Credit Transactions UM TSN 2015

CREDIT TRANSACTIONS March 4, 2015
The coverage of Credit Transactions in the bar are the following:
Loan
Deposit
Guaranty and Suretyship
Pledge
Chattel Mortgage
Real Mortgage and Act 3135 (Extrajudicial Foreclosure of Real Mortgage)
Antichresis
Chattel mortgage including PD 1508
Quasi contracts and preference and concurrence of credits
For the purpose of bar trending, why is Credit transactions important?

Because for the last 24 years, inclusive of 2014 bar examinations, there had
been 57 questions already asked relating to Credit Transactions.

What to expect what type of examinations for Credit Transactions?

We have distinctions, enumerations and problem solving.

What were the repeating questions for the bar?

Commodatum, mutuum, deposit, guarantee and suretyship, pledge and chattel
mortgage, remortgage and antichresis.

What are the characteristics of Credit Transactions?

There are always two parties involved. You cannot enter into a credit
transactions with your self.
Example 1: Bangs borrows Andi’s book. Andi voluntarily lends it. This is a
commodatum. Two parties are involved.

What happens there is only one party?

Example 2: Bangs borrows Andi’s book without Andi’s knowledge. This is theft.
No trust or faith is involved.

There is also a time element (Obligor receives something now but he must
return the same thing or its equivalent in the future).

Trust and faith must always attend the transaction, which may take the form
of a security or guaranty.

What are the types of contract in Credit Transactions?
PRINCIPAL CONTRACTS or contracts founded on trust, belief or credit. They are

contracts that can stand on their own and which do not depend upon the
existence of other contracts to themselves be valid. As distinguished with
preparatory contracts, principal contracts are ends in themselves and do not
merely serve as precursors to other contracts.
Examples of preparatory contracts are contracts of agency and partnership. The
contract of agency is preparatory and not a principal contract because you do not
enter into a contract of agency for its own sake. Nobody executes a special power
of attorney to do nothing. By the contract of agency a person binds himself to
render some service or to do something in representation or on behalf of another.
A contract of agency is not an end in itself. It is preparatory to the
commencement of another contractual relationship.
For example, I execute a special power of attorney authorizing X to sell my land.

The principal contract there is not the SPA but the agency is entered into for the
purposes of entering further juridical relations.
Another example, if you can recall the definition of partnership. By the contract of

partnership two or more persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of dividing the profits among
themselves. The partners contribute money, property or industry to a common
fund but the intention of dividing profits cannot be obtained without doing
something to their contributions. The partners must necessarily enter into further
contracts to obtain profit. In other words, you do not enter into a conract of
partnership for the purpose of becoming a partner. You have to do something
else.
The PRINCIPAL CONTRACTS/CREDIT TRANSACTIONS are LOAN and DEPOSIT.

They are also collectively called BAILMENT CONTRACTS.
What is meant by bailment?
Delivery of property of one person to another in trust for a specific purpose, with
a contract, express or implied, that the trust shall be faithfully executed and the
property returned or duly accounted for when the special purpose is accomplished
or kept until the bailor claims it. It will not be asked in the bar exams but it will
be enough in case it will be asked, you know what the contract of bailment is.
There is no statutory definition of a bailment contract.
Who are the parties in the bailment contract?
The Bailor and the Bailee. The BAILOR is the one who lends a thing and
remember that he need not be the owner but must have possessory interest in
the SM such as the Lessee (Article 1643, in relation to Article 1650) and the
Usufructuary (Article 562). BAILEE is the one who borrows the thing ug dunay
obigasyon to return the thing to the bailor.
Now, here is an interesting Bar Question in the year 2007. Why am I saying that
it is interesting? Because in 2007, it was an experimental. It introduce MCQ.
The parties to a bailment are:
A. bailor
B. bailee
C. comodatario
D. all of the above
E. letters A and B
Answer: E
If you do not have a basic stored knowledge, you will be misled by comodatario.
For the purposes of discussion, kinsa maning comodatario? Comodatario is the
agent or a third person to whom property involved in a bailment is delivered.
What are the accessory contracts of bailment?
Those which depend upon the existence of PRINCIPAL CONTRACTS and which
tend to strengthen the said belief or trust because of the security given. They
may be further classified as contracts of:
PERSONAL GUARANTY or SECURITY, where a person’s personal credit is involved

as in guaranty proper and suretyship;
REAL GUARANTY or SECURITY, where the debtor reciprocates the trust given to
him by the creditor by furnishing the latter with security that consists in the use
of property:
real mortgage and antichresis, if the property given is real property; and
pledge and chattel mortgage, if the property given is personal property.
This is the reason why the contracts of guaranty, suretyship, pledge, mortgage
and antichresis are also called “SECURITY CONTRACTS”. They are security
contracts and accesory contracts, they cannot exist without valid principal
obligation which is usually but not necessarily a loan. Ang pasabot man gud nato
sa credit transactions, specially when you were in second year na there will
always be a loan in the transaction. But no,it can be used to secure any type of
principal obligation. The law does not say that it has to be a loan. In other words,
pwede na lahi na obligation.
Lets go now to LOAN which covers Articles 19331961 of the New Civil Code.
What is a loan?
By the contract of loan, one of the parties delivers to another, either something

not consumable so that the latter may use the same for a certain time and return
it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same kind and quality shall be
paid, in which case the contract is simply called a loan or mutuum (Article 1933).
What are the two types of loan?
They are commodatum and mutuum.
What are the characteristics of commodatum?
it is a contract of loan whereby one of the parties delivers to another something

not consumable so that the latter may use the same for a certain time and return
it, the former retaining the ownership of the thing loaned. So, the purpose of
commodatum is temporary possession and use by the borrower.
What are the characteristics of mutuum?
it is a contract of loan whereby one of the parties delivers to another money or
other consumable thing, the ownership of which passes to the latter, upon the
condition that the same amount of the same kind and quality shall be paid.
If you ask me, what would be the use of commodatum? It is simply a temporary
use and possession. What is the essence of mutuum? It is for consumption.
What are the common characteristics of commodatum and mutuum?
Both nominate – given a particular name by law. Which also hints upon a party

to a contract wherein when you enter into a contract you are governed by specific
provisions of the law that would characterize such a nominate contract.
Both principal – does not depend on the existence or validity of other contracts;
Both real – perfected by delivery rather than consensual which is perfected by
mere consent. Consent, ofcourse, is manifested by the meeting of the offer and
acceptance of the thing and the cause which are to constitute a contract.;
Both unilateral only one of the parties is principally obliged. Let us talk for
example, commodatum. I lend you my book. Do I have an obligation as a lender?
I dont. Principally, no. I do not have the obligation but you on the other hand, as
a borrower is obliged to take care of the book and return it to me within the
period stipulated in the contract;
Both gratuitous per se – consideration is pure liberality. Although, you might raise

an eyebrow saying na dili man ing ana Sir kay kung mangutang ka usahay naa
my interest. Kato pa, naa koy gina bayran, dili na liberality ang rason nganong
gipahulam ko. I will expalain it later on;
What are the legal consequences of loan?
Nominate – governed by specific provisions of law
Principal – in contrast to an accessory contract (ex. pledge, mortgage and
antichresis), loan can stand on its own and does not depend on another contract
for its validity or existence; in contrast to a preparatory contract (ex. agency and
partnership) because it is an end in itself not as a means through which future
contracts or transactions may be made.
Real – Just take note in the loan on mutuum it is perfected only by delivery so the

obligations of the bailee/borrower do not arise until the subject matter is
delivered.
Remember Art. 1316. Real contracts, such as deposit, pledge and commodatum,
are not perfected until the delivery of the object of the obligation.
My question simply is, only deposit, pledge and commodatum is
mentioned in Article 1316. Is mutuum no longer a real contract or is it a
real contract?
It is still a real contract. For two reasons:
Article 1316 is not an exclusive enumeration of what are real contracts. Note the

words “such as”.
The nature of mutuum as a real contract is revealed by Article 1934 which
provides that: “Art. 1934. XXX the commodatum or simple loan itself shall not be
perfected until the delivery of the object of the contract.”
But we have a further problem, we say that mutuum is a real contract. It is
perfected by mere delivery but it is not perfected by mere consent. But why is it
that in the case of Bonnevie versus Court of Appeals, GR No. 49101,
October 24, 1983, where the Supreme Court made a pronouncement that: “A
contract of loan being a consensual contract, the herein contract of loan was
perfected at the same time the contract of mortgage was executed.”? Applying
that, let us look at the case of BPI INVESTMENT CORPORATION versus CA
G.R. No. 133632, February 15, 2002. Let us simplify the facts, Borrower
entered into a contract of loan with mortgage with BPI. The contract stipulates
that the obligation to pay monthly amortizations will begin after release of the
proceeds of the loan to the borrower. The loaned amount was released in two
batches: first part on March 31, 1981 and the remainder on September 13, 1982.
Borrower was not able to faithfully comply with his amortization schedule. BPI,
therefore, foreclosed on the mortgage and computed interest beginning May 1,
1981. The Court of Appeals ruled that because a simple loan is perfected upon the
delivery of the object of the contract, the loan contract in this case was perfected
only on September 13, 1982. BPI, on the other hand, claims that a contract of
loan is a consensual contract, and a loan contract is perfected at the time the
contract of mortgage is executed conformably with Bonnevie v. Court of Appeals,
125 SCRA 122.
Let me simplify further. Kaduha gi release ang loan, in other words, naay duha ka

batch sa pag release sa loan. The first batch gi release tung March 31, 1981 ug
ang second batch kay tung September 13, 1982. If the contract of loan is
perfected by mere consent, it is enough that there is just a meeting of the minds
between the bank and the borrower and the moment he does not perform his
obligation, the bank can automatically foreclose the mortgage and compute
interest. But, if the contract of loan is a real contract meaning perfected by mere
delivery, then, you should not compute the interest based on partial delivery. You
have to wait for the full delivery of the proceeds for you to determine there is
breach that would enable the bank to foreclose the mortgage and to compute
interest.
Issue: When was the contract of loan being perfected?
Held: The SC itself stated that The loan contract was perfected only on
September 1982, the date of the second release of the loan. Why? Because the
loan is a real contract. Perfected only by mere delivery, not partial delivery but a
complete delivery by the creditor to the debtor. How about the ruling of SC in
Bonnevie? That is an aberrant pronouncement. Following the intentions of the
parties on the commencement of the monthly amortization, the borrower’s
obligation to pay commenced only on October 13, 1982, a month after the
perfection of the contract.
A contract of loan involves a reciprocal obligation, wherein the obligation or
promise of each party is the consideration for that of the other. It is a basic
principle that neither party incurs in delay, if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him. Only when
a party has performed his part of the contract can he demand that the other
party also fulfills his own obligation. Consequently, petitioner could only demand
for the payment of the monthly amortization after September 13, 1982 for it was
only then when it complied with its obligation under the loan contract. Therefore,
in computing the amount due as of the date when BPI extrajudicially caused the
foreclosure of the mortgage, the starting date is October 13, 1982 (one month
after the loan was delivered in full) and not May 1, 1981 (one month after the
mortgage was executed).
In addition to the three elements, delivery is required in the principal contracts of

bailment. Why? Because it is only after delivery that a party can begin fulfilling
his obligations.
In commodatum, the borrower is obliged to exercise due diligence over the thing
loaned. This obligation cannot be done unless the thing subject of the loan is
delivered to him.
In mutuum, the borrower is obliged to return the money that was borrowed. This

obligation does not arise unless there is a debt in the first place.
In deposit, the depositary is obliged to keep the object safely. This obligation
cannot be done unless the thing subject of the deposit is delivered to him.
ANOTHER EXAMPLE is contract of carriage, because unless the carrier is actually
used, the carrier cannot be said to have already assumed his obligations.

EXAMPLE: A promised to lend B his book (COMMODATUM) on January 14.
On January 14, A refused to deliver the book. May B sue A for damages?
YES, but not for breach of contract of commodatum because it was not yet
perfected. B may sue A for breach of the consensual contract to make a
commodatum which is perfected by mere consent (see Article 1934).
Other characteristics:
UNILATERAL once the subject matter has been delivered, it creates obligations

on the part of only one of the parties, namely the borrower.
GRATUITOUS Under Article 1933, commodatum is essentially gratuitous while

simple loan may be gratuitous or with a stipulation to pay interest. This means
that mutuum is not gratuitous only when the parties agree that, in addition to the
return of the money, interest is also to be computed and paid.
A asks B if he could borrow the latter’s fountain pen. B agrees and gives
his pen to A but tells A to return the same within one week.
What is the consideration of the contract insofar as B is concerned?
Pure liberality. B receives nothing.
What if, before B lends his pen to A, B asks him to pay P50 and to return
the pen within one week?
No more commodatum because commodatum is essentially gratuitous. Once

valuable consideration other than liberality is imposed, the transaction becomes
another contract. Because of the obligation to return, the contract is a lease. If
there is payment with no obligation to return, then the contract is a sale. Without
the obligation to return and without valuable consideration, the contract is a
donation.
What is the importance of that? Why do we need to discuss this?
Because of Art. 1378. When it is absolutely impossible to settle doubts by the
rules established in the preceding articles, and the doubts refer to incidental
circumstances of a gratuitous contract, the least transmission of rights and
interests shall prevail. If the contract is onerous, the doubt shall be settled in
favor of the greatest reciprocity of interests.

How do we distinguish Commodatum from Mutuum?
COMMODATUM MUTUUM
As to object Involves something Involves money or
not consumable other consumable
(exception is Art. thing (Art.1933)
1936)

As to kind of object May involve real and Involves personal
personal property (Art. property only.
1937)

As to transfer of Ownership of the thing Ownership of the thing
ownership of the is retained by the loaned passes to the
object lender (Art. 1933, last borrower (ibid)
paragraph.)

As to risk of loss The lender bears the The borrower bears
risk of loss because he the risk of loss
retains ownership of because ownership
the thing loaned (Arts. over the thing loaned
1942 & 1174) passes to him

As to obligation to The borrower must The borrower need
return return the same thing only pay the same
loaned. amount of the same
kind and quality.

As to purpose For use or temporary For consumption
possession

As to the ability to The lender may The lender may not
demand return demand the return of demand its return
the thing loaned before the lapse of the
before expiration of term agreed upon
the term in case of
urgent need (Art.
1946)

As to consideration Essentially gratuitous May be gratuitous or
with a stipulation to
pay interest

As to nature Purely personal Not purely personal

Here is another interesting case, PRODUCERS BANK versus CA
G.R. No. 115324, Feb 19, 2003 which would apply the distinctions between
commodatum and mutuum. Sometime in 1979, Vives was asked by his neighbor
and friend Sanchez to help her friend and townmate, Doronilla, in incorporating
his business, Sterela Marketing and Services. Sanchez asked Vives to deposit in a
bank a certain amount of money in the bank account of Sterela for purposes of its
incorporation. She assured private respondent that he could withdraw his money
from said account within a month’s time. Relying on the assurances and
representations of Sanchez and Doronilla, Franklin Vives issued a check in the
amount of P200,000.00 in favor of Sterela. When Vives went to the bank to verify
if the money was still intact, the bank informed them that part of the money had
been withdrawn by Doronilla, and that only P90,000.00 remained therein. On
June 29, 1979, Vives received a letter from Doronilla, assuring him that his
money was intact and would be returned to him. On August 13, 1979, Doronilla
issued a postdated check for Two Hundred Twelve Thousand Pesos (P212,000.00)
in favor of Vives. However, upon presentment thereof, the check was dishonored.
With the facts, you can simply make out a case of simple loan or mutuum. In
fact, when it eventually pays but eventually bounced nganong naay dungag?
Diba, remember that in commodatum you borrow something, you return the
exact the same thing. Dili dapat madugangan, right?
But if it is a simple loan or mutuum, what will happen?
There could be payment of interest.
Petitioner contends that the transaction between private respondent and Doronilla

is a simple loan or mutuum since all the elements of a mutuum are present: first,
what was delivered was money, a consumable thing; and second, the transaction
was onerous as Doronilla was obliged to pay interest, as evidenced by the check
issued by Doronilla in the amount of P212,000.00, or P12,000 more than what
was deposited in Sterela’s bank account.
To simplify our discussion unsa ni na contrata?
The SC held that the transaction was a commodatum, not a mutuum. Article
1933 implies that if the subject of the contract is a consumable thing, such as
money, the contract would be a mutuum. However, there are instances where a
commodatum may have for its object a consumable thing. Article 1936 of the
Civil Code provides that consumable goods may be the subject of commodatum if
the purpose is not the consumption of the object, as when it is merely for
exhibition. Thus, if consumable goods are loaned only for purposes of exhibition,
or when the intention of the parties is to lend consumable goods and to have the
very same goods returned at the end of the period agreed upon, the loan is a
commodatum.
The rule is that the intention of the parties shall be accorded primordial
consideration in determining the true character of a contract. The evidence shows
that Vives agreed to deposit his money in the savings account of Sterela
specifically for the purpose of making it appear "that said firm had sufficient
capitalization for incorporation, with the promise that the amount shall be
returned within thirty (30) days."
Doronilla’s attempts to return to the amount of P200,000.00 together with an
additional P12,000.00, allegedly representing interest on the mutuum, did not
convert the transaction from a commodatum into a mutuum. Article 1935 of the
Civil Code expressly states that "[t]he bailee in commodatum acquires the use of
the thing loaned but not its fruits." Hence, it was only proper for Doronilla to
remit to private respondent the interest accruing to the money deposited. The
fact na nitubo ang kwarta does not imply that it is a contract of loan.
What is Article 1935?
Art. 1935. The bailee in commodatum acquires the use of the thing loaned but
not its fruits; if any compensation is to be paid by him who acquires the use, the
contract ceases to be a commodatum.
As to fruits, Art. 1940 provides that the parties may stipulate that the bailee may

make use of the fruits of the thing loaned (PRODUCERS BANK case)
If there is compensation, the contract is one of LEASE.
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. (ad ostentationem)
Is there a commonality between a commodatum and usufruct?
Yes. Because they are both involve use and possession.
Is there a distinction between them?
Yes. They are as follows:
USUFRUCT is a right given to a person (usufructuary) to enjoy the property of
another with the obligation of preserving its form and substance. (Art. 562. Civil
Code) On the other hand, COMMODATUM is a contract by which one of the
parties (bailor) delivers to another (bailee) something not consumable so that the
latter may use it for a certain time and return it.
In usufruct the usufructuary gets the right to the use and to the fruits of the
same, while in commodatum, the bailee only acquires the use of the thing loaned
but not its fruits. Usufruct may be constituted on the whole or a part of the fruits
of the thing. (Art. 564. Civil Code). It may even be constituted over consumables
like money.
On the other hand, in commodatum, consumable goods may be subject thereof
only when the purpose of the contract is not the consumption of the object, as
when it is merely for exhibition. (Art. 1936, Civil Code)
Is commodatum a purely personal contract?
Yes. Art. 1939. Commodatum is purely personal in character. Consequently:
(1) The death of either the bailor or the bailee extinguishes the contract;
(2) The bailee can neither lend nor lease the object of the contract to a third
person. However, the members of the bailee's household may make use of the
thing loaned, unless there is a stipulation to the contrary, or unless the nature of
the thing forbids such use.
The ipad cannot be used by either the bailee or the members of her household as

a pillow, because the nature of the ipad forbids its use as such. The bailee can
use the ipad as paperweight because the nature of the laptop does not really
prohibit its use as such for as long as such use does not lead to possible
destruction of the thing.
NOTE: Commodatum is purely personal in character which means that rights
acquired by virtue of the same could not be transmitted to another. This makes
perfect sense inasmuch as the bailor relies on the character, credit and conduct of
the bailee when he contracts with the latter gratuitously.
What is the effect of the death of the bailee?
It extinguishes the commodatum. Remember that in commodatum, the trust
and confidence by the bailor is exclusive to the bailee. Not to third persons.
Art. 1937. Movable or immovable property may be the object of
commodatum.
This provision makes commodatum dissimilar to mutuum but similar to lease.
Art. 1938. The bailor in commodatum need not be the owner of the thing
loaned.
Rationale: There is no transfer of ownership in commodatum. But in mutuum,
ownership is required on the premise that Nemo dat quod non habet. You cannot
transfer a thing you do not own. Dili ka pwede magpautang ug kwarta na dili imo.
What are the obligations of the bailee?
The bailee is obliged to return the thing loaned upon the expiration of the
period.
In relation to the obligation to return, the bailee is obliged not to retain the thing
loaned even if the bailor has outstanding liabilities to the bailee;
The bailee is obliged to take care of and safely keep the thing loaned while in his
possession, exercising the diligence of a good father of a family;
In relation to the immediately preceding obligation, the bailee is obliged to pay
for the ordinary expenses for the use and preservation of the thing loaned (Article
1941);
Suppose that A borrowed B’s jeep. A is obliged to pay for expenses to have the
jeep washed, lubricants, oil, gas, etc.
For extraordinary expenses, Article 1949 is the governing rule:
Art. 1949. The bailor shall refund the extraordinary expenses during the contract
for the preservation of the thing loaned, provided the bailee brings the same to
the knowledge of the bailor before incurring them, except when they are so
urgent that the reply to the notification cannot be awaited without danger.
If the extraordinary expenses arise on the occasion of the actual use of the thing
by the bailee, even though he acted without fault, they shall be borne equally by
both the bailor and the bailee, unless there is a stipulation to the contrary.
(1751a)
Using the same example, A can have B reimburse expenses of having the engine
repaired if required.
But take note of Article 1950 which bars reimbursement on account of expenses
that are not covered by either Article 1941 and 1949. Thus:
Art. 1950. If, for the purpose of making use of the thing, the bailee incurs
expenses other than those referred to in Articles 1941 and 1949, he is not
entitled to reimbursement. (n)
Thus, if A installs a sound system on the jeep for his better use, he shall not be
entitled to reimbursement.
The bailee is obliged to pay for damages under the circumstances provided in
Article 1942 of the Civil Code. This serves as an exception to the general rule on
fortuitous events. Actus dei nemini facit injuriam.
Art. 1942. The bailee is liable for the loss of the thing, even if it should be
through a fortuitous event:
(1) If he devotes the thing to any purpose different from that for which it has
been loaned;
(2) If he keeps it longer than the period stipulated, or after the accomplishment
of the use for which the commodatum has been constituted;
(3) If the thing loaned has been delivered with appraisal of its value, unless there
is a stipulation exemption the bailee from responsibility in case of a fortuitous
event;
(4) If he lends or leases the thing to a third person, who is not a member of his
household;
(5) If, being able to save either the thing borrowed or his own thing, he chose to

save the latter.
Art. 1943. The bailee does not answer for the deterioration of the thing loaned
due only to the use thereof and without his fault.
Art. 1944. The bailee cannot retain the thing loaned on the ground that the bailor

owes him something, even though it may be by reason of expenses. However, the
bailee has a right of retention for damages mentioned in Article 1951.
Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not advise

the bailee of the same, shall be liable to the latter for the damages which he may
suffer by reason thereof.
Art. 1945. When there are two or more bailees to whom a thing is loaned in the
same contract, they are liable solidarily. (1748a)
2014 Bar Examinations Question – Civil Law
Who enjoys the Right of Retention? (1%)
(A) Depositary until full payment of what may be due him in deposit.
(B) Lessee if he advances the expenses for the repair of the leased premises.
(C) Bailee if bailor owes him something.
(D) Builder in bad faith for the recovery of necessary and useful expenses.
Answer: A
What are the obligations of the bailor?
Take note that since commodatum is a unilateral contract, the obligations of the

bailor are mere incidental ones. Sir,diba unilateral man ang commodatum?
Nganong naa may obligations ang bailor? They are merely incidental.
Thus, the “obligations” of the bailor are the following:
Obligation to respect the duration of the loan or the period of the contract;
Obligation to refund extraordinary expenses; and
Obligation to pay damages for hidden flaws.
OBLIGATION TO RESPECT PERIOD
As a rule, the bailor must respect the period and cannot require the premature
return of the thing loaned. Why? Basic Obligations and Contracts ang maka tubag
ing ana under Article 1196.
Art. 1196. Whenever in an obligation a period is designated, it is presumed to
have been established for the benefit of both the creditor and the debtor, unless
from the tenor of the same or other circumstances it should appear that the
period has been established in favor of one or of the other.
Since commodatum is gratuitous, the period is deemed to have been designated
in favor of the debtor, who in this case is the bailee. That is why the bailor cannot
demand the return pre mature to the bailee.
RIGHT TO REQUIRE RETURN
The bailor can demand the return of the thing:
Upon expiration of the period or after the accomplishment of the use for which
the commodatum has been constituted (Article 1946);
For temporary use in case of urgent need but the contract, and, by implication,
the performance of the obligations of the bailee, are suspended in the meantime
(Article 1946);
Right to demand the return of the thing at will in the case of precarium (Article
1947); and
Right to demand the return of the thing for acts of ingratitude committed by the
bailee (Article 1948, in relation to Article 765); Nganong naay acts of ingratitude?
Diba applicable lang na sa donations? Remember Article 765 applies to
commodatum because both commodatum and donation are gratuitous contracts.
ACTS OF INGRATITUDE IN COMMODATUM. The bailor may demand the immediate
return of the thing:
If the bailee should commit some offense against the person, the honor or the
property of the bailor, or of his wife or children under his parental authority;
If the bailee imputes to the bailor any criminal offense, or any act involving moral

turpitude, even though he should prove it, unless the crime or the act has been
committed against the bailee himself, his wife or children under his authority; and
If the bailee unduly refuses the bailor support when the bailee is legally or
morally bound to give support to the bailor.
How do we now distinguish commodatum from donations?
COMMODATUM DONATION
As to consideration Both contracts are gratuitous.

As to effect of ingratitude Ingratitude revokes either contract.

As to nature A contract An act of liberality, a
contract, and a mode of
acquisition of ownership

As to obligations Bailee is obliged to return Donee is not obliged to
return unless donation is
revoked

As to perfection Delivery perfects the The donation is perfected
contract. from the moment the
donor knows of the
acceptance by the donee.

As to type of contract It is a real contract (Art. It is a formal contract
1934). (Art. 734).

As to effect of presence In commodatum, the In donation, the presence
of valuable consideration presence of valuable of valuable consideration
consideration transforms makes the donation
the contract into some onerous but it is still a
other contract such as donation. However, it will
lease. (Art. 1935) now be governed by the
law of contracts (Article
733).

Let us summarize, what are the instances when the bailor may demand
return immediately?
The instances when the bailor may demand return immediately are the
following:
(UDPUTA)
Urgent need; (URGENCY)
No stipulation as to duration; (DURATION)
No stipulation as to purpose for use; (PURPOSE)
Acts of ingratitude; (UNGRATEFULNESS)
Expiration of period; (TERM) and
Accomplishment of the purpose. (ACCOMPLISHMENT)
Art. 1952. The bailor cannot exempt himself from the payment of expenses or
damages by abandoning the thing to the bailee. (n)
Bar 2005
A left his adventure van to B before he left to work abroad. The parties agreed
that B can use the van for 1 year. A did not tell B that the van’s brakes are faulty.
B had the brakes repaired and the van tuned up, spending P15,000. B discovered
that the van consumed too much fuel. Hence, he leased the van to C. Two
months later, A returned and asked B to return the van. However, the van was
damaged while B was using it, without his fault.
Who shall bear the P15,000 spent for van repair?
Who shall bear the cost of the van’s fuel?
Does A have the right to get the van before the lapse of one year?
Answer:
(a) Brakes (extraordinary) – A
Tuneup (ordinary) – B
(b) Fuel (ordinary) – B
(c) A cannot demand return before the period unless he has urgent need of the
van.
SIMPLE LOAN OR MUTUUM
Art. 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality. (1753a)
An essential characteristic of mutuum is that there is a transfer of ownership from

the lender to the borrower. The legal consequences of this characteristic are as
follows:
The obligation of the borrower is to PAY and NOT TO RETURN because the
consumption is the object of mutuum;
Due to the transfer of ownership, the rule in commodatum that the lender need
not be the owner of the thing loaned does not apply. Nemo dat quod non habet.
No one can give what one does not have;
As there is transfer of ownership, there can be no criminal liability on the part of
the borrower in case he fails to pay, without any circumstance indicating fraud or
other elements that criminalize an act. The liability here is merely civil in nature.
Art. 1954. A contract whereby one person transfers the ownership of nonfungible
things to another with the obligation on the part of the latter to give things of the
same kind, quantity, and quality shall be considered a barter. (n)
Art. 1638. By the contract of barter or exchange one of the parties binds himself
to give one thing in consideration of the other's promise to give another thing.
(1538a)
EXAMPLES:
MUTUUM OF MONEY A loans B P50,000 payable in one month.
MUTUUM OF GOODS A loans B 2 sacks of NFA rice (fungible, for consumption)
for a period of 2 months. After two months, B is obliged to give 2 sacks of rice of
the same kind and quality.
ARTICLE 1954 A gives B a Mitsubishi Evolution VIII, an imported Japanese car

because B will participate in a race. However, as a condition, B is obligated to
give A another Mitsubishi Evolution VIII car to replace the car of A after the race.
(This is now considered a barter)
Art. 1955. The obligation of a person who borrows money shall be governed by
the provisions of Articles 1249 and 1250 of this Code.
If what was loaned is a fungible thing other than money, the debtor owes
another thing of the same kind, quantity and quality, even if it should change in
value. In case it is impossible to deliver the same kind, its value at the time of the
perfection of the loan shall be paid. (1754a)
Making it a contract of sale or in reverse dacion in payment. In dacion in
payment, unsa may mahitabo? Naa kay utang in money pero pwede nimo bayran
ang utang nimo with a thing. What happens there? There is an objective
novation. Instead of paying money, you pay a thing. Here, in the last paragraph
of Article 1955 last sentence. Ang utang nimo butang pero kay dili naman nimo
mauli, bayaran nalang nimo ang value sa butang. So, it is a reverse dacion en
pago. Please take note of this case, Aguilar vs Light Bringers Credit
Cooperative.
INTEREST
GENERAL RULE: Article 1956 – no interest shall be due unless it has been
expressly stipulated in writing and is lawful. There are two types of interest
recognize by law.
1st CONTRACTUAL or CONVENTIONAL INTEREST – meaning a product of

stipulation between the parties and in the absence of stipulation certain
conditions under the law and as provided by law would lead to imposition called
as the legal interest.
Liam Law vs Olympic Sawmill 1984 – when in the usury law, the ceiling of
interest rates was lifted, nothing in the said circular grants lenders carte blanche
(blanket authority) to raise interest rates to levels which will enslave their
barrowers or lead to hemorrhaging of their assets. The SC is consistent with
saying, in the proper case, interest must be equitably reduced for inequitous,
unconscionable and exhorbitant.
Advocates vs Monetar Board, January 15, 2013 – the lifting of the ceilings
for interest rates does not authorize stipulations, charging excessive,
unconscionable and inequitous interest.
2nd LEGAL INTEREST one that is supplied by the law. Thus, according to old
pertinent legislation, legal interest should be 6% under Article 2209 or 12% under
CB Circular no. 416. This 6% under Article 2209 is, ofcourse discussed in Torts
and Damages. 12% is the one provided by the Central Bank. What traditionally
distinguish between 6% from 12% interest from the litanny of cases decided by
the SC in Kengwa Paper Products, Eastern Shipping including Reformina vs
Tomol. 12% would apply to loans, forbearance of money, goods or credits and
judgments involving a loan, forbearance of money, goods or credits. So, what
should be important here is understanding of what constitutes forbearance of
money. In cases where money is transferred from one person to another and the
obligation to return the same or apportion thereof as a judge. Traditionally, you
apply only the 12% interest in cases where it is a loan, forbearance of money,
goods or credits. 6% if it is not a loan, forbearance of money, goods or credits.
So, ang kinahanglan lang unta nimo timan an kung unsa ng forbearance ug unsa
ng loan. The doctrinal ruling here is Eastern Shipping.
Where interest is previously stipulated by the parties, you follow that interest.
Remember, that it must be stipulated in writing otherwise, it will not be
demandable. Interest due above should itself earn legal interest. The interest
should be computed from the time it is judicially demanded. In the absence of
stipulation, the interest should be 12%. This will be computed from default this
time from judicial or extra judicial demand. When an obligation not constituting a
loan, forbearance of money, goods or credits the interest would be 6% per
annum. No interest should be adjudged for unliquidated claims and damages
except when and until the demand can be established with reasonable certainty.
Where the demand is established with reasonable certainty, the interest shall
begin to run from the claim is made juduicially or extra judicially. When such
certainty cannot reasonably be established at the time the demand was made,
interest shall begin to run only from the date of the judgment of the court is
made. At which time, the quantification of damages may be deemed to have been
reasonably certain. The actual base for the computation of legal interest shall in
any case be the amount finally adjudged. When the judgment of the court
awarding a sum of money becomes final and executory, the rate of legal interest
regardless of whether the obligation in the case which was demanded consist of a
loan or forbearance of money or not shall be 12% per annum. Why? Because, the
money judgement by the court when it becomes final and executory is treated as
if it is a loan or forbearance.
Examples
● An action for the enforcement of the obligation of payment of money

arising from a contract of piece of work – According to SC in Crismina
Garments vs CA, not a loan or forbearance of money. So, traditionally,
you apply only 6%.
● An action to collect purchase price in a contract of sale. Whereby the
seller did not receive full payment of the merchandise – In PNB vs CA.
Not a loan or forbearance of money. Traditionally, you apply 6%
because it is not a loan or forbearance of money.

Here is an interesting case, PNB vs CA. The issue here is whether the action for
damages the legal rate of interest is 6% and when do you compute that interest?
Is it 6% or 12% interest? When do you begin in computing the legal interest? The
proper rate of interest referred to in the judgment of execution is only 6%. But
when it becomes final and executory it is the time to apply traditionally the 12%
interest.
Estores vs Supangan – the contract here is not a loan but a conditional deed of

sale. The contract provides that the seller must return the payment made by the
buyer if the conditions are not fulfilled. There is no question that it did not in fact
fulfilled as the seller admitted it. Notwithstanding by the demand of the buyer,
the seller has failed to return the money and should be considered in default on
the time the demand was made on September 27, 2000. Issue, even if the
transaction involved a deed of conditional sale, can the stipulation governing the
return of the money be considered as forbearance of money which requires
payment of interest of 12%. Forbearance ba siya? How do you define forbearance
first? forbearance” was defined as a “contractual obligation of lender or creditor to
refrain during a given period of time, from requiring the borrower or debtor to
repay a loan or debt then due and payable.” This definition describes a loan
where a debtor is given a period within which to pay a loan or debt. In such case,
“forbearance of money, goods or credits” will have no distinct definition from a
loan. We believe however, that the phrase “forbearance of money, goods or
credits” is meant to have a separate meaning from a loan, otherwise there would
have been no need to add that phrase as a loan is already sufficiently defined in
the Civil Code. Forbearance of money, goods or credits should therefore refer to
arrangements other than loan agreements, where a person acquiesces to the
temporary use of his money, goods or credits pending happening of certain
events or fulfillment of certain conditions.
The SC further held, they have therefore allowed or granted forbearance to the
seller (petitioner) to use their money pending fulfillment of the conditions. They
were deprived of the use of their money for the period pending fulfillment of the
conditions and when those conditions were breached, they are entitled not only to
the return of the principal amount paid, but also to compensation for the use of
their money. And the compensation for the use of their money, absent any
stipulation, should be the same rate of legal interest applicable to a loan since the
use or deprivation of funds is similar to a loan. Petitioner’s unwarranted
withholding of the money which rightfully pertains to respondentspouses
amounts to forbearance of money which can be considered as an involuntary
loan. Thus, the applicable rate of interest is 12% per annum.
However, when you talk about 6% or the 12% interest rate that would normaly
distinguish a loan or forbearance of money and a non loan and forbearance of
money has been changed. Why? Because the Monetary Board has already
changed the legal interest rate for loan and credit transactions. Through MB
Circular no. 799. It declared that the rate of interest for the loan and forbearance
of money, goods or credits and the rate involving judgments in the absence of
express contract to such rate of interest is 6% per annum. So, legally speaking
there is no more 12% legal interest. Reverting to the old rule under Article 2209.
You really have to distinguish a loan and forbearance of money from a non loan
and forbearance of money. You need to understand that.
Bar 2002
Carlo sues Dino for
(a) collection on a promissory note for a loan, with NO agreement on interest on

which Dino defaulted
(b) damages caused by Dino on Carlos’ priceless painting on which Dino
accidentally spilled acid while transporting it.
The court finds Dino liable for both obligations. What rates of interests may the
court impose?
Answer:
With respect to the amount covered by a promissory note, an interest of 12% per

annum may be imposed since it arose from a contract of loan
With respect to damages, it is 6% from the time of final demand until finality of
judgment and 12% of the amount from final judgment until the debt is fully paid.
But currently a of circular bank 799, it shall be 6% per annum, no more
distinction.
Contracting parties may stipulate freely on any adjustment in the interest rate on

a loan or forbearance of money.
However, the law does not authorize increase of interest rate by one party
without the other party’s consent.
Any change of interest must be mutually agreed by the parties.
In case of agreement as to inflation or deflation of the value of the currency, it is
valid so long as they mutually agreed it upon. This is what you call escalation
clause.
Juico vs Chinabank Escalation clauses refer to stipulations allowing an

increase in the interest rate agreed upon by the contracting parties. This Court
has long recognized that there is nothing inherently wrong with escalation clauses
which are valid stipulations in commercial contracts to maintain fiscal stability and
to retain the value of money in long term contracts. Hence, such stipulations are
not void per se.
Nevertheless, an escalation clause "which grants the creditor an unbridled right to

adjust the interest independently and upwardly, completely depriving the debtor
of the right to assent to an important modification in the agreement" is void. A
stipulation of such nature violates the principle of mutuality of contracts. Thus,
this Court has previously nullified the unilateral determination and imposition by
creditor banks of increases in the rate of interest provided in loan contracts. The
SC consistently nullified the unilateral determination and imposition by creditor
banks of a cases provided in the interest rate of loan contracts.
What therefore are the requisites for the validity of an escalation clause?
1. The adjustment should be subjected to the mutual agreement of the
contracting parties;
2. The rate of interest will be increased only if allowed by law or monetary board;
3. The contract itself must contain a de escalation clause.

Principle to remember: There cannot be any escalation clause without any
corresponding de escalation clause.

In the said case, the clause provides “I/We hereby authorize the CHINA BANKING
CORPORATION to increase or decrease as the case may be, the interest
rate/service charge presently stipulated in this note without any advance notice to
me/us in the event a law or Central Bank regulation is passed or promulgated by
the Central Bank of the Philippines or appropriate government entities, increasing
or decreasing such interest rate or service charge.” Is this a valid de escalation
clause? No. we hold that the escalation clause is still void because it grants
respondent the power to impose an increased rate of interest without a written
notice to petitioners and their written consent. Respondent’s monthly telephone
calls to petitioners advising them of the prevailing interest rates would not suffice.
A detailed billing statement based on the new imposed interest with
corresponding computation of the total debt should have been provided by the
respondent to enable petitioners to make an informed decision. An appropriate
form must also be signed by the petitioners to indicate their conformity to the
new rates. Compliance with these requisites is essential to preserve the mutuality
of contracts.

Bar 2001

A obtained a P300,000 housing loan from X Bank at 18% per annum interest. The
promissory note provides that X reserves the right to increase the interest within
the limits allowed by law. X Bank increased the interest to 48% per annum.
When A questioned the increase in court, X argued that the usury law is already
legally suspended. Will the action prosper? Why?

Answer:
The action will prosper. While it is true that interest ceilings set by the Usury law
are no longer in force, the court may still reduce interests which are
unconscionable.

Contracting parties may stipulate freely on any adjustment in the interest rate on
a loan or forbearance of money.

However, the law does not authorize increase of interest rate by one party
without the other party’s consent.

Any change of interest must be mutually agreed by the parties

Article 1960 If the debtor pays interest when there is no stipulation therefor, the
provisions on solutio indebiti or natural obligations will apply (debtor may
recover)

KINDS OF INTEREST

SIMPLE – paid for the principal at a certain rate fixed or stipulated by the parties.

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

What is a Credit Card?

means any card, plate, coupon book, or other credit device existing for the
purpose of obtaining money, goods, property, labor or services or any thing of
value on credit;

What is the nature of Credit Card Transactions? Is there only one
contract involved in a Credit Card Transaction?

No. In fact, there are three contracts involved. Two contracts of loan and one
contract of sale. The sales contract between the credit card holder and the
merchant or the business establishment which accepted the credit card; the loan
agreement between the credit card issuer and the credit card holder; and the
promise to pay between the credit card issuer and the merchant or business
establishment.

Pantaleon vs American Express, August 25, 2010 – credit cards are mere offer
to enter in loan agreements. From the loan agreement perspective, the
contractual relationship begins to exist only upon the meeting of the offer[25] and
acceptance of the parties involved. In more concrete terms, when cardholders use
their credit cards to pay for their purchases, they merely offer to enter into loan
agreements with the credit card company. Only after the latter approves the
purchase requests that the parties enter into binding loan contracts, in keeping
with Article 1319 of the Civil Code, which provides:

Article 1319. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract. The
offer must be certain and the acceptance absolute. A qualified acceptance
constitutes a counteroffer.

This view finds support in the reservation found in the card membership
agreement itself, particularly paragraph 10, which clearly states that AMEX
“reserve[s] the right to deny authorization for any requested Charge.” By so
providing, AMEX made its position clear that it has no obligation to approve any
and all charge requests made by its card holders.

AMEX not guilty of culpable delay

Since AMEX has no obligation to approve the purchase requests of its credit
cardholders, Pantaleon cannot claim that AMEX defaulted in its obligation. Article
1169 of the Civil Code, which provides the requisites to hold a debtor guilty of
culpable delay, states:

Article 1169. Those obliged to deliver or to do something incur in delay from the
time the obligee judicially or extrajudicially demands from them the fulfillment of
their obligation. x x x.

The three requisites for a finding of default are: (a) that the obligation is
demandable and liquidated; (b) the debtor delays performance; and (c) the
creditor judicially or extrajudicially requires the debtor’s performance.[26]

Based on the above, the first requisite is no longer met because AMEX, by the
express terms of the credit card agreement, is not obligated to approve
Pantaleon’s purchase request. Without a demandable obligation, there can be no
finding of default.

On AMEX’s obligation to act on the offer within a specific period of time

Even assuming that AMEX had the right to review his credit card history before it
approved his purchase requests, Pantaleon insists that AMEX had an obligation to
act on his purchase requests, either to approve or deny, in “a matter of seconds”
or “in timely dispatch.”

Nevertheless, every time Pantaleon charges a purchase on his credit card, the
credit card company still has to determine whether it will allow this charge, based
on his past credit history. This right to review a card holder’s credit history,
although not specifically set out in the card membership agreement, is a
necessary implication of AMEX’s right to deny authorization for any requested
charge.

Letter of Credit

What is a letter of credit?
How do you define letter of credit?
How many contracts are there in the letter of credit?
What are the types of letter of credit?
What is Independence Principle?

Metrobank vs Ley Construction December 3, 2014
Transfield Phil. vs Luzon Hydro November 22, 2004
LBP vs Monets Export March 10, 2005

DEPOSIT

What is a deposit?

Article 1962. A deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and returning the
same.

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

Who are the parties to a deposit?

The PARTIES are:
DEPOSITOR, or the person who turns over possession and custody of the thing to
another;
DEPOSITARY, or the person who receives the thing under obligations to safely
keep and preserve it.

What are the characteristics of deposit?

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

SAFEKEEPING MUST BE THE PRIMARY PURPOSE

Under Article 1962, the safekeeping of the thing loaned is the principal purpose of
the contract of deposit. If the safekeeping of the thing delivered is not the
principal purpose of the contract, there is no deposit but some other contract.

If a contract is therefore constituted and deposit is made as an accessory or
preparatory contract, the principal purpose would no longer be safekeeping.

Example:

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

Example:

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

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

Deposit is a real contract

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

In other words, there can be a consensual contract to constitute a deposit. But
the deposit itself will not be perfected until the delivery of the thing subject of
deposit.

Nature of Deposit Based on Consideration

Art. 1965. A deposit is a gratuitous contract, except when there is an agreement
to the contrary, or unless the depositary is engaged in the business of storing
goods.

So, when it is gratuitous there is no obligation therefore on the part of the
depositor to pay compensation for the act of safely keeping the thing object of
deposit. But if there is a compensation, it becomes a bilateral contract because he
obligation to safely keep the thing is now being made dependent on the obligation
also of the depositor to pay for the service of preservation.

If gratuitous, it is a unilateral contract because only one of the parties (the
depositary) is principally obliged.

If onerous, it is a bilateral contract because the undertaking of the depositary to
safely keep the thing is the reason why the depositor pays compensation.

Subject Matter

As a general rule, only movable things may be the object of a deposit (Article
1966). Because, traditionally what the law envisions in a contract of deposit are
deposits of things susceptible of manual delivery or capable of being transferred
from one hand to another.

Judicial deposit, however, may cover immovable or movable things (Articles
20052009).

Form and Constitution

Is form required in deposit?

No. Art. 1969 A contract of deposit may be entered into orally or in writing.

Art. 1964. A deposit may be constituted judicially or extrajudicially.

Judicial – by means of an order by the court
Extrajudicial – necessary or voluntary.

JUDICIAL DEPOSIT

Also known as sequestration

What is the primary purpose of sequestration?

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

Art. 2005. A judicial deposit or sequestration takes place when an attachment or
seizure of property in litigation is ordered. (1785)

Art. 2006. Movable as well as immovable property may be the object of
sequestration. (1786)

Art. 2007. The depositary of property or objects sequestrated cannot be relieved
of his responsibility until the controversy which gave rise thereto has come to an
end, unless the court so orders. (1787a)

Art. 2008. The depositary of property sequestrated is bound to comply, with
respect to the same, with all the obligations of a good father of a family.
What are the examples of judicial deposit?

Just be familiar, no need to memorize.

Rule 57 (Preliminary attachment) – attachment by sheriff upon filing of complaint.

Rule 59 (Receivership) a receiver may be appointed by the court to administer
and preserve the property in litigation.

Rule 60 (Replevin) personal property may be seized by sheriffs in suits of
replevin or manual delivery of personal property.

Remember, what would be the order or the writ that would allow you to take
possession of property replevined? Writ of possession. Remember, that the
issuance of writ of possession in replevin is issued ex parte.

Rule 127 – attachment in criminal cases.

NECESSARY DEPOSIT

Art. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such as fire, storm,
flood, pillage, shipwreck, or other similar events.

OTHER INSTANCES

When travellers deposit effects in hotels or inns (Article 1998)

When made by passengers of common carriers when entering into a contract of
carriage of persons.

Katong last. Musakay kag eroplano. Can you choose kung asa nimo ideposit ang
imong luggage or necessarily you have to deposit it in the same airline? No. There
is less freedom in choosing depositary therefore, in a contract of necessary
deposit.

When is deposit necessary in compliance with a legal obligation?

Art. 538. Possession as a fact cannot be recognized at the same time in two
different personalities except in the cases of copossession. Should a question
arise regarding the fact of possession, the present possessor shall be preferred; if
there are two possessors, the one longer in possession; if the dates of the
possession are the same, the one who presents a title; and if all these conditions
are equal, the thing shall be placed in judicial deposit pending determination of its
possession or ownership through proper proceedings.

Because here, the person in possession who needs to make a delivery of
property doesn’t know. It needs to determine kinsa ba jud ang tag iya. So, what
does he do? Place it under judicial deposit.

Art. 2104. The creditor cannot use the thing pledged, without the authority of
the owner, and if he should do so, or should misuse the thing in any other way,
the owner may ask that it be judicially or extrajudicially deposited. When the
preservation of the thing pledged requires its use, it must be used by the creditor
but only for that purpose.

On the occasion of a calamity

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

Possession passes by accident from one person to another and the law imposes
on the recipient the obligations of a bailee

What is the primary purpose in this case?

To save the property.

When made by travelers

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

Art. 1999. The hotelkeeper is liable for the vehicles, animals and articles which
have been introduced or placed in the annexes of the hotel.

Imagine this provision. Imagine also yourself driving a biological conveyance.
Rather than a motorized conveyance. Going to a hotel. Naa pa ba na karon? Wala
naman siguro na. Does it mean Article 1999 is no longer applicable? No.

When is hotelkeepers or innkeepers is liable for loss or injury?

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

When is hotelkeepers or innkeepers is not liable for loss or injury?

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

Art. 2003. The hotelkeeper 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 hotelkeeper and the guest whereby the responsibility of
the former as set forth in articles 1998 to 2001 is suppressed or diminished shall
be void.

Why? Because it is prohibited by law. It is tantamount to waivers of future fraud.

Art. 2004. The hotelkeeper has a right to retain the things brought into the hotel
by the guest, as a security for credits on account of lodging, and supplies usually
furnished to hotel guests.

2014 Bar Exam

Due to the continuous heavy rainfall, the major streets in Manila became flooded.
This compelled Cris to checkin at Square One Hotel. As soon as Crisgot off from
his Toyota Altis, the Hotel’s parking attendant got the key of his car and gave him
a valet parking customer’s claim stub. The attendant parked his car at the
basement of the hotel. Early in the morning, Cris was informed by the hotel
manager that his car was carnapped. (4%)

(A) What contract, if any, was perfected between Cris and the Hotel when Cris
surrendered the key of his car to the Hotel’s parking attendant?

(B) What is the liability, if any, of the Hotel for the loss of Cris’ car?

Answer:
(A) A contract of necessary deposit was perfected between them. Under
Article 1998, the deposit of effects made by travellers in hotels or
inns shall also be regarded as necessary. The keepers of hotels or
inns shall be responsible for them as depositaries. In this case, the
deposit was perfected from Cris’ delivery when she handed over to
the parking attendant the keys to her vehicle which the latter
received with the obligation of keeping and returning the same.

(B) Under Article 1999, the hotelkeeper is liable for the vehicles which
have been introduced or placed in the annexes of the hotel. He
hotel cannot claim force majeur to be relieved from liability. The act
of a thief or robber, who has entered the hotel is not deemed force
majeur, unless it is done with the use of arms or through an
irresistible force.

Durban Apartments vs Pioneer Insurance, January 12, 2011

TripleV vs Filipino Merchants, February 21, 2005

Facts: Maja, while she was eating she noticed her car , which is a gift from me
cannot be found at Kamayans parking area. She sued Kamaan for damages for
the lost of her car. Kamaan contends that it cannot be liable due to stipulation
found in the stub stating that the management and staff will not be responsible
for any loss of or damage incurred in the vehicle or valuable thing found therein.

SC: When Maja entrusted the car in question to petitioners valet attendant while
eating at petitioner's Kamayan Restaurant, the former expected the car's safe
return at the end of her meal. Thus, petitioner was constituted as a depositary of
the same car. Petitioner cannot evade liability by arguing that neither a contract
of deposit nor that of insurance, guaranty or surety for the loss of the car was
constituted when De Asis availed of its free valet parking service.

In a contract of deposit, a person receives an object belonging to another with
the obligation of safely keeping it and returning the same.A deposit may be
constituted even without any consideration. It is not necessary that the
depositary receives a fee before it becomes obligated to keep the item entrusted
for safekeeping and to return it later to the depositor.

The parking claim stub embodying the terms and conditions of the parking,
including that of relieving petitioner from any loss or damage to the car, is
essentially a contract of adhesion, drafted and prepared as it is by the petitioner
alone with no participation whatsoever on the part of the customers, like De Asis,
who merely adheres to the printed stipulations therein appearing. While contracts
of adhesion are not void in themselves, yet this Court will not hesitate to rule out
blind adherence thereto if they prove to be onesided under the attendant facts
and circumstances.

DEPOSIT OF MOVABLE FOUND

Art. 719. Whoever finds a movable, which is not treasure, must return it to its
previous possessor. If the latter is unknown, the finder shall immediately deposit
it with the mayor of the city or municipality where the finding has taken place.

The finding shall be publicly announced by the mayor for two consecutive weeks
in the way he deems best.

If the movable cannot be kept without deterioration, or without expenses which
considerably diminish its value, it shall be sold at public auction eight days after
the publication.

Six months from the publication having elapsed without the owner having
appeared, the thing found, or its value, shall be awarded to the finder. The finder
and the owner shall be obliged, as the case may be, to reimburse the expenses.
(615a)

1992 Bar Exam

X and Y staged a daring bank robbery in Manila at 10:30 AM in the morning of a
regular business day, and escaped with their loot of two (2) bags, each bag
containing P50,000,00. During their flight to elude the police, X and Y entered the
nearby locked house of A, then working in his Quezon City office. From A's house,
X and Y stole a box containing cash totaling P50,000.00 which box A had been
keeping in deposit for his friend B. In their hurry, X and Y left in A's bedroom one
(1) of the bags which they had taken from the bank. With X and Y now at large
and nowhere to be found, the bag containing P50.000.00 is now claimed by B, by
the Mayor of Manila, and by the bank. B claims that the depository. A, by force
majeure had obtained the bag of money in place of the box of money deposited
by B. The Mayor of Manila, on the other hand, claims that the bag of money
should be deposited with the Office of the Mayor as required of the finder by the
provisions of the Civil Code. The bank resists the claims of B and the Mayor of
Manila. To whom should a deliver the bag of money? Decide with reasons.

SUGGESTED ANSWER:

B would have no right to claim the money. Article 1990 of the Civil Code is not
applicable. The law refers to another thing received in substitution of the object
deposited and is predicated upon something exchanged. The Mayor of Manila
cannot invoke Article 719 of the Civil Code which requires the finder to deposit
the thing with the Mayor only when the previous possessor is unknown. In this
case , a must return the bag of money to the bank as the previous possessor and
known owner (Arts. 719 and 1990. Civil Code.)

VOLUNTARY DEPOSIT

What is the concept of voluntary deposit? How is it different with
necessary deposit?

Article 1968 Delivery of the thing is made by the will of the depositor or by two
or more persons each of whom believes himself entitled to the thing deposited

DIFFERENCE WITH NECESSARY DEPOSIT: The depositor in voluntary deposit has
complete freedom in choosing the depositary.

Obligations of the Depositary

A depositary has a LOT of obligations, which can be grouped into the following:

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

AS TO PRESERVATION

The depositary is obliged to keep the thing safely and to return it, when required,
to the depositor, or to his heirs and successors, or to the person who may have
been designated in the contract (Art. 1972).

When the thing deposited consists in securities, the depositary is obliged to take
such steps in order that the same may preserve their value (Art. 1975).

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

The depositary is obliged to use the thing deposited if its preservation requires its
use. It must be used but only for that purpose (Art. 1977).

AS TO INFORMATION

The depositary is obliged to notify the depositor and wait for the latter’s decision
in case the former changes the way of the deposit (Art. 1974).

When the thing deposited is delivered closed and sealed but its seal or lock is
broken, the depositary shall keep the secret of the deposit (Art. 1981).

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

The depositary is obliged to immediately inform the depositor if the thing
deposited is judicially attached or if its return or removal is opposed by a third
person (Art. 1988).

AS TO RETURN

When the thing deposited is delivered closed and sealed, the depositary is obliged
to return it in the same condition (Art. 1981).

The depositary is obliged to return the thing deposited with all its products,
accessories and accessions (Art. 1983).

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

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

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

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

PROHIBITIONS AND LIMITATIONS ON THE DEPOSITARY

The depositary cannot deposit the thing with a third person, unless there is a
stipulation to the contrary (Art. 1972).

The depositary cannot make use of the thing deposited without the express
permission of the depositor. (Art. 1977).

The depositary cannot demand that the depositor prove his ownership of the
thing deposited (Art. 1984).

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

LIABILITIES

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

If deposit with a third person is allowed, the depositary is liable for the loss if he
deposited the thing with a person who is manifestly careless or unfit.
The depositary is responsible for the negligence of his employees (Art. 1973).

The depositary makes use of the thing deposited without the express permission
of the depositor is liable for damages. (Art. 1977).

The depositary is liable for the loss of the thing through a fortuitous event:
If it is so stipulated;
If he uses the thing without the depositor's permission;
If he delays its return;
If he allows others to use it, even though he himself may have been authorized to
use the same.

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

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

RIGHTS OF THE DEPOSITARY

If there is a stipulation or if the depositary is engaged in the business of storing
goods, the depositary is entitled to adequate compensation for his services (Art.
1965).

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

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

The depositary may open a locked box or receptacle if the key has been delivered
to him or when the instructions of the depositor as regards the deposit cannot be
executed without opening the box or receptacle (Art. 1982).

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

If the depositary has reasonable grounds to believe that the thing has not been
lawfully acquired by the depositor, the former may return the same (Art. 1984).

In case of gratuitous deposit, if he has justifiable reasons for not keeping the
thing may, even before the time designated, return it to the depositor (Art.
1989).

If the depositor refuses to receive the thing, the depositary may secure its
consignation from the court (Art. 1989).

The depositary may retain the thing in pledge until the full payment of what may
be due him by reason of the deposit (Art. 1994).

OBLIGATIONS OF THE DEPOSITOR

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

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

If the deposit is not gratuitous, the depositor is obliged to pay compensation to
the depositary. Should the depositor fail to pay, the depositary may retain the
thing in pledge until the full payment of what may be due him by reason of the
deposit (Art. 1994).

The depositor shall reimburse the depositary for any loss arising from the
character of the thing deposited, except in the following cases:
If at the time of the constitution of the deposit the former was not aware of, or
was not expected to know the dangerous character of the thing; or
If he notified the depositary of the same, or the latter was aware of it without
advice from the depositor (Art. 1993).

Extinguishment of Voluntary Deposit

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

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

Bar 2007

A deposit made in compliance with a legal obligation is:

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

ANSWER: C

BANK DEPOSITS

Article 1980. Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning simple loan. (n)

Why do you call it a deposit?

They are in the nature of irregular deposits. In fact they are deposits in name
only because they are loans which earn interest. The relationship then between a
depositor and a bank is one of creditor and debtor. You, the bank depositor are
the creditor and the bank is your debtor. It is payable in demand by the creditor.
Being simple loan, the relationship of the bank and the depositor with respect to
the deposit is fiduciary in nature. A bank is under obligation to treat the accounts
of its creditors with meticulous care and always to have in mind the fiduciary
nature of its relationship with the depositor.

What is the degree of care required in banks acting in fiduciary capacity
with respect to their deposits?

Extraordinary diligence. But if it is not acting in its fiduciary capacity, only
ordinary diligence is required.

PNB vs Cheah April 25, 2012 With regard to collection or encashment of
checks, suffice it to say that the law imposes on the collecting bank the duty to
scrutinize diligently the checks deposited with it for the purpose of determining
their genuineness and regularity. “The collecting bank, being primarily engaged
in banking, holds itself out to the public as the expert on this field, and the law
thus holds it to a high standard of conduct.” A bank is expected to be an expert in
banking procedures and it has the necessary means to ascertain whether a check,
local or foreign, is sufficiently funded.

The doctrine of last clear chance even applies. If the bank has the last clear
opportunity to prevent damage in cases of encashment or forged checks by
following its validation procedures it will be held liable for damages.

Now, I have a problem with this as Torts professor. According to Phoenix vs IAC,
the doctrine of last clear chance does not already apply in the Philippine
jurisdiction. But the Supreme Court itself does not abandon this doctrine. Daghan
kayo kaso na pabalik balik ug reiterate sa ing ani na doctrine. Worst, it applies to
non accident cases such as banking cases.

Metrobank vs Rosales January 13, 2014 The "Hold Out" clause applies only
if there is a valid and existing obligation arising from any of the sources of
obligation enumerated in Article 1157 of the Civil Code, to wit: law, contracts,
quasicontracts, delict, and quasidelict. In this case, petitioner failed to show
that respondents have an obligation to it under any law, contract, quasicontract,
delict, or quasidelict. And although a criminal case was filed by petitioner against
respondent Rosales, this is not enough reason for petitioner to issue a "Hold Out"
order as the case is still pending and no final judgment of conviction has been
rendered against respondent Rosales.

1997 Bar Exam

In order to secure a bank loan, XYZ Corporation surrendered its deposit
certificate, with a maturity date of 01 September 1997 to the bank. The
corporation defaulted on the due repayment of the loan, prompting the bank to
encash the deposit certificate. XYZ Corporation questioned the above action taken
by the bank as being a case of pactum commissorium. The bank disagrees. What
is your opinion?

SUGGESTED ANSWER:

We submit that there is no pactum commissorium here. Deposits of money in
banks and similar institutions are governed by the provisions on simple loans
(Art. 1980. Civil Code). The relationship between the depositor and a bank is one
of creditor and debtor. Basically this is a matter of compensation as all the
elements of compensation are present in this case. Where the security for the
debt is also money deposited in a bank, it is not illegal for the creditor to encash
the time deposit certificates to pay the debtor's overdue obligation.

Spouses Edralin vs PVB March 9, 2011 Pactum commissorium is "a
stipulation empowering the creditor to appropriate the thing given as guaranty for
the fulfillment of the obligation in the event the obligor fails to live up to his
undertakings, without further formality, such as foreclosure proceedings, and a
public sale."

Chu vs CA September 2, 1989 The prohibition against a pacto commissorio is
intended to protect the obligor, pledgor, or mortgagor against being overreached
by his creditor who holds a pledge or mortgage over property whose value is
much more than the debt. Where, as in this case, the security for the debt is also
money deposited in a bank, the amount of which is even less than the debt, it
was not illegal for the creditor to encash the time deposit certificates to pay the
debtors' overdue obligation, with the latter's consent.

Judicial Deposit vs. Extrajudicial Deposit
ORIGIN: will of the court ORIGIN: will of the parties

PURPOSE: to secure the right PURPOSE: safekeeping
of a party to recover
Movable or immovable Movable

Always remunerated May be gratuitous or onerous

Held in behalf of prevailing Held in behalf of depositor
party

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CREDIT TRANSACTIONS March 4, 2015

­ PRINCIPAL CONTRACTS or contracts founded on trust, belief or credit. They are

For example, I execute a special power of attorney authorizing X to sell my land.

Another example, if you can recall the definition of partnership. By the contract of

The PRINCIPAL CONTRACTS/CREDIT TRANSACTIONS are LOAN and DEPOSIT.

PERSONAL GUARANTY or SECURITY, where a person’s personal credit is involved

­ ​By the contract of loan, one of the parties delivers to another, either something

­ it ​is a contract of loan whereby one of the parties delivers to another something

­ Both nominate – given a particular name by law. Which also hints upon a party

Both gratuitous per se – consideration is pure liberality. Although, you might raise

Real – Just take note in the loan on mutuum it is perfected only by delivery so the

Article 1316 is not an exclusive enumeration of what are real contracts. Note the

Let me simplify further. Kaduha gi release ang loan, in other words, naay duha ka

In addition to the three elements, delivery is required in the principal contracts of

In mutuum, the borrower is obliged to return the money that was borrowed. This

UNILATERAL ­ once the subject matter has been delivered, it creates obligations

GRATUITOUS ­ Under Article 1933, commodatum is essentially gratuitous while

­ No more commodatum because commodatum is essentially gratuitous. Once

Petitioner contends that the transaction between private respondent and Doronilla

As to fruits, Art. 1940 provides that the parties may stipulate that the bailee may

Art. 1936. Consumable goods may be the subject of commodatum if the purpose

The ipad cannot be used by either the bailee or the members of her household as

(5) If, being able to save either the thing borrowed or his own thing, he chose to

Art. 1944. The bailee cannot retain the thing loaned on the ground that the bailor

Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not advise

­ ​Take note that since commodatum is a unilateral contract, the obligations of the

If the bailee imputes to the bailor any criminal offense, or any act involving moral

An essential characteristic of mutuum is that there is a transfer of ownership from

ARTICLE 1954 ­ A gives B a Mitsubishi Evolution VIII, an imported Japanese car

1st CONTRACTUAL or CONVENTIONAL INTEREST – meaning a product of

● An action for the enforcement of the obligation of payment of money

Estores vs Supangan – the contract here is not a loan but a conditional deed of

(a) collection on a promissory note for a loan, with NO agreement on interest on

With respect to the amount covered by a promissory note, an interest of 12% per

Contracting parties may stipulate freely on any adjustment in the interest rate on

Juico vs Chinabank ­ Escalation clauses refer to stipulations allowing an

Nevertheless, an escalation clause "which grants the creditor an unbridled right to

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PRINCIPAL CONTRACTS or contracts founded on trust, belief or credit. They are

By the contract of loan, one of the parties delivers to another, either something

it is a contract of loan whereby one of the parties delivers to another something

Both nominate – given a particular name by law. Which also hints upon a party

UNILATERAL once the subject matter has been delivered, it creates obligations

GRATUITOUS Under Article 1933, commodatum is essentially gratuitous while

No more commodatum because commodatum is essentially gratuitous. Once

Take note that since commodatum is a unilateral contract, the obligations of the

ARTICLE 1954 A gives B a Mitsubishi Evolution VIII, an imported Japanese car

Juico vs Chinabank Escalation clauses refer to stipulations allowing an