1
CREDIT
TRANSACTIONS
Title XI
LOAN
GENERAL PROVISIONS
Art. 1933. 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 amount of the same
kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a
stipulation to pay interest.
In commodatum the bailor retains the
ownership of the thing loaned, while in simple
loan, ownership passes to the borrower.
A contract of loan is a real contract
because the delivery of the thing is
necessary for the perfection of the
contract.
A contract of loan is a unilateral contract
because once the subject matter has been
delivered, it creates obligations on the part
of only one of the parties, i.e. the
borrower.
Cause or consideration in a contract of
loan as to the borrower the acquisition of
the thing as to the lender the right to
demand its return or its equivalent
Kinds of Loan
1. commodatum – where the
bailor(lender) delivers o the
bailee(borrower) a non-consummabble
thing so hat the latter may use it for a
certain time and return the identical
thing
2. simple loan or mutuum – where the
lender delivers to the borrower money
or other consumable thing upon the
condition that the latter shall pay the
same amount of the same kind or
quality a thing is consumable when it
is consumed when used in a manner
appropriate to its purpose or nature
Commodatum & Mutuum distinguished
1. commodatum ordinarily involves
something not consumable while in
muttum the subject matter is money or
other consumable thing
2. in commodatum ownership of the thing
loaned is retained by the lender while in
muttuum the ownership is passed to the
borrower
3. commodatum is essentially gratuitous
while muttum may be gratuitous or it
may be onerous (ex. Stipulation to pay
interest)
4. in commodatum the borrower must
return the same thing loaned while in
muttum the borrower need only pay the
same amount of the same kind and
quality
5. commodatum may involve real or
personal property while mutuum refers
only to personal property
6. commodatum is a loan for use while
mutuum is a loan for consumption
7. in commodatum the bailor may demand
the return of the thing loaned before the
expiration of the term in case of urgent
need while in mutuum the lender
maynot demand its return before the
lapse of the term agreed upon
8. in commodatum the loss is suffered by
the bailor since he is the owner while in
mutuum the borrower suffers the loss
Kinds of Commodatum
1. ordinary commodatum
2. prercarium – one whereby the bailor
may demand the thing loaned at will
Art. 1934. An accepted promise to deliver
something by way of commodatum or simple
loan is binding upon parties, but the
commodatum or simple loan itself shall not be
perfected until the delivery of the object of the
contract.
NOTES
1. Delivery is necessary in view of the
purpose of the contract which is the
transfer either the use or ownership of
the thing loaned
2. An accepted promise to make a future
loan is a consensual contract and
therefore binding upon parties but it is
only after delivery will the real contract
of loan arise.
 2
CHAPTER 1
COMMODATUM
SECTION 1
Nature of Commodatum
Art. 1935. The bailee in commodatum
acquires the used 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.
NOTES
1. Commodatum is essentially gratuitous.
2. The contract ceases to be a extinguishes the contract;
ccommodatum if any compensation is
to be paid by the borrower who
acquires the use. In such a case there
arises a lease contract
3. The right to use is limited to the thing
loaned but not to its fruits unless there
is a stipulation to the contrary
4. Commodatum is similar to a donation
in that it confers a benefit to the
recipient
5. The purpose of the contract of
ccommodatum must be the use of the
thing loaned. If the bailee is not
entitled to the use of the thing the
contract may be one of deposit.
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.
NOTES
1. In ccommodatum the subject matter is
generally non-consumable things
whether real or personal.
2. If the purpose of the contract is not
for consumption of the object as when
it is merely for exhibition, consumable
goods may be the subject of
ccommodatum.
Art. 1938. The bailor in commodatum need not
be the owner of the thing loaned.
NOTES
1. In ccommodatum the bailor need not be
the owner of the thing loaned since by
the loan, ownership does not pass to
the borrower.
2. A lessee of the thing, or a usufructuary
may lend
3. The borrower or bailee himself may not
lend nor lease the thing loaned to him
to a third person
Art. 1939. Commodatum is purely personal in
character. Consequently:
(1) The death of either the bailor or the bailee
(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.
NOTES
1. Commodatum is a purely personal
contract, the lender having in view the
character, credit and conduct of the
borrower.
2. The death of either party terminates the
contract unless by stipulation the
commodatum is transmitted to the heirs
or either or both parties
3. The use of the thing loaned may extend
to the members of the bailee’s
household unless there is a stipulation
contrary or the nature of the thing
forbids it
Art. 1940. A stipulation that the bailee may
make use of the fruits of the thing loaned is
valid.
NOTES
1. The bailee is entitled only to the use of
the thing loaned and not its fruits.
2. The parties may stipulate that the bailee
may also make tuse of the fruits of the
thing. But the enjoyment must only be
incidental to the use of the thing for if it
is main cause then the contract is a
usufruct
 3
SECTION 2
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.
NOTES
1. The borrower should defray the
expenses for the use and preservation
of the thing loaned for after all he
acquires the use of the same and he
is supposed to return the identical
thing
2. The borrower must take good care of
the thing with the diligence of a good
father of a family
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.
NOTES
1. As a general rule the bailee is not
liable for loss or damage due to
fortuitous event.
2. The purpose of this provision is to
punish the bailee for his improper acts
although they may not be the
proximate cause of the loss
3. No 1: the bailee acts in bad faith
4. No 2: bailee incurs delay
5. No 3: the law presumes that the
aprties intended that the borrower
shall be liable for the loss of the thing
even if it is due to a fortuitous event
for otherwise they would not have
appraised the thing
6. No 4: Ccommodatum is purely personal
7. No 5: the baille shows his ingratitude
Art. 1943. The bailee does not answer for the
deterioration of the thing loaned due only to the
use thereof and without his fault.
NOTES
1. The thing borrowed cannot be used
without deterioration due to ordinary
wear and tear. In the absence of
agreement to the contrary, the
depreciation is borne by the bailor.
2. The bailee is liable if he is guilty of fault
or negligence or if he devotes the thing
to any purpose different from that for
which it has been loaned.
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.
NOTE
The borrower has no right to retain the thing
loaned as security for claims he has against
the lender even though they may be by
reason of extraordinary expenses, except
under 1951 CC.
Art. 1945. When there are two or more bailees
to whom a thing is loaned in the same contract,
they are liable solidarily.
NOTES
1. The reason for imposing solidary liability
is to guarantee the efficacy of the rights
of the lender
2. The law presumes that the bailor takes
into account the personal integrity and
responsibility of all the bailees and that
he would not have constituted the
commodatum if there wer only one
bailee
SECTION 3
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.
 4
In case of temporary use by the bailor, the
contract of commodatum is suspended while
the thing is in the possession of the bailor.
NOTES
1. The primary obligation of the bailor is
to allow the bailee the use of the
thing loaned for the duration of the
period stipulated or until
accomplishment of the purpose for
which the commodatum was
constituted
2. If the bailor should have an urgent
need of the thing or if the borrower
commits an act of ingratitude the
bailor may demand its return or
temporary use
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.
NOTES
1. Precarium is a kind of commodatum
where the bailor may demand the
thing at will. In either of the two cases
in 1947 it is presumed that the use of
the thing has been granted subject to
revocation by the bailor at any time.
2. In ordinary commodatum the bailee
has the right to retain the thing until
the expiration of the period agreed
upon of the accomplishment of the use
for which the commodatum was
constituted.
Art. 1948. The bailor may demand the
immediate return of the thing if the bailee
commits any act of ingratitude specified in Art
765.
Art. 765. The donation may also be revoked at
the instance of the donor, by reason of
ingratitude in the following cases:
(1) If the donee should commit some
offense against the person, the honor or
the property of the donor, or of his wife
or children under his parental authority;
(2) If the donee imputes to the donor any
criminal offense, or any act involving
Art. 1949. The bailor shall refund the
moral turpitude, even though he should
extraordinary expenses during the contract for
prove it, unless the crime or the act has
the preservation of the thing loaned, provided
been committed against the donee
the bailee brings the same to the knowledge of
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.
NOTES:
1. One who has been the subject of
generosity must not turn ungrateful.
Gratitude here is a moral as well as a
legal duty
2. Acts of ingratitude in art 766 are:
a.) purely personal – hence the act must
have been committed by the donee &
not by his wife or relatives. As a
general rule it is only the debtor who
can, in the proper case, bring an
action to revoke on the ground of
ingratitude
b.) exclusive – hence those not
enumerated are deemed excluded
3. par 1
a.) offense includes both crimes & non-
crimes; no criminal conviction is
required, & proof of the offense, by
mere preponderance of evidence, in
suit for revocation would be sufficient
b.) under parental authority refers to
those children not yet emancipated by
reaching the age of majority, or
marriage or by parental concession, or
by appointment of a general guardian.
4. Par 2
authority should be understood to refer
to parental authority
5. par 3
a.) the law says legally or morally bound
b.) the refusal to support must be undue
or unjustified (hence if there is a just
reason for refusal, there can be no
revocation)
c.) it is understood that the support given
periodically should not exceed the
value of the thing donated. The
moment this value is reached, the
duty to support also ends. There will
really be no more donation that can
be revoked.
d.) even if the donor still has relatives
who can adequately support him, it
would seem from the wording & the
intent of the article that once the
donor calls upon him for support, the
donee must give the support he is
bale to. Otherwise there would indeed
be ingratitude.
e.) one ground for revoking a donation
propter nuptias is ingratitude as
defined by art 765.
 5
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.
NOTES
1. extraordinary expenses for the
preservation of the thing are borne by
the bailor for the reason that it is the
bailor who profits by the said
expenses. If they are incurred by the
bailee they must be reimbursed
provided the bailee brings the same to
the knowledge of the bailor before
incurring them
2. extraordinary expenses arising on the
occasion of the actual use of the thing
loaned shall be borne by the bailor
and bailee alike. the bailee pays one
half because the benefit derived from
the use of the thing loaned to him and
the bailor pays the other half because
he is the owner.
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.
NOTES
1. all other expenses other than those
referred to in 1941 and 1949 “for the
purpose of making use of the thing”
must be shouldered by the borrower.
2. Ordinary expenses incurred for the
preservation of the thing are also for
the account of the bailee.
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.
For the article to apply:
1. there is a flaw or defect in the thing
loaned
2. the flaw or defect is hidden
3. the bailor is aware thereof
4. he does not advise the bailee of the
same
5. the bailee suffers damages by reason
of said flaw or defect
Art. 1952. The bailor cannot exempt himself
from the payment of expenses or damages by
abandoning the thing to the bailee.
NOTE
The reason is that the expenses and
damages may exceed the value of the thing
loaned and it would be unfair to allow the
bailor to just abandon the thing instead of
paying for said expenses and for damages.
CHAPTER 2
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.
NOTES
1. mutuum – where the lender delivers to
the borrower money or other
consumable thing upon the condition
that the latter shall pay the same
amount of the same kind or quality.
2. the contract of mutuum involves the
return of the equivalent only and not
the identical thing because the borrower
acquires ownership thereof
3. the law uses the word “pay” and not
“return” because the consumption of the
thing loaned is the distinguishing
character of the contract of mutuum
from that of commodatum
4. fungible things are those which are
usually dealt with by number, weight or
measure so that any given unit of
portion is treated as the equivalent of
any other unit or portion. (ex. Grain, oil,
sugar)
5. whether the thing is consumable or not
depends upon its nature and whether it
is fungible or not depends upon the
intention of the parties.
Art. 1954. A contract whereby one person
transfers the ownership of non-fungible things to
another with the obligation on the part of the
latter to give things of the same kind, quantity,
and quality shall be considered a barter.
NOTES
1. By the contract of barter or exchange
one of the parties binds himself to give
 6
one thing in consideration of the
other's promise to give another thing.
2. The distinction between mutuum and
barter lies in the subject matter. In
mutuum it is money or any other
fungible thing. In barter it is non-
fungible thing
3. In commodatum the bailee is bound to
return the identical thing borrowed
when the time has expired or the
purpose has been served. In barter
the equivalent thing is given in return
for hwat has been received.
4. Mutuum may be gratuitous.
Commodatum is always gratuitous.
Barter is an onerous contract.
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.
Form of Payment
Art 1250. In case an extraordinary inflation or
deflation of the currency stipulated should
supervene, the value of the currency at the
time of the establishment of the obligation shall
be the basis of payment, unless there is an
agreement to the contrary.
NOTES
1. In case an extraordinary
inflation/deflation of the currency
stipulated occurs, the value of the
currency at the time the oblig was
established shall be the basis of
payment, UNLESS there was an
agreement contrary to this.
2. This applies only in
contracts/agreements. Extraordinary
fluctuation means that w/c both
parties couldn’t have foreseen when
oblig was established.
3. Debts in money are considered debts
of value. When the value of the
money is devaluated due to
unforeseen circumstances, the
doctrine of unforeseen risks can apply.
The debt shall be revalued acc. to the
principles of good faith & the intent of
the parties.
Art 1251. Payment shall be made in the place
designated in the obligation.
NOTES
1. Payment shall be made in place
designated in oblig. If it was not
stipulated & the oblig is to deliver a
determinate thing, payment shall be
made wherever the thing is located.
Otherwise, it shall be made at the
domicile of debtor.
2. If debtor changes domicile in bad faith
or after delay, he shall shoulder
additional expenses.
3. This applies to obligs to do.
4. When there’s no stipulation & the oblig
concerns delivering a determinate
thing, creditor has the duty to collect
from the debtor by going to the latter’s
domicile. The debtor doesn’t incur delay
if the creditor doesn’t make the
collection. He also doesn’t shoulder the
expenses the creditor incurs by going to
his domicile.
5. Art 1247 doesn’t include creditor’s
expenses mentioned herein.
Art. 1956. No interest shall be due unless it has
been expressly stipulated in writing.
Requisites for recovery of interest
1. the payment must expressly be stipulated
2. the agreement must be in writing
3. the interest must be lawful
NOTES
1. If the exact rate of interest is not
mentioned, the legal rate shall be
imposed
2. Exceptions to the rule:
a. the debtor is liable to pay legal
interest (12%) as indemnity even in
the absence of stipulation for the
payment of interest
b. interest due shall earn legal interest
from the time it is judicially demanded
although the obligation may be silent
upon this point
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.
NOTES
 7
1. Usury is contracting for or receiving
something in excess of the amount
allowed by law for the loan or
forbearance of money, goods or
chattels
2. Forbearance signifies the contractual
obligation of the creditor to forbear or
refrain during a period to require the
debtor payment of an existing debt
then due and payable.
3. Where there is no loan or forbearance
there is no usury
4. The usury law has not been repealed,
it is just suspended.
5. Interest is the compensation allowed
by law or fixed by the parties for the
loan or forbearance of money, goods
or chattels
Kinds of interest
1. Simple interest – which is paid for the
principal at a certain rate fixed or
stipulated by the parties
2. Compound Interest – that which is
imposed interest due and unpaid. The
accrued interest is added to the
principal sum and the whole is treated
as a new principal upon which the
interest for the next period is
calculated
3. Legal Interest – that which the law
directs to be charged in the absence of
any agreement as to the rate between
the parties.
4. Lawful Interest – that which the laws
allow or do not prohibit
5. Unlawful or Usurious Interest – paid or
stipulated to be paid beyond the
maximum fixed by law
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.
NOTE
The purpose of this article is to make
usury harder to perpetrate
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.
As a general rule, accrued interest shall
not earn interest except:
1. when judicially demanded as provided in
art 2122.
2. when there is an 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
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.
NOTES
1. where unstipulated interest is paid by
mistake the debot may recover as this
would be a case of solution indebiti or
undue payment
2. where the unstipulated interest is paid
voluntarily because the debtor feels
morally obliged to do so there can be no
recovery as in the case of natural
obligations
Art. 1961. Usurious contracts shall be governed
by the Usury Law and other special laws, so far
as they are not inconsistent with this Code.
NOTES
1. usury law – fix the ceiling of inter3st
rates
2. only suspended by virtue of circular by
central bank
3. there may still be unconscionable
interest if the court finds it so
4. a floating interest rate is not invalid per
se but there must be a reference point
5. Requirements for a valid escalation
clause
a. increase is provided by law/ resolution
by the monetary board
b. there is a corresponding de-escalation
clause
c. the effectivity of the clause is on or
after the effect of increase ordered on
the maximum interest
CASES
REPUBLIC vs. BAGTAS
Jose V. Bagtas borrowed from the Republic of the
Philippines through the Bureau of Animal Industry three
bulls: a Red Sindhi with a book value of P1,176.46, a
Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for
a period of one year from 8 May 1948 to 7 May 1949 for
breeding purposes subject to a government charge of
breeding fee of 10% of the book value of the bulls.
 8
Upon the expiration of the contract, the borrower
asked for a renewal for another period of one year. the
Secretary of Agriculture and Natural Resources
approved a renewal thereof of only one bull for
another year from 8 May 1949 to 7 May 1950 and
requested the return of the other two.
Jose V. Bagtas wrote to the Director of Animal Industry
that he would pay the value of the three bulls. the
Director of Animal Industry advised him that the book
value of the three bulls could not be reduced and that
they either be returned or their book value paid not
later than 31 October 1950. Jose V. Bagtas failed to
pay the book value of the three bulls or to return them.
The SC held that the contract was a not commodatum.
A contract of commodatum is essentially gratuitous. If
the breeding fee be considered a compensation, then
the contract would be a lease of the bull.
And even if the contract be commodatum, still the
appellant is liable, because article 1942 of the Civil
Code provides that a bailee in a contract of
commodatum is liable for loss of the things, even if it
should be through a fortuitous event:(2) If he keeps it
longer than the period stipulated; (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. It was not
stipulated that in case of loss of the bull due to
fortuitous event the late husband of the appellant
would be exempt from liability.
DE LOS SANTOS vs. JARRA
Jimenea borrowed and obtained from de los Santos 10
first-class carabaos, to be used at the animal-power
mill of his hacienda, without recompense or
remuneration whatever for the use thereof, under the
sole condition that they should be returned to the
owner as soon as the work at the mill was terminated.
Jimenea, however, did not return the carabaos.
Defendant said that it was true that Jimenea asked de
los Santos to loan him ten carabaos, but that he only
obtained 3 second-class animals, which were later
sold by him to Jimenea.
WON it’s a contract of sale or commodatum 
commodatum!
The alleged purchase of three carabaos by Jimenea
from Santos is not evidenced by any trustworthy
documents such as those of transfer, nor were the
declarations of witnesses presented by defendant
affirming it satisfactory; it can not be considered that
Jimenea only received three carabaos on loan, and
that he afterwards kept them definitely by virtue of the
purchase.
It can be concluded that the carabaos loaned or given
on commodatum to Jimenea were ten in number; that
they, or at any rate the six surviving ones, have not
been returned to the owner, and that it is not true that
the latter sold to the former three carabaos that the
purchaser was already using; therefore, as the said six
carabaos were not the property of the deceased nor of
any of his descendants, it is the duty of the
administratrix of the estate to return them or indemnify
the owner for their value.
MANZANO vs. PEREZ
Nieves Manzano, sister of the petitioner Emilia
Manzano and predecessor-in-interest of the herein
private respondents, borrowed the aforementioned
property as collateral for a projected loan. The petitioner
acceded to the request of her sister upon the latter's
promise that she would return the property immediately
upon payment of her loan.
Pursuant to their understanding, the petitioner executed
two deeds of conveyance for the sale of the residential
lot on 22 January 1979 and the sale of the house
erected thereon on 2 February 1979, both for a
consideration of P1.00 plus other valuables received by
her from Nieves Manzano.
These heirs, respondents herein, allegedly refused to
return the subject property to the petitioner even after
the payment of their loan with the Rural Bank.
The petitioner sought the annulment of the deeds of sale
and execution of a deed of transfer or reconveyance of
the subject property in her favor.
The SC held that the agreement between the parties
was a not of commodatum but an absolute sale.
Petitioner has presented no convincing proof of her
continued ownership of the subject property. The facts
alleged by petitioner in her favor are the following: (1)
she inherited the subject house and lot from her parents,
with her siblings waiving in her favor their claim over the
same; (2) the property was mortgaged to secure a loan
of P30,000 taken in the names of Nieves Manzano
Perez and Respondent Miguel Perez; (3) upon full
payment of the loan, the documents pertaining to the
house and lot were returned by Respondent Florencio
Perez to petitioner; (4) three of the respondents were
signatories to a document transferring one half of the
property to Emilia Manzano in consideration of the sum
of ten thousand pesos, although the transfer did not
materialize because of the refusal of the other
respondents to sign the document; and (5) petitioner
hacked the stairs of the subject house, yet no case was
filed against her. These matters are not, however,
convincing indicators of petitioner's ownership of the
house and lot. On the contrary, they even support the
claim of respondents.
Respondents were able to present two Deeds of Sale,
which petitioner executed in favor of the former's
predecessor-in-interest. Both Deeds - for the residential
lot and for the house erected thereon - were each in
consideration of P1.00 plus other valuables. Having
been notarized, they are presumed to have been duly
executed. Also, issued in favor of respondents'
predecessor-in-interest the day after the sale was Tax
Declaration No. 9589, which covered the property.
In order to contradict the facts contained in a notarial
document, such as the two Kasulatan ng Bilihang
Tuluyan in this case, as well as the presumption of
regularity in the execution thereof, there must be clear
and convincing evidence that is more than merely
preponderant.
SAURA IMPORT & EXPORT CO., INC. vs. DBP
Saura applied to RFC (later DBP) for an industrial loan
for the purpose of financing the manufacture of jute
sacks in Davao. RFC approved the loan to be secured
by a first mortgage. After several modifications, RFC
restored the loan with several conditions. But the
negotiations came to a standstill since Saura was not
able to meet the conditions and it instead requested
RFC to cancel the mortgage.
Almost 9 years after the mortgage was cancelled at the
request of Saura, the latter commenced the present suit
 9
for damages, alleging failure of RFC to comply with its
obligation to release the proceeds of the loan applied
for and approved, thereby preventing the plaintiff from
completing or paying contractual commitments it had
entered into, in connection with its jute mill project.
TRIAL COURT - there was a perfected contract
between the parties and that the defendant was guilty
of breach thereof.
WON there’s a perfected contract of loan – YES, but
there later was MUTUAL DESISTANCE
We hold that there was indeed a perfected consensual
contract There was undoubtedly offer and acceptance.
It should be noted that RFC entertained the loan
application of Saura on the assumption that the factory
to be constructed would utilize locally grown raw
materials. However, Saura was in no position to
comply with RFC's conditions. So instead of doing so
and insisting that the loan be released as agreed
upon, Saura asked that the mortgage be cancelled.
The action thus taken by both parties was in the nature
of MUTUAL DESISTANCE — what Manresa terms
"mutuo disenso"— which is a mode of extinguishing
obligations. It is a concept that derives from the
principle that since mutual agreement can create a
contract, mutual disagreement by the parties can
cause its extinguishment.
CEBU FINANCIAL v CA
On April 25, 1991, private respondent, Vicente Alegre,
invested with CIFC Cebu International Finance
Corporation, five hundred thousand (P500,000.00)
pesos, in cash.
Petitioner issued a promissory note to mature on May
27, 1991. The note for five hundred sixteen thousand,
two hundred thirty-eight pesos and sixty-seven
centavos (P516,238.67) covered private respondent's
placement plus interest at twenty and a half (20.5%)
percent for 32 days.
CIFC issued a check for P514,390.94 in favor of the
private respondent as proceeds of his matured
investment plus interest. The CHECK was drawn from
petitioner's current account, maintained with the Bank
of the Philippine Islands (BPI).
Private respondent's wife deposited the CHECK with
Rizal Commercial Banking Corp. (RCBC). BPI
dishonored the CHECK with the annotation, that the
"Check (is) Subject of an Investigation."
BPI took custody of the CHECK pending an
investigation of several counterfeit checks drawn
against CIFC's aforestated checking account. BPI
used the check to trace the perpetrators of the forgery.
Private respondent notified CIFC of the dishonored
CHECK and demanded, on several occasions, that he
be paid in cash. CIFC refused the request, and instead
instructed private respondent to wait for its ongoing
bank reconciliation with BPI.
Private respondent, through counsel, made a formal
demand for the payment of his money market
placement. In turn, CIFC promised to replace the
CHECK but required an impossible condition that the
original must first be surrendered.
February 25, 1992, private respondent Alegre filed a
complaint for recovery of a sum of money against the
petitioner with the Regional Trial Court of Makati.
The SC held that Art 1249 of the CC concerning
extinction of an obligation applies.
Art 1249 CC deals with a mode of extinction of an
obligation and expressly provides for the medium in the
"payment of debts." It provides that:
"The payment of debts in money shall be made in the
currency stipulated, and if it is not possible to deliver
such currency, then in the currency, which is legal
tender in the Philippines.
The delivery of promissory notes payable to order, or
bills of exchange or other mercantile documents shall
produce the effect of payment only when they have
been cashed, or when through the fault of the creditor
they have been impaired.
In the meantime, the action derived from the original
obligation shall be held in abeyance."
Considering the nature of a money market transaction,
the above-quoted provision should be applied in the
present controversy. As held in Perez vs. Court of
Appeals, a "money market is a market dealing in
standardized short-term credit instruments (involving
large amounts) where lenders and borrowers do not deal
directly with each other but through a middle man or
dealer in open market. In a money market transaction,
the investor is a lender who loans his money to a
borrower through a middleman or dealer.
In the case at bar, the money market transaction
between the petitioner and the private respondent is in
the nature of a loan. The private respondent accepted
the CHECK, instead of requiring payment in money. Yet,
when he presented it to RCBC for encashment, as early
as June 17, 1991, the same was dishonored by non-
acceptance, with BPI's annotation: "Check (is) subject of
an investigation."
Under these circumstances, and after the notice of
dishonor, the holder has an immediate right of recourse
against the drawer, and consequently could immediately
file an action for the recovery of the value of the check.
In a loan transaction, the obligation to pay a sum certain
in money may be paid in money, which is the legal
tender or, by the use of a check. A check is not a legal
tender, and therefore cannot constitute valid tender of
payment.
CU UNJIENG v MABALACAT SUGAR CO.
This action was instituted by Cu Unjieng, for the purpose
of recovering from Mabalacat an indebtedness
amounting to more than P163,00, with interest, and to
foreclose a mortgage given by the debtor to secure the
same, as well as to recover stipulated attorney's fee and
the sum of P1,206, paid by the plaintiff for insurance
upon the mortgaged property, with incidental relief.
HELD: There was a mistake in the computation of the
interest, it was excessive and should therefore be
reduced.
It is well settled that, under article 1109 of the Civil Code,
as well as under section 5 of the Usury Law (Act No.
2655), the parties may stipulate that interest shall be
compounded; and rests for the computation of
compound interest can certainly be made monthly, as
well as quarterly, semiannually, or annually. But in the
absence of express stipulation for the accumulation of
compound interest, no interest can be collected upon
interest until the debt is judicially claimed, and then the
rate at which interest upon accrued interest must be
computed is fixed at 6 per cent per annum. The point
here ruled is in exact conformity with the decision of this
court in Bachrach Garage and Taxicab Co. vs. Golingco,
where this court held that interest cannot be allowed in
 10
the absence of stipulation, or in default thereof, except
when the debt is judicially claimed; and when the debt
is judicially claimed, the interest upon the interest can
only be computed at the rate of 6 per cent per annum.
EASTERN ASSURANCE v CA
TC fixed interest rate at 12% for an unpaid insurance
claim. CA modified and fixed the rate 6% from date of
claim until the judgment became final and executory
and 12% until from latter date until payment. CA ruling
is based on the ruling in Eastern Shipping v CA by the
SC.
SC agreed w/ CA. Based on CC, award of interest in
the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is
imposed, as follows:
a. Obligation consists in the payment of a sum of
money – interest due is that stipulated by the
parties. Absent stipulation, interest due shall be
12%.
b. Obligation does not consist in the payment of the
sum of money - interest imposed at the discretion
of the court at 6%.
c. During interim period (from date judgement
become final and executory until satisfaction) –
interest due is at 12%, equivalent to forbearance
of credit.
B and C apply in this case.
LIGUTAN v CA
Petitioners Tolomeo Ligutan and Leonidas dela Llana
obtained on 11 May 1981 a loan in the amount of
P120,000.00 from respondent Security Bank and Trust
Company.
Petitioners executed a promissory note binding
themselves, jointly and severally, to pay the sum
borrowed with an interest of 15.189% per annum upon
maturity and to pay a penalty of 5% every month on
the outstanding principal and interest in case of
default. In addition, petitioners agreed to pay 10% of
the total amount due by way of attorney’s fees if the
matter were indorsed to a lawyer for collection or if a
suit were instituted to enforce payment.
The obligation matured on 8 September 1981; the
bank, however, granted an extension but only up until
29 December 1981.
Despite several demands from the bank, petitioners
failed to settle the debt which, as of 20 May 1982,
amounted to P114,416.10.
On 30 September 1982, the bank sent a final demand
letter to petitioners informing them that they had five
days within which to make full payment.
Since petitioners still defaulted on their obligation, the
bank filed on 3 November 1982, with the Regional Trial
Court of Makati, a complaint for recovery of the due
amount.
In its decision of 7 March 1996, the appellate court
affirmed the judgment of the trial court except on the
matter of the 2% service charge which was deleted
pursuant to Central Bank Circular No. 783. Not fully
satisfied with the decision of the appellate court, both
parties filed their respective motions for
reconsideration.
Petitioners prayed for the reduction of the 5%
stipulated penalty for being unconscionable. The
bank, on the other hand, asked that the payment of
interest and penalty be commenced not from the date of
filing of complaint but from the time of default as so
stipulated in the contract of the parties.
On 16 November 1998, petitioners filed an omnibus
motion for reconsideration and to admit newly
discovered evidence, alleging that while the case was
pending before the trial court, petitioner Tolomeo Ligutan
and his wife Bienvenida Ligutan executed a real estate
mortgage on 18 January 1984 to secure the existing
indebtedness of petitioners Ligutan and dela Llana with
the bank. Petitioners contended that the execution of
the real estate mortgage had the effect of novating the
contract between them and the bank. Petitioners further
averred that the mortgage was extrajudicially foreclosed
on 26 August 1986, that they were not informed about it,
and the bank did not credit them with the proceeds of the
sale.
The SC held the the subsequent execution of the real
estate mortgage as security for the existing loan would
not have resulted in the extinguishments of the original
contract of loan because of novation. Mortgage is but an
accessory contract to secure the loan in the promissory
note.
Extinctive novation requires first, a valid obligation;
second, the agreement of all the parties to the new
contract; third, the extinguishments of the obligation; and
fourth the validity of the new one. In order that an
obligation may be extinguished by another which
substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the
new obligation be on every point imncompatible with
each other.
An obligation to pay a sum of money is not extinctively
novated by the new instrument which merely changes
the terms of payment or adding compatible covenants or
where the old contract is merely supplemented by the
new one. When not expressed, incompatibility is
required so as to ensure that the parties have indeed
intended such novation despite their failure to express it
in categorical terms. The incompatibility should take
place in any of the essential elements of the obligation:
the juridical tie from commodatum to lease, from
negotiorum gestio to agency, from mortgage to
antichresis, from sale to loan; the object or principal
conditions, such as change of nature of the prestation; or
the subjects such as the substitution of a debtor or the
subrogation of the creditor.
RCBC vs. HON. JOSE P. ARRO
Residoro Chua and Enrique Go, Sr. executed a
comprehensive surety agreement to guaranty any
existing indebtedness of Davao Agricultural Industries
Corporation, and/or to induce the bank at any time or
from time to time thereafter, to make loans or advances
or to extend credit in other manner to, or at the request,
or for the account of the Borrower, either with or without
security, and/or to purchase on discount, or to make any
loans or advances evidenced or secured by any notes,
bills, receivables, drafts, acceptances, checks or other
evidences of indebtedness upon which the Borrower is
or may become liable, provided that the liability shall not
exceed at any one time the aggregate principal sum of
P100T.
A promissory note in the amount of P100T was issued in
favor of RCBC. The note was signed by Go, in his
personal capacity and in behalf of Daicor. The
 11
promissory note was not fully paid despite repeated
demands; hence, RCBC filed a complaint for a sum of
money against Daicor, Go and Chua.
Chua claims that he cannot be held liable under the
promissory note because it was only Go who signed
the same in behalf of Daicor and in his own personal
capacity.
RCBC opposed alleging that by virtue of the execution
of the comprehensive surety agreement, Chua is liable
because said agreement covers not merely the
promissory note subject of the complaint, but is
continuing; and it encompasses every other
indebtedness the Daicor may incur from time to time
w/ RCBC.
WON Chua is liable to pay the obligation evidenced by
the promissory note which he did not sign, in the light
of the provisions of the comprehensive surety
agreement - YES
The comprehensive surety agreement was jointly
executed by Chua and Go, President and General
Manager, respectively of Daicor to cover existing as
well as future obligations which Daicor may incur with
RCBC, subject only to the proviso that their liability
shall not exceed at any one time the aggregate
principal sum of P100T.
The agreement was executed obviously to induce
RCBC to grant any application for a loan Daicor may
desire to obtain from the bank. The guaranty is a
continuing one which shall remain in full force and
effect until the bank is notified of its termination.
The surety agreement is an accessory obligation,
it being dependent upon a principal one which, in this
case is the loan obtained by Daicor as evidenced by a
promissory note.
The surety agreement was executed to guarantee
future debts which Daicor may incur w/ RCBC, as is
legally allowable under the A2053 CC.
SEGOVIA vs. DUMATOL
SEGOVIA and DUMATOL entered into 3 separate but
identical contracts to sell involving 3 condominium
units, units 703, 704 and 904, of the Heart Tower
Condominium in Valero Street, Salcedo Village, Makati
City. The total contract price for was P6.050M. The
parties had an agreed schedule of payment.
The contracts, which were in standard form approved
by the HLURB, contained the following provisions:
b. Cancellation by the Seller
4.1 x x x x Where less than 2 years of installments
were paid, the SELLER shall give the BUYER a
grace period of 60 days but a penalty of 3% per
month shall be levied upon unpaid installments.
xxx.
Out of the total contract price of P6.050M, DUMATOL
was able to pay only the amount of P4.5M for the 3
units. SEGOVIA sent a Notice of Rescission officially
notifying DUMATOL that the contract to sell for Unit
904 was being rescinded. Parties agreed that the
action for rescission was to be w/drawn and Dumatol
would pay the unpaid balance but the parties agreed
as to the amount that Dumatol will pay. Since, the
settlement of the outstanding balance of the purchase
price was not materialized, DUMATOL received
another notice of cancellation. DUMATOL consigned
w/ the HLURB an amount which it believed to be its
remaining accountability to SEGOVIA.
WON there is valid consignation of payment which
justified the suspension of the imposition of the 3%
penalty interest provided under the contract – NO but
3% is considered by the court to be unconscionable and
was reduced to 1%
Consignation to be valid and effective have the ff
requisites:
(a) Tender of payment and refusal to accept without
reason;
(b) Previous notice of consignation to the persons
interested in its fulfillment;
(c) After the deposit or consignation has been
made, the persons interested shall be notified
thereof.
DUMATOL never made any prior tender of payment to
SEGOVIA (Consignment was made to forestall
impending rescission).
The essential requisites of a valid consignation must be
complied with fully and strictly in accordance with the
law. That these Articles must be accorded a mandatory
construction is clearly evident and plain from the very
language of the codal provisions themselves. Substantial
compliance is not enough for that would render only
directory construction of the law. The use of the words
“shall” and “must” which are imperative, operating to
impose a duty which may be enforced, positively
indicated that all the essential requisites of a valid
consignation must be complied with.
The 3% penalty interest is patently iniquitous and
unconscionable as to warrant the exercise by the SC of
its judicial discretion. A close reading of the contracts to
sell will show that the 3% penalty interest on unpaid
installments on a monthly basis would translate to a
yearly penalty interest of 36%. The payments
respondent made would be virtually wiped out if the 3%
penalty interest were imposed on the account balance.
And considering that DUMATOL stands to lose the 3
condo units notwithstanding the fact that it has
substantially complied with its contractual obligations.
SC did not remove interest but reduced it to be more
consistent with fairness and equity since SEGOVIA
remains an unpaid seller and that it has suffered, one
way or another, from DUMATOL's non-performance of its
contractual obligations. The SC used the authority
granted by Art. 1229 CC, and as equity dictates, to
reduce the interest rate.
WON SEGOVIA is entitled to the 6% interest per annum
as damages - NO
There is no legal basis for it. The contracts to sell do not
provide for a 6% interest on the unpaid principal and
accumulated penalty and interest charges. The interest
was raised for the first time on appeal as a claim for 12%
interest which was subsequently reduced to 6% by the
HLURB.
FIRST METRO INVESTMENT CORP vs. ESTE DEL
SOL MOUNTAIN
January 31, 1978, petitioner FMIC granted respondent
Este del Sol a loan of Seven Million Three Hundred
Eighty-Five Thousand Five Hundred Pesos
(P7,385,500.00) to finance the construction and
development of the Este del Sol Mountain Reserve, a
sports/resort complex project located at Barrio Puray,
Montalban, Rizal.
Under the terms of the Loan Agreement, the proceeds of
the loan were to be released on staggered basis.
Interest on the loan was pegged at sixteen (16%)
 12
percent per annum based on the diminishing balance.
The loan was payable in thirty-six (36) equal and
consecutive monthly amortizations to commence at
the beginning of the thirteenth month from the date of
the first release in accordance with the Schedule of
Amortization.
In case of default, an acceleration clause was, among
others, provided and the amount due was made
subject to a 20% one-time penalty on the amount due
and such amount shall bear interest at the highest rate
permitted by law from the date of default until full
payment thereof plus liquidated damages at the rate of
2% per month compounded quarterly on the unpaid
balance and accrued interests together with all the
penalties, fees, expenses or charges thereon until the
unpaid balance is fully paid, plus attorney's fees
equivalent to twenty-five (25%) percent of the sum
sought to be recovered, which in no case shall be less
than Twenty Thousand Pesos (P20,000.00) if the
services of a lawyer were hired.
Respondent Este del Sol failed to meet the schedule
of repayment in accordance with a revised Schedule of
Amortization, it appeared to have incurred a total
obligation of P12,679,630.98 per the petitioner's
Statement of Account dated June 23, 1980.
The SC held that nullity of the stipulation on the
usurious interest affects the lender's right to receive
back the principal amount of the loan
It is an elementary rule of contracts that the laws, in
force at the time the contract was made and entered
into, govern it.
Central Bank Circular No. 905 did not repeal nor in any
way amend the Usury Law but simply suspended the
latter's effectivity. The illegality of usury is wholly the
creature of legislation. A Central Bank Circular cannot
repeal a law. Only a law can repeal another law. Thus,
retroactive application of a Central Bank Circular
cannot, and should not, be presumed.
The Underwriting and Consultancy Agreements which
were executed and delivered contemporaneously with
the Loan Agreement on January 31, 1978 were
exacted by petitioner FMIC as essential conditions for
the grant of the loan. An apparently lawful loan is
usurious when it is intended that additional
compensation for the loan be disguised by an
ostensibly unrelated contract providing for payment by
the borrower for the lender's services which are of little
value or which are not in fact to be rendered, such as
in the instant case.
In usurious loans, the entire obligation does not
become void because of an agreement for usurious
interest; the unpaid principal debt still stands and
remains valid but the stipulation as to the usurious
interest is void, consequently, the debt is to be
considered without stipulation as to the interest.
In simple loan with stipulation of usurious interest, the
prestation of the debtor to pay the principal debt, which
is the cause of the contract (Article 1350, Civil Code),
is not illegal. The illegality lies only as to the prestation
to pay the stipulated interest; hence, being separable,
the latter only should be deemed void, since it is the
only one that is illegal.
the nullity of the stipulation on the usurious interest
does not affect the lender's right to receive back the
principal amount of the loan. With respect to the
debtor, the amount paid as interest under a usurious
agreement is recoverable by him, since the payment is
deemed to have been made under restraint, rather than
voluntarily.
CONSOLIDATED BANK (SOLIDBANK) v CA
Continental and Lim obtained from Consolidated Bank a
Letter of Credit, which was used to purchase bunker fuel
oil from Petrophil. A trust receipt was executed by
Continental, with Lim as signatory. Upon Continental’s
failure to turn over the goods covered by the trust
receipts or its proceeds, Consolidated filed a complaint
for sum of money with application for preliminary
attachment.
Continental and Lim averred that the transaction
between them was a simple loan and not a trust receipt
transaction. Lim also denied any personal liability in the
subject transactions.
WON the transaction between the parties is a trust
receipt transaction rather than a simple loan - LOAN
Colinares v. CA- Inasmuch as the debtor received the
goods subject of the trust receipt before the trust receipt
itself was entered into, the transaction in question was a
simple loan and not a trust receipt agreement. Prior to
the date of execution of the trust receipt, ownership over
the goods was already transferred to the debtor. This
situation is inconsistent with what normally obtains in a
pure trust receipt transaction, wherein the goods belong
in ownership to the bank and are only released to the
importer in trust after the loan is granted.
In this case, the delivery to Continental of the goods
occurred long before the trust receipt itself was
executed. The subject trust receipt was only executed
nearly 2 months after full delivery of the oil was made to
Continental.
The danger in characterizing a simple loan as a trust
receipt transaction: The Trust Receipts Law does not
seek to enforce payment of the loan, rather it punishes
the dishonesty and abuse of confidence in the handling
of money or goods to the prejudice of another regardless
of whether the latter is the owner.
Similarly, Continental cannot be said to have been
dishonest in its dealings with the bank. Neither has it
been shown that it has evaded payment of its
obligations. It negates any badge of dishonesty, abuse of
confidence or mishandling of funds on the part of
respondent Corporation, which are the gravamen of a
trust receipt violation. Evidently, Continental was
required to sign the trust receipt simply to facilitate
collection of the loan.
Lim and his spouse should not be personally liable under
the subject trust receipt. The transactions sued upon
were clearly entered into by Lim in his capacity as
Executive Vice President of Continental. Corporate
personality is a shield against personal liability of its
officers.
MENDOZA v CA
Danilo D. Mendoza was granted by respondent
Philippine National Bank (PNB) a P500,000.00 credit line
and a P1,000,000.00 Letter of Credit/Trust Receipt
(LC/TR) line.
In a letter dated January 3, 1980 and signed by Branch
Manager Fil S. Carreon Jr., respondent PNB advised
petitioner Mendoza that effective December 1, 1979, the
 13
bank raised its interest rates to 14% per annum, in line
with Central Bank's Monetary Board Resolution No.
2126 dated November 29, 1979.
On March 9, 1981, he wrote a letter to respondent
PNB requesting for the restructuring of his past due
accounts into a five-year term loan and for an
additional LC/TR line of P2,000,000.00.
Fernando Maramag, PNB Executive Vice-President,
disapproved the proposed release of the mortgaged
properties and reduced the proposed new LC/TR line
to One Million Pesos (P1,000,000.00).
Petitioner claimed he was forced to agree to these
changes and that he was required to submit a new
formal proposal and to sign two (2) blank promissory
notes.
the subject Promissory Notes Nos. 127/82 and 128/82
superseded and novated the 3 1979 promissory notes
and the 11 1979 "Application and Agreement for
Commercial Letter of Credit" which the petitioner
executed in favor of respondent PNB.
Pursuant to the escalation clauses of the subject 2
promissory notes, the interest rate on the principal
amount in Promissory Note No. 127/82 was increased
from 21% to 29% on May 28, 1984, and to 32% on
July 3, 1984 while the interest rate on the accrued
interest per Promissory Note No. 128/82 was
increased from 18% to 29% on May 28, 1984, and to
32% on July 3, 1984.
Petitioner failed to pay the subject 2 Promissory Notes
Nos. 127/82 and 128/82 as they fell due.
Respondent PNB extra-judicially foreclosed the real
and chattel mortgages, and the mortgaged properties
were sold at public auction to respondent PNB, as
highest bidder, for a total of P3,798,719.50.
The SC held that five-year restructuring plan was not
approved by respondent PNB.
Nowhere in the letters given by petitioner is there a
categorical statement that respondent PNB had
approved the petitioner’s proposed five-year
restructuring plan. those correspondences only prove
that the parties had not gone beyond the preparation
stage, which is the period from the start of the
negotiations until the moment just before the
agreement of the parties.
The doctrine of promissory estoppel is an exception to
the general rule that a promise of future conduct does
not constitute an estoppel. In some jurisdictions, in
order to make out a claim of promissory estoppel, a
party bears the burden of establishing the following
elements: (1) a promise reasonably expected to
induce action or forebearance; (2) such promise did in
fact induce such action or forebearance, and (3) the
party suffered detriment as a result.
the doctrine of promissory estoppel presupposes the
existence of a promise on the part of one against
whom estoppel is claimed. The promise must be plain
and unambiguous and sufficiently specific so that the
Judiciary can understand the obligation assumed and
enforce the promise according to its terms.
For petitioner to claim that respondent PNB is
estopped to deny the five-year restructuring plan, he
must first prove that respondent PNB had promised to
approve the plan in exchange for the submission of the
proposal.
no such promise was proven, therefore, the doctrine
does not apply to the case at bar. A cause of action for
promissory estoppel does not lie where an alleged oral
promise was conditional, so that reliance upon it was
not reasonable. It does not operate to create liability
where it does not otherwise exist.
SPS. CATUNGAL vs. HAO
Aniana Galang, leased a 3-storey building to BPI for a
period of about 15 years. During the existence of the
lease, BPI subleased the ground floor of the building to
Hao. Galang and Hao executed a contract of lease on
the 2nd and 3rd floors of the building. The lease was for
4 years. Spouses Catungal bought the property from
Galang. The lease agreement between BPI and Galang
expired. Upon expiration of the lease agreements, the
spouses sent demand letters to Hao for her to vacate the
building. The demand letters were unheeded by Hao
causing the spouses to file two complaints for ejectment.
RTC ruled in favor of the spouses and ordered Hao to
pay unpaid rent.
WON the spouses are entitled to interest for the unpaid
rent - YES
In Eastern Shipping Lines, Inc. vs. CA, SC gave the
following guidelines in the award of interest:
xxx
II With regard particularly to an award of interest in
the concept of actual and compensatory damages,
the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1.When the obligation is breached, and it consists in
the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that
which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil
Code.
The back rentals in this case being equivalent to a loan
or forbearance of money, the interest due thereon in
twelve percent (12%) per annum from the time of extra-
judicial demand on September 27, 1988.
TAN vs. CA
Antonio Tan obtained 2 loans from CCP evidenced by 2
promissory notes. Tan defaulted but after a few partial
payments he had the loans restructured by CCP, and
Tan accordingly executed a promissory note payable in
five (5) installments. Tan failed to pay any installment on
the said restructured loan.
HELD: There are contractual and legal bases for the
imposition of the penalty, interest on the penalty and
attorney’s fees and that interest may accrue on the
penalty or compensatory interest without violating the
provisions of Article 1959 of the New Civil Code.
Article 1226. In obligations with a penal clause, the
penalty shall substitute the indemnity for damages
and the payment of interests in case of non-
compliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor
refuses to pay the penalty or is guilty of fraud in the
fulfillment of the obligation.
The promissory note expressly provides for the
imposition of both interest and penalties in case of
 14
default on the part of the petitioner in the payment of obligs on both the depositary & the
the subject restructured loan. The 14% per annum depositor.
interest charge until full payment of the loan 2.Principal Purpose: Safekeeping of the
constitutes the monetary interest on the note and is
thing delivered. (This is why if it’s only
allowed under Article 1956 of the New Civil Code. The
2% per month penalty is in the form of penalty charge an accessory or secondary oblig of the
which is separate and distinct from the monetary recipient, deposit is not constituted but
interest on the principal of the loan. some other contract).
If the parties stipulate this kind of agreement, the 3.The depositary cannot make use of the
penalty does not include the monetary interest, and as thing deposited except only in the 2
such the two are different and distinct from each other instances mentioned in 1977 CC.
and may be demanded separately.
The penalty charge of two percent (2%) per month in 4. Deposit v. Mutuum
the case at bar began to accrue from the time of Purpose Safekeeping Consumpti
default by the petitioner. There is no doubt that the or mere on of the
petitioner is liable for both the stipulated monetary custody Subj
interest and the stipulated penalty charge. The penalty Matter
charge is also called penalty or compensatory interest. Demandability Depositor Lender
There appears to be a justification for a reduction of can demand must wait
the penalty charge. Inasmuch as petitioner has made the return until the
partial payments which showed his good faith, a of the subj expiration
reduction of the penalty charge to 2% per month on matter at of the
the total amount due, compounded monthly, until paid
will period
can indeed be justified under the said provision of
granted to
Article 1229 of the New Civil Code.
Petitioner contends the continued monthly accrual of the debtor
the 2% penalty charge on the total amount due to be Object May be Only
unconscionable inasmuch as the same appeared to both money &
have been compounded monthly.  Considering movable & other
petitioner’s several partial payments and the fact he is immovable fungible
liable under the note for the 2% penalty charge per property thing
month on the total amount due, compounded monthly, 5. Deposit v. Commodatum
for 21 years since his default in 1980, we find it fair
Purpose Safekeeping Transfer of
and equitable to reduce the penalty charge to a
straight 12% per annum on the total amount. the Use
Remunerat May be Essentially
ion gratuitous & always
gratuitous
Object In Both
DEPOSIT extrajudicial movable &
deposit, only immovable
movable property
things may be may be the
the object object
CHAPTER 1
DEPOSIT IN GENERAL AND ITS
DIFFERENT KINDS 1963. An agreement to constitute a deposit is
binding, but the deposit itself is not perfected
until the delivery of the thing.
1962. A deposit is constituted from the
moment a person receives a thing belonging to NOTES
another, with the obligation of safely keeping it 1. Bec a deposit is a real contract, it is
and of returning the same. If the safekeeping perfected only upon delivery of the obj
of the thing delivered is not the principal of the contract.
purpose of the contract, there is no deposit but 2. Where there is no delivery, there is
some other contract. merely an agreement to deposit w/c,
however, is binding & enforceable upon
NOTES the parties.
1.Characteristics of a Deposit: 3. Hence, a contract of future deposit is
a.) Real – like commodatum & consensual (see 1934 CC).
mutuum; bec it’s perfected by the
delivery of the subj matter.
b.) unilateral– if it’s gratuitous; bec 1964. A deposit may be constituted judicially or
only the depositary has an oblig. extrajudicially.
c.) Bilateral – if it’s for a
compensation; bec it gives rise to NOTES
 15
1. A deposit may be created by virtue of
a court order or by law & not by the
will of the parties.
2. In deposit, it is essential that the
depositary is not the owner of the
property deposited (see 1962).
3. Kinds of Deposit
a.) judicial – takes place when an
attachment or seizure of property in
litigation is ordered
b.) extrajudicial
1.) voluntary – where the delivery
is made by the will of the
depositor or by 2 or more
persons each of whom believes
himself entitled to the thing
deposited
2.) necessary – made in compliance
w/ a legal oblig, or on the
occasion of any calamity, or by
travelers in hotels & inns, or by
travelers w/ common carriers.
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.
NOTES
Exceptions:
a.) where there is contrary stipulation
b.) where depositary engaged in the
business of storing goods
c.) where property saved from destruction
w/o knowledge of the owner
1966. Only movable things may be the object
of a deposit.
NOTES
1. Only movable/personal property may
be the obj of extrajudicial deposit,
whether voluntary or necessary.
2. Judicial deposit may cover movable as
well as immovable property, its
purpose being to protect the rights of
the parties to a suit.
3. This provision does not embrace
incorporeal or intangible property, like
rights & actions.
1967. An extrajudicial deposit is either
voluntary or necessary.
NOTES
1. Deposit is generally voluntary. It
becomes necessary in the 3 cases in
1996 & 1998 CC.
2. The deposit of goods made by
travelers/passengers w/ common
carriers may also be regarded as
necessary.
CHAPTER 2
VOLUNTARY DEPOSIT
SECTION 1
General Provisions
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.
NOTES
1. Ordinarily, there are only 2 persons
involved. Sometimes, however, the
depositary may be a 3rd person.
2. The main difference btw a voluntary
deposit & a necessary deposit is that in
voluntary deposit, the depositor has
complete freedom in choosing the
depositary, whereas in the latter, there
is lack of free choice in the depositor.
3. The depositor need not be the owner of
the thing.
4. 2 or more persons, each claiming to be
entitled to the thing, may deposit it w/ a
3rd person who assumes the oblig to
deliver to the one to whom it belongs.
Here 1 one the depositors is not the
owner.
1969. A contract of deposit may be entered into
orally or in writing.
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 should
acquire capacity.
NOTE
Under the law, persons who are capable
cannot allege the incapacity of those w/
whom they contract (see 1397 CC).
 16
1971. If the deposit has been made by a
capacitated 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.
NOTES
1. The incapacitated depositary does not
incur the oblig of a depositary
2. HOWEVER, he is liable to:
a.) return the thing deposited while
still in his possession
b.) pay the depositor the amnt by w/c
he may have benefited himself w/
the thing or its price, subj to the
right of any 3rd person who
acquired the thing.
SECTION 2
Obligations of the Depositary
1972. 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. His responsibility, with regard
to the safekeeping and the loss of the thing,
shall be governed by the provisions of Title I of
this Book.
If the deposit is gratuitous, this fact shall be
taken into account in determining the degree of
care that the depositary must observe.
NOTES
1. The safekeeping & the return of the
thing when req’d, are the 2 primary
obligs of the depositary.
2. Ordinarily, the depositary must
exercise over the thing deposited the
same diligence as he would exercise
over his property for 2 reasons:
a.) bec it is an essential req’site of the
judicial relation w/c involves the
depositor’s confidence in his GF &
trustworthiness
b.) bec of the presumption that the
depositor, in choosing the
depositary, took into acct the
diligence w/c the depositary is
accustomed w/ respect to his own
property.
3. The depositary cannot excuse himself
from liability in the event of loss by
claiming that he exercised the same
amnt of care toward the thing deposited
as he would toward his own if such care
is less than that req’d by the
circumstances.
4. The liability of the depositary for the
care & delivery of the thing was
insured:
a.) he is liable if the loss occurs thru his
fault or negligence, even if the thing
was insured
b.) the loss of the thing while in his
possession, ordinarily raises the
presumption of fault on his part.
c.) The req’d degree of care is greater if
the deposit is for compensation than
when it is gratuitous
5. The thing deposited must be returned to
the depositor whnever he claims it,
even tho a specified term or time for
such may have been stipulated in the
contract.
1973. Unless there is a stipulation to the
contrary, the depositary cannot deposit the thing
with a third person. If deposit with a third person
is allowed, the depositary is liable for the loss if
he deposited the thing with a person who is
manifestly careless or unfit. The depositary is
responsible for the negligence of his employees.
NOTES
1. Reason: bec a deposit is founded on
trust & confidence & it can be supposed
that the depositor, in choosing the
depositary, has taken into consideration
the latter’s qualification.
2. Under this provision, the depositor is
liable for the loss of the thing deposited
if:
a.) he transfers the deposit w/ a 3 rd
person w/o authority altho there is no
negligence on his part & the 3rd person
b.) he deposits the thing w/ a 3rd person
who is manifestly careless or unfit
altho authorized, even in the absence
of negligence;
c.) the thing is lost thru the negligence of
his employees whether the latter are
manifestly careless or not
3. The depositor is not responsible in case
the thing is lost w/o negligence of the
3rd person w/ whom he was allowed to
deposit the thing if such 3 rd person is
not manifestly careless or unfit.
1974. The depositary may change the way of
the deposit if under the circumstances he may
reasonably presume that the depositor would
consent to the change if he knew of the facts of
the situation. However, before the depositary
 17
may make such change, he shall notify the loan or mutuum. But if safekeeping is
depositor thereof and wait for his decision, still the principal purpose of the
unless delay would cause danger. contract, it is still a deposit but an
irregular one; hence, it is called an
1975. The depositary holding certificates, irregular deposit. Bank deposits are in
bonds, securities or instruments which earn the nature of irregular deposits but they
interest shall be bound to collect the latter
are really loans governed by the law on
when it becomes due, and to take such steps
loans.
as may be necessary in order that the
securities may preserve their value and the 3. Irregular deposit vs. Mutuum
rights corresponding to them according to law. The consumable Lender is bound by
The above provision shall not apply to contracts thing deposited the provisions of
for the rent of safety deposit boxes. may be demanded the contrat &
at will by the cannot seek
irregular depositor restitution until the
NOTES
for whose benefit time for payment,
1. Under this provision, the depositary is the deposit has as provided in the
bound to collect not only the interest been constituted contract, has arisen
but also the capital itself when due. The only benefit is The essential cause
2. A contract for the rent of safety that w/c accrues to for the transaction
deposit boxes is really a contract of the depositor is the necessity of
lease of things & not a contract of the borrower. (A
deposit. The renter has control over loan w/ a
stipulation to apy
the box & its contents, the bank not
interest is for the
having the right to open the same. benefit of both
parties)

1976. Unless there is a stipulation to the Depositor has Common creditors

contrary, the depositary may commingle grain preference over enjoy no preference
or other articles of the same kind and quality, other creditors w/ in the distribution
in which case the various depositors shall own respect to the thing of the debtor’s
or have a proportionate interest in the mass. deposited property.
4. In a deposit, the permission to use is
not presumed except when such use is
1977. The depositary cannot make use of the necessary for the preservation of the
thing deposited without the express permission thing deposited, & the burden is one the
of the depositor. depositary to prove that permission has
Otherwise, he shall be liable for damages. been given.
However, when the preservation of the thing
deposited requires its use, it must be used but
only for that purpose. 1979. The depositary is liable for the loss of the
thing through a fortuitous event:
(1) If it is so stipulated;
1978. When the depositary has permission to (2) If he uses the thing without the
use the thing deposited, the contract loses the depositor's permission;
concept of a deposit and becomes a loan or (3) If he delays its return;
commodatum, except where safekeeping is still (4) If he allows others to use it, even
the principal purpose of the contract. though he himself may have been
The permission shall not be presumed, and its authorized to use the same.
existence must be proved.

NOTES 1980. Fixed, savings, and current deposits of

1. If thing deposited is non-consumable
& the depositary has permission to use
the thing, the contract loses the
charac of a deposit & acquires that of
a commodatum despite the fact that
the parties may have denominated it
as a deposit, unless safekeeping is still
the principal purpose of the contract.
2. If the thing deposited money or other
consumable thing, the permission to
use it will result in its consumption &
converts the contract into a simple
money in banks and similar institutions shall be
governed by the provisions concerning simple
loan.
NOTES
1. Deposits of money in banks, whether
fixed, savings, & current, are really loan
to a bank bec the abnk can use them for
its ordinary transactions & for the
banking businesses in w/c it is engaged.
 18
2. Accordingly, the relationship btw a
depositor & a bank is that of a creditor
& debtor.
1981. When the thing deposited is delivered
closed and sealed, the depositary must return
it in the same condition, and he shall be liable
for damages should the seal or lock be broken
through his fault.
Fault on the part of the depositary is presumed,
unless there is proof to the contrary.
As regards the value of the thing deposited, the
statement of the depositor shall be accepted,
when the forcible opening is imputable to the
depositary, should there be no proof to the
contrary. However, the courts may pass upon
the credibility of the depositor with respect to
the value claimed by him.
When the seal or lock is broken, with or without
the depositary's fault, he shall keep the secret
of the deposit.
1982. When it becomes necessary to open a
locked box or receptacle, the depositary is
presumed authorized to do so, 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.
NOTES
1. Obligs of depositary:
a.) return the thing deposited when
delivered closed & sealed, in the
same condition
b.) pay for damages should the seal or
lock be broken thru his fault, w/c is
presumed unless proved otherwise
c.) keep the secret of the deposit when
the seal or lock is broken, w/ or w/o
his fault
2. Reason: w/o this rule, irresponsible
depositaries may violate their trusts
w/ impunity. The depositor constituted
the deposit in reliance upon the
depositary’s fidelity.
3. The statement of the depositor is
prima facie evidence only ---
necessary in view of the natural
tendency to exaggerate values.
1983. The thing deposited shall be returned
with all its products, accessories and
accessions.
Should the deposit consist of money, the
provisions relative to agents in article 1896
shall be applied to the depositary.
NOTES
1. If what has been deposited is money,
the depositary has no right to make use
thereof &, therefore, he is not liable to
pay interest.
2. If depositary is in delay or uses the
money w/o permission, he shall be
liable for interest as indemnity. The
depositary owes interest on the sums he
has applied to his own use from the day
on w/c he did so, & those w/c he still
owes after the extinguishment of the
deposit.
1984. The depositary cannot demand that the
depositor prove his ownership of the thing
deposited.
Nevertheless, should he discover that the thing
has been stolen and who its true owner is, he
must advise the latter of the deposit.
If the owner, in spite of such information, does
not claim it within the period of one month, the
depositary shall be relieved of all responsibility
by returning the thing deposited to the depositor.
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.
NOTES
1. To acquire proof of ownership may open
the door to fraud & BF, for the
depositary, on the pretense of requiring
proof of ownership, may be able to
retain the thing.
2. If thing is returned to the depositor
after 1 month, the true owner may still
recover it thru other legal processes.
1985. When there are two or more depositors, if
they are not solidary, and the thing admits of
division, each one cannot demand more than his
share.
When there is solidarity or the thing does not
admit of division, the provisions of Articles 1212
and 1214 shall govern. However, if there is a
stipulation that the thing should be returned to
one of the depositors, the depositary shall return
it only to the person designated.
NOTES
1. When oblig is solidary, or if the thing is
not divisible, the rules on active
solidarity shall apply, to the effect that
each one of the solidary depositors may
do whatever may be useful to the
others but not anything w/c may be
prejudicial to the latter, & the
depositary may return the thing to any
one of the solidary depositors unless a
demand, judicial or extrajudicial, for its
 19
return is made by 1 of them in w/c
case delivery should be made to him.
2. If by stipulation, the thing should be
returned to 1 of the depositors,
depositary is bound to return it only to
the person designated altho he has
not made any demand for its return.
1986. If the depositor should lose his capacity
to contract after having made the deposit, the
thing cannot be returned except to the persons
who may have the administration of his
property and rights.
NOTES
Persons to whom return must be made:
a.) when req’d: to the depositor, his heirs
& successors, or to the person who
may have been designated in
contract;
b.) when depositor was incapacitated at
the time of making the deposit: his
guardian or administrator or the
person who made the deposit or to the
depositor himself should he acquire
capacity
c.) if depositor lost his capacity during the
deposit: his legal representative
1987. 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.
If no place has been designated for the return,
it shall be made where the thing deposited may
be, even if it should not be the same place
where the deposit was made, provided that
there was no malice on the part of the
depositary.
NOTES
1. In 1st case, expenses of transpo borne
by depositor bec the deposit is
constituted for the benefit of the
depositor & not the depositary who
assumes no more than the
safekeeping & return of the thing.
2. The rule herein is similar to the gen
rule of law regarding place of
payment.
1988. The thing deposited must be returned to
the depositor upon demand, even though a
specified period or time for such return may
have been fixed.
This provision shall not apply when the thing is
judicially attached while in the depositary's
possession, or should he have been notified of
the opposition of a third person to the return or
the removal of the thing deposited. In these
cases, the depositary must immediately inform
the depositor of the attachment or opposition.
NOTES
1. As a rule, the depositor can demand the
return of the thing deposited at will &
this is true whether a period has been
stipulated or not.
2. In deposit, the designated period may
be validly waived by the depositor, altho
the period is generally binding upon the
depositary.
3. If deposit is for a compensation, the
depositary is entitled to the
compensation corresponding to the
entire period (here, the pd is also for
the benefit of the depositary).
1989. Unless the deposit is for a valuable
consideration, the depositary who may have
justifiable reasons for not keeping the thing
deposited may, even before the time
designated, return it to the depositor; and if
the latter should refuse to receive it, the
depositary may secure its consignation from
the court.
NOTES
1. The depositary may also return the
thing notwithstanding that a period has
been fixed, if (a) deposit is gratuitous, &
(b) justifiable reasons exist for its
return.
2. In case the depositor refuses to receive
the thing, the depositary may deposit
the thing at the disposal of judicial
authority.
3. If deposit is for a valuable
consideration, depsotary has no right to
return the thing deposited before the
expiration of the time designated, even
if he should suffer inconvenience as a
consequence. He is bound by the pd &
restitution before its expiration
constitutes a breach of his oblig.
1990. If the depositary by force majeure or
government order loses the thing and receives
money or another thing in its place, he shall
deliver the sum or other thing to the depositor.
1991. The depositor's heir who in good faith
may have sold the thing which he did not know
was deposited, shall only be bound to return the
price he may have received or to assign his right
of action against the buyer in case the price has
not been paid him.
 20
NOTES
1. Rule is based on considerations of
equity.
2. If the buyer acquired the thing in BF,
the depositor may bring an action
against him for its recovery.
3. If the heir acts in BF, he is liable for
damages. The sale/appropriation of
the thing deposited constitutes estafa.
SECTION 3
Obligations of the Depositor
1992. If the deposit is gratuitous, the
depositor is obliged to reimburse the depositary
for the expenses he may have incurred for the
preservation of the thing deposited.
NOTES
1. The provision rests on equity.
2. W/o the duty of reimbursement, the
depositor would be enriching himself
at the expense of the depositary.
3. Bec the law makes no distinction, the
right to reimbursement covers all
expenses for preservation, whether
ordinary or extraordinary; so long as a
necessary expenses.
4. If deposit is for a valuable
consideration, expenses of
preservation are borne by the
depositary bec they are deemed
included in the compensation. There
can however be contrary stipulation.
1993. The depositor shall reimburse the
depositary for any loss arising from the
character of the thing deposited, unless at the
time of the constitution of the deposit the
former was not aware of, or was not expected
to know the dangerous character of the thing,
or unless he notified the depositary of the
same, or the latter was aware of it without
advice from the depositor.
1994. The depositary may retain the thing in
pledge until the full payment of what may be
due him by reason of the deposit.
NOTES
1. This provision gives an example of a
pledge created by the operation of law.
2. The thing retained serves as security for
the payment of what may be due to the
depositary by reason of the deposit.
3. The right granted here is similar to that
granted to the agent.
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.
NOTES
1. The causes here are not exclusive (see
1231).
2. If deposit is gratuitous, the death of
either the depositor or depositary
extinguishes the deposit.
3. If deposit for compensation, it is not
extinguished by the death of either
party bec, unlike a gratuitous deposit,
an onerous deposit is not personal in
nature. Hence, the rights & obliges
arising therefrom are transmissible to
their respective heirs --- altho the latter
have the right to terminate the deposit
even before the expiration of the term.
CHAPTER 3
NECESSARY DEPOSIT
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.
1997. The deposit referred to in No. 1 of the
preceding article shall be governed by the
provisions of the law establishing it, and in case
of its deficiency, by the rules on voluntary
deposit.
The deposit mentioned in No. 2 of the preceding
article shall be regulated by the provisions
concerning voluntary deposit and by Article 2168.
NOTES
1. 1996 & 1997 mention 2 kinds of
necessary deposit. The 3rd kind is made
by travellers in hotels/inns (1998 CC).
The 4th kind is made by passengers w/
common carriers (1754).
 21
2. Examples of Necessary Deposit in
compliance w/ legal oblig:
a.) Judicial deposit of a thing the
possession of w/c is being disputed
in a litigation by 2 or more
persons;
b.) deposit w/ a bank/pub institution
of pub bonds/insruments of credit
payable to order/bearer given in
usufruct when the usufructary does
not give proper security for their
conservation
c.) deposit of a thing pledged when
the creditor uses the same w/o the
authority of the owner or misuses
it in any other way
d.) those made in suits as provided in
the ROC
e.) those constituted to guarantee
contracts w/ the gov’t. (Here
deposit arises from an oblig of
pub/admin character).
3. Necessary Deposit made on the
occasion of any calamity:
a.) possession of movable property
passes from 1 person to another by
accident or fortuitously thru force of
circumstances & w/c the law
imposes on the recipient the obligs
of a bailee.
b.) More immediate obj is to save the
property rather than its safekeeping.
c.) This quasi-bailment is ordinarily
distinguished by the name
“involuntary bailment or
“involuntary deposit.” There must be
a casual relation btw the calamity &
the constitution of the deposit. (also
known as deposito miserable)
d.) Aside from the provisions on
voluntary deposit, this kind shall
also be governed by 2168 CC.
1998. The deposit of effects made by the
travellers in hotels or inns shall also be
regarded as necessary. The keepers of hotels
or inns shall be responsible for them as
depositaries, provided that notice was given to
them, or to their employees, of the effects
brought by the guests and that, on the part of
the latter, they take the precautions which said
hotel-keepers or their substitutes advised
relative to the care and vigilance of their
effects.
1999. The hotel-keeper is liable for the
vehicles, animals and articles which have been
introduced or placed in the annexes of the
hotel.
NOTES
1. Elements that must concur in order for
keepers of hotels/inns may be held
responsible as depositaries:
a.) they have been previously informed
about the effects brought by the
guests
b.) the guests have taken the precautions
prescribed regarding their safekeeping
2. Liability is not limited to effects
lost/damaged in the hotel rooms w/c
comes under the term “baggage” or
articles such as clothing as are
ordinarily used by travelers BUT include
those lost/damaged in hotel annexes
(ex. vehicles in the hotel’s garage.
3. The responsibility extends to all who
offer lodging for compensation,
whatever may be their character.
4. Travellers/guests - synonymous; refers
to transients & not to boarders. Non-
transients are governed by the rules on
lease.
2000. The responsibility referred to in the two
preceding articles shall include the loss of, or
injury to the personal property of the guests
caused by the servants or employees of the
keepers of hotels or inns as well as strangers;
but not that which may proceed from any force
majeure. The fact that travellers are constrained
to rely on the vigilance of the keeper of the
hotels or inns shall be considered in determining
the degree of care required of him.
2001. The act of a thief or robber, who has
entered the hotel is not deemed force majeure,
unless it is done with the use of arms or through
an irresistible force.
2002. The hotel-keeper is not liable for
compensation if the loss is due to the acts of the
guest, his family, servants or visitors, or if the
loss arises from the character of the things
brought into the hotel.
NOTES
1. Cases where hotel-keeper is liable
regardless of the amnt of care
exercises:
a.) loss/injury caused by his
servants/employees as well as by
strangers, provided that notice has
been given & proper precautions
taken
b.) loss caused by act of a thief/robber
done w/o the use of arms &
irresistible force (here hotel-keeper is
apparently negligent)
2. Cases where hotel-keeper is not liable:
 22
a.) loss/injury caused by force majeure,
theft or robbery by a stranger w/ 2008. The depositary of property sequestrated is
the use of arms or irresistible force, bound to comply, with respect to the same, with
etc; unless he is guilty of all the obligations of a good father of a family.
fault/negligence in failing to provide
against the loss/injury from his
cause NOTES
b.) loss due to acts of the guest, his 1. Deposit is judicial bec it is auxiliary to a
family, servants or visitors case pending in court.
c.) loss arising from the character of the 2. Purpose: To maintain the status quo
things brought into the hotel.
during the pendency of the litigation or
to insure the right of the parties to the
property in case of a favorable
2003. The hotel-keeper cannot free himself
judgment.
from responsibility by posting notices to the
3. The depositary of sequestrated property
effect that he is not liable for the articles
brought by the guest. Any stipulation between is the person appointed by the court.
the hotel-keeper and the guest whereby the 4. Judicial v. Extrajudicial Deposits
responsibility of the former as set forth in Cause/ Will of the Will of the
articles 1998 to 2001 is suppressed or Origin court parties
diminished shall be void. Purpose As security & to Custody &
secure the right safekeeping
of a party to of the thing
2004. The hotel-keeper has a right to retain recover in case
of a favorable
the things brought into the hotel by the guest,
judgment
as a security for credits on account of lodging,
Subj movables or Movables
and supplies usually furnished to hotel guests. Matter immovables; only
altho
NOTES immovables
1. The right of retention recognized in generally
this article is in the nature of a pledge Remuner onerous Generally
created by operation of law. ation gratuitous
2. Right is given to compensate hotel- In Person who, by Depositor or
keepers for the liabilities imposed whose judgment, has 3rd person
behalf it a right designated
upon them by law. is held
3. Act of obtaining food/accommodation
in a hotel/inn w/o paying therefore
constitutes estafa.
2009. As to matters not provided for in this
Code, judicial sequestration shall be governed
by the Rules of Court.

CHAPTER 4 NOTE
The law on judicial deposit is
SEQUESTRATION OR remedial/procedural in nature. Hence Rules
JUDICIAL DEPOSIT of Court are applicable.

2005. A judicial deposit or sequestration takes CASES

place when an attachment or seizure of
property in litigation is ordered.
2006. Movable as well as immovable property
may be the object of sequestration.
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.
THE ROMAN CATHOLIC BISHOP OF JARO vs. DE LA
PEÑA
The Bishop of Jaro is the trustee of a charitable bequest
made for the construction of a leper hospital and that
Father Agustin de la Peña was the duly authorized
representative of the bishop to receive the legacy. As
trustee, Father de la Peña showed that he had on hand
as trustee P6,641. In the same year he deposited in his
personal account P19T in HSBC-Iloilo.
Shortly after and during the war of the revolution, Father
De la Peña was arrested by the military authorities as a
political prisoner, and while detained made an order on
 23
said bank in favor of the US Army officer under whose
charge he then was for the sum deposited in HSBC.
The arrest of Father De la Peña and the confiscation
of the funds in the bank were the result of the claim of
the military authorities that he was an insurgent and
that the funds thus deposited had been collected by
him for revolutionary purposes. The money was taken
from the bank by the military authorities by virtue of
such order, was confiscated and turned over to the
Government.
WON Father de la Peña can be held liable for the loss
of the funds- NO
Although the CC states that "a person obliged to give
something is also bound to preserve it with the
diligence pertaining to a good father of a family" (art.
1094), it also provides, following the principle of the
Roman law, major casus est, cui humana infirmitas
resistere non potest, that "no one shall be liable for
events which could not be foreseen, or which having
been foreseen were inevitable, with the exception of
the cases expressly mentioned in the law or those in
which the obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his
personal funds De la Peña did not thereby assume an
obligation different from that under which he would
have lain if such deposit had not been made, nor did
he thereby make himself liable to repay the money at
all hazards. If the money had been forcibly taken from
his pocket or from his house by the military forces of
one of the combatants during a state of war, it is clear
that under the provisions of the Civil Code he would
have been exempt from responsibility. The fact that he
placed the trust fund in the bank in his personal
account does not add to his responsibility. Such
deposit did not make him a debtor who must respond
at all hazards.
There was no law prohibiting him from depositing it as
he did and there was no law which changed his
responsibility by reason of the deposit. While it may be
true that one who is under obligation to do or give a
thing is in duty bound, when he sees events
approaching the results of which will be dangerous to
his trust, to take all reasonable means and measures
to escape or, if unavoidable, to, temper the effects of
those events, SC cannot say that, in choosing
between two means equally legal, he is culpably
negligent in selecting one whereas he would not have
been if he had selected the other.
CA AGRO-INDUSTRIAL DEV. CORP. v CA
On 3 July 1979, petitioner (through its President,
Sergio Aguirre) and the spouses Ramon and Paula
Pugao entered into an agreement whereby the former
purchased from the latter two (2) parcels of land for a
consideration of P350,625.00. Of this amount,
P75,725.00 was paid as downpayment while the
balance was covered by three (3) postdated checks.
Petitioner, through Sergio Aguirre, and the Pugaos
then rented Safety Deposit Box No. 1448 of private
respondent Security Bank and Trust Company, a
domestic banking corporation hereinafter referred to
as the respondent Bank.
After the execution of the contract, two (2) renter's
keys were given to the renters - one to Aguirre (for the
petitioner) and the other to the Pugaos. A guard key
remained in the possession of the respondent Bank.
The safety deposit box has two (2) keyholes, one for
the guard key and the other for the renter's key, and
can be opened only with the use of both keys. Petitioner
claims that the certificates of title were placed inside the
said box.
Mrs. Margarita Ramos offered to buy from the petitioner
the two (2) lots at a price of P225.00 per square meter
which, as petitioner alleged in its complaint, translates to
a profit of P100.00 per square meter or a total of
P280,500.00 for the entire property.
Aguirre, accompanied by the Pugaos, then proceeded to
the respondent Bank on 4 October 1979 to open the
safety deposit box and get the certificates of title.
However, when opened in the presence of the Bank's
representative, the box yielded no such certificates.
Because of the delay in the reconstitution of the title,
Mrs. Ramos withdrew her earlier offer to purchase the
lots; as a consequence thereof, the petitioner allegedly
failed to realize the expected profit of P280,500.00.
The SC held that the contractual relation between a
commercial bank and another party in a contract of rent
of a safety deposit box is one of deposit
the prevailing rule is that the relation between a bank
renting out safe-deposit boxes and its customer with
respect to the contents of the box is that of a bailor and
bailee, the bailment being for hire and mutual benefit.
The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with,
this principal function. A contract of deposit may be
entered into orally or in writing and, pursuant to Article
1306 of the Civil Code, the parties thereto may establish
such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to
law, morals, good customs, public order or public policy.
The depositary's responsibility for the safekeeping of the
objects deposited in the case at bar is governed by Title
I, Book IV of the Civil Code. Accordingly, the depositary
would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the
tenor of the agreement. In the absence of any stipulation
prescribing the degree of diligence required, that of a
good father of a family is to be observed. Hence, any
stipulation exempting the depositary from any liability
arising from the loss of the thing deposited on account of
fraud, negligence or delay would be void for being
contrary to law and public policy.
JAVELLANA v. LIM ET AL.
Javellana gave Jose & Ceferino Domingo Lim P2,686.50
as a deposit w/o interest. The amnt was to be returned
on a later date. This was put into writing. When the oblig
became due, the Lims asked for an extension for the
payment. This time, they bound themselves to pay
interest @ a rate of 15%. Javellana agreed. This 2 nd
agreement was also put into writing. The Lims paid
P1,000 to Javellana. Bec no other payment was
tendered by the Lims, Javellana sued them. The Lims, in
defense, alleged that the they actually paid P1,102.16 to
Javellana AND that it was not as payment of interest, but
rather, of the principal and DENIED that there ever was
an agreement as to an extension of the time for payment
& that there was going to be a payment of a 15%
interest.
Was the contract a deposit or a loan --- a LOAN!
It is true that the 1st docu evidencing the agreement of
the parties expressly stated that it was a deposit. It
stated that the Lims were given a sum of money on
deposit w/c they were jointly & severally obliged to return
on a certain fixed date.
 24
The 2nd docu, HOWEVER, shows that the agreement
was in fact a LOAN of money; only that from that time
on (execution of the 2nd docu), the loan was already
subj to a 15% interest per annum.
Reason: 1767 CC, a depositary CANNOT make use of
the thing deposited w/o the express permission of the
depositor. 1768 CC also states that when the
depositary has permission to make use of the thing
deposited, the contract LOSES the character of a
deposit & becomes a LOAN or BAILMENT.
HERE, the conduct performed by the Lims clearly
showed that the agreement they entered into was a
LOAN: when they bound themselves to refund the
money, they DID NOT engage to return the SAME
coins they received; hence, they could have
accomplished such return by simply delivering a sum
EQUAL to the 1 they received; they were lawfully
authorized to make use of the amnt deposited --- w/c
they did, as proven by the fact that they asked for an
extension for the return of the money
FURTHERMORE, Javellana, by granting the
extension, evidently confirmed the express permission
he had previously given to the Lims so that they may
use & dispose of the amnt stated to have been
“deposited” in their care.
Title XV
GUARANTY
CHAPTER 1
NATURE AND EXTENT OF
GUARANTY
Art. 2047. By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case
the latter should fail to do so.
If a person binds himself solidarily with the
principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a
suretyship.
Nature
Consensual, accessory to a principal
obligation, gives rise to a subsidiary
obligation on the part of the guarantor, a
unilateral contract
Guarantor and surety distinguished:
Surety Guarantor
Each promises for the debt or default of
another
A surety assumes The liability of the
liability as a regular guarantor depends
party to the upon an independent
undertaking agreement to pay the
obligation if the payor
fails to do so
Primary obligation Secondary obligation
Undertakes to pay if Undertakes to pay if the
principal does not principal cannot pay
pay
Insurer of debt Insurer of the solvency
of the debtor
A guarantor who binds himself in solidum
with the principal debtor under the
provisions of the 2nd par. does not become a
solidary co-debtor. The surety, outside of
the liability he assumes to pay the debt
before the property of the principal debtor
has been exhausted, retains all rights,
actions and benefits which pertain to him by
reason of the surety.
Art. 2048. A guaranty is gratuitous, unless there
is a stipulation to the contrary.
Art. 2049. A married woman may guarantee an
obligation without the husband's consent, but
shall not thereby bind the conjugal partnership,
except in cases provided by law.
Art. 2050. If a guaranty is entered into without
the knowledge or consent, or against the will of
the principal debtor, the provisions of Articles
1236 and 1237 shall apply.
NOTE
The principal debtor is legally bound to pay
what his guarantor had advanced to the
creditor, notwithstanding that the guaranty
had been given w/out his knowledge.
Art. 2051. A guaranty may be conventional,
legal or judicial, gratuitous, or by onerous title.
It may also be constituted, not only in favor of
the principal debtor, but also in favor of the other
guarantor, with the latter's consent, or without
his knowledge, or even over his objection.
NOTE
Guaranty is conventional when it is created
by agreement of the parties. It is legal when
it is required by law, such as that required
of a usufructuary. It is judicial when it is
required by the court, such as that required
in the lifting of an attachment or a
preliminary injunction.
Art. 2052. A guaranty cannot exist without a
valid obligation.
 25
Nevertheless, a guaranty may be constituted to
guarantee the performance of a voidable or an
unenforceable contract. It may also guarantee
a natural obligation.
NOTES
1. Being an accessory contract, a
contract of guaranty is deemed bound
by the same consideration that makes
the principal contract effective
between the principal parties. It is not
necessary that that a guarantor or
surety should receive any part of the
benefit.
2. The guaranty of the obligations
mentioned in the 2nd par. must be
considered binding only if the
guarantor knew of the defective
character of the principal obligation.
Upon paying, he cannot enforce the
obligation against the debtor, because
he merely steps into the shoes of the
creditor.
3. The guarantor who pays a natural
obligation has no recourse against the
principal debtor, who cannot be
obliged to pay such obligation.
Art. 2053. A guaranty may also be given as
security for future debts, the amount of which
is not yet known; there can be no claim against
the guarantor until the debt is liquidated. A
conditional obligation may also be secured.
Art. 2054. A guarantor may bind himself for
less, but not for more than the principal debtor,
both as regards the amount and the onerous
nature of the conditions.
Should he have bound himself for more, his
obligations shall be reduced to the limits of that
of the debtor.
Art. 2055. A guaranty is not presumed; it
must be express and cannot extend to more
than what is stipulated therein.
If it be simple or indefinite, it shall compromise
not only the principal obligation, but also all its
accessories, including the judicial costs,
provided with respect to the latter, that the
guarantor shall only be liable for those costs
incurred after he has been judicially required to
pay.
NOTES
1. The law requires that a guaranty be
express, w/out providing that it be in
writing. However because of Art 1403,
it is unenforceable unless ratified.
2. The obligation of the surety is strictly
construed and cannot be extended by
implication beyond its specified limit.
Art. 2056. One who is obliged to furnish a
guarantor shall present a person who possesses
integrity, capacity to bind himself, and sufficient
property to answer for the obligation which he
guarantees. The guarantor shall be subject to the
jurisdiction of the court of the place where this
obligation is to be complied with.
NOTES
1. The law requires that the qualities
required of guarantors to be present
only at the time of the perfection of the
contract of guaranty.
2. Once the contract has become perfected
and binding, the supervening incapacity
of the guarantor would not operate to
exonerate him of the eventual liability
he has contracted.
3. In determining the sufficiency of the
property of the guarantor, the
properties which are in litigation, or
which are so far that the court cannot
properly appreciate their value, shall not
be taken into account.
4. Creditor may waive the qualifications.
Art. 2057. If the guarantor should be convicted
in first instance of a crime involving dishonesty
or should become insolvent, the creditor may
demand another who has all the qualifications
required in the preceding article. The case is
excepted where the creditor has required and
stipulated that a specified person should be the
guarantor.
NOTES
1. The demand for replacement of the
guarantor, after the loss of integrity, is
optional w/ the creditor. He may waive
it if he chooses and hold the guarantor
to his bargain.
2. Gaurantor’s liability is not extinguished
by his death, and in such event, the
obligee has the right to file against the
estate, a contingent claim for
reimbursement.
CHAPTER 2
EFFECTS OF GUARANTY
SECTION 1
 26
Effects of Guaranty
Between the Guarantor
and the Creditor
Art. 2058. The guarantor cannot be compelled
to pay the creditor unless the latter has
exhausted all the property of the debtor, and
has resorted to all the legal remedies against
the debtor.
NOTES
1. 2 rights of guarantor in simple
guaranty:
a.) the benefit of excussion and
b.) the benefit of division.
2. No action will lie against the guarantor
unless the creditor has exhausted all
legal remedies against the debtor.
3. The right to the benefit of exhaustion
should be interposed as a defense
before judgment is rendered against
the guarantor.
Art. 2059. The excussion shall not take place:
1.) If the guarantor has expressly
renounced it;
2.) If he has bound himself solidarily with
the debtor;
3.) In case of insolvency of the debtor;
4.) When he has absconded, or cannot be
sued within the Philippines unless he
has left a manager or representative;
5.) If it may be presumed that an
execution on the property of the
principal debtor would not result in the
satisfaction of the obligation.
Other cases
1. natural or unenforceable obligations,
since the creditor has no right of
action against the principal debtor
2. judicial bond.
Art. 2060. In order that the guarantor may
make use of the benefit of exclusion, he must
set it up against the creditor upon the latter's
demand for payment from him, and point out
to the creditor available property of the debtor
within Philippine territory, sufficient to cover
the amount of the debt.
NOTES
1. Requisites for exercise of the
benefit of exhaustion:
a.) Guarantor must require it of the
creditor as soon as the creditor
makes demand of payment;
b.) Guarantor must point out to the
creditor property of the debtor which
is salable w/in the Philippines and
sufficient to cover the amount of the
debt.
2. It is not sufficient that the guarantor
claim the benefit of exhaustion in time,
he must also designate property of the
debtor to satisfy the debt.
Art. 2061. The guarantor having fulfilled all the
conditions required in the preceding article, the
creditor who is negligent in exhausting the
property pointed out shall suffer the loss, to the
extent of said property, for the insolvency of the
debtor resulting from such negligence.
Art. 2062. In every action by the creditor, which
must be against the principal debtor alone,
except in the cases mentioned in Article 2059,
the former shall ask the court to notify the
guarantor of the action. The guarantor may
appear so that he may, if he so desire, set up
such defenses as are granted him by law. The
benefit of excussion mentioned in Article 2058
shall always be unimpaired, even if judgment
should be rendered against the principal debtor
and the guarantor in case of appearance by the
latter.
NOTES
1. Under this article, notice to the
guarantor is mandatory in the action
against the principal debtor. The
guarantor, however, is not duty bound
to appear in the case, and his non-
appearance shall not constitute default,
w/ its consequential effect.
2. The purpose of notification is to give the
guarantor the opportunity to allege and
substantiate whatever defenses he may
have against the principal obligation,
and chances to set up such defenses as
are afforded him by law if he so desires.
Art. 2063. A compromise between the creditor
and the principal debtor benefits the guarantor
but does not prejudice him. That which is
entered into between the guarantor and the
creditor benefits but does not prejudice the
principal debtor.
Art. 2064. The guarantor of a guarantor shall
enjoy the benefit of excussion, both with
respect to the guarantor and to the principal
debtor.
 27
Art. 2065. Should there be several guarantors
of only one debtor and for the same debt, the
obligation to answer for the same is divided
among all. The creditor cannot claim from the
guarantors except the shares which they are
respectively bound to pay, unless solidarity has
been expressly stipulated.
The benefit of division against the co-
guarantors ceases in the same cases and for
the same reasons as the benefit of excussion
against the principal debtor.
NOTES
1. The benefit granted to the guarantor
under this art is known as the benefit
of division and entitles him to ask for a
division of the liability among his co-
guarantors and pay only his aliquot
part of the debt in case the debtor
defaults in the payment of his
obligation.
2. This is similar to the benefit of
exhaustion in that it should be claimed
at the time demand for payment is
made (Art 2060), and in that it ceases
to exist under circumstances in Art
2059.
SECTION 2
Effects of Guaranty
Between the Debtor
and the Guarantor
Art. 2066. The guarantor who pays for a
debtor must be indemnified by the latter.
The indemnity comprises:
1.) The total amount of the debt;
2.) The legal interests thereon from the
time the payment was made known to
the debtor, even though it did not
earn interest for the creditor;
3.) The expenses incurred by the
guarantor after having notified the
debtor that payment had been
demanded of him;
4.) Damages, if they are due.
Art. 2067. The guarantor who pays is
subrogated by virtue thereof to all the rights
which the creditor had against the debtor.
If the guarantor has compromised with the
creditor, he cannot demand of the debtor more
than what he has really paid.
A guarantor who pays the debt is entitled
to every remedy which the creditor has
against the principal debtor, to enforce
every security and all means of payments;
to stand in the place of the creditor not only
through the medium of the contract, but
even by means of the securities entered into
w/out the knowledge of the surety; having
the right to have those securities transferred
to him though there was no stipulation for
it, and to avail himself of all securities
against the debtor
Art. 2068. If the guarantor should pay without
notifying the debtor, the latter may enforce
against him all the defenses which he could have
set up against the creditor at the time the
payment was made.
Art. 2069. If the debt was for a period and the
guarantor paid it before it became due, he
cannot demand reimbursement of the debtor
until the expiration of the period unless the
payment has been ratified by the debtor.
Art. 2070. If the guarantor has paid without
notifying the debtor, and the latter not being
aware of the payment, repeats the payment, the
former has no remedy whatever against the
debtor, but only against the creditor.
Nevertheless, in case of a gratuitous guaranty, if
the guarantor was prevented by a fortuitous
event from advising the debtor of the payment,
and the creditor becomes insolvent, the debtor
shall reimburse the guarantor for the amount
paid.
Art. 2071. The guarantor, even before having
paid, may proceed against the principal debtor:
1.) When he is sued for the payment;
2.) In case of insolvency of the principal
debtor;
3.) When the debtor has bound himself to
relieve him from the guaranty within a
specified period, and this period has
expired;
4.) When the debt has become demandable,
by reason of the expiration of the period
for payment;
5.) After the lapse of ten years, when the
principal obligation has no fixed period for
its maturity, unless it be of such nature
that it cannot be extinguished except
within a period longer than ten years;
6.) If there are reasonable grounds to fear
that the principal debtor intends to
abscond;
7.) If the principal debtor is in imminent
danger of becoming insolvent.
In all these cases, the action of the guarantor is
to obtain release from the guaranty, or to
demand a security that shall protect him from
any proceedings by the creditor and from the
danger of insolvency of the debtor.
 28
This article constitutes en exception to the
general rule that the guarantor can sue
the debtor only after he has paid the debt.
It must be restrictively construed and
cannot be extended to cases not expressly
enumerated.
This article is likewise applicable to a
surety.
Art. 2072. If one, at the request of another,
becomes a guarantor for the debt of a third
person who is not present, the guarantor who
satisfies the debt may sue either the person so
requesting or the debtor for reimbursement.
SECTION 3
Effects of Guaranty as
Between Co-Guarantors
Art. 2073. When there are two or more
guarantors of the same debtor and for the
same debt, the one among them who has paid
may demand of each of the others the share
which is proportionally owing from him.
If any of the guarantors should be insolvent,
his share shall be borne by the others,
including the payer, in the same proportion.
The provisions of this article shall not be
applicable, unless the payment has been made
by virtue of a judicial demand or unless the
principal debtor is insolvent.
This article deals with the situation which
arises when one guarantor has paid the
debt to the creditor and is seeking
contribution from his co-guarantors. It is
required that the guarantor paying the
debt should have made payment by virtue
of judicial proceedings or when the
principal debtor should have become
solvent or bankrupt.
Art. 2074. In the case of the preceding article,
the co-guarantors may set up against the one
who paid, the same defenses which would have
pertained to the principal debtor against the
creditor, and which are not purely personal to
the debtor.
Art. 2075. A sub-guarantor, in case of the
insolvency of the guarantor for whom he bound
himself, is responsible to the co-guarantors in
the same terms as the guarantor.
CHAPTER 3
EXTINGUISHMENT OF
GUARANTY
Art. 2076. The obligation of the guarantor is
extinguished at the same time as that of the
debtor, and for the same causes as all other
obligations.
Art. 2077. If the creditor voluntarily accepts
immovable or other property in payment of the
debt, even if he should afterwards lose the same
through eviction, the guarantor is released.
Art. 2078. A release made by the creditor in
favor of one of the guarantors, without the
consent of the others, benefits all to the extent
of the share of the guarantor to whom it has
been granted.
Art. 2079. An extension granted to the debtor
by the creditor without the consent of the
guarantor extinguishes the guaranty. The mere
failure on the part of the creditor to demand
payment after the debt has become due does not
of itself constitute any extention of time referred
to herein.
Reason
To avoid prejudice to the guarantor.
The mere fact that the creditor does not
demand fulfillment of the obligation upon
the same becoming due does not release
the guarantor. In the ff cases, however,
such a delay extinguishes the guaranty: (1)
when delay is for such length of time as to
allow prescription of the action to enforce
payment; (2) when upon maturity the
guarantor requires the creditor to enforce
payment against the debtor, but the creditor
fails to act and the debtor subsequently
becomes insolvent.
This article applies to sureties.
Art. 2080. The guarantors, even though they be
solidary, are released from their obligation
whenever by some act of the creditor they
cannot be subrogated to the rights, mortgages,
and preference of the latter.
NOTES
1. If the difficulty or impossibility of the
subrogation by the guarantor to the
rights of the creditor is attributable to
 29
the guarantor, he cannot be released
from the obligation.
2. If the guarantor has already paid the
creditor when the latter allows his
liens and preferences to be
extinguished, said creditor will have to
indemnify the guarantor for the
damages which he may suffer thereby.
Art. 2081. The guarantor may set up against
the creditor all the defenses which pertain to
the principal debtor and are inherent in the
debt; but not those that are personal to the
debtor.
NOTE
Inherent to the debt are all those
connected w/ the obligation secured by the
bond, all those which contribute to weaken
or destroy the vinculum juris existing
between the creditor and principal debtor,
all means of defense which may invalidate
the original contract from which right of
action of the creditor arises against the
surety, such as defenses of fraud or
violence, which annul consent, that of sine
action agis founded on payment already
made, that of res adjudicate, that of
prescription, that of nullity of the loan
made to a minor child, and others of the
same class.
CHAPTER 4
LEGAL AND JUDICIAL
BONDS
Art. 2082. The bondsman who is to be offered
in virtue of a provision of law or of a judicial
order shall have the qualifications prescribed in
Article 2056 and in special laws.
Art. 2083. If the person bound to give a bond
in the cases of the preceding article, should not
be able to do so, a pledge or mortgage
considered sufficient to cover his obligation
shall be admitted in lieu thereof.
Art. 2084. A judicial bondsman cannot
demand the exhaustion of the property of the
principal debtor.
A sub-surety in the same case, cannot demand
the exhaustion of the property of the debtor of
the surety.
CASES
E. ZOBEL, INC. v CA
Spouses Raul and Elea Claveria, doing business under
the name "Agro Brokers," applied for a loan w/
Consolidated Bank and Trust Corporation (now
SOLIDBANK) to finance the purchase of 2 maritime
barges and 1 tugboat which would be used in their
molasses business. The loan was granted subject to the
condition that the spouses execute a chattel mortgage
over the 3 vessels to be acquired and that a continuing
guarantee be executed by E. Zobel, Inc., in favor of
SOLIDBANK. The spouses agreed. Consequently, a
chattel mortgage and a Continuing Guaranty were
executed. Spouses defaulted in the payment of the
entire obligation upon maturity. SOLIDBANK filed a
complaint for sum of money with a prayer for a writ of
preliminary attachment, against spouses and E Zobel. E.
Zobel moved to dismiss the complaint on the ground that
its liability as guarantor of the loan was extinguished
pursuant to Art 2080 CC. It argued that it has lost its right
to be subrogated to the first chattel mortgage in view of
SOLIDBANK's failure to register the chattel mortgage
with the appropriate government agency. SOLIDBANK
opposed the motion contending that Art 2080 is not
applicable because petitioner is not a guarantor but a
surety.
WON E. Zobel under the "Continuing Guaranty"
obligated itself to SOLIDBANK as a guarantor or a
surety - SURETY
A contract of surety is an accessory promise by which a
person binds himself for another already bound, and
agrees with the creditor to satisfy the obligation if the
debtor does not.
A contract of guaranty, on the other hand, is a collateral
undertaking to pay the debt of another in case the latter
does not pay the debt.
Guaranty and surety are nearly related, and many of the
principles are common to both. However, under our civil
law, they may be distinguished thus:
Surety – insurer of the debt and obligates himself to
pay if principal does not pay
 Usually bound w/ his principal by the same
instrument, executed at the same time, and on
the same consideration.
 An original promissor and debtor from the
beginning, and is held, ordinarily, to know every
default of his principal.
 Not discharged by the mere indulgence of the
creditor to the principal or by want of notice of
the default of the principal, no matter how much
he may be injured thereby.
Guaranty – insurer of the insolvency of the debtor
thus binds himself if principal if unable to pay
 Guarantor's own separate undertaking, in which
the principal does not join.
 Usually entered into before or after that of the
principal
 Often supported on a separate consideration
 Original contract of Guarantor's principal is not
his contract, and he is not bound to take notice of
its non-performance.
 Guarantor's often discharged by the mere
indulgence of the creditor to the principal, and is
usually not liable unless notified of the default of
the principals.
 30
Based on the aforementioned definitions, it appears
that the contract executed by petitioner in favor of
SOLIDBANK, albeit denominated as a "Continuing
Guaranty," is a contract of surety. The terms of the
contract categorically obligates petitioner as "surety" to
induce SOLIDBANK to extend credit to the spouses.
This can be seen in the following stipulations. The
contract clearly disclosed that E. Zobel assumed
liability to SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original
promissor. It bound itself jointly and severally to the
obligation with the spouses. In fact, SOLIDBANK
need not resort to all other legal remedies or exhaust
spouses' properties before it can hold E. Zobel liable
for the obligation. The use of the term "guarantee"
does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word
"guarantee" is frequently employed in business
transactions to describe not the security of the debt but
an intention to be bound by a primary or independent
obligation. The interpretation of a contract is not
limited to the title alone but to the contents and
intention of the parties.
TOCAO v CA
Belo introduced Nenita Anay to petitioner Marjorie
Tocao and they all agreed to enter into a joint venture
importing and distributing kitchen cookwares from
West Bend Company in the USA.
Belo would be the financier, Anay would be assigned
to marketing and sales and Tocao would be president
and manager. The parties agreed that Belo’s name
would not appear in any document relating to West
bend.
the parties further agreed that Anay would be entitled
to: 10 % annual net profits, overriding commission of 6
% of the overall weekly production, 30 % of the sales
she would make and 2 % for her demonstration
services.the agreement was not reduced to writing on
the strength of Belo’s assurances that he was sincere,
dependable and honest.
Belo signed a memo entitling Anay to her 37 %
commission for her personal sales which were said to
be part of her 10% share of profits.
on oct 9, 1987 Anay learned that she was removed as
vice president of the company. She was also barred
from holding office in their makati and cubao offices.
Anay attempted to contact Belo demanding her
overriding commission and an audit to determine her
share of the profits.
Belo asserted that Anay was not supposed to receive
a share of the profits. But he admitted that he had
agreed to give Anay 3-4% share in the gross sales of
the cookware. He denied contributing capital to the
business and said he was merely a guarantor of Tocao
who was new in the business.
the Sc held that Belo is a not guarantor.
Belo’s denial that he financed the partnership is
untenable since it was established that he presided
over meetings and he himself authorized that Anay
should receive her 37% commission. It shows that he
had a proprietary interest in the business. Belo’s claim
that he was a guarantor is belied by that act of
proprietorship.
if Belo were indeed a guarantor of future debts of
Tocao he should have presented documentary
evidence. While art 2055 provides that guaranty must
be express, art 1403 on the statute of frauds requires
that “a special promise to answer foe debt, default or
miscarriage of another” be in writing.
SPOUSES TOH v SOLIDBANK
SOLIDBANK AGREED TO EXTEND an "omnibus line"
credit facility worth P10M in favor of FBPC. Among the
documents essential for the credit facility was a
Continuing Guaranty for any and all amounts signed by
Luis (Chair) and Vicky Tan Toh (VP), Kenneth (Pres) and
Ma. Victoria Ng Li (GM). The Continuing Guaranty set
forth no maximum limit on the indebtedness that FBPC
may incur and for which the sureties may be liable,
stating that the credit facility "covers any and all existing
indebtedness of, and such other loans and credit
facilities which may hereafter be granted to FBPC." The
effectivity of the Continuing Guaranty was not contingent
upon any event or cause other than the written
revocation of it with notice to the Bank that may be
executed by the sureties.
FBPC started to avail of the credit facility and procure
letters of credit. However, the Bank received information
that spouses Ng Li had fraudulently departed from their
conjugal home. The Bank served a demand letter upon
FBPC and Luis Toh and also invoked the Continuing
Guaranty. Bank filed a complaint for sum of money
against FBPC, spouses Ng Li, and spouses Toh.
Toh spouses allege that they were made to sign papers
in blank and the Continuing Guaranty could have been
one of them. Spouses Toh asserted, it was impossible
and absurd for them to have freely and consciously
executed the surety since they had already divested
their shares in FBPC.
WON the Continuing Guaranty is not legally valid and
binding against the spouses for having been executed
long after they had withdrawn from FBPC - VALID.
There is no basis for spouses to limit their responsibility
on the contract so long as they were corporate officers
and stockholders of FBPC. Nothing in the Continuing
Guaranty restricts their contractual undertaking to such
condition or eventuality. In fact the obligations assumed
by them therein subsist "upon the undersigned, the
heirs, executors, administrators, successors and assigns
of the undersigned, and shall inure to the benefit of, and
be enforceable by you, your successors, transferees
and assigns," and that their commitment "shall remain in
full force and effect until written notice shall have been
received by [the Bank] that it has been revoked by the
undersigned."
They are personally bound. There is no law that prohibits
a corporate officer from binding himself personally to
answer for a corporate debt. While the limited liability
doctrine is intended to protect the stockholder by
immunizing him from personal liability for the corporate
debts, he may nevertheless divest himself of this
protection by voluntarily binding himself to the payment
of the corporate debts.
WON the surety agreement has been extinguished by
the material alterations made by the Bank - YES
The stipulation in the Continuing Guaranty that the Bank
"may at any time, or from time to time, in [its] discretion x
x x extend or change the time payment," even if
understood as a waiver is confined per se to the grant of
an extension and does not surrender the prerequisites
mandated in the "letter-advise." In other words, the
authority of the Bank to defer collection contemplates
 31
only authorized extensions, that is, those that meet the
terms of the "letter-advise."
Under Art. 2055 of the CC, the liability of a surety is
measured by the terms of his contract, and while he is
liable to the full extent thereof, his accountability is
strictly limited to that assumed by its terms. The
extensions of the letters of credit made by the Bank
w/out observing the rigid restrictions for exercising the
privilege are not covered by the waiver stipulated in
the Continuing Guaranty. Evidently, they constitute
illicit extensions prohibited under Art. 2079 CC, "[a]n
extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the
guaranty."
The consequence of omissions committed by the Bank
is to discharge the surety, petitioners herein, under Art.
2080 of the CC, or at the very least, mitigate the
liability of the surety up to the value of the property or
lien released – If the creditor x x x has acquired a lien
upon the property of a principal, the creditor at once
becomes charged with the duty of retaining such
security, or maintaining such lien in the interest of the
surety, and any release or impairment of this security
as a primary resource for the payment of a debt, will
discharge the surety to the extent of the value of the
property or lien released x x x x [for] there immediately
arises a trust relation between the parties, and the
creditor as trustee is bound to account to the surety for
the value of the security in his hands.
The omission or negligence of the Bank in failing to
safe-keep the security provided by the marginal
deposit and the 25% requirement results in the
material alteration of the principal contract and
consequently releases the surety. This inference was
admitted by the Bank through the testimony of its lone
witness that "[w]henever this obligation becomes due
and demandable, except when you roll it over, (so)
there is novation there on the original obligations." As
has been said, "if the suretyship contract was made
upon the condition that the principal shall furnish the
creditor additional security, and the security being
furnished under these conditions is afterwards
released by the creditor, the surety is wholly
discharged, without regard to the value of the
securities released, for such a transaction amounts to
an alteration of the main contract."
SEVERINO v. SEVERINO
The plaintiff Fabiola Severino is the recognized natural
daughter of Melecio Severino. Upon the death of
Melecio Severino he left considerable property and
litigation ensued between his widow, Felicitas
Villanueva, and Fabiola Severino and other heirs of
the deceased on the other part.
a compromise was effected by which Guillermo
Severino, a son of Melecio Severino, took over the
property pertaining to the estate of his father at the
same time agreeing to pay P100,000 to Felicitas
Villanueva and Fabiola Severino.
This sum of money was made payable, first, P40,000
in cash upon the execution of the document of
compromise, and the balance in three several
payments of P20,000 at the end of one year, two
years, and three years respectively. To this contract
the appellant Enrique Echaus affixed his name as
guarantor.
Of the remaining P60,000, all as yet unpaid, Fabiola
Severino is entitled to the sum of P20,000.
It was stipulated that the last P20,000 corresponding to
Fabiola and the last P5,000 corresponding to Felicitas
Villanueva should be retained on deposit until the
definite status of Fabiola Severino as natural daughter of
Melecio Severino should be established.
Fabiola Severino instituted an action for the purpose of
recovering the sum of P20,000 from Guillermo Severino
and Enrique Echaus, the latter in the character of
guarantor for the former.
The SC held that Enrique Echaus is bound as a
guarantor.
A guarantor or surety is bound by the same
consideration that makes the contract effective between
the principal parties thereto.
The compromise and dismissal of a lawsuit is
recognized in law as a valuable consideration; and the
dismissal of the action which Felicitas Villanueva and
Fabiola Severino had instituted against Guillermo
Severino was an adequate consideration to support the
promise on the part of Guillermo Severino to pay the
sums of money stipulated in the contract which is the
subject of this action.
The promise of the appellant Echaus as guarantor is
therefore binding.
It is never necessary that a guarantor or surety should
receive any part of the benefit, if such there be, accruing
to his principal.
RCBC v ARRO
Residoro Chua and Enrique Go, Sr. executed a
comprehensive surety agreement to guaranty, among
others, any existing indebtedness of Davao Agricultural
Industries Corporation, and/or to induce the bank at any
time or from time to time thereafter, to make loans or
advances or to extend credit in other manner to, or at
the request, or for the account of the Borrower, either
with or without security, and/or to purchase on discount,
or to make any loans or advances evidenced or secured
by any notes, bills, receivables, drafts, acceptances,
checks or other evidences of indebtedness upon which
the Borrower is or may become liable, provided that the
liability shall not exceed at any one time the aggregate
principal sum of P100T.
A promissory note in the amount of P100T was issued in
favor of RCBC. The note was signed by Go, in his
personal capacity and in behalf of Daicor. The
promissory note was not fully paid despite repeated
demands; hence, RCBC filed a complaint for a sum of
money against Daicor, Go and Chua.
WON Chua is liable to pay the obligation evidenced by
the promissory note which he did not sign, in the light of
the provisions of the comprehensive surety agreement -
YES
The comprehensive surety agreement was jointly
executed by Chua and Go, President and General
Manager, respectively of Daicor to cover existing as well
as future obligations which Daicor may incur with RCBC,
subject only to the proviso that their liability shall not
exceed at any one time the aggregate principal sum of
P100T.
The agreement was executed obviously to induce RCBC
to grant any application for a loan Daicor may desire to
obtain from the bank. The guaranty is a continuing one
which shall remain in full force and effect until the bank
is notified of its termination.
 32
At the time the loan of P100T was obtained from
RCBC by Daicor, for the purpose of having an
additional capital for buying and selling coco-shell
charcoal and importation of activated, carbon, the
comprehensive surety agreement was admittedly in
full force and effect. The loan was, therefore, covered
by the said agreement, and Chua, even if he did not
sign the promissory note, is liable by virtue of the
surety agreement. The only condition that would make
him liable under the agreement is that Daicor "is or
may become liable as maker, endorser, acceptor or
otherwise." There is no doubt that Daicor is liable on
the, promissory note evidencing, the indebtedness.
The surety agreement is an accessory obligation, it
being dependent upon a principal one which, in this
case is the loan obtained by Daicor as evidenced by a
promissory note.
DIÑO vs. CA
UTEFS, thru its representative Uy Tiam, applied for
and obtained credit accommodations from Metrobank
in the sum of P700,000.00. To secure the credit
accommodations Norberto Uy and Jacinto Uy Diño
executed separate Continuing Suretyships, dated 25
February 1977.
In 1977 & 1978, UTEFS obtained and fully settled
credit accommodation from METROBANK. In 1979, an
irrevocable letter of credit was applied for and obtained
by UTEFS. However, Dino was not asked to execute
any suretyship to guarantee payment of the 1979 letter
of credit. Neither did METROBANK nor UTEFS inform
them that the 1979 Letter of Credit has been opened
and the Continuing Suretyships executed in February,
1977 shall guarantee its payment. But UTEFS did not
acquiesce to the obligatory stipulations in the trust
receipt. METROBANK sent letters to UTEFS and its
sureties, Norberto Uy and Jacinto Uy Diño, demanding
payment of the amount due.
Diño, thru counsel, denied his liability for the amount
demanded and requested METROBANK to send him
copies of documents showing the source of his liability.
The bank informed him that the source of his liability is
the Continuing Suretyship which he executed on
February 25, 1977. Diño maintained that he cannot be
held liable for the 1979 credit accommodation because
it is a new obligation contracted without his
participation. Besides, the 1977 credit accommodation
which he guaranteed has been fully paid.
HELD: The petitioners may be held liable as sureties
for the obligation contracted by Uy Tiam with
METROBANK on 30 May 1979 under and by virtue of
the Continuing Suretyship Agreements signed in 1977.
Under the Civil Code, a guaranty may be given to
secure even future debts, the amount of which may
not known at the time the guaranty is executed. This is
the basis for contracts denominated as continuing
guaranty or suretyship.
A continuing guaranty is one which is not limited to a
single transaction, but which contemplates a future
course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked. It is
prospective in its operation and is generally intended
to provide security with respect to future transactions
within certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor
becomes liable.
A continuing guaranty 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. 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.
Where the contract of guaranty states that the same is to
secure advances to be made "from time to time" the
guaranty will be construed to be a continuing one.
The stipulations in the suretyship agreement reveal that
the suretyship agreement in the case at bar are
continuing in nature. Petitioners do not deny this; in fact,
they candidly admitted it. Neither have they denied the
fact that they had not revoked the suretyship
agreements.
When the Irrevocable Letter of Credit was obtained from
appellant bank, the suretyships were in full force and
effect. Even if sureties did not sign the "Commercial
Letter of Credit and Application, they are still liable as the
credit accommodation (letter of credit/trust receipt) was
covered by the said suretyships. What makes them
liable thereunder is the condition which provides that the
Borrower "is or may become liable as maker, endorser,
acceptor or otherwise." And since UTEFS was liable as
principal obligor for having failed to fulfill the obligatory
stipulations in the trust receipt, they as insurers of its
obligation, are liable thereunder.
TAÑEDO vs. ALLIED BANKING CORPORATION
Allied filed a complaint with preliminary attachment to
recover sums of money from Cheng Ban Yek Co., Inc.
on its 7 past due promissory notes with principal
amounts totaling P10M, from Alfredo Ching and Emilio
Tañedo under a Continuing Guaranty providing for joint
and several liability relative to the said promissory notes.
The preliminary attachment sought was granted upon
the required bond and was maintained despite Allied’s
efforts to have it discharged.
Both Allied Banking Corporation and Cheng Ban Yek &
Co., Inc. appealed from the summary judgment.
Allied’s appeal is limited to the portion which declared
Aldredo Ching and Emilio Tañedo as free from any
liability under the Continuing Guaranty.
WON the execution by the Bank of the Fourth
Amendatory Agreement extinguished Tanedo’s
obligations as surety - NO
The amendatory agreement between Allied Banking
Corporation and Cheng Ban Yek & Co., Inc. extended
the maturity of the promissory notes w/out notice or
consent of Tanedo as surety of the obligations. However,
the “continuing guarantee” executed by Tanedo provided
that he consents and agrees that the bank may, at any
time or from time to time extend or change the time of
payments and/or the manner, place or terms of payment
of all such instruments, loans, advances, credits or other
obligations guaranteed by the surety. Hence, the
extensions of the loans did not release the surety.
Whether the “continuing guarantee” executed by Tanedo
is a contract of (surety) adhesion – YES but VALID
Even if the “continuing guarantee” were considered as
one of adhesion, we find the contract of “surety” valid
because Tanedo was “free to reject it entirely”. Tanedo
was a stockholder and officer of Cheng Ban Yek and
 33
Co., Inc. and it was common business and banking
practice to require “sureties” to guarantee corporate
obligations.
SOUTHERN MOTORS, INC. v BARBOSA,
Plaintiff, Southern Motors, Inc., brought this action
against Eliseo Barbosa, to foreclose a real estate
mortgage, constituted by the latter in favor of the
former, as security for the payment of the sum of
P2,889.53 due to said plaintiff from one Alfredo
Brillantes, who had failed to settle his obligation in
accordance with the terms and conditions of the
corresponding deed of mortgage.
Defendant Eliseo Barbosa filed an answer admitting
the allegations of the complaint and alleging, by way of
"special and affirmative" defense:
"That the defendant herein has executed the deed of
mortgage Annex A for the only purpose of
guaranteeing - as surety and/or guarantor - the
payment of the above mentioned debt of Mr. Alfredo
Brillantes in favor of the plaintiff.
"That the plaintiff until now has no right action against
the herein defendant on the ground that said plaintiff,
without motive whatsoever, did not intent or intent to
exhaust all recourses to collect from the true debtor
Mr. Alfredo Brillantes the debt contracted by the latter
in favor of said plaintiff, and did not resort nor intends
to resort all the legal remedies against the true debtor
Mr. Alfredo Brillantes, notwithstanding the fact that said
Mr. Alfredo Brillantes is solvent and has many
properties within the Province of Iloilo."
The SC held that the mortgage in question could be
foreclosed although plaintiff had not exhausted, and
did not intend to exhaust, the properties of his principal
debtor, Alfredo Brillantes.
The right of guarantors, under Article 2058 of the Civil
Code of the Philippines, to demand exhaustion of the
property of the principal debtor, exists only when a
pledge or a mortgage has not been given as special
security for the payment of the principal obligation.
It has been held already that a mortgagor is not
entitled to the exhaustion of the property of the
principal debtor.
Although an ordinary personal guarantor - not a
mortgagor or pledgor - may demand the
aforementioned exhaustion, the creditor may, prior
thereto, secure a judgment against said guarantor,
who shall be entitled, however, to a deferment of the
execution of said judgment against him until after the
properties of the principal debtor shall have been
exhausted to satisfy the obligation involved in the
case.
WISE & CO. v TANGLAO
Wise & Co. instituted a civil case against Cornelio C.
David, its agent, for the recovery of a certain sum of
money. The amount claimed from him was the result
of a liquidation of accounts showing that he was
indebted in said amount. Wise asked and obtained a
preliminary attachment of David's property. To avoid
execution, David succeeded in having his Attorney
Tanglao execute a power of attorney in his favor: To
sign for me as guarantor for himself in his
indebtedness to Wise & Company, and to mortgage
my lot to guarantee the said obligations to the Wise &
Company.
The parties came up with a compromise agreement
where David confessed judgment which he bound
himself to pay by monthly installment. As security for the
payment, David binds in favor of, and pledges to the
plaintiff, real real properties which include a house,
apartments, parcel of land which David holds an SPA to
pledge the same in favor of Wise as a guarantee for the
payment of the claim against him. However, David was
not able to completely pay. Wise now files a case
against Tanglao for the recovery of the balance.
HELD: TANGLAO NOT A SURETY. There is no doubt
that Tanglao empowered David, in his name, to enter
into a contract of suretyship and a contract of mortgage
of the property with Wise. However, David used said
power of attorney only to mortgage the property and did
not enter into contract of suretyship. Nothing is stated to
the effect that Tanglao became David's surety for the
payment of the sum in question. Neither is this inferable
from any of the clauses thereof, and even if this
inference might be made, it would be insufficient to
create an obligation of suretyship which, under the law,
must be express and cannot be presumed.
Tanglao could not have contracted any personal
responsibility. The only obligation created on the part of
Tanglao is that resulting from the mortgage of a property
belonging to him to secure payment. However, a
foreclosure suit is not instituted in this case against
Tanglao, but a purely personal action for the recovery of
the amount still owed by David.
At any rate, even granting that Tanglao may be
considered as a surety, the action does not yet lie
against him on the ground that all the legal remedies
against the debtor have not previously been exhausted.
The plaintiff has in its favor a judgment against debtor
David for the payment of debt. It does not appear that
the execution of this judgment has been asked for and
David has two pieces of property the value of which is in
excess of the balance of the debt the payment of which
is sought of Tanglao in his alleged capacity as surety.
SYQUIA v JACINTO
The Bank of the Philippine Islands obtained a judgment
against Perfecto and Felipe Jacinto and Rafael Palma
on a promissory note in its favor executed by the
defendants on May 27, 1922, for the sum of P24,000
with interest at the rate of 9 per cent per annum plus 10
per cent of the principal as costs and attorney's fees.
the Bank of the Philippine Islands "in consideration of
the sum of P1 and other valuable considerations"
assigned and transferred said judgment to Gregorio
Syquia.
The widow of Gregorio Syquia, as administratrix of his
estate, filed suit in the Court of First Instance of Manila
against Perfecto and Felipe Jacinto and Rafael Palma
reciting the aforementioned judgment and assignment
and alleging that since the date of said judgment none of
the defendants had paid anything thereon and there
remains still due the sum of P24,000 with interest at 9
per cent since May 27, 1923.
The plaintiff prayed that the judgment be revived and
that the defendants Perfecto and Felipe Jacinto as
principal and Rafael Palma as guarantor be adjudged to
pay the sum of P24,000 with interest since May 27,
1923, and costs. To this petition were attached a copy of
the judgment of December 15, 1924, and a copy of the
assignment thereof to the plaintiff.
 34
The defendants filed a joint amended answer in which
they admitted the judgment and that said judgment
had lapsed and it was necessary to revive the same;
but they denied the assignment to Syquia and the
allegation that nothing had been paid on said
judgment and that the full amount thereof was still due.
They set up as a special defense that the judgment
which the plaintiff was attempting to revive has been
fully paid; that at the time of making the assignment to
Gregorio Syquia, the bank had no right or interest
under said judgment, the same having been fully paid,
and that the petition does not state facts sufficient to
constitute a cause of action.
The SC held that Rafael Palma as guarantor may be
held contingently liable only in the sum of P3,036.24
under said judgment,
In the instant case, although it was alleged the
property was sold for greatly below its value, the
defendants did not exercise any right of redemption.
We hold, therefore, that the judgment debt in its
entirety was not discharged before the action for the
revival of the judgment was brought.
the majority of the court are of the opinion that there
should be credited upon the judgment for the benefit of
the guarantor alone the sum of P10,560, being the
revenues collected and retained during the year of
redemption by Gregorio Syquia from said properties,
according to the testimony of Perfecto Jacinto.
It is conceded that Palma as guarantor is still entitled
to the benefits of articles 1830, 1832 and 1852 of the
Civil Code.
Up to the present, the judgment creditor has made no
demand on Palma. Joining him in the suit against the
principal debtor is not the demand intended by article
1832 of the Civil Code.
That demand can be made only after judgment on the
debt, for obviously the "exhaustion of the principal's
property" the benefit of which the guarantor claims
cannot even begin to take place before judgment has
been obtained. Only then can the creditor "levy upon
the property of the principal" only then can the liability
of the creditor begin under article 1833 of the Civil
Code. It would be absurd an futile to point out
"saleable property of the debtor" at the inception of the
suit, when it cannot be seized or sold, and require the
creditor to make a "levy" upon it.
There is no competent evidence that the principal
debtors, Perfecto and Felipe Jacinto, are insolvent -
even if they were now, there can be no certainty that
they may not be in funds when an execution on the
revived judgment is issued.
The judgment creditor has not exhausted his remedies
against the principal debtors and he is still looking to
them for payment. It is not for the guarantor to
anticipate that there will be a return of nulla bona on
the execution, when and if issued. Nor is it for him to
anticipate a demand on him under article 1832 and to
offer defenses thereto which have not matured. The
occasion for these defenses may never arise.
The present revived judgment could not therefore be
res judicata as to such future defenses. The revived
judgment does not foreclose any defense which the
guarantor may raise when "demand for payment" is
made on him. Indeed, he cannot claim the benefits of
articles 1830, 1832, 1834 and 1852 of the Civil Code
before demand is made on him; they are all available
to him only after "demand for payment" (art. 1832).
LUZON STEEL CORP. v SIA
Luzon Steel sued Metal Manufacturing and Jose O. Sia,
the former's manager, for breach of contract and
damages. It obtained a writ of preliminary attachment of
the properties of the defendants, but the attachment was
lifted upon a counterbond executed by Sia, as principal,
and the Times Surety & Insurance Co. (surety), as
solidary guarantor. They entered into a compromise
whereby Sia agreed to settle the claim. When Sia failed
to comply, Luzon moved for and obtained a writ of
execution against defendant and the counterbond. The
surety, however, moved to quash the writ of execution
against it, averring that it was not a party to the
compromise, and that the writ was issued without giving
the surety notice and hearing.
WON the judgment upon the compromise discharged
the surety from its obligation under its attachment
counterbond; WON the writ of execution could be issued
against the surety without previous exhaustion of the
debtor's properties. YES, YES.
Counterbond filed to discharge a levy on attachment.
Rule 57, section 12, specifies that an attachment may be
discharged upon the making of a cash deposit or filing a
counterbond "in an amount equal to the value of the
property attached as determined by the judge"; that
upon the filing of the counterbond "the property attached
... shall be delivered to the party making the deposit or
giving the counterbond, or the person appearing on his
behalf, the deposit or counterbond aforesaid standing in
place of the property so released".
Any judgment may be made effective upon the property
released; and since the counterbond merely stands in
the place of such property, there is no reason why the
judgment should not be made effective against the
counterbond regardless of the manner how the judgment
was obtained.
The bond filed for the discharge of an attachment is "to
secure the payment to the plaintiff of any judgment he
may recover in the action," and stands "in place of the
property so released". Judgment had already been
rendered in the civil case sentencing defendant to pay.
There is no point in the contention of the respondent
Surety Company that the compromise was entered into
without its knowledge and consent, thus becoming as to
it essentially fraudulent. The Surety is not a party to the
civil case and, therefore, need not be served with notice
of the petition for judgment.
Counterbonds posted to obtain the lifting of a writ of
attachment are security for the payment of any judgment
that the attaching party may obtain; they are thus mere
replacements of the property formerly attached, and just
as the latter may be levied upon after final judgment in
the case in order to realize the amount adjudged, so is
the liability of the countersureties ascertainable after the
judgment has become final. On the other hand, sureties
in injunction counterbonds merely undertake "to pay all
damages that the plaintiff may suffer by reason of the
continuance ... of the acts complained of" and not to
secure payment of the judgment recovered.
Error on the part of the TC to have ordered the surety
bond cancelled, on the theory that the parties'
compromise discharged the obligation of the surety. The
liability of the sureties was fixed and conditioned on the
finality of the judgment rendered regardless of whether
the decision was based on the consent of the parties or
on the merits. A judgment entered on a stipulation is
 35
nonetheless a judgment of the court because
consented to by the parties.
1) The surety in the present case bound itself
"jointly and severally" (in solidum) with the
defendant; and excusion (previous exhaustion
of the property of the debtor) shall not take
place "if he (the guarantor) has bound himself
solidarily with the debtor". The rule cannot be
construed as requiring that an execution
against the debtor be first returned unsatisfied
even if the bond were a solidary one.
2) Even if the surety's undertaking were not
solidary with that of the principal debtor, still he
may not demand exhaustion of the property of
the latter, unless he can point out sufficient
leviable property of the debtor within Philippine
territory.
3) The counter-bond is only conditioned upon the
rendition of the judgment. Payment under the
bond is not made to depend upon the delivery
or availability of the property previously
attached. Where under the rule and the bond
the undertaking is to pay the judgment, the
liability of the surety or sureties attaches upon
the rendition of the judgment.
It is true that recovery from the surety or sureties
should be "after notice and summary hearing in the
same action". But this requirement has been
substantially complied with from the time the surety
was allowed to move for the quashal of the writ of
execution and for the cancellation of their obligation.
TOWERS ASSURANCE CORP. v ORORAMA
SUPERMART
See Hong, the proprietor of Ororama Supermart in
Cagayan de Oro City, sued the spouses Ernesto Ong
and Conching Ong in the Court of First Instance for the
collection of the sum of P58,400 plus litigation
expenses and attorney's fees.
the lower court issued an order of attachment. The
deputy sheriff attached the properties of the Ong
spouses in Valencia, Bukidnon and in Cagayan de Oro
City.
To lift the attachment, the Ong spouses filed on March
11, 1976 a counterbond in the amount of P58,400 with
Towers Assurance Corporation as surety. the Ong
spouses and Towers Assurance Corporation bound
themselves to pay solidarily to See Hong the sum of
P58,400.
the lower court rendered a decision, ordering not only
the Ong spouses but also their surety, Towers
Assurance Corporation, to pay solidarily to See Hong
the sum of P58,400. The court also ordered the Ong
spouses to pay P10,000 as litigation expenses and
attorney's fees.
The writ of execution was issued on March 14 against
the judgment debtors and their surety.
Towers Assurance Corporation filed the instant petition
for certiorari where it assails the decision and writ of
execution.
The SC held that the TC erred in issuing a writ of
execution against the surety without first giving it an
opportunity to be heard
Under section 17, Rule 57 of the Rules of Court, in
order that the judgment creditor might recover from the
surety on the counterbond, it is necessary (1) that
execution be first issued against the principal debtor
and that such execution was returned unsatisfied in
whole or in part; (2) that the creditor made a demand
upon the surety for the satisfaction of the judgment, and
(3) that the surety be given notice and a summary
hearing in the same action as to his liability for the
judgment under his counterbond.
The first requisite mentioned above is not applicable to
this case because Towers Assurance Corporation
assumed a solidary liability for the satisfaction of the
judgment.
A surety is not entitled to the exhaustion of the properties
of the principal debtor (Art. 2959 CC).
But certainly, the surety is entitled to be, heard before an
execution can be issued against him since he is not a
party in the case involving his principal. Notice and
hearing constitute the essence of procedural due
process.
PNB vs. CA
Rubin obtained from PNB-Binalbagan a 1954-1955
sugar crop loan, secured by a chattel mortgage
executed by Rubin as debtor-mortgagor and Jose A.
Campos as mortgagor. As additional security, Phoenix
issued a surety bond. Liability under said bond was to
expire 1 year from the date thereof, unless within 10
days from its expiration, the surety is notified of any
existing obligations thereunder.
Bank increased the loan without the knowledge and
consent of Phoenix. Rubin failed to liquidate said loan.
Bank demanded of Phoenix that it make good its
undertaking as surety for Rubin. Phoenix denied liability,
resulting in a collection case against Rubin, his
guarantors and sureties, including Phoenix.
HELD: The discharge of Phoenix from liability under the
surety bond is correct.
The contract in question is not a continuing chattel
mortgage for which consent and knowledge of the surety
is unnecessary for an increase in the amount of the
principal obligation. The undertaking under said contract
was "for the purpose of securing their payment including
the interest thereon, the cost of collection and other
obligations owing by the Debtor-Mortgagor to the
mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and
records of the mortgagee .
The term "other obligations" must be limited to such as
are of the same nature as interest and costs of
collection. The term cannot be enlarged to include future
additional advances to debtor-mortgagor, much less be
interpreted as a previous authorization from the surety to
increase the principal amount fixed in the contract.
The increase in the indebtedness is material and
prejudicial to Phoenix. While its liability under the bond is
limited to P10,000, the increase in the amount of the
debt proportionally decreased the probability of the
principal debtor being able to liquidate the debt; thus,
increasing the risk undertaken by the surety to answer
for the failure of the debtor to pay.
A material alteration of the principal contract, effected by
the creditor and principal debtor without the knowledge
and consent of the surety, completely discharges the
surety from all liability in the contract of suretyship.
PEOPLES BANK AND TRUST CO. v TAMBUNTING
appellee Peoples Bank & Trust Company and Appellant
Francisco D. Santana and other appellants executed a
contract denominated 'overdraft agreement and pledge'
wherein the appellee granted to the spouses Jose Maria
 36
Tambunting and Maria Paz Tambunting an overdraft
from time to time on their current account with the
appellee bank not to exceed P200,000.00, with
interest at the rate of 9% per annum until September
10, 1964, the proceeds of which were to be used by
the Tambuntings in their logging operations.
Appellant Francisco D. Santana, as guarantor, and the
spouses Tambuntings, conveyed to the bank shares of
capital stock of the International Sports Development
Corporation as collateral security for the payment of
any and all indebtedness incurred or arising from the
overdraft, and all extensions, renewals, amendments
or applications thereof.
appellant Francisco D. Santana executed a document
denominated as absolute guaranty in which, in
consideration of the 'overdraft agreement and pledge,'
he bound himself to the bank, jointly and severally,
with the Tambunting spouses for the full and prompt
payment of all the indebtedness incurred or to be
incurred by said spouses on account of the overdraft
line.
Appellee bank granted the Tambunting spouses an
extension of the over, draft line for six (6) months from
September 10, 1964, but reducing the overdraft line to
P185,000.00 with the understanding that other terms
and conditions of the overdraft agreement would be in
full force and effect.
Before the expiration of the six (6) months period, or
on March 5, 1965, Jose Maria Tambunting asked for
another renewal of the overdraft line for another year.
It was granted.
the Manager of the Credit Department advised Jose
Maria Tambunting that the Board of Directors of the
appellee bank approved his request for an extension
of the overdraft line in the amount of P185,000.00 for
another year, or until March 10, 1965, but with interest
at the rate of 10% per annum, that in the same
meeting, the Board also approved the release of the
pledge of 135 shares of stocks of the International
Sports Development Corporation.
The appellants failed to pay the indebtedness on the
date due and demand for payment was made upon
Francisco Santana and Tambunting as per letters
dated December 14, 1965, January 24, 1966 and
March 4,1966
Appellant Francisco D. Santana was sued by appellee,
Peoples Bank & Trust Company, along with the other
appellants, Jose Maria Tambunting and Maria Paz
Tambunting, his son-in-law and his daughter, for the
recovery of the sum of money due in an overdraft
agreement, with the Tambunting couple as principal
debtors and appellant as surety.
The TC found for the appellee bank.
the contract of absolute guaranty executed by
appellant Santana is the measure of his rights and
duties. As it is with him, so it is with the appellee bank.
What was therein stipulated had to be complied with
by both parties.
Nor could appellant have any valid cause for
complaint. He had given his word; he must live up to it.
Once the validity of its terms is conceded, he cannot
be indulged in his unilateral determination to disregard
his commitment. A promise to which the law accords
binding force must be fulfilled. It is as simple as that.
So the Civil Code explicitly requires: "Obligations
arising from contracts have the force of law between
the contracting parties and should be complied with in
good faith."
It could have been different if there were no such
contract of absolute guaranty to which appellant was a
party under the aforesaid Article 2080.
He would have been freed from the obligation as a result
of appellee releasing to the Tambuntings without his
consent the 135 shares of the International Sports
Development Corporation pledged to appellee bank to
secure the overdraft line. For thereby subrogation
became meaningless.
Such a provision is intended for the benefit of a surety.
That was a right he could avail of. He is not precluded
however from waiving it. That was what appellant did
precisely when he agreed to the contract of absolute
guaranty.
PNB v. MANILA SURETY
PNB opened a letter of credit and advanced
$120,000.00 to Edgington Oil Refinery for 8,000 tons of
hot asphalt. Of this amount, 2,000 tons were released
and delivered to Adams & Taguba under a trust receipt
guaranteed by Manila Surety up to the amount of
P75,000.00. To pay for the asphalt, ATACO constituted
the Bank its assignee and attorney-in-fact to receive and
collect from the Bureau of Public Works out of funds
payable to the assignor. The Bank regularly collected
from the Bureau from April to November. The Bank
ceased to collect, until in 1952 its investigators found
that more moneys were payable to ATACO from the
Public Works office, because the latter had allowed
mother creditor to collect funds due to ATACO under the
same purchase order. Its demands on the principal
debtor and the Surety having been refused, the Bank
sued to recover the balance.
HELD: The power of attorney obtained from ATACO was
not additional security in its favor.
The Bank's power to collect was expressly made
irrevocable, so that the Bureau of Public Works could
very well refuse to make payments to the principal
debtor itself, and a fortiori reject any demands by the
surety.
Even if the assignment with power of attorney from the
principal debtor were considered as mere additional
security still, by allowing the assigned funds to be
exhausted without notifying the surety, the Bank
deprived the former of any possibility of recoursing
against that security.