouse for purposes, of
showing the pledgees control over the
goods, the delivery to him of the keys to
the warehouse is sufficient delivery of
possession (constructive/symbolic
delivery).

Q: Can incorporeal rights

evidenced by proper document
be pledged? (Art. 2095, NCC)
A: Yes . It is, however, required that
the actual instrument be delivered
to the pledge. More, if the
instrument is a negotiable
document, it must be indorsed.

Q: What is the rationale behind the

requirement that the pledge cannot take
effect against third persons if the thing is
not described and the date does not
appear in a public instrument? (Art. 2096)
A: To forestall fraud because a debtor may
attempt to conceal his property from his
creditors when he sees it in danger of
execution by simulating a pledge thereof
with an accomplice (Tec Bi & Co. v.
Chartered Bank of India, No. 9802, Feb. 5,
1916/March 31, 1917).

Q: Who are the parties in a

contract of pledge?
A:
1. Pledgor the debtor; the one
who delivers the thing pledged to
the creditor
2. Pledgee the creditor; the one
who receives the thing pledged

OBLIGATIONS OF PLEDGOR
AND PLEDGEE

Q: What are the rights of

a pledgee?
1. Retain the thing until debt is paid. (Art.
2. To be reimbursed for the expenses
made for the preservation of the thing
pledged. (Art. 2099, NCC)
3. Creditor may bring any action
pertaining to the pledgor in order to
recover it from or defend it against a
3rd person.

Q: What are the obligations of a

pledgee?
A:
1. Take care of the thing pledged with the
diligence of a good father of a family.
(Art. 2099, NCC)
Note: Pledgee is liable for the loss or
deterioration of the thing by reason of
fraud, negligence, delay, or violation of
the terms of the contract.

2. GR: Pledgee cannot deposit the

thing pledged to a 3rd person.
XPN: Unless there is stipulation to
the contract (Art. 2100, NCC)
Note: Pledgee is liable for the loss or
deterioration of the thing pledged
caused by the acts or negligence of
the agents or employees of the
pledgee.

3. Apply the fruits, income, dividends,

or interests produced or earned by
the property, to interests or
expenses first, then to the principal.
(Art. 2102, NCC)
4. GR: Cannot use the thing pledged
without authority.
XPNs:
a. If the pledgor had given him
authority or permission to use it;

b. If the use of the thing is

necessary for its preservation but
only for that purpose.
5. Return the thing pledged to the
pledgor when the principal
obligation is fulfilled or satisfied it.

Art. 2103
Q: Does the debtor continue to be the
owner of the thing in case the same is
expropriated by the State?
A: No. Ownership is transferred to the
expropriating authority.
Note: The creditor may bring actions
pertaining to the owner of the thing
pledged in order to recover it from, or
defend it against a third person.

Q: Does the pledgor have the right

to demand the return of the thing
pledged against the will of the
creditor?
A: No. He cannot ask for its return
until the obligation is fully paid
including interest due thereon
and expenses incurred for its
preservation (Art. 2105, NCC)

Q: When may the owner ask that the thing

pledged be deposited judicially or
extrajudicially?
1. If the creditor uses the thing without authority
2. If he misuses the the thing in any other way;
or
3. If the thing is in danger of being lost or
impaired because of the negligence or willful
act of the pledgee (Art. 2106, NCC)

Q: What are the rights of the pledgor?

1. Right to dispose the thing pledged,

provided there is consent of the pledgee
(Art. 2097, NCC)
2. Right to ask that the thing pledged be
deposited (Art. 2104 and Art. 2106, NCC)
3. Right to substitute thing pledged (Art.
2107, NCC)

Q: Can the debtor ask for the return of the thing

pledged against the will of the creditor?
GR: No.
XPNs:
1. If the debtor has paid the debt and its interest,
with expenses in a proper case (Art. 2105,
NCC).
2. If the thing is in danger of destruction or
impairment provided, the pledgor offers an
acceptable substitute for it which is of the same
kind and not of inferior quality and without
prejudice to the application of Art. 2108
whenever warranted.

Q: Can the pledgee cause the sale of the

thing pledged in public auction where
the obligation is not yet due?
A: Yes, if without the fault of the pledgee,
there is danger of destruction, impairment
or diminution in value of the thing
pledged. The proceeds of the auction
shall be security for the principal
obligation in the same manner as the
thing originally pledged (Art. 2108, NCC).

Q: What are the rights of the creditor

who is deceived on the substance
or quality of the thing pledged?
A: To demand:
1. from the pledgor an acceptable
substitute of the thing; or
2. the immediate payment of the
principal obligation (Art. 2109, NCC).

Q: What is the effect of the

return of the thing pledged to
the pledgor by the pledgee?
A: The pledge shall be
extinguished. Any stipulation
to the contrary shall be void
(Art. 2110, NCC).

Q: What is the presumption when the thing is

found in the possession of the pledgor
subsequent to the perfection of the pledge?
A: There is prima facie presumption that the thing
pledged has been returned by the pledgee to the
pledgor or owner, in any of the following
circumstances:
1. If the thing is found in the possession of the pledgor
or owner after the pledge had been perfected; or
2. If the thing is found in the possession of a third
person who received it from the pledgor or owner
after the perfection of the pledge (2nd par., Art.
2110, NCC).

Q: What is the requisite for the

renunciation or abandonment
of the pledge by the pledgee?
A: There must be a statement in
writing to that effect (1st
sentence, Art. 2111, NCC).

Q: Is acceptance or return of the

thing necessary for the validity
of the renunciation under Art.
2111?
A: No. it is not a case of
donation where acceptance is
necessary to make the
donation valid.

Q: Suppose the thing was not returned, is

there extinction of the pledge?
A: Yes. Even if the thing was not returned,
as long as there is an effective
renunciation, abandonment or waiver, the
pledge is already extinguished.
The pledgor is considered a depositor and
the pledgee shall become a depositary of
the thing. Accordingly, the law on deposit
will apply.

Q: What is the right of the pledgee

when the debt has not been
satisfied in due time?

e part of the pledge

A:
The
pledgee
has
the
right
to
ering in place of the thing, another thing in pledge which is of the same kind and quality as th
proceed
thethe thing
sale
ofto the
thing
at (Art.
not choose
to exercise hiswith
right to cause
pledged
be sold at
public auction
a public auction to raise funds for
payment of the obligation (Art. 2112,
NCC).

Q: What are the requisites of

public sale?
1. The obligation must be due and unpaid;
2. The sale of the thing must be at a public
auction;
3. There must be notice to the pledgor and
owner stating the amount for which the
sale is to be held; and
4. The sale must be conducted by a Notary
Public.

Q: May the pledgor

participate in the public
auction?
A: Yes. Moreover, he shall
have a better right if he offers
the same terms as the
highest bidder [Art. 2113 (1),
NCC].

Q: Who can bid in the public

auction?
A:
1. The public
2. Pledgor/owner/debtor shall be
preferred if same terms as the
highest bidder is offered
3. Pledgee/creditor he must not
be the only one bidder, otherwise,
his bid is invalid and void

Q: May a third person pay

the pledgors debt?
A: Yes, if he has any interest
in the fulfillment of the
principal obligation (Art.
2117, NCC).

Q: What is the rule when what

has been pledged is a credit?
A: The pledgee may collect and
receive the amount due. He shall
apply the same to the payment of
his claim, and deliver the surplus,
should there be any, to the
pledgor (Art. 2118, NCC).

Q: What is the rule when two

or more things are pledged?
A: The pledgee may choose
which he will cause to be sold,
unless there is a stipulation to
the contrary (1st sentence, Art.
2119, NCC).

Q: What is the restriction on the

right of the pledgee under the
1st sentence of Art. 2119?
A: He may only demand the sale
of only as many of the things as
are necessary for the payment
of the debt (2nd sentence, Art.
2119, NCC).

Q: How is a contract of pledge

perfected?
A: A contract of pledge is perfected
when the thing pledged is placed in
the actual possession of or
delivered to the pledgee or a third
person designated by the parties by
common consent. (Art. 2093, NCC)

Q: What are the requisites to bind third

persons in a contract of pledge?
A: To bind third persons, the pledge
must be embodied in a public
instrument where the following entries
must appear
A description of the thing pledged; and
Statement of date when the pledge
was executed. (Art. 2096, NCC)

Q: What are the requisites before

the pledgor may substitute the
thing pledged with another thing?
A:
1. Pledgor has reasonable grounds
to fear the destruction or
impairment of the thing pledged;

2. No fault on the part of the pledge

3. Pledgor is offering in place of the
thing, another thing in pledge which is
of the same kind and quality as the
former; and
4. Pledgee does not choose to exercise
his right to cause the thing pledged to
be sold at public auction (Art. 2107,
NCC)

REAL MORTGAGE