CREDIT TRANSACTIONS LECTURE NOTES SY 2019-20

20191209 MONDAY

Articles 1933 to 1952 New Civil Code (NCC); Pineda - Pages 1 to 31;

What is meant by credit;

What are credit transactions;

What is the significance of credit transactions in the economy;

 Allows a more productive use of money and property;
 Allows more exchanges of goods and service;
 Actual physical transfer of is eliminated through cancellations of debts and credit;

Credit transactions coverage in the Bar examinations:

 i. loan
 II. Deposit
 III. Guaranty and Suretyship
 IV. Pledge
 V. Real Mortgage
 Include: Act 3135, as amended by R.A. No. 4118
VI. Antichresis
 VII. Chattel Mortgage
 Include: Act 1508
 VIII. Quasi-contracts
 IX. Concurrence and Preference of Credits;

Terms to understand
 What is bailment; Delivery of property of one person to another “in trust” for a specific
purpose, with a contract (express or implied), that the trust shall be faithfully executed and the
property returned or duly accounted for when the special purpose is accomplished or kept until
the bailor reclaims it; Note – not exactly a trust transaction; no trustee-beneficiary relationship
is created;
o Bailor;
o Bailee;

 Bailment, der., an act of delivering goods to a bailee for a particular purpose, without transfer of
ownership; "a contract of hire is a species of bailment"

 There are three types of bailments: (1) for the benefit of the bailor and bailee; (2) for the sole
benefit of the bailor; and (3) for the sole benefit of the bailee. A bailment for the repair of an
item is a bailment for mutual benefit when the bailee receives a fee in exchange for his or her
work;

 Letter of credit
  Bridge Financing

TITLE XI
Loan

General Provisions

Two kinds of loan; commodatum; mutuum

ARTICLE 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. (1740a)

Notes:

 What kinds of loans are provided for under the Civil Code – commodatum and
mutuum/simple loan;

 What kind of loan is commodatum;

- Parties; bailor; bailee;
- Purpose; to enable the borrower to use the thing loaned;
- Object; non-consumable; object is to be returned;

 What is the obligation of the bailor;

 What is the obligation of the bailee;

 Is the bailee obliged to pay for his use of the thing loaned; commodatum is essentially
gratuitous; if there is compensation, the contract may be usufruct or lease;

 What is mutuum or simple loan;

- Parties; creditor; debtor;/lender; borrower;
- Purpose; loan for consumption (ownership is transferred);
- Object; money or other fungible thing; what is meant by fungible; non-fungible; is
fungibility determined by the nature of the thing; what makes a thing fungible or non-
fungible;

 What is the obligation of the debtor in mutuum; to return the same amount of the same kind
and quality;

 In mutuum or simple loan, is the borrower obliged to pay compensation for the use of the
money or fungible thing borrowed?

 Which loan is called a loan for use; a loan for consumption;

 If there is compensation for the use, the contract may be a lease;

 Obligation to pay interest must be stipulated in writing;

 What happens to the ownership of the thing loaned in commodatum; in mutuum?

 What kind of contract is loan as to how it is perfected; loan is a real contract, perfected by
delivery of the object?

 Why is the delivery of the thing essential in loan? The use of the thing loaned which is the
object of the contract will not be possible unless the thing is delivered to the borrower;
  There used to be so-called civil loans and commercial loans under the law before; what
happened to the so-called commercial laws; under Art. 2270 of the New Civil Code, the
provisions of the Code of Commerce governing sales, partnership, agency, loan, deposits and
guaranty were expressly repealed;

 Distinctions between commodatum and mutuum;

- subject matter;
- nature as to consideration;
- purpose;
- object as to kind of property;
- who bears the risk in case of loss of the object;
- time of return of the object or time of payment;
- character of the contract as to whether it is personal or not personal;

 Why is it important to know whether the contract is commodatum or mutuum; loan?

 Distinction between loan and deposit;

- purpose;
- time or payment or return of the object;
- applicability of legal compensation;
- juridical relations (lender-borrower; depositor-depositary);

 What is the nature of the deposit of money in a bank by bank depositors?

 Term to understand:
- loan v. discount; discount is really a mode of lending money; interest is deducted in
advance; it is on a double-name paper (to explain this);

 Loan v. lease or rent; owner of property does not lose his ownership of the property, only the
control, for the period of lease; relationship is landlord and tenant/lessor-lessee;

 Case – money deposited, to be returned in two months, subject to interest; the payment of
interest indicates the contract is loan (mutuum) not deposit;

 To view video – How the economic machine works by Ray Dalio (31 minutes);
o to give a context for the legal discussions of the law on credit transaction;
o what significance does credit have in the economy;
o what rules govern credit transaction;
o what actual legal contracts are used in credit transaction;
o who are the parties to credit transactions;
o what are the right and obligations of the parties under the contracts;
 o What remedies do the parties have in case of breach of the agreement;

Nature of the contract of loan

ARTICLE 1934.

An accepted promise to deliver something by way of commodatum or simple loan

is binding upon parties,

but the commodatum or simple loan itself shall not be perfected

until the delivery of the object of the contract. (n)

Notes:

 If today, A agrees to lend B P100,000 next month, upon the meeting of minds, does a contract
of loan come to existence?

 Is the contract of loan a consensual contract; does it mean consent of the parties is not
essential; what is meant when it is said that a contract is consensual;

 Does B acquire any right based on the agreement?

 See case notes: #credit transactions case 20140115 Development Bank of the Philippines v.
Guarina Acgricultural and Realty Development Corporation, GR 160758

CHAPTER 1
Commodatum

Section 1
Nature of Commodatum

Commodatum defined
 ARTICLE 1935. The bailee in commodatum acquires the use of the thing loaned

but not its fruits;

if any compensation is to be paid by him who acquires the use,

the contract ceases to be a commodatum. (1941a)

Notes:


Does the bailee acquire the fruits of the thing loaned?


What is the rule on the fruits of the thing in commodatum?


What is the rule where compensation is paid for the used of the thing in commdatum?


What happens to the contract of commodatum if compensation is required to be paid?


Note – under Art. 1940, a stipulation allowing the bailee to enjoy the fruit shall be valid; this
is just an exception, not the rule; but the primary intention must still be the use of the
property not the enjoyment of the fruits;

Instance when a consumable thing may be the subject matter of commodatum

ARTICLE 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. (n)

Notes:

 What is the nature of the object in commodatum? Why?

 May a consumable thing be a proper object in commodatum;

- in what instance;
- what thing is required to be returned?
Object of commodatum
ARTICLE 1937.

Movable or immovable property may be the object of commodatum. (n)

Notes:

 What kinds of property (movable or immovable) may the object in commodatum be?
- Note the definition of movable and immovable property;

 Case – owner of a parcel of land allowed it to be used by his brother who built a warehouse
thereon and occupied the lot for 30 years without payment of rental; when the owner
demanded for the return of the property, the brother refused to return the property; among
the issues raised is the absence of stipulation on the return of the property;
- contract was deemed a commodatum;

 If no period was agreed upon for the use, when can the owner demand the return of the
thing?

Bailor (lender) need not be the owner

ARTICLE 1938.

The bailor in commodatum need not be the owner of the thing loaned. (n)

Notes:

 Why is the bailor not required to be the owner of the thing loaned;

 Note - The bailor must be allowed to alienate his right to use the thing loaned when he is not
prohibited to allow the use of the thing by a third person;

Personal nature of commodatum

Art. 1939. Commodatum is purely personal in character. Consequently:

(1) The death of either the bailor or the bailee extinguishes the contract;
 (2) The bailee can neither lend nor lease the object of the contract to a third person.

However, the members of the bailee's household may make use of the thing loaned,

unless there is a stipulation to the contrary,

or unless the nature of the thing forbids such use. (n)

Notes:

 Under Art. 1178, NCC, all rights acquired by virtue of an obligation are transmissible; may the
bailee allow the use of the object in commodatum by a third person?

 What is the effect of the contract of commodatum being purely personal in character?

 A and B are bailees in a contract of commodatum, in case A dies, is the contract of

commodatum extinguished?

 Who can use the object?

Stipulation allowing the bailee the use of fruits

ARTICLE 1940.

A stipulation that the bailee may make use of the fruits of the thing loaned is valid. (n)

Notes:

 In commodatum, to whom does the fruits of the thing loaned belong? Why? As a rule, the
fruits of a property pertain to the owners; see Article 441. To the owner belongs: (1) The
natural fruits; (2) The industrial fruits; (3) The civil fruits. (354)

 Is it possible in a contract of commodatum for the bailee to have a right to the fruits of the
thing loaned? [This is what Art. 1940 deals with.]

 Problem: Without any compensation, A allowed B the possession and use of a parcel of land
in order that B may be able to cultivate the land and have a source of income for the
sustenance of B’s family. What contract is there between A and B?

 Liberality must still be the actual cause of the contract;

20200108 WEDNESDAY BLOCK A
Sec. 2
Obligations of the Bailee

Duty of bailee to pay for ordinary expenses

ARTICLE 1941. The bailee is obliged to pay for the ordinary expenses for

the use

and preservation of the thing loaned. (1743a)

Notes:

 Note that the bailee has the duty to return the identical thing delivered to him by the bailor;
thus, he is obliged to take care of the thins;

 Who is liable for the ordinary expenses for the use and preservation of the thing loaned?

 In connection with the duty of the bailee to preserve the object in commodatum, what is the
degree of diligence required by law for the bailee to exercise? See Article 1163. Every
person obliged to give something is also obliged to take care of it with the proper diligence
of a good father of a family, unless the law or the stipulation of the parties requires another
standard of care.

 What if the expenses needed for preservation are not ordinary?

Extraordinary expenses

ARTICLE 1949.

The bailor shall refund the extraordinary expenses during the contract

for the preservation of the thing loaned,

provided the bailee brings the same

to the knowledge of the bailor before incurring them,

except when they are so urgent

 that the reply to the notification cannot be awaited without danger.

If the extraordinary expenses arise

on the occasion of the actual use of the thing by the bailee,

even though he acted without fault,

they shall be borne equally by both the bailor and the bailee,

unless there is a stipulation to the contrary. (1751a)

20200108 WEDNESDAY BLOCK B

Bailee’s liability for loss due to fortuitous even

ARTICLE 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 exempting the bailee from responsibility in case of a fortuitous event;

(4) If he lends or leases the thing to a third person, who is not a member of his household;

(5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter.
(1744a and 1745)

Notes:

 Under Art. 1174, NCC, “no person shall be responsible for those events which could not be
foreseen, or which though foreseen, were inevitable.

 Q? - A lent B his car without compensation to enable B to drive from Naga city to Legazpi City
and back. On the way back to Naga City, the car was hit by lightning causing the total
destruction of the car. Who shall be liable for the damage?

 Loss, def. – when it perishes, or goes out of commerce, or disappears in such a way that its
existence is unknown or cannot be recovered (Art. 1189);

 Why does the law hold the bailee liable even when the cause of the loss is a fortuitous event -
improper conduct of the bailee;

 There is bad faith; when bailee deviates from the purpose agreed upon;

 There is liability when bailee is guilty of mora or default;

 In view of the delivery with appraisal, law presumes that the parties intended the bailee to be
liable for loss due to fortuitous event; but this presumption does not operate if there is a
stipulation to the contrary;
  There is liability when bailee violates the pure personal character of commodatum; there is
abuse of trust;

 Bailee’s act in saving his own property instead of the property borrowed is deemed
equivalent to an act of ingratitude; bailee ignored the liberality of the bailor in choosing to
save his own property;

Bailee is not liable for deterioration without fault

ARTICLE 1943.

The bailee does not answer for the deterioration of the thing loaned

due only to the use thereof and without his fault. (1746)

Notes:

 When is there deterioration of the thing loaned?

 Is the bailee liable for the deterioration of the thing loaned due only to the use thereof and
without his fault?

As a general rule, the bailee has no right of retention

ARTICLE 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. (1747a)

Notes:

 Problem: A lent B his laptop, to be returned after a month. When A asked for the return of
the laptop, B refused to return it to A. According to B, he will not return it to A unless A first
pay B a loan granted by B to A which has remained unpaid for over a year. A came to you for
advice. What will you tell him?
  What if what the bailor owes the bailee is the reimbursement for expenses for which the
bailor is liable; what if it were for extraordinary expenses for the preservation of the thing
loaned;

 Is there an instance when the bailee may rightfully refuse to return the thing borrowed?

 What is the reason why, as a rule, the bailee cannot retain the object in commodatum? Why
does the law not give the bailee a right of retention as a general rule? Bailment implies a
trust that the thing shall be returned to the bailor when the time agreed upon has expired or
when the purpose is accomplished;

 Note – Art.1287, “compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depositary or of a bailee in commodatum;”

 Does the right of retention given by law include the right to cause the sale of the thing?

Solidary liability of several bailees

ARTICLE 1945.

When there are two or more bailees

to whom a thing is loaned

in the same contract,

they are liable solidarily. (1748a)

Notes:

 A and B borrowed C’s newly purchased car for a trip that A and B will take to Manila. C
initially hesitated to lend the car but later on reconsidered and allowed A and B to use the
car, telling them that the car is worth P1.5 million. On the way back to Naga City, the car met
an accident due to A’s reckless driving. C demanded for the payment of the value of the car.
Since A did not have any money, C demands that B pay him P1.5 million. Can B be compelled
to pay to C the entire amount being demanded by C?
  Note, solidary obligation, where each one of the debtors is obliged to pay the entire
obligation (passive solidarity), and where each one of the creditors has the right to demand
from any of the debtors, the payment or fulfilment of the entire obligation (active solidarity);

 Art. 1945 is an exception to the general rule on “joint obligations” that where there are two
or more debtors, who concur in one and the same obligation the obligation shall be joint, see
Art. 1207;

Arts. 1207
“The concurrence of two or more creditors or of two or more debtors
in one and the same obligation
does not imply that each one of the former has a right to demand,
or that each one of the latter is bound to render,
entire compliance with the prestations.
There is a solidary liability only
when the obligation expressly so states,
or when the law
or the nature of the obligation requires solidarity;”

and 1208 –
… presumed as divided into as many equal shares
as there are creditors or debtors,
the credits or debts being considered distinct from one another;

Sec. 3
Obligations of the Bailor

As a general rule, the bailor cannot demand immediate return

 ARTICLE 1946.

The bailor cannot demand the return of the thing loaned

till after the expiration of the period stipulated,

or after the accomplishment of the use for which the commodatum has been constituted.

However, if in the meantime, he should have urgent need of the thing,

he may demand its

return

or temporary use.

In case of temporary use by the bailor,

the contract of commodatum is suspended

while the thing is in the possession of the bailor. (1749a)

Notes:

 When can the bailor demand the return of the thing loaned;

 What if the bailor has an urgent need for the thing loaned;

 Does the return of the thing extinguish the contract of commodatum;

Precarium; two kinds of precarium

ARTICLE 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. (1750a)

Notes:

 What is a contract of precarium?

 If in commodatum the parties did not stipulate on the duration of the contract or the use to
which the thing loaned should be devoted, when is the bailee obliged to return the thing
loaned?

 If the use of a thing is merely tolerated by the owner, when is the bailee obliged to return the
object?

 Note – use of the term “owner” is not proper because the bailor need not be the owner of
the thing loaned;

 What is the rule where the thing is loaned for illegal or immoral purpose or use?
 Ans. - Bailor who is innocent or in good faith can demand immediate return before crime is
committed; if the crime has been consummated, the thing may possibly be forfeited in
favour of the state;

Effects of acts of ingratitude

ARTICLE 1948.

The bailor may demand the immediate return of the thing

if the bailee commits any act of ingratitude specified in article 765. (n)

Notes:

 Other than in instances of precarium, when else may the bailor demand the immediate return
of the thing loaned?

 What acts of ingratitude are provided in Art. 765;

Article 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 moral turpitude,

even though he should prove it,

 unless the crime or the act has been committed

against the donee himself, his wife or children under his authority;

(3) If he unduly refuses him support when the donee is legally or morally bound to give

support to the donor. (648a)

 Why are the rules in Art. 765 made to apply in commodatum?

Ans. - The application of Art. 765 (involving donor-donee) is explainable by the fact that
commodatum like donation is gratuitous in nature;

Extraordinary expenses
ARTICLE 1949.

The bailor shall refund

the extraordinary expenses

during the contract

for the preservation of the thing loaned,

provided the bailee brings the same

to the knowledge of the bailor

before incurring them,

except when they are so urgent

that the reply to the notification cannot be awaited without danger.

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee,

even though he acted without fault,

they shall be borne equally by both the bailor and the bailee,

unless there is a stipulation to the contrary. (1751a)

Notes:

 Can the bailee be held liable for extraordinary expenses for the preservation of the thing
loaned where he is not at fault;

 Is the bailor always wholly liable for the extraordinary expenses for the preservation of the
thing loaned?

 Is it possible for the bailor to be wholly liable for extraordinary expenses arising on the
occasion of the actual use of the thing by the bailee?
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  Ans. – Yes if there is stipulation that makes the bailor wholly liable. This is an exception to the
general rule that the expense shall be borne equally if the extraordinary expenses arises on
the occasion of the actual use of the thing.

Other expenses
ARTICLE 1950. If, for the purpose of making use of the thing,

the bailee incurs expenses

other than those referred to in articles 1941 and 1949,

he is not entitled to reimbursement. (n)

Notes:

Q – In commodatum, the thing is delivered to the possession of the bailee for his use, in
case expenses are incurred by the bailee in connection with the use of the thing who shall
be responsible for such expenses? Will he be entitled to any reimbursement?

 Who is liable for expenses (other than 1941 & 1949) incurred by the bailee for the purpose of
making use of the thing loaned?

Art. 1941 – ordinary expenses for the use and preservation of the thing loaned; eg. Gas to
run car;

Art. 1949 – extraordinary expenses for the preservation of the thing loaned on occasion of
actual use;

Rule when object is defective

ARTICLE 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. (1752)

Notes:

Q – In case the bailee suffers damages because of defects in the thing lent by the bailor,
will the bailor have any liability?

 What is the bailor’s liability if he fails to advise the bailee of defects in the thing loaned that
are known to him?

 Why is the bailor made liable under the law?

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 Ans. - The omission of vital information constitutes negligence which may be made the basis
of liability; there is bad faith (when a person lends a thing, he ought to confer a benefit, not
to do mischief);

Bailee cannot exempt himself from payment of expenses or damages by abandoning thing
ARTICLE 1952.

The bailor cannot exempt himself

from the payment of expenses or damages

by abandoning the thing to the bailee. (n)

Notes:

Q – In a situation where the bailor is liable to the bailee for the reimbursement of certain
expenses (like extraordinary expense for the preservation of the thing) or payment of
damages arising from hidden defects of the thing borrowed, may the bailor just abandon
the thing to the bailee to relieve himself of his liability?

Q - Are you aware of a situation under the law where a person liable to another in
connection with certain property may simple abandon the property in favor of the other
and relieve himself from his liability?

 May the bailor exempt himself from the payment of expenses or damages provided for by law
by abandoning the thing loaned to the bailee?

 Note – this is one instance where the renunciation of one’s right over the property is not
sufficient to satisfy an obligation for expenses incurred, unlike in the case of co-ownership
(e.g. liability for tax) and in easement of party walls;

CHAPTER 2
Simple Loan or Mutuum

ARTICLE 1953. A person who receives a loan

of money

or any other fungible thing

acquires the ownership thereof,

and is bound to pay to the creditor

an equal amount of the same kind and quality. (1753a)

Notes:

Q – In case A borrowed a sack of palay from B, what will be the obligation of B in favour of
A?

Q - A deposited USD 1,000 with Bank ABC, with each serial number of the dollar bills noted
in the deposit slip. Can A later demand that the bank should return to him exactly the
same dollar bills he deposited?

 What kind of a loan is mutuum?

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 Ans. - Primary purpose is loan for consumption;

 How are the parties in mutuum called?

 What is meant by fungible;

 In mutuum what happens to the ownership of the thing loaned? What is the implication if
the debtor acquires the ownership of the thing loaned?

 What is the obligation of the debtor in mutuum?

ARTICLE 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. (n)

Notes:

Q - Where A gave B a pen which B shall own, with the obligation to give A in return another
pen of the same kind and quality, what contract has been entered into between A and B?

ARTICLE 1953. A person who receives a loan ARTICLE 1954.

of money A contract whereby one person

or any other fungible thing transfers the ownership of non-fungible

acquires the ownership thereof,
and is bound to pay to the creditor
an equal amount of the same kind and
quality. (1753a)
things to another
with the obligation on the part of the latter
to give things of the same kind, quantity,
and quality
shall be considered a barter. (n)

 Object is money or other fungible  Non-fungible things;

thing;
 Ownership passes to debtor;
 Obligation of debtor is to pay an
equal amount of the same kind and
quality;
 Contract/transaction is a loan
 Ownership passes to other
party/”buyer”;
 Obligation of other party is to give
things of the same kind, quantity
and quality;
 Transaction is considered a barter;
 ? How is this differentiated from a contract of loan provided for in Art. 1953; in Art. 1953
object is “fungible” (capable of being substituted); in Art. 1954 the provision uses the term “non-
fungible” but if the object is indeed non-fungible, the contemplation must be for the same object
must be returned which is obviously not the situation; the law must have intended the word to
be “non-consumable” instead of “non-fungible” for the provision to make sense;

 Barter, Art. 1638 – barter is a contract whereby one of the parties binds himself to give one
thing to another in consideration of the latter’s promise to give another thing; it conveys
ownership; in effect a mutual sale;

? If the object is consumable, Art. 1954 will not apply. It will be considered a loan. How should
Art. 1954 be distinguished from 1953; In Art. 1954, the object is “non-fungible” (supposedly non-
consumable); in Art. 1953, the object is consumable; note the intention of the parties, the
obligation is clearly for the bailee “to give things of the same kind, quantity, and quality”; the
object is not delivered as a thing loaned but for exchange with “things of the same kind, quantity,
and quality”;

 Case – where one party failed to comply with the contract of barter because he was not the
owner of the lands which he had promised in exchange, the remedy of the other party is
rescission;

? Pineda’s comment, non-fungible things are irreplaceable, 1954 is an exception to the rule but

contract become barter, not a loan; still it is difficult to understand when the object is indeed

non-fungible, meaning it cannot be substituted with another thing; note however that in case the

contract is rescinded (the contract being deemed a barter under the law), the other party ought

to deliver the very same thing delivered to him;

Rules governing simple loan

ARTICLE 1955. The obligation of a person

who borrows money

shall be governed by the provisions of articles 1249 and 1250 of this Code.

If what was loaned is a fungible thing other than money,

the debtor owes another thing of the same kind, quantity and quality,

even if it should change in value.

In case it is impossible to deliver the same kind,

its value at the time of the perfection of the loan shall be paid. (1754a)

Notes:

Q – When a person borrows money from the lender, what provisions of law shall govern
their contract?

 Art. 1249 – payment is to be made in the currency stipulated; if not possible, then
in currency which is legal tender in the Philippines; notes or bills shall produce the
effect of payment only when cashed or 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 (?);

 Art. 1250 – in case of extraordinary inflation or deflation of the currency stipulated,

the value of the currency at the time of the establishment of the obligation shall be
the basis of payment, unless otherwise stipulated;

 Get copy/read case of Citibank, N.A. v. Sabeniano; see #credittransactionscase 20070206

citibank, n.a. v. sabeniano gr 156132; assign case, for submission of requirement; Nieves,
Offemaria;

#credittransactionscase 20070206 citibank, n.a. v. sabeniano gr 156132

 The case involves a claim by respondent Sabeniano for the recovery of
certain US dollar deposits from Citibank; petitioner Citibank prays that
in case it is ordered to refund to the respondent the amount of her
dollar deposits with Citbank-Geneva, that the Court adjust the
nominal values of the dollar accounts by using the values of the
currencies stipulated at the time the obligations were established in
1979, citing the extreme and extraordinary devaluation of the
Philippine currency that occurred in the course of the Asian financial
crisis of 1997, invoking Article 1250 of NCC –

“In case of 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.”;

 What constitutes as extraordinary inflation or deflation of currency

was discussed by the SC in the case of Singson v. Caltex (Philippines),
Inc.

o SC held that extraordinary inflation[/deflation] exists when

there is a decrease or increase in the purchasing power of the
Philippine currency which is unusual or beyond the common
fluctuation in the value of said currency, and such increase or
decrease could not have been reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time
of the establishment of the obligation;

o Example of extraordinary inflation (as cited in Filipino Pipe and

Foundry Corporation v. NAWASA) is that which happened to
the deutschmark in 1920s

 Hyperinflation in Germany in the 1920’s; in early 1921,

value of the German currency was 4.2 to the US dollar;
in May 1921, it stumbled to 62 to the US dollar; by
October 1923, it reached 4.2 trillion to the US dollar;
  “prices were going up every week, then every day, then
every hour. Workers were paid several times a day so
that they could rush out. and exchange their money for
something of value before what little purchasing power
was left dissolved in their hands. Some workers tried to
beat the constantly rising prices by throwing their
money out of the windows to their waiting wives, who
would rush to unload the nearly worthless paper. A
postage stamp cost millions of marks and a loaf of
bread, billions.”;

o The supervening of extraordinary inflation is never assumed.

The party alleging it must lay down the factual basis for the
application of Article 1250;

o In the Filipino Pipe case, SC acknowledged that there has been

a decline in the purchasing power of the Philippine peso, but
the downward fall cannot be considered extraordinary but was
simply a universal trend that has not spared the Phil.;

o In Huibonhoa v. CA, SC found unsubstantiated the allegation

that the Aquino assassination in 1983 caused building and
construction costs to double during the period July 1983 to
February 1984;

o In Serra v. CA, SC did not consider the decline in purchasing

power of the pesos from 1983 to 1985 to be so great as to
result in extraordinary inflation;

o In the instant case, petitioner’s evidence showed that inflation

rate rose to 54.34% in 1984; SC did not treat it as an
extraordinary inflation within the meaning and intent of Article
1250;
 o SC adopted with approval CA’s observation on the petitioner’s
evidence, especially the NEDA certification of inflation rates
based on consumer price index

 1966 to 1986; official inflation rate never exceeded

100% in any single year;
 Highest official inflation rate recorded was in 1984 which
reached only 50.34%
 Over a 21-year period, there was only a single-digit
inflation in 10 years;
 In the other years, Phil. experienced double-digit
inflation rates, at an average rate of only 20.88%;
 While there was a decline in the purchasing power of the
peso from 1966 to 1986, the same cannot be considered
as extraordinary; rather, it is a normal erosion of the
value of the peso which is a characteristic of most
currencies;

 The effects of extraordinary inflation are not to be applied without an

official declaration by competent authorities; the only competent
authority so far recognized by SC to make such official proclamation is
the BSP;

 Art. 1250 is based on equitable considerations; among the maxims of

equity are (1) he who seeks equity must do equity, and (2) he who
comes into equity must come with clean hands; he who has done
inequity shall not have equity; (SC did not find petitioner Citibank
coming to court with clean hands; SC found the act of Citibank in
delaying the recovery of the deposits by the respondent unlawful);

 Case of alleged extraordinary inflation, acdg. to SC, there must be an official declaration to
that effect by the appropriate agency of the government; acdg. to SC, only BSP is the
recognized authority;
 Quiz - A borrowed from B one sack of corn, costing P700 at the time the loan was
perfected. Under the contract, B is obliged to pay A after one month a sack of corn of the
same kind and quality. At the time of payment, the cost of a sack of corn has increased to
P2,500. Can B be obliged to deliver to B a sack of corn that is now costing P2,500? Why?

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 Answer- See Art. 1955.
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 What if it has become impossible to deliver a sack of corn of the same kind and quality, what
should B pay A?
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 Why? (Ans. - P700, value at the time of perfection.), see the provision of the law (Art. 1955 – If what
was loaned is a fungible thing other than money,

the debtor owes another thing of the same kind, quantity and quality,

even if it should change in value.

In case it is impossible to deliver the same kind,

its value at the time of the perfection of the loan shall be paid. xxx

Obligation to pay interest must be stipulated in writing (interest referred to is monetary interest)
ARTICLE 1956.

No interest shall be due

unless it has been expressly stipulated in writing. (1755a)

Notes:

Q – When a person borrows money or a consumable thing from another person, is he

obliged to pay interest?

 What are the two kinds of interests?

- Interest for the use of money, called monetary interest;
- Interest as indemnity for damage, called compensatory interest; serve as penalty for
breach of contractual obligations; this need not be stipulated in writing; judicial demand
must be made (not merely extra-judicial demand);

 What kind of interest is referred to in the Art. 1956? Interest for use (not interest as damage
or compensatory interest).

 Simple, compound, legal interest;

 How does the obligation to pay interest arise?
- By reason of contract, need to be stipulated in writing;
- By reason of delay of failure to pay the principal on which interest is demanded; as
damage (failure to pay the principal obligation and demand is made; if no interest is
stipulated no monetary interest is due; but compensatory interest can be payable after a
judicial demand);

 A borrowed P1,000 from B. No stipulation was made on the payment of interest. Is interest
demandable? No; what if a judicial demand is made, interest as damage will be payable;

 A borrowed P1,000 from B. A stipulation was made for the payment of interest but no
interest rate was indicated. Is interest payable? Yes. At what rate? Legal interest rate which
at present is 6% p.a.;

 When under a contract interest is due but is unpaid, will the amount of unpaid interest be
subject to interest? Yes, from the time judicial demand (not extra-judicial) is made. What if
the contract is silent on the payment of interest on the amount of unpaid interest , will
interest be payable? Yes, but only after a judicial demand is made. (Art. 2212, CC)

“Article 2212.
Interest due shall earn legal interest
from the time it is judicially demanded,
although the obligation may be silent upon this point. (1109a)”

 What is the measure of damages for the failure to pay a sum of money on time? Interest, as
agreed upon; in the absence of stipulation, the legal rate of interest;

 What do you mean by consolidation of the unpaid interest with the capital? For what
purpose is this done? Computation of the interest due on unpaid interests (and principal);

20200119 MONDAY

 Read case –

- Eastern Shipping Lines, Inc. v. CA, G.R. No. 97412, 1994 07 12 ;

- Nacar v. Gallery Frames, G.R. No. 189871, 2013 08 13; see #credittransactionscase
20130813 nacar v. gallery frames gr 189871; assigned reading; Gracilla, Nocos;

#credittransactionscase 20130813 nacar v. gallery frames gr 189871

 The landmark case of Eastern Shipping Lines, Inc. v. CA lays down the
guidelines regarding the manner of computing legal interest; the case of Nacar
v. Gallery Frames recapitulates the rules and provides for future guidance;

 The BSP-MB in its Res. NO. 796 dated May 16, 2013 amended Sec. 2 of BSP
Circular No. 905. S. 1982 and issued Circular No. 799, Series of 2013, effective
July 1, 2013;

“Section 1.
The rate of interest for the loan or forbearance of any money, goods or credits
and the rate allowed in judgments,
in the absence of an express contract as to such rate of interest,
shall be six percent (6%) per annum.”

 SC recapitulated for future guidance the guidelines laid down in the case of
Eastern Shipping Lines to embody BSP-MB Circular No. 799 as follows

I. When an obligation,
regardless of its source,
i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached,
the contravenor can be held liable for damages.
The provisions under Title XVIII on “Damages” of the Civil Code
govern in determining the measure of recoverable damages.

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, if imposed as
follows:

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 demand.
In the absence of stipulation,
the rate of interest shall be 6% 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.

When an obligation,
not constituting a loan or forbearance of money,
is breached,
an interest on the amount of damages awarded may be imposed
at the discretion of the court
at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or
damages,
Except when or until the demand can be established with reasonable
certainty.
Accordingly, where the demand is established with reasonable
certainty,
The interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code),
but when such certainty cannot be so reasonably established
at the time the demand is made,
the interest shall being to run
only from the date the judgment of the court is made
(at which time the quantification of damages
may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall,
in any case,
be on the amount finally adjudged.

When the judgment of the court

awarding a sum of money
becomes final and executory,
the rate of legal interest,
whether the case falls under paragraph 1 or paragraph 2, above,
shall be 6% per annum
from such finality until its satisfaction,
this interim period being deemed
to be an equivalent to a forbearance of credit.
 And, in addition to the above, judgments that have become final and
executory
prior to July 1, 2013, shall not be disturbed and shall continue to be
implemented
applying the rate of interest fixed therein.

[Note that the rate of legal interest up to June 30, 2013 shall be those
provided under BSP-MB Circular No. 905. S. 1982 (i.e., 6% or 12% as
the case may be); Circular No. 799, Series of 2013, shall be effective
only from July 1, 2013, it cannot apply retroactively]

20200121 TUESDAY

- Advocates for Truth in Lending, Inc. v. Banko Sentral Monetary Board, GR 192986,
20130115; see #credittransactions case 20130115 advocates for truth in lending, inc. v.
bangko sentral monetary board gr 192986; assigned reading; Cabaero, Bano;

#credittransactionscase 20130115 Advocates for Truth in Lending, Inc. v. Banko Sentral

Monetary Board, GR 192986,

 Petitioners Advocates for Truth in Lending, Inc. et al. seek that SC declare that
BSP-MB has no authority to continue enforcing Central Bank Circular No. 905
(1982) which “suspended” Act No. 2655 (the Usury Law of 1916);

 Factual antecedents:
 o RA No. 265 which created CB on June 15, 1948, empowered CB-MB to
set the maximum rates which banks may charge for all types of loans
and other credit operations, within limits prescribed by the Usury Law:

o Usury Law of 1916 (Act 2655) was amended by PD 1684 (March 17,
1980), authorizing CB-MB to prescribe different maximum rates of
interest which may be imposed for a loan or renewal thereof or the
forbearance of any money, goods or credits, and to change such rate or
rates whenever warranted by prevailing economic and social conditions:
Provided, That changes in such rate or rates may be effected gradually
on scheduled dates announced in advance;

o CB-MB issued CB Circular No. 905, Series of 1982, effective January 1,

1983, removing the ceilings on interest rates on loans or forbearance of
money, goods or credits, and allowing parties to stipulate on the rates
of interest payable;

o June 14, 1993, RA No. 7653 established BSP to replace CB; RA 265
(created CB on June 15, 1948) repealed; PD 1792 [?] also repealed;

 Issue/s: Whether under RA 265 and/or PD 1684 (authorizing CB-MB to prescribe

different maximum rates of interest), CB-MB had authority to prescribe the
maximum rates of interest for all kinds of credit transactions and forbearance of
money, goods or credit beyond the limits prescribed in the Usury Law;

Whether CB-MB exceeded its authority when it issued CB Circular No. 905 which
removed all interest ceilings and thus suspended Act. No. 2655 (Usury Law of
1916) as regards usurious interest rates;

 SC noted that petitioners claim that RA 7653 (law creating BSP) did not re-enact
a provision similar to Section 109 [?] of RA 265 (law creating CB), and therefore,
in view of the repealing clause in RA 7653, the BSP-MB had been stripped of
authority to prescribe the maximum rates of interest that banks may charge for
different kinds of loans and credit transactions, or to suspend RA 2655 (Usury
Law) and continue enforcing CB Circular No. 905

 [SC held (among other matters) that petition is procedurally infirm (writ of
certiorari is directed against tribunal exercising judicial or quasi-judicial function
and BSP-MB does not perform judicial or quasi-judicial function, its issuance of
CB Circular No. 905 was done in the exercise of an executive function, thus,
certiorari will not lie; that the petitioners have no locus standi to file the
petition; the petition (which was filed directly with SC) raises no issues of
transcendental importance];

 SC held that the CB-MB merely suspended the effectivity of the Usury Law when
it issued CB Circular No. 905; that the power of the CB to effectively suspend
 the Usury Law pursuant to PD 1684 has long been recognized and upheld in
many cases;

[PD 1684, authorized CB-MB to prescribe different maximum rates of interest

which may be imposed for a loan or renewal thereof or the forbearance of any
money, goods or credits, and to change such rate or rates whenever warranted
by prevailing economic and social conditions:
Provided, That changes in such rate or rates may be effected gradually on
scheduled dates announced in advance];

o Medel v. CA – CB Circular No. 905 “did not repeal nor in anyway amend
the Usury Law but simply suspended [its] effectivity”; a circular cannot
repeal a law; by virtue of the circular, the Usury Law has been rendered
ineffective; usury has been legally non-existent in our jurisdiction;
interest can now be charged as lender and borrower may agree;

o Other cases also cited;

 BSP-MB has authority to enforce CB Circular NO. 905;

“Sec. 1 of CB Circular NO. 905 provides that “The rate of interest, including
commissions, premiums, fees and other charges, on a loan or forbearance of any
money, goods, or credits, regardless of maturity and whether secured or
unsecured, that may be charges or collected by any person, whether natural or
juridical, shall not be subject to any ceiling prescribed under or pursuant to the
Usury Law, as amended.” SC noted that this does not purport to suspend the
Usury Law only as it applies to banks but to all lenders;

SC noted that Section 109 of RA 265 (law creating CB in 1948) covered only loans
extended by banks, while under Section 1-a of the Usury Law (RA 2655 of 1916)
BSP-MB may prescribe the maximum rate or rates of interest for all loans (not
limited to loans granted by banks); Act 2655 is much broader in scope, whereas
RA 265 (now RA 7653 law creating BSP) merely supplemented Act 2655 (Usury
Law) as it concerns loans by banks and other financial institutions; had RA 7653
been intended to repeal Section 1-a of Act 2655, it would have so stated in
unequivocal terms; implied repeals are not favoured; implied repeal is
predicated upon the condition that a substantial conflict or repugnancy is found
between the new and prior laws; SC found no such conflict between the
provisions of Act 2655 (Usury Law) and RA 7623 (creating BSP);
 The lifting of the ceilings for interest rates does not authorize stipulations
charging excessive, unconscionable, and iniquitous interest; it is settled that
nothing in CB Circular No. 905 grants lenders a carte blanche [permission to do
something in any way you choose to do it; incidentally note also “a la carte” as
used in restaurants – with a separate price for each item on the menu] authority
to raise interest rates to level which will either enslave their borrowers or lead
to a haemorrhaging of their assets; the imposition of an unconscionable rate of
interest on a money debt, even if knowingly and voluntarily assumed, is immoral
and unjust; it is tantamount to a repugnant spoliation and an iniquitous
deprivation of property, repulsive to the common sense of man; it has no
support in law, in principles of justice, or in the human conscience nor is there
any reason whatsoever which may justify such imposition as righteous and as
one that may be sustained within the sphere of public or private morals (Castro
v. Tan); [Note that the courts have authority to mitigate or reduce interest rates
that are excessive, iniquitous or unconscionable];

 [Note that BSP-MB’s authority in issuing CB Circular No. 905 was pursuant to
power provided under Act 2655 (Usury Law), as amended (by PD 1684 of 1980);
and SC held that Act 2655 (an older and broader law) was not repealed by RA
7653 (1993), hence, ruling against the petitioners’ claim that BSP-MB had been
stripped of its authority to issue or continue to enforce CB Circular No. 905];

Summary

Notes

* imposes limits on * applies to all loans not

* Usury Law of 1916 interest rates only to those grantes by
(Act 2655) banks;

* applies to rates that

* empowered CB-MB to banks may charge,
set the maximum rates subject to the limits
which banks may charge under Usury Law;
* RA No. 265 which
for all types of loans and
created CB on June 15,
other credit operations,
1948,
within limits prescribed
by the Usury Law;
* applies to all loans
* authorizing CB-MB to even loans not grantes
prescribe different by banks;
maximum rates of
interest which may be
 imposed for a loan or
renewal thereof or the
* PD 1684 (March 17, forbearance of any
1980), amended Usury money, goods or
Law of 1916 (Act 2655) credits, and to change
such rate or rates;

* issued by CB pursuant
to its power under PD
* removing the ceilings 1684 amending Act
on interest rates on
2655;
loans or forbearance of
money, goods or
credits, and allowing
parties to stipulate on
the rates of interest
payable;

* repealed RA 265
* CB-MB issued CB (created CB on June 15, * note RA 7653 did not
Circular No. 905, Series 1948), also repealed PD expressly repeal Act
of 1982, effective 1792 [?]; 2655 (Usury Law) nor
January 1, 1983, PD 1684 which grants
CB/BSP the power to
change interest rates;

* June 14, 1993, RA No.

7653 established BSP to
replace CB;
 [Note that in 2013, BSP
issued BSP Cir. 799
dated May 2013
effective July 1, 2013, as
discussed in the case of
Nacar v. Gallery Frames]

Agreements circumventing the Usury law

ARTICLE 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. (n)

Notes:

 BSP Circular 905 removed the ceiling on interest rates; parties may agree on the rate of
interest; usury has been legally non-existent;

 Nacar v. Gallery Frames, G.R. No. 189871, 2013 08 13; and BSP Cir. 799 dated May 2013;

 But interests that are iniquitous or unconscionable may be reduced by the courts;

 Example of a circumvention of the laws against the usury law: A borrowed P100 from B on
January 1, 2000, subject to 12% interest per annum, payable in one year. Thus on January 1,
2011, A is supposed to pay the principal of P100 plus interest of P12. To circumvent the law
on usury, A made B execute a promissory for the payment of the loan and the date of the PN
was indicated to be January 1, 1999 instead of January 1, 2000. Thus on January 1, 2001
when the PN became due, B’s obligation will be to pay the principal plus interest for 2 years
or P24 which is effective 24% of the amount borrowed. Such circumvention will be void.
Determination of interest payable in kind
ARTICLE 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. (n)

Notes Notes:

 Quiz - A lent B P10,000 which B will use to plant rice. The amount is agreed to be payable 5
months from the date the loan is granted. A and B further agreed that B shall pay interest at
the rate of 2% per month in kind i.e. rice. At the time the loan was granted the price of rice
was P1,000 per sack; when the time for payment came the price of rice had increased to
P2,000 per sack. How much interest is payable after the 5 months? How many sacks of rice is
B obliged to deliver?
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 Ans. - (2% interest per month on P10,000 is P200 per month or P1,000 for 5 months. B should
deliver ½ sack of rice, based on the value of rice at the time of payment which is P2,000 per
sack of rice;
  When interest is payable in kind, how will the value of the thing to be paid be determined?
Value at the time and place of payment;

Interest due and unpaid; capitalizing interest;

ARTICLE 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. (n)

Notes:

 What is meant by accrued interest; interest due and unpaid;

 Will accrued interests (interest due and unpaid) be subject to interest? As a general rule, no.
But in the following instances, yes:
- When there is agreement to that effect (Art. 1959);

it must be expressly made;

[Does the following stipulation allow compound interest: “Interest, to be computed upon
the still unpaid capital of the loan, shall be paid monthly, at the end of each month.”

No, the language does not justify the charging of interest on interest.]

- When there is judicial demand (Art. 2212); Article 2212. Interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent
upon this point. (1109a)

 What rate of interest will be used to compute for said interest on accrued interest?
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 The rate stipulated in case there is such stipulation, or in case there is no such stipulation, the
legal rate of interest;

 What is compound interest?

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 Interest on accrued interest (interest that has become due but remains unpaid);

 Why are compound interests generally not allowed?

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 Debts would accumulate with a rapidity beyond ordinary calculation and endurance; against
avarice of creditors; some allowance for the indolence of men;

When interest is paid when no interest is due; when interest is paid by mistake;

ARTICLE 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. (n)

Notes:

 What is the rule when the debtor pays interest by mistake?

 Give an illustration where the rule on natural obligation operates.
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 Where borrower orally agreed to pay interest (not reduced into writing); therefore no
interest is due; nevertheless, if the debtor paid the interest because he considered the
payment of the interest as a moral obligation on his part, the payment is valid and cannot be
recovered;

o Moral obligation, an obligation arising out of consideration of right and wrong, arising
from ethical motives, or a mere conscientious duty, unconnected with any legal
obligation;

o Natural obligation, an obligation that has no legal basis and hence does not give a
right of action to enforce its performance; it is based on equity, morality, and natural
law and should be voluntary;

Rule on usurious contracts

ARTICLE 1961.
 Usurious contracts

shall be governed

by the Usury Law and other special laws,

so far as they are not inconsistent with this Code. (n)

Notes:

 During the time the usury law was still operative, there were certain significant legal issues
that the SC had to resolve, wit:

o Increase of the price of a thing on credit over its cash sale price is not interest within
the purview of the usury law, if the sale is made in good faith and not as a mere
pretext to cover a usurious loan; the price involved was a selling price for sale made
on instalment basis;

o Express agreement to charge compound interest is not to be taken into consideration

in determining whether or not the stipulated interest rate exceeded the limit under
the usury law; this ruling was later changed holding that charging compound interest
violates the usury law when the sums charged as such when added to the stipulated
interest exceeds the rate that may be legally charged;

o How much can a debtor get back from the creditor if he had paid usurious interest?
The whole interests paid or just the excess over the legally allowable rate; note
varying decisions of the SC – first, whole interest is void; later, only the excess is void;
subsequently, all interest is void;

TITLE XII
Deposit
CHAPTER 1
Deposit in General and its Different Kinds

What is a contract of deposit;

When is a contract of deposit perfected;
When safekeeping is not the principal purpose of the contract;
 ARTICLE 1962.

A deposit is constituted

from the moment a person receives a thing

belonging to another,

with the obligation

of safely keeping it

and of returning the same.

If the safekeeping of the thing delivered

is not the principal purpose of the contract,

there is no deposit but some other contract. (1758a)

Notes:

 When is a contract of deposit constituted?

 Deposit is a real contract, perfected by delivery;

 What are the obligations of the person receiving the thing deposited?

 What is the rule if safekeeping is not the principal purpose of the contract?

Agreement to constitute a deposit;

ARTICLE 1963.

An agreement to constitute a deposit

is binding,

but the deposit itself is not perfected

 until the delivery of the thing. (n)

Notes:

 A and B agreed that A’s car will be deposited with B two months from now. Has a contract of
deposit been constituted?

 Does said agreement have any legal effect?

 How is a contract of deposit perfected?

Deposits, judicial or extrajudicial

ARTICLE 1964. A deposit may be constituted judicially or extrajudicially. (1759)

Notes:

 How may a contract of deposit be constituted?

- Article 2005. A judicial deposit or sequestration takes place when an attachment or

seizure of property in litigation is ordered. (1785)

- Article 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. (1763)

- Article 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. (1781a)
20200127 MONDAY BLOCK A

Is the depositor obliged to pay compensation to the depositary?

ARTICLE 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. (1760a)

Notes:

 Is the safekeeping of a thing deposited with the depositary subject to compensation?

 When is compensation for the safekeeping payable?

Two kinds of extrajudicial deposit

ARTICLE 1967.

An extrajudicial deposit is either

voluntary

or necessary. (1762)

Notes:

 What are the two kinds of extrajudicial deposit?

  What is a voluntary deposit? See Art. 1968
ARTICLE 1968. “A voluntary deposit is that wherein the delivery is made by the will of the
depositor….”

 What is a necessary deposit? See Art. 1996

ARTICLE 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. (1781a)

CHAPTER 2
Voluntary Deposit

Section 1
General Provisions

When is deposit is voluntary;

Can a person, as depositary, accept a thing from two persons (as depositors) having conflicting claims
on the thing;

ARTICLE 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. (1763)

Notes:

 When is a deposit voluntary?

  May a deposit be made by two or more persons each of whom believes to be entitled to the
thing deposited?

 To whom should such thing be later delivered?

What is the formality required for the contract of deposit;

ARTICLE 1969.

A contract of deposit may be entered into

orally

or in writing. (n)

Notes:

What is the form required for a contract of deposit?

Rule where the depositary is capacitated but the depositor is incapacitated;

ARTICLE 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. (1764)

Notes:
  Capacity, Article 37. Juridical capacity, which is the fitness to be the subject of legal
relations, is inherent in every natural person and is lost only through death. Capacity to act,
which is the power to do acts with legal effect, is acquired and may be lost. (n)

 Depositary is capacitated; depositor is incapacitated;

 May a deposit made by an incapacitated person be properly accepted?

 What is the rule in such case? Persons who accepts the deposit is subject to the obligations of
a depositary under the law, and can be compelled to return the thing;

 Who may demand the return of the thing so deposited?

Rule when the depositor is capacitated but the depositary is incapacitated;

ARTICLE 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. (1765a)

Notes:

 Art. 1971 - Depositary is incapacitated; depositor is capacitated;

 What are the rights of the depositor?
  Does the depositor have a right of action to recover the thing from a third person who may
have acquired it?

Sec. 2
Obligations of the Depositary

What are the obligations of the depositary;

What is the degree of care that the depositary must observe;

ARTICLE 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. (1766a)

Notes:

 What are the obligations of the depositary?

 What rules shall govern the responsibility of the depositary regarding the safekeeping or the
loss of the thing deposited? Title I of this book refers to obligations and contracts (Arts. 1156
to 1304);

 What matter may be taken into consideration in determining the degree of care that the
depositary must observe?
Is the depositary allowed to deposit the thing deposited with a third person;
Is the depositary who deposited the thing with a third person liable for the loss of the thing;

ARTICLE 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. (n)

Notes:

 May the depositary deposit the thing with a third person? No, unless stipulated;

 If the deposit of the thing with a third person is allowed, is the depositary liable in case of loss
of the thing? Yes if he deposited thing with a person who is manifestly careless or unfit;

 Is the depositary liable for the negligence of his employees? Yes;

Is the depositary allowed to change the way of the deposit;

ARTICLE 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 may make such change,

he shall notify the depositor thereof

and wait for his decision,

unless delay would cause danger. (n)

Notes:

 May a depositary change the way of the deposit?

 What is required by law for the depositary to do before making such change? Exception?

What is obligation is imposed upon a depositary who holds securities or instrument that earn interest;
Does Art. 1975 apply to contracts for the rent of safety deposit boxes;

ARTICLE 1975.

The depositary holding

certificates, bonds, securities or instruments which earn interest

shall be bound to collect the latter

when it becomes due,

and to take such steps as may be necessary

in order that the

securities may preserve their value

and the rights corresponding to them

according to law.

The above provision shall not apply

to contracts for the rent of safety deposit boxes.

 Notes:

 What obligations are imposed by the law on the depositary in case of deposit of certificates
that earn interest?

 Will the rule apply to contracts for rent of deposit boxes?

Is the depositary allowed to commingle grains or articles of the same kind and quality;

What is the rule where grains or articles of the same kind and quality are commingled;

ARTICLE 1976.

Unless there is a stipulation to the contrary,

the depositary may commingle

grain

or other articles

of the same kind and quality,

in which case the various depositors

shall own or have a proportionate interest

in the mass. (n)

Notes:

 Is a depositary allowed to commingle grains or other articles of the same kind and quality?
Yes, unless there is contrary stipulation;

 In which case, what will be the claim of the depositors?

 A, B and C deposited with D 10, 40 and 50 sacks of palay, respectively. The warehouse caught
fire and 50 sacks were destroyed. To whom will the remaining 50 sacks belong?
Is the depositary allowed to make use of the thing deposited;

ARTICLE 1977.

The depositary

cannot make use

of the thing deposited

without the express permission of the depositor.

Otherwise, he shall be liable for damages.

However, when the preservation

of the thing deposited

requires its use,

it must be used but only for that purpose. (1767a)

Notes:

 Can the depositary make use of the thing deposited? Only when there is express permission
by the depositor;

 What will be the effect if the depositary used the thing deposited without the express
permission of the depositor?

 Is there an instance when the depositary can make use of the thing deposited even without
the express permission of the depositor?
What is the rule when the depositary is allowed to use the thing deposited;

ARTICLE 1978.

When the depositary

has permission to use the thing deposited,

the contract loses the concept of a deposit

and becomes a loan or commodatum,

except where safekeeping

is still the principal purpose of the contract.

The permission shall not be presumed,

and its existence must be proved. (1768a)

Notes:

 A delivered his car to B with the agreement that B can use the car and take care of its
safekeeping. What contract is entered into by A and B?

 May the depositary presumed permission to use the thing deposited?

Is the depositary liable for the loss of the thing deposited through fortuitous event;

ARTICLE 1979. The depositary is liable for the loss of the thing through a fortuitous event:

(1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
(3) If he delays its return;
 (4) If he allows others to use it, even though he himself may have been authorized to use the same.
(n)

Notes:

 Is the depositary liable for the loss of the thing deposited through fortuitous event? Only in
the instances provided in Art. 1979;

What rules govern the deposit of money in banks (fixed, savings and current deposits);

ARTICLE 1980.

Fixed, savings, and current deposits

of money in banks and similar institutions

shall be governed by the provisions

concerning simple loan. (n)

Notes:

 What rules shall govern the deposit of money by a bank’s depositors?

What are are the obligations of the depositary when the thing deposited is delivered closed and
sealed;

ARTICLE 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. (1769a)

Notes

 What is the rule in case of deposits delivered closed and sealed?

  Is the depositary liable for damages in case the seal or lock is broken?

 In case the lock or seal is broken, who has the burden of proving fault or absence of fault?

 What will be the basis in determining the value of the thing deposited in case there has been
forcible opening?

 When the seal or lock is broken, whether or not there is fault by the depositary, what duty or
obligation is imposed by law on the depositary?

When is the depositary allowed to open a locked box or receptacle containing the thing deposited;

ARTICLE 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. (n)

Notes:

 In what instances is it presumed that the depositary is authorized to open a locked box or
receptacle?

20200128 TUESDAY BLOCK B

20200127 MONDAY BLOCK B

What is the rule on the fruits of the thing deposited;

What is the rule regarding deposit of money with the depositary;

ARTICLE 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. (1770)

Notes:

 The first par. applies to fungible[?] things other than money; the deposit of money is covered
by the 2nd par.;

 Accessories? Things that can be added to something else in order to make it more useful,
versatile, or attractive;

 Accession? Article 440. The ownership of property gives the right by accession to everything
which is produced thereby, or which is incorporated or attached thereto, either naturally or
artificially. (353)

 What obligation is imposed on the depositary under the 2nd par. of Art. 1893 - when the
deposit consist of money ;

 When is the depositary under obligation to pay interest for the receipt of money as deposit;

Article 1896.
The agent owes interest
on the sums he has applied to his own use from the day on which he did so,
and on those which he still owes after the extinguishment of the agency. (1724a)

 Money deposited must be returned with interest when the depositary uses the money for his
own or delay in the return;

 In contracts of deposits, interest is in the form of penalty; there is no agreement to pay

interest in this case, otherwise the contract will be mutuum;
Can the depositary require the depositor to prove his ownership of the thing kept in deposit;

What is the rule where the thing accepted in deposit is discovered to be stolen;

What is the rule where the depositary has reasonable ground that the thing has not been lawfully
acquired by the depositor;

ARTICLE 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. (1771a)

Notes:

 What reason is there for the rule in the first par. Of 1892; to allow the depositary to require
the depositor to prove his ownership after the thing has been accepted as deposit may enable
the depositary to retain the thing against the depositor until the issue is settled; this may
lead to commission of fraud;

 Note that the depositary is not under obligation to receive a thing for the purpose of
safekeeping;

 Note that in deposit, there is no transfer of ownership;

 Note that the bailee is estopped from asserting title to the thing received as against the
bailor;

 What must the depositary do in case he learns that the thing received in deposit is a stolen
article; Advise is to be made to the owner for him to take necessary precautions or actions to
retrieve it;

 Depositary cannot just deliver the thing to the owner without the knowledge of the
depositor;

 If the depositor insists on this ownership, remedy will be interpleader;

 If identity of owner cannot be ascertained, thing may be returned to the depositor based on
last par. of 1984;

 What if the depositor demands the immediate return of the thing; - [suggested] that he wait
for 30 days; purpose of the law is to protect the owner; if thing is returned immediately, the
intent of the law would be defeated;
  What if the owner does not take action after being advised; for how long must the depositary
wait; after that what can he do;

 In case of things lost and found, see Article 719 below;

Article 719.

Whoever finds a movable, which is not treasure,

must return it to its previous possessor.

If the latter is unknown,

the finder shall immediately deposit it with the mayor

of the city or municipality where the finding has taken place.

The finding shall be publicly announced by the mayor

for two consecutive weeks in the way he deems best.

If the movable
cannot be kept without deterioration,
or without expenses which considerably diminish its value,
it shall be sold at public auction
eight days after the publication.
Six months from the publication having elapsed
without the owner having appeared,
the thing found, or its value, shall be awarded to the finder.
The finder and the owner shall be obliged,
as the case may be, to reimburse the expenses. (615a)

NOTES

 What reason is there why the depositary is allowed to return the thing to the depositor; - to
avoid possible liability;
Who can demand for the return of the thing deposited where there are two or more depositors who
are not solidary and the thing admits of division;

What is the rule where there is solidarity or the thing does not admit of division;

ARTICLE 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. (1772a)

Notes:

 What are the right of solidary depositors or where thing is not capable of division;

Article 1212.
Each one of the solidary creditors
may do whatever may be useful to the others,
but not anything which may be prejudicial to the latter. (1141a)

Article 1214.
The debtor may pay any one of the solidary creditors;
but if any demand, judicial or extrajudicial, has been made by one of them,
payment should be made to him. (1142a)
  Note where there is stipulation for the return of the thing to a designated depositor; - return
should be to him; this may be subject to modification with the consent of the parties
concerned;

What is the rule where the depositor becomes incapacitated after making the deposit;

ARTICLE 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. (1773)

Notes:

 What is the rule if the depositor loses capacity after the making of the deposit;

 Administrator may be a guardian appointed by court; spouse who is given power of

administration by the court (Art. 128 FC); or representative in case depositor is declared
absent;

 Note that if depositor is capacitated at the time of the deposit with a depositary who is
incapacitated, Art. 1971 shall apply;

ARTICLE 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. (1765a)

Where should the thing deposited be returned by the depositary to the depositor;

ARTICLE 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. (1774)

Notes:
  Where should the thing deposited be returned;

When can the depositor demand for the return of the thing deposited;

When is a depositary restricted from returning the thing deposited to the depositor despite the
demand of the depositor;

ARTICLE 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. (1775)

 Notes:

 When must the thing deposited be returned to the depositor;

 May the depositor demand the return at will; why is the depositor allowed to do this under
the law; - the term or period is for the benefit of the depositor;

 If deposit Is for compensation, must the depositor still pay for the depositary’s services;

 Is the right of the depositor to demand the return of the thing at will absolute;

 Exceptions
- Subj. to writ of attachment; placed in custodial legis
- When there is opposition to the return by a third person;
- When there is opposition to the removal;
- Re stolen goods, period of 30 days;

When is the depositary allowed to return the thing deposited despite an agreement on a period;

When is the depositary not allowed to return the thing even when there are justifiable reasons for not
keeping the thing;

ARTICLE 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. (1776a)

Notes:
  If deposit is not gratuitous, may 1989 apply, no;
 Example, depositary have to leave for abroad for needed medical treatment;
 What if deposit is for a consideration; cannot return; there will be breach of contract;
possible exception may be force majeure;
 Proportionate reduction in compensation;

What is the rule when the thing is lost by force majeure;

What is the rule when the thing is expropriated by the government and value is received in its place;

ARTICLE 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. (1777a)

Notes:

 Depositary will not be liable; but note the obligation in case something is received;

What is the rule where the depositary dies and the thing deposited remaining in his possession is sold
by the heir of the depositary;

ARTICLE 1991.

The depositor's [depositary’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. (1778)

Notes:

 Depositary has died and left heir who took possession of the thing deposited and sold it in
good faith to third person;

Sec. 3
Obligations of the Depositor

Is the depositor obliged to reimburse the depositary for expenses incurred for the preservation of the
thing deposited;

ARTICLE 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. (1779a)

Notes:

 Why is the depositor when the deposit is for compensation not obliged to reimburse the
depositary for expenses for preservation of the thing deposited; - deemed considered in the
compensation paid by the depositor;

 The expenses subject to reimbursement does not includes useful, luxurious expenses;
What is the rule where the depositary suffers loss arising from the character of the thing deposited;

ARTICLE 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 [depositor] 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. (n)
Notes:

May the depositary have the right to retain the thing deposited against the depositor;

ARTICLE 1994.

The depositary may retain the thing in pledge

until the full payment

of what may be due him by reason of the deposit. (1780)

Notes:

 Right of retention is granted by the law in this case;

 Can the right be exercised whether the deposit is gratuitous or for a compensation; - yes;

 Thing is retained in pledge;

Article 2121.
Pledges created by operation of law,
such as those referred to in articles 546, 1731, and 1994,
are governed by the foregoing articles
on the possession, care and sale of the thing
as well as on the termination of the pledge.
However, after payment of the debt and expenses,
 the remainder of the price of the sale shall be delivered to the obligor. (n)

Article 546. Necessary expenses shall be refunded to every possessor; but only the
possessor in good faith may retain the thing until he has been reimbursed therefor.

Useful expenses shall be refunded only to the possessor in good faith with the same
right of retention, the person who has defeated him in the possession having the option
of refunding the amount of the expenses or of paying the increase in value which the
thing may have acquired by reason thereof. (453a)

Article 1731. He who has executed work upon a movable has a right to retain it by way
of pledge until he is paid. (1600)

Article 1994. The depositary may retain the thing in pledge until the full payment of
what may be due him by reason of the deposit. (1780)

 May the depositary sell the thing retained in pledge;

Article 2108.
If, without the fault of the pledgee,
there is danger of destruction, impairment, or diminution in value of the thing pledged,
he may cause the same to be sold at a public sale.
The proceeds of the auction
shall be a security for the principal obligation
in the same manner as the thing originally pledged. (n)

 After payment of the expenses remainder is delivered to the obligor; this is unlike the rule in
ordinary pledge where the excess pertains to the pledgee, though in case of deficiency, the
pledgee can no longer run after the pledgor for the deficiency;

 Problem – In case the depositor happens to be indebted to the depositary under certain
transaction separate from the deposit, may the depositary retain the thing until such debt is
paid first by the depositor;

Under Art. 1995, what grounds are provided for the extinguishment of the contract of deposit;
Are the grounds for extinguishment of deposit provided in Art. 1995 the only grounds for the
extinguishment of the contract of deposit;

ARTICLE 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. (n)

Notes:

 Grounds for extinguishment is not limited to those listed in 1995; - note expiration of period;
demand at will for return; mutual withdrawal; fulfilment of the purpose of the deposit;
fulfilment of resolutory condition agreed upon;

 If the depositary is at fault, there will be liability for damage/ the value of the thing;

 If the deposit is for compensation, the deposit is not extinguished; rights and liabilities arising
from contract are transmissible to the heirs, unless there is a stipulation to the contrary;

CHAPTER 3
Necessary Deposit

When is deposit called a necessary deposit under the Civil Code;

ARTICLE 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. (1781a)

Notes:

 Illustrations of cases under item no. 1 (made in compliance with a legal obligation)

o Article 538. Possession as a fact

cannot be recognized at the same time in two different personalities
 except in the cases of co-possession.
Should a question arise regarding the fact of possession,
the present possessor shall be preferred;
if there are two possessors, the one longer in possession;
if the dates of the possession are the same,
the one who presents a title;
and if all these conditions are equal,
the thing shall be placed in judicial deposit
pending determination of its possession or ownership through proper proceedings.
(445)

o Article 586. Should the usufructuary fail to give security

in the cases in which he is bound to give it,
the owner may demand that the immovables be placed under administration,
that the movables be sold,
that the public bonds, instruments of credit
payable to order or to bearer
be converted into registered certificates
or deposited in a bank or public institution,
and that the capital or sums in cash
and the proceeds of the sale of the movable property
be invested in safe securities.

The interest
on the proceeds of the sale of the movables
and that on public securities and bonds,
and the proceeds of the property placed under administration,
shall belong to the usufructuary.

Furthermore, the owner may, if he so prefers,

until the usufructuary
gives security
or is excused from so doing,
retain in his possession the property in usufruct
as administrator,
subject to the obligation to deliver to the usufructuary
the net proceeds thereof,
after deducting the sums
which may be agreed upon
or judicially allowed him for such administration. (494)

o Article 1754. The provisions of articles 1733 to 1753 shall apply

to the passenger's baggage
which is not in his personal custody
or in that of his employee.
 As to other baggage,
the rules in articles 1998 and 2000 to 2003
concerning the responsibility of hotel-keepers shall be applicable.

o Article 2104. The creditor cannot use the thing pledged,

without the authority of the owner,
and if he should do so,
or should misuse the thing in any other way,
the owner may ask that it be judicially or extrajudicially deposited.
When the preservation of the thing pledged requires its use,
it must be used by the creditor but only for that purpose. (1870a)

o Other instances – cash deposits placed as bond by certain officers before they assume
their positions;

 Illustrations of cases under item no. 2 When it takes place on the occasion of any calamity,
such as fire, storm, flood, pillage, shipwreck, or other similar events.

o Case of properties saved by another person on the occasion of conflagration; also in

other disasters like storm, floods, shipwreck, pillage and similar other misfortunes;

See Art. 2168:

Article 2168. When during a fire, flood, storm, or other calamity,

property is saved from destruction
by another person
without the knowledge of the owner,
the latter [the owner]
is bound to pay the former just compensation.

ARTICLE 1997.

The deposit referred to in No. 1 of the preceding article

[When it is made in compliance with a legal obligation]

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

[When it takes place on the occasion of any calamity,

such as fire, storm, flood, pillage, shipwreck, or other similar events]

shall be regulated by the provisions concerning voluntary deposit

and by article 2168. (1782)

Notes:

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

ARTICLE 1998.

The deposit of effects made by travellers in hotels or inns

shall also be regarded as necessary.

The keepers of hotels or inns

shall be responsible for them as depositaries,

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. (1783)

 Notes:

 See case of Garcia v. Antipolo Hotel, p. 98 (Pineda);

ARTICLE 1999.

Is the hotel-keeper liable for things placed in the annexes of the hotel?

ARTICLE 1999.

The hotel-keeper is liable

for the vehicles, animals and articles

which have been introduced or placed

in the annexes of the hotel. (n)

Notes

 Note also Art. 102, par. 1, RPC; p. 99;

Art. 102 RPC
Subsidiary civil liability of innkeepers, tavern-keepers and proprietors of establishments. –
In default of the persons criminally liable,
innkeepers, tavern-keepers, and any other persons or corporations
shall be civilly liable for crimes committed in their establishments,
in all cases where a violation
of municipal ordinances
or some general or special police regulations
shall have been committed by them or their employees.

Innkeepers are also subsidiarily liable

for the restitution of the goods
taken by robbery or theft
within their houses
from guests lodging therein,
or for the payment of the value thereof,
provided that guests
shall have notified in advance
 the innkeeper himself, or the persons representing him,
of the deposits of such goods within the inn;
and shall furthermore have followed the directions
which such innkeeper or his representative may have given them
with respect to the care and vigilance over such goods.
No liability shall attach
in case of robbery with violence against or intimidation of persons
unless committed by the innkeeper’s employees.

ARTICLE 2000.

Is the hotel keeper liable for loss caused by the employees of the hotel keeper?
What about loss caused by strangers?
What about loss due to force majeure?
What particular rule is provided regarding the degree of diligence required to be observed by the
hotel keeper?

ARTICLE 2000.

The responsibility referred to

in the two preceding articles

[Arts. 1998 - deposit of effects made by travellers in hotels or inns

and 1999 - hotel-keeper is liable for the vehicles, animals and articles

which have been introduced or placed in the annexes of the hotel]

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. (1784a)

Notes

ARTICLE 2001.

Is the act of thief or robber deemed force majeure?

Is the hotel-keeper liable for said act?
Under what instance is act of thief or robber deemed force majeure?

ARTICLE 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. (n)

Notes

 Where the theft or robbery is committed by an employee of the hotel, Art. 2000 shall apply,
making the hotel-keeper liable for the loss;

ARTICLE 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. (1784a)

ARTICLE 2002.
Is the hotel-keeper liable for loss caused by the guest, family or visitors of the hotel guest?
What is the rule if loss is caused by the character of the things brought into the hotel?

ARTICLE 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. (n)

Notes

 The fault under Art. 2002 is on the side of the guest and not of the hotel-keeper;
ARTICLE 2003.
Will the posting of notice declaring that the hotel-keeper will not be liable free the hotel-keeper from
liability?

What is the rule where there is stipulation that the hotel-keeper’s responsibility under Arts. 1998-
2001 NCC is suppressed or diminished?

ARTICLE 2003.

The hotel-keeper cannot free himself

from responsibility

by posting notices to the effect

that he is not liable for the articles

brought by the guest.

Any stipulation

between the hotel-keeper and the guest

whereby the responsibility of the former

as set forth in articles 1998 to 2001

is suppressed or diminished

shall be void. (n)

Notes

 See case of De Los Santos v. Tan Khey, p. 102; hotel guest’s bag (containing cash, ring,
revolver) placed under his bed was stolen; hotel disclaimed liability because the guest did not
deposit the things with the manager despite a notice to that effect posted in the hotel;

SC held when the law speaks of “deposit” of effects by the traveller, personal receipt by the
innkeeper for safekeeping of the effects is not necessarily meant thereby; the reason
therefor is the fact that the nature of the business of the innkeeper is to provide not only
lodging but also security for their personal effects;

The security mentioned is not confined to effects delivered to the innkeeper for safekeeping
but also to all effects brought to the hotel; innkeepers, by the nature of their business, have
supervision and control of their inns and its premises; by reason of the travellers being
 strangers to the place, travellers are constrained to rely on the vigilance and protection of
innkeepers over their effects placed in the premises of the hotel;

Authorities are to the effect that it is not necessary in order to hold an innkeeper liable that
the effects of the guests be actually delivered to him or his employees, it is enough that they
are within the inn;

Article 2004.
Does the hotel-keeper have the right to retain the things brought into the hotel in case lodging fee or
supplies furnished to the guest are not paid by the guest?

Article 2004.
The hotel-keeper has a right to retain
the things brought into the hotel by the guest, as a security for credits
on account of lodging,
and supplies usually furnished to hotel guests. (n)

Notes

 Art. 2004 applies only when the debtor is a guest of the hotel, i.e. one who is registered or
one allowed to stay as guest; the rule does not apply if the debtor is not a guest of the hotel
as understood by the term “traveller”;

 Note that a right of retention is also recognized in construction or piece of work (Art. 1721)
and in commodatum for damages suffered by the bailee occasioned by the unrevealed flaws
of the thing loaned (Art. 1944 and Art. 1951);

 See case of Chuidian v. Hotel Inter-Continental, p. 104; whatever is brought into the hotel by
the guest becomes security for credit and is subject to retention; it is enough that they were
brought into the hotel, it is not required that the hotel must have acquired physical or
constructive possession of said things;

The right to retain is in the nature of legal pledge under Art. 2080; [Article 2105. The debtor
cannot ask for the return of the thing pledged against the will of the creditor, unless and
until he has paid the debt and its interest, with expenses in a proper case.];

 Note, Paras submits that the right to retain does not include the right to sell without judicial
authorization, citing that the law is silent on this point; Paras however also notes that the
right of retention is in the nature of a pledge created by operation law and thus, the hotel-
 keeper is allowed to sell the thing retained under Arts. 2121 and 2122; Paras submits that the
issue is debatable;

 See also Art. 315 of RPC; act of obtaining food or accommodation in a hotel or inn without
payment is estafa;

CHAPTER 4
Sequestration or Judicial Deposit

When is there judicial deposit or sequestration?

ARTICLE 2005.

A judicial deposit or sequestration takes place

when an attachment or seizure of property in litigation

is ordered. (1785)

Notes

What things may be the objects of sequestration?

ARTICLE 2006.

Movable as well as immovable property

may be the object of sequestration. (1786)

Notes

Until when is the depositary of the property sequestered charged with his responsibilities as
depositary?
ARTICLE 2007.
 The depositary of property or objects sequestrated

cannot be relieved of his responsibility

until the controversy

which gave rise thereto

has come to an end,

unless the court so orders. (1787a)

Notes

What is the degree of care that the depositary of sequestered property is obliged to observe?
ARTICLE 2008.

The depositary of property sequestrated

is bound to comply, with respect to the same,

with all the obligations

of a good father of a family. (1788)

NOTES