CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
BASED ON THE LECTURES OF ATTY. SARONA
PRELIM EXAM COVERAGE
November 12, 2015 (1st Hour)
Transcribed by: Alona Suzell B. Ruyeras
PART I: CONCEPT OF CREDIT TRANSACTIONS
We have Credit Transactions. So what are these
transactions that are involved here? These are transactions
for purchaser of goods or loan of goods, including services
or money, which (relates to) a purchase or loan at the
present time with promise to pay or deliver in the future.
With these credit transactions, it is now possible for more
exchanges to take place. Because essentially, you get to
enjoy the money that you borrow now but you will pay later.
Or you get to enjoy the use of a property now and just
return it later.
So, credit transactions that are involved, we
have:
• Bailment Contracts;
• Usury Law, but the Usury Law has already been
suspended;
• Contracts of Guarantees and Suretyship;
• Mortgages;
• Antichresis; and
• Concurrence and Preference of Credits.
Now, in relation to Credit Transactions, we will also
discuss the two (2) types of security. Security, meaning
yung collaterals noh. It can be:
1. Real Security; or
2. Personal Security.
When we talk about Real Security, we have here:
• Contracts of Pledge;
• Chattel Mortgage;
• Real Estate Mortgage; as well as
• Antichresis.
With these types of “Secured Transactions” or real
security, there is a collateral or an encumbrance upon a
property.
And then we have Personal Security or “Unsecured
Transactions” wherein the obligation or the collateral is
essentially supported only by a promise to pay or a
personal commitment of a person such as a guarantor or a
surety. So with contracts of security, essentially, something
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is given, deposited or served as a means to ensure the
fulfilment or enforcement of an obligation or of protecting
some interest in the property.
Bailment
So, we have here contracts of bailment. Bailment,
meaning, it involves contracts to deliver. Delivery of
property of one person to another in trust for a specific
purpose with a contract, whether 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 retains it. So, we have
here contractual relations. Since it involves contractual
relations, then we also take into consideration the essential
elements of a valid contract.
Now, who are the parties in a bailment? We have:
• The Bailor; and
• The Bailee
Bailor, also referred to as the “Commodatario”, is the
giver. The one who delivers possession or custody of the
thing bailed. As you will see when we discuss the different
contracts involving bailment, it is NOT required that the
bailor be the owner of the property that is delivered. What
is important is that the bailor must have a POSSESSORY
INTEREST like that of a lessee, wherein he is not
prohibited to let other persons lease or use the property, as
well as a usufructuary, wherein the person is given the right
to enjoy the property without transfer of ownership. Again,
these persons (i.e. Lessee and Usufructuary) can be
considered as bailors.
And then we have bailees. Bailee is the recipient. It
refers to the person who receives the possession or
custody of the thing that is delivered. He is also known as
the “Commodante”. Now, the bailee’s obligation is to
restore the subject of the bailment in the same or in an
altered form xxx (NOTE: a few words are inaudible),
therefore.
Kinds of Bailment:
1. For the sole benefit of the bailor wherein we have
a Gratuitous Deposit and Mandatum;
2. For the sole benefit of the bailee. This would
involve contracts of Commodatum as well as
Gratuitous Simple Loan or Mutuum; and
3. For the benefit of both parties such as a Contract
of Deposit for compensation, Involuntary Deposit,
as well as Pledge.
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When we say the bailment is “gratuitous”, there is
no consideration involved but nevertheless,
obligations are imposed on the respective parties.
When we say “Mutual Benefit Bailments”, the
third kind that I’ve mentioned, essentially what we
have here are business transactions with
consideration.
Now, we also have “Bailments for Hire”:
• Hire of Things, we have contracts of
lease;
• Hire of Service, like that of a contract
for piece of work under Article 1467;
• Hire for Carriage of Goods, like
common carrier; and
• Hire for Custody for Safekeeping, like
that which is covered under the
Warehouse Receipts Law.
PART II: LOAN (ARTICLES 1933 - 1961)
I. Concept
So the first Credit Transaction that we will tackle
is that of a Contract of Loan. We begin with Article 1933:
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 ownership
of the thing loaned, while in simple loan, ownership
passes to the borrower.
Alright, when we think of loan, the first thing that
comes into our mind is money, “pera” or “utang”. Pag
sinabing loan, naghiram ka ng pera. But if you take into
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consideration the definition as provided under our laws,
loan is not just money. Loan as provided under Article
1933, we have two (2) kinds:
1. Commodatum; and
2. Mutuum.
So these are the two (2) Kinds of Contracts of
Loan. Again, as we go along, we will be able to discuss
more of this.
Now, first thing that you should consider is that a
Contract of Loan is a REAL CONTRACT, perfected by
mere delivery. And essentially, it is considered as a
unilateral contract because obligations are more on the
part of the borrower. But we will see later on that there are
also obligations on the part of the bailee pero very minor
nalang siya with regard to this loan.
Now, what is the cause or consideration in this
Contract of Loan?
• On the part of the borrower, the
consideration is the acquisition of the
thing;
• On the part of the lender, the right to
demand the return or the equivalent
thereof.
Now, when we talk of loan in the common
acceptance of the term, that is what we call MUTUUM
wherein there is delivery by one party and the receipt of the
other party who becomes the OWNER of that sum that was
given or other consumable thing upon agreement, whether
express or implied, with the obligation to repay the same
amount of the same kind and quality, with or without
interest.
Loan vs. Credit:
When we say loan in its general sense, it is
different from CREDIT. Because when we talk about credit,
it is the ability to borrow money or things by virtue of the
confidence or trust reposed by a lender that he will pay
what he has promised within the period specified by the
parties. So it is a sum credited on the books of a company
who gives credit to a person who appears entitled to it.
LOAN (in its general
CREDIT
sense)
Delivery by one party and The ability to borrow money
the receipt of the other party or things by virtue of the
who becomes the owner of confidence or trust reposed
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that sum that was given or by a lender that he will pay consumable fungible thing
other consumable thing what he has promised (e.g. money, rice)
upon agreement, whether within the period specified As to ownership Ownership is Ownership is
express or implied, with the by the parties retained by the transferred to the
obligation to repay the bailor person who
same amount of the same obtained the loan
kind and quality, with or As to cause ESSENTIALLY May be
without interest. Gratuitous (not gratuitous or
just gratuitous) onerous
As to property Involves real or Only involves
Loan vs. Discounting: personal personal
properties properties (e.g.
When we talk about loan, it is different from money or
DISCOUNTING. Now, what happens in discounting? It is a consumable
“mode of loaning money”. Anybody who is familiar with thing)
discounting? A check is issued in your name pero post- As to purpose For temporary For consumption
dated pa. Wala ka naming bank account or kelangan mo use or
pa puntahan sa banko para magpa-encash. So, magpa possession only
discount ka. When we say “magpa-discount”, bawasan As to demand Bailor may The lender/bailor
yung amount, diba? sa check? Which should be
demand the may not demand
considered as interest on the part of the person na nagpa- return of the thing its return before
discount. So, essentially, it is really not a loan. In a loaned before the lapse of the
discount, interest is deducted in advance unlike that of a the expiration of term agreed upon
loan in its general term. So you could have a single paper the term in case
discounting, only the signature of the maker appears, in of urgent need as
loan. But if it is discounting, that is considered as double provided for
paper in the sense that you would have two (2) signatures under Article
appearing with both parties liable for the payment.
1946
As to obligation To return the To pay the same
LOAN DISCOUNTING
thing loaned amount of the
Interest usually not Interest is deducted in same kind and
deducted in advance. advance. quality that was
loaned to you
One could have a “single Considered as “double As to loss Applying the The borrower
paper discounting” (only the paper discounting” in the principle of Res suffers the loss
signature of the maker sense that you would have Perit Domino, the
appears). two (2) signatures owner/bailor
appearing with both parties As to nature Purely personal Not purely
liable for the payment. personal in
nature

Alright, so what are the two (2) kinds of loan?

So, those are the distinctions between
1. Commodatum; and Commodatum and Mutuum.
2. Mutuum (also known as “Simple Loan”).
Kinds of Commodatum:
What are the distinctions between these two?
1. Ordinary Commodatum; and
COMMODATUM MUTUUM 2. Precarium.
As to object Ordinarily Subject matter is
involves money or other Aside from distinguishing loan from credit, from
something not consumable or discounting, we also take into consideration that a loan is
different from a lease.
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Loan vs. Lease:

In lease, one of the parties binds himself to give Also, a loan is different from a barter.
to another the enjoyment or use of a property for a price
certain. Loan vs. Barter:

LOAN (Mutuum) LEASE A barter is onerous. You exchange something for

Delivery by one party and
the receipt of the other party
who becomes the owner of
that sum that was given or
other consumable thing
upon agreement, which is
either express or implied,
with the obligation to repay
the same amount of the
same kind and quality, with
or without interest.
some quantity, quality or kind.
One of the parties binds
himself to give to another LOAN BARTER
the enjoyment or use of a
property for a price certain. Commodatum is essentially Onerous
gratuitous, while Mutuum
may be onerous or
gratuitous
Now, let’s go to the specific provisions for a
Commodatum.

Deposit is also different from a loan. II. Commodatum

Loan vs. Deposit:
In deposit, you deliver a subject matter but you
do not authorize the depositary to use the said property. In
deposit, the purpose is safekeeping.
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.

LOAN DEPOSIT Okay, So, this emphasizes the purpose of a

You allow the borrower to You do not authorize the
use. depositary to use the said
property. The purpose is
safekeeping.
commodatum, noh – USE OF THE THING LOANED. Now,
relate it to Article 1933, that the bailee is allowed to make
use of the thing loaned and that commodatum is essentially
gratuitous. In other words, walay compensation, as to be
distinguished from a Contract of Lease.

What happened in the case of Pajuyo vs. Court

of Appeals?
Usufruct.

Loan vs. Usufruct: Pajuyo vs. Court of Appeals

In usufruct, enjoyment of the fruits is the main
cause.
LOAN
Temporary possession and
use (Commodatum) and
Consumption (Mutuum) can
be the purposes.
Facts:
Pajuyo was able to acquire rights over a 250 sq. m. lot in
USUFRUCT Payatas, Quezon City from one Pedro Perez. Pajuyo made
a house made of light materials in such lot. He and his
Enjoyment of the fruits is
family lived there from 1979 to December 7, 1985.
the main cause.
On December 8, 1985, Pajuyo entered into a Kasunduan
with respondent. Pajuyo, as the owner of the house,
allowed Guevarra to live in the house for free provided that
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the latter will maintain the cleanliness and orderliness of
the house. Guevarra promised that upon Pajuyo’s demand,
the former will vacate the premises.
However, when the time came that Pajuyo demanded him
to vacate, Guevarra refused. This prompted Pajuyo to file
an ejectment case against Guevarra.
MTC rendered a decision in favour of Pajuyo. RTC affirmed
the same.
Issue:
W/N the Kasunduan entered into by Guevarra and Pajuyo
can be considered a Commodatum
Ruling:
The contract cannot be considered a Commodatum
because it is NOT essentially gratuitous. The stipulation
regarding maintaining the cleanliness and orderliness of
the house was considered by the Court as a cause or
consideration.
Q1: Why is there a need to determine whether it was a
commodatum or not?
A1: It is important to determine whether it was a
commodatum or not Ma’am because there is a
responsibility on the part of the lender or the bailee to
return the property upon the demand of the property.
Q2: So if it is not a commodatum, (Pajuyo) cannot demand
the return of the property?
A2: Ay, rather Ma’am, it is important to determine whether
it was a commodatum or not because, if it is a
commodatum, then the....
Q3: What was the case filed here?
A3: Ejectment. Unlawful Detainer, Ma’am.
Q4: Okay. So, the issue is with regard to entitlement of
possession. So was there a commodatum?
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A4: According to the Supreme Court Ma’am, there was
NO commodatum.
Q5: Why not? Isn’t it that he was allowed to use the
property?
A5: Yes Ma’am but the Court considered the stipulation to
maintain the cleanliness and the orderliness (of the house)
as the compensation, Ma’am.
Q6: So, if their Kasunduan was not a commodatum, what
kind of contract would that be? It is not commodatum
because there is an obligation imposed on the part of the
bailee which will not make the Kasunduan essentially
gratuitous. So if it is not commodatum, then what kind of
contract?
A6: Contract of Lease, Ma’am??
Q7: So was there a stipulation to pay for a price certain?
A7: (NOTE: Ma’am answers her own question) It would be
similar to a contract of lease but we could not really say
that it would exactly be a contract of lease because there
was no payment of a price.
Q8: So with that, since the law does not provide a name for
such contract, what do you think that contract would be? Is
the Kasunduan a valid contract?
A8: No Ma’am??
Q9: Oh, so there was no valid contract? There was no
meeting of the minds between the parties??
A9: It is a valid contract Ma’am.
Q10: What kind of contract would that be?? It is not
commodatum because it is not essentially gratuitous. It is
not exactly a lease. Ang nakalagay dyan, “akin to a
landlord-tenant relationship”. It is similar to a lease but not
exactly a lease. So san sya mahulog na classification? If
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BY: 2 MANRESA 2015-2016
the law does not designate a name for a contract, what
would that be?
A10: (NOTE: Class answers) Innominate Contract
Q11: Oh, What kind of innominate contract?
A11: Do ut facias.
Q12: Do ut facias which means?
A12: I give so that you may do.
Okay, thank you. So, what do we have here? In
this case, the Supreme Court emphasized the fact that a
Commodatum MUST be ESSENTIALLY GRATUTOUS.
While it is true that the bailor here was given the right to
use the subject matter, it is not essentially gratuitous
because while the Kasunduan did not require Guevarra to
pay rent, it obligated him to maintain the property in good
condition. So that obligation makes it a contract different
from commodatum.
Now, the effects of the Kasunduan are also
different because here, a case of ejectment is similar to a
lease (NOTE: Ha?? Di ko po ‘to gets?
) However, even if
we assume that we do not have a commodatum, Guevarra
would still have the duty to return, or rather turn-over, the
possession to Pajuyo, the bailor.
Now, take note here that one of the defenses of
Guevarra was that Pajuyo does not have a valid title over
the property. Now, take note that the defense could not be
used in a contract of commodatum because ownership is
NOT required on the part of the bailor for the perfection of
a commodatum.
So, we could say that commodatum is somehow
similar to a donation because a benefit is given to the
recipient to make use of the property without any
compensation. Now, the presumption here is that when the
bailor in commodatum has loaned the thing to a bailee, he
has no need for the said property.
But, the difference between donation and
commodatum is obviously, in donation, there is
TRANSFER OF OWNERSHIP which is absent in
Commodatum.
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Now, as mentioned earlier in Article 1935, the
purpose (of commodatum) is to make use of the thing itself.
So the use is limited to the thing, the fruits are EXCLUDED
unless otherwise stipulated by the parties.
Why are the fruits excluded in the use? Because
“fruits” is (sic) essentially a right to be enjoyed by the
OWNER. It could be the bailor if he is the owner, it could
be the bailor if he is given the right by the owner to make
use thereof. But just because the bailee is given the right to
use of the thing, it does not necessarily mean na kasama
ang fruits unless otherwise stipulated.
Also in Article 1935, it emphasizes the purpose of
a commodatum – USE.
However, if there is compensation, it will not be
considered as a commodatum anymore as it will be
considered as a LEASE. So the purpose of commodatum
is the temporary use of the thing loaned for a certain time.
If you deliver a thing to another person, but the
bailee is not allowed the use thereof, take into
consideration the purpose which may be safekeeping
wherein it will be considered as a DEPOSIT.
Q1: So, what is a valid subject matter in a commodatum?
What would be a subject matter in commodatum? It was
already mentioned earlier during the distinctions.
A1: Ummm, it ordinarily involves something not
consumable.
Q2: What do you mean by consumable things?
A2: It will be consumed Ma’am, in time it will be lesser in
value.
Q3: You mentioned that the subject matter in a
commodatum is a non-consumable thing. Is it possible for
a commodatum that the subject matter is a consumable
thing?
A3: Yes Ma’am.
Q4: When?
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A4: When the use of the consumable thing Ma’am would

be for exhibition.
Q6: Why would that matter (Ma’am refers to the issue on
W/N this case is a commodatum)?

Q5: Example? A6: It would matter Ma’am because it relates to the amount
to be returned Ma’am.
A5: Rice, for exhibition.

Q7: What do you mean by that? So do we have a

What happened in the case of Producers Bank commodatum here? What is the subject matter?
vs. Court of Appeals?
A7: Yes Ma’am. The P200,000.

Producers Bank vs. Court of Appeals

Facts: Q8: So, that is money?

Franklin Velez was asked by a friend to assist Doronilla in
incorporating his business, Sterella. Velez asked that
P200,000 be deposited in the bank for such purpose and
he promised that the same shall be returned and that the
same can be withdrawn in a month’s time. The said
amount was indeed deposited under the name of Sterella.
A8: Yes Ma’am. But still, the Supreme Court held that it is
still a commodatum because the P200,000 was used to
make it appear that Sterella (the business) has an amount
that is sufficient for its incorporation. So although it is
money, a consumable thing, it is still a commodatum
because it was used for exhibition.

Later on, it was discovered that the office of Sterella is not

anymore in the original location. Also, upon checking with
the bank, only P90,000 of the P200,000 was left.
Issue:
W/N this is a case of commodatum
Q9: So what is the effect that it was determined that it was
a commodatum and not a simple loan?
A9: It is essential Ma’am that the same amount, the
P200,00, will be given back/returned.

Ruling:
YES. As provided under Article 1936, “consumable goods
may be the subject of commodatum if the purpose of the
contract is not the consumption of the object as it is merely
for its exhibition.”
The rule here is to determine the intention of the parties.
The intention of the parties in entering the contract shall be
accorded primordial consideration in determining the actual
character of a contract. In case of doubt, contemporaneous
and subsequent acts of the parties shall be considered in
such determination.
Okay. So, we have in this case a contract of
commodatum and not a mutuum even if the subject matter
is money. Now, as provided under Article 1936,
“consumable goods may be the subject of commodatum if
the purpose of the contract is not the consumption of the
object as it is merely for its exhibition.” So, a commodatum
may have for its subject matter a consumable thing.
Article 1936. Consumable goods may be the subject of a
commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for
exhibition.

Here, evidence shows that private respondent agreed to

deposit his money in the savings account of Sterella for the The rule here is to determine the intention of the
purpose of making it appear that the said firm has sufficient parties. The intention of the parties, as we all know, in
capitalization for incorporation with the promise that the determining the contract, shall be accorded primordial
amount shall be returned within thirty (30) days. consideration in determining the actual character of a

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contract. In case of doubt, as we have learned in the
interpretation of contracts, contemporaneous and
subsequent acts of the parties shall be considered in such
determination. Here, evidence shows that private
respondent agreed to deposit his money in the savings
account of Sterella for the purpose of making it appear that
the said firm has sufficient capitalization for incorporation
with the promise that the amount shall be returned within
thirty (30) days. Private respondent clearly accommodated
Doronilla by lending his money without consideration as a
favour to his friend.
Doronilla’s attempt to return to private
respondent the amount of P200,000 which the latter
deposited in Sterella’s account together with P12,000,
(which) allegedly represented interest in a contract of
mutuum, however did not convert the transaction from a
commodatum to mutuum because again, there was no
intention on the part of the parties. The P12,000 could be
considered not as an interest in a mutuum or simple loan
but rather the fruits to which the bailor should be entitled.
So it was only proper for Doronilla to remit to private
respondent the P200,000 plus the interest accruing to the
money deposited with petitioner.
Now, notice in this case that what we have is
somehow unique. Why? Because it was held to be
commodatum but the subject is money. And what is
expected to be returned, while the same amount of
P200,000, is NOT the exact denomination, the exact serial
number, of the money that is deposited in that account –
equivalent lang. Because if we take into consideration a
commodatum noh, you return the EXACT SAME THING.
Dito, what was demanded was the equivalent value.
Although the purpose is similar to that of
commodatum, merely to show that there was sufficient
capitalization in the bank account of the corporation, there
was no transfer of ownership, similar to a commodatum,
again this is unique in the sense na what is expected to be
returned is not the exact denomination of money that was
put into that account, but the exact value. Okay? Because
when we talk of commodatum, kung ano yung hiniram mo,
yun EXACTLY ang ibalik mo.
So, subject matter, as a general rule, in
commodatum is a non-consumable good. So again, when
we talk about “consumable”, it cannot be returned anymore
once you use it. Because how do you use it? You consume
it. So the purpose here (in commodatum) if the subject
matter is consumable should NOT be consumption. As
mentioned, it is merely for exhibition with the intent to
return the same thing to the bailor.
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Example is yung wine, mag exhibit ka ng mga
wines. That could be considered as a commodatum with
the intention that you would return the exact same thing to
the bailor.
Now, Article 1937:
Article 1937. Movable or immovable property may be the
object of commodatum.
Now, we have this case of Mina vs. Pascual:
Mina vs. Pascual
Facts:
The property involved here is a lot in the center of Laoag,
Ilocos Norte which was awarded to Francisco Fontanilla,
the brother of Andres Fontanilla. Later, Andres Fontanilla,
with the consent of his brother Francisco, erected a
warehouse on a part of the said lot.
After Francisco’s death, he was succeeded by Mina.
Andres also died and was succeeded by his wife, Roberta
Pascual and their children.
The controversy arose when Roberta attempted to sell a
portion of the lot allegedly corresponding to Andres. This
was opposed by Mina.
One of the contentions that were raised is that the sale of
the portion of the lot is not valid because she was not the
owner of the same.
Issue:
W/N there was a contract of commodatum between
Francisco Fontanilla and Andres Fontanilla
Ruling:
Two features of a commodatum:
1. Subject matter is non-consumable;
2. It must be for a certain period of time.
In this case, Francisco, when he allowed Andres to build a
warehouse on a portion of the land, did not stipulate a
period of time when he will demand the return of the
subject matter. Hence, there can be no valid commodatum.
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Q1: So, you agree with that? That ownership is required in
a valid contract of sale?
A1: Based on our Law on Sales, Ma’am, NO. Ownership at
the time of the perfection of the sale Ma’am is not required.
It is only required at the time of delivery or consummation
of the sale.
Q2: Notwithstanding the status of the sale, what about the
second issue (on W/N there is commodatum) that you
mentioned?
A2: There are two features of a commodatum, Ma’am:
1. Subject matter is non-consumable;
2. It must be within a certain time.
In this case, Ma’am, Francisco, when he allowed Andres to
build a warehouse on a portion of the land, did not stipulate
a period of time when he will demand the return of the
subject matter.
Q3: What does that mean?
A3: It means, Ma’am that there is no valid commodatum.
Q4: So, if there was no commodatum, what was the
arrangement here? What was the intention of the parties if
it is not a commodatum?
A4: The intention of the parties here Ma’am is for lease.
Okay, because it presupposes that the use of the
property was for a valid consideration. Alright, thank you.
So, what we have here is a property that was passed from
generations, noh. So as we already emphasized, a real
property can be the subject matter of a commodatum. In
this case, a portion of a property was at issue.
Now, an essential feature of a commodatum is
that the use of the thing belonging to another shall be for a
certain period. But under the facts of this case, Francisco
did not fix any period during which Andres could use the
lot. That is what happened for the past thirty (30) years,
noh. Napasa na nga sa kanilang mga heirs.
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So here, it could not be considered a
commodatum as it never entered Francisco’s mind to limit
the period during which his brother was to have the use of
the lot because he expected that the warehouse will
eventually fall into the hands of his son, Fructuoso.
However, this did not happen because Fructuoso died
before Andres.
Now, with that, it appears that the intention of the
parties was for Francisco to allow his brother Andres a
surface right with the payment of an annual rent and with
the use of the lot. So, we could say that their intention
could have been a contract of lease.
So therefore, along with the issue as to the sale,
it was necessary to annul the sale of the lot that was made
to the third person made by Roberta in representation of
her minor children.
Now, Article 1938:
Article 1938. The bailor in commodatum need not be the
owner of the thing loaned.
Because again, there is no transfer of ownership
in a commodatum. In fact, if you are a lessee, you are
allowed to loan the same subject matter that was leased to
you if there is no express prohibition. If you are a
usufructuary, wherein you are entitled to the use and fruits
of the property, you can also allow another person to make
use thereof, unless otherwise stipulated. However, as we
will see in Article 1939, the bailee may not himself lease to
a third person. Please read Article 1939:
Article 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.
Okay, so under Article 1939, it emphasizes the
character of commodatum being personal in nature.
Q1: Jose, let us say, you have a car. You do not want to
use it because you like to commute going to school. Do
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you trust Raphael, noh, that you will loan your car (to him)
without any compensation?
A1: *Shakes his head* (Agay, Friendship Over..haha)
Q2: What do you take into consideration? Magpahiram ka
sa tao ng walang bayad.
A2: Ummm. Friendship??
O, friends daw kayo. (Yiheee..bawi-
bawi..hahaha) Now, that makes it personal in nature! You
take into consideration the character of this person. Maybe
you are friends, pero meron man rin tayong friends na
danghagan (Bitaw Ma’am..haha). So syempre, kahit
friends, tapos danghagan sya, di sya marunong mag-
drive,kaskasero sya mag-drive, bakit mo ipahiram? Diba?
So you take into consideration the character as well as the
credit of a person. That makes is purely personal in nature,
noh. CHARACTER, CREDIT and CONDUCT are taken into
consideration.
Now, the general rule here since it is purely
personal in nature, the death of either party will terminate
the contract of commodatum. Why? Because the trust that
you may repose on the bailor or the bailee is not the same
trust that you can have with regards to his heirs, noh.
Saligan nimo sya because he takes care of things, he will
take care of the thing that you loaned to him, pero if the
bailee dies, it does not mean that the same care may be
extended by his heirs. So, the general rule is that the
contract will be terminated. So, it is an INTRANSMISSIBLE
RIGHT. The only exception is, of course, by stipulation of
the parties that in case any one of them dies, the
commodatum will not be extinguished.
Now, if there are two (2) or more bailees, the
death of one, however, will NOT extinguish the contract
unless there is a stipulation to the contrary. So, in relation
to this, we recall your Article 1178 in Obligations and
Contracts:
Article 1178. Subject to the laws, all rights acquired in
virtue of an obligation are transmissible, if there has been
no stipulation to the contrary.
So eto (NOTE: Ma’am referring to the
intransmissible nature of commodatum), exception sya.
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Now, with regard to use, general rule, the
BAILEE cannot lend or lease the object to a third person.
While it is true that the BAILOR is NOT required to be the
owner of the subject property as long as he has
possessory interest and not prohibited by the owner
thereof, he can loan the subject matter to another person
and enter into a contract of commodatum, the BAILEE
himself, as a general rule, cannot lend or lease the object
to a third person with exceptions under paragraph 2 of
Article 1939:
a. Stipulation of the parties; or
b. Members of the bailee’s household may
make use of the thing loaned.
So, pwede, kung same household. So pinahiram
mo ang cellphone, laptop. Pwede yung members (ng same
household) ang mag gamit unless otherwise stipulated by
the parties. Or, unless the nature of the thing forbids such
use.
For instance, kahit magkasama kayo sa bahay,
pero ang pinahiram sayo ay damit. Okay? By the nature of
the thing itself, hindi sya yung ipahiram mo nalang basta
kanino sa bahay ninyo. Kase bakit? Baka kasya sayo tapos
ipagpilitan ng kapatid mo na kasya rin sa kanya. So baka
masira lang. Okay?
So here, when it comes to the members of the
same household, as a general rule, pwede nila gamitin
EVEN WITHOUT THE CONSENT OF THE BAILOR,
unless otherwise stipulated or when the nature of the thing
forbids such use.
Now, Article 1940:
Article 1940. A stipulation that the bailee may make use of
the fruits of the thing loaned is valid.
So, eto yung exception sa Article 1935 because
the right to USE the subject matter is distinct from the right
to USE ITS FRUITS. If the parties stipulated that the bailee
can use the fruits, then that is VALID, but in the absence of
a stipulation, only as to the use of the thing.
Now, when we talk of fruits here, the use of the
fruits must only be incidental to the use of the thing.
Because otherwise, if the stipulation provides that the
bailee can use the fruits as the MAIN cause of the contract,
it is not commodatum anymore but usufruct.
Now, we have here the case of Delos Santos
vs. Jarra:
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Delos Santos vs. Agustina Jarra
Facts:
This case involves lending of carabaos. On September 1,
1906, Felix Delos Santos brought a suit against Agustina
Jarra as the administratrix of the estate of Jimenea.
Delos Santos averred that Jimenea borrowed from him ten
(10) first class carabaos. However, Jimenea never returned
the same.
Because of Jimenea’s death, the estate of Jimenea was
already administered by Agustina Jarra.
Issue:
What is the contract entered into by Jimenea and Delos
Santos?
Ruling:
COMMODATUM. From the foregoing, it may be logically
inferred that the carabaos were loaned through a
commodatum to the now deceased Magdaleno Jimenea.
However, for some reasons, there are now only six (6)
surviving carabaos.
Agustina Jarra, being the administratrix of Jimenea’s
estate, has now the responsibility to return the said
carabaos because the contract between Jimenea and
Delos Santos was in the form of a commodatum.
Q1: At the time of the demand for the return of the
carabaos, were all of them still alive?
A1: Yes Ma’am.
Q2: Now, at the time of the finality of the case?
A2: No Ma’am.
Q3: Okay, so in view of the return of the carabaos, what
was the liability here on the part of the heirs of the bailee?
A3: The Supreme Court held Ma’am that because there
was DELAY in the return of the said carabaos, the heirs
would still be liable for the death of the other carabaos (or
the dead carabaos) because they, Jimenea or his heirs,
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were not able to return the carabaos on time. So, because
of the delay, they are liable for damages, Ma’am plus the
value of the carabaos.
Alright, thank you. Now, the case of Delos
Santos emphasizes the first obligation of the bailee – to
return the thing that was loaned, to return the thing subject
of the commodatum. Since it is a commodatum, there was
no transfer of ownership so you, as the bailee, has the
obligation to return the EXACT same thing that you have
borrowed.
The carabaos given for use, not being returned
by the defendant upon demand, there is no doubt that
there is an obligation to indemnify the owner thereof by
paying him the value of the said carabaos. It is the
imperative duty of the bailee, to return the thing itself to its
owner, or to pay him damages if through the fault of the
bailee, the thing should have been lost or injured. So, that
was the ruling in this case.
Obligations of the Bailee:
1. To return the thing that was borrowed;
2. To pay for the ordinary expenses for the use and
preservation of the thing loaned;
Article 1941. The bailee is obliged to pay for the ordinary
expenses for the use and preservation of the thing loaned.
Why is it that the bailee shoulders the ordinary
expenses? Because these are ordinary expenses in
relation to USE, which he gets to enjoy. Now, in relation to
Article 1941, don’t forget the obligation imposed in Article
1163. The obligation to take good care of the thing with the
diligence of a good father of a family:
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.
So, based on that, you take care of the ordinary
expenses. If what was loaned is car, then you should be
liable for the gas, or the change oil, among others
3. To pay for the loss of the thing even if it is for a
fortuitous event under certain circumstances;
Article 1942. The bailee is liable for the loss of the thing,
even if it should be through a fortuitous event:
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three (3) bulls.

(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 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.
Okay. While the general rule is that the bailee is
not liable for the loss or damage (of the thing loaned) due
to a fortuitous event, again applying the principle of Res
Perit Domino, you have the exceptions under Article 1942.
In relation to that, we have the case of Republic
vs. Bagtas:
Republic vs. Bagtas
Facts:
Bagtas borrowed from the Bureau of Animal Industry three
(3) bulls for breeding purposes subject to the government
charge/breeding fee of 10%.
At the expiration of the period, Bagtas requested for an
extension of one (1) year. The Secretary of Agriculture
acquiesced but only as to one (1) bull. So, Bagtas offered
to pay for the value of the three (3) bulls with the deduction
of the yearly depreciation as approved by the Auditor
General.
Bagtas later on died and was substituted by his wife. The
latter said that the two (2) bulls were already returned.
However, one (1) of the bulls was gunshot and died.
According to the spouse, this is considered as force
majeure and she is therefore relieved from the obligation of
returning the bull.
The Republic, on the other hand, contended that even if
the ownership was retained by it, the wife is still liable.
Issue:
W/N the contract between the Republic and Bagtas is a
commodatum
Ruling:
NO. A contract of commodatum is essentially gratuitous.
The Supreme Court held that the 10% breeding fee is
considered compensation. As such, it would be considered
a contract of lease wherein the lessee would be subject to
the responsibilities of a possessor in bad faith.
Even assuming that the contract was commodatum, the
spouse would still be liable under Article 1942 making the
bailee liable even if the loss is through a fortuitous event if
he keeps the thing longer than the period stipulated.
Q1: Was there commodatum here? What was the
contention of the government? As to compensation? Was
there compensation here?
A1: No Ma’am?

However, the Secretary of Agriculture said that the value of Q2: Are you sure? What about the breeding fee?10% of
the three (3) bulls cannot be reduced and that they should the value of the bulls?
be paid their book value or should be returned not later
than October 1, 1950. A2: Ay, Yes Ma’am.

Because Bagtas was still not able to return the three (3)
bulls or pay the book value, the Republic of the Philippines
Q3: If that is compensation, can it be considered
commenced an action praying that he be ordered to return
commodatum?
the three (3) bulls or pay the book value.
A3: No Ma’am because commodatum is essentially
Bagtas contended that due to the bad condition of the gratuitous.
peace and order of their place, he is not able to return the

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Q4: Now, considering that the contract could not be
considered a commodatum, can we say that the spouse of
Bagtas can still be liable for the value of the third bull?
A4: Yes Ma’am. She would still be liable.
So here, again, a contract of commodatum is
ESSENTIALLY GRATUITOUS. In the agreement between
the parties, the State and Bagtas, there was a breeding fee
to be considered as a compensation. As such, it would be
considered a contract of lease wherein the lessee would be
subject to the responsibilities of a possessor in bad faith.
Why? Because Bagtas, as well as his surviving spouse,
continued possession of the bull after the expiry of the
contract. So with that, he could be held liable.
Even assuming that it was commodatum, the
spouse would still be liable under Article 1942. Why?
Because of paragraph 2, “If he keeps it longer than the
period stipulated...”
So, regardless of whether it was a lease or a
commodatum, the fact remains that the bull that was
subject of the lease or the loan, whichever is applicable,
(was lost) and the surviving spouse or the estate would be
held liable for the bull or the value thereof which has not
been returnedl because it was killed while it was under the
custody of the estate regardless of who is at fault.
Regardless kung sino or paano namatay yung bull because
there is already DELAY.
Take a look at the exceptions under Article 1942.
Essentially, these refer to improper acts on the part of the
bailee:
a. Devotes the thing to any purpose different from
that for which it has been loaned;
This shows bad faith on the part of the
bailee. Kotse, syempre, sa road lang (dapat),
tapos gisadya talaga, gi drive mo nung nagbaha,
noh. So, obviously, that is a purpose different
from that for which it has been loaned.
there is delay, there is already liability on the part
of the debtor, in this case, the bailee.
Article 1169. Those obliged to deliver or to do
something incur delay from the time the oblige
judicially or extrajudicially demands from them
the fulfilment of their obligation xxx.
Article 1170. Those who in the performance of
their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene
the tenor thereof, are liable for damages.
c. The thing loaned has been delivered with
appraisal value, unless there is a stipulation
exempting the bailee from responsibility in case
of a fortuitous event;
There is the intention here for the
borrower to be made liable. Why? because the
bailor puts value on the thing subject of
commodatum. However, this is unless there is a
stipulation exempting the bailee from
responsibility in case of a fortuitous event.
d. Lends or leases the thing to a third person, who
is not a member of his household;
Again, let’s go back to the nature of a
commodatum being purely personal in nature.
e. If, being able to save either the thing borrowed or
his own thing, he chose to save the latter.
Lastly - Ingratitude. While naturally, we
tend to save our personal things, it would still be
considered ingratitude if we chose to save our
own thing over the thing that was loaned to you.
Why? because remember, it was loaned to you
“essentially gratuitous”.

b. Keeps it longer than the period stipulated, or after

the accomplishment of the use for which the
commodatum has been constituted;

That would mean DELAY. So we all

know under Article 1169, noh, ay, 1169 ba yun?
Delay? Or 1164? I forgot (NOTE: Article 1170 po
ata Ma’am ☺) Yun, the effect of delay. When

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 CREDIT TRANSACTIONS LECTURES - TRANSCRIPT OF STENOGRAPHIC NOTES
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November 12, 2015 (2nd Hour)
Transcribed by: Zarah Domingo
To emphasize, the primary obligation on the part of
the bailee, to return the thing that was loaned, to return the
thing that was subject of the commodatum. Since it was a
commodatum, there was no transfer of ownership. So you
as the bailee has the obligation to return the exact same
thing that was borrowed. The carabaos being used, not
having been returned by the defendant upon demand,
there is no doubt that she is under obligation to indemnify
the owner thereof, by paying him the value of the said
carabao.
It is the imperative duty of the bailee to return the
thing itself to the owner or to pay him damages if
through the fault of the bailee, the thing should have
been lost of injured.
Obligations of the bailee, again to return the thing that
was borrowed.
Article 1941: The bailee is obliged to pay for the
ordinary expenses for the use and preservation of the
thing loaned.
Why is it that the bailee shoulders these ordinary
expenses?
It is because, these are ordinary expenses in relation
to use which he gets to enjoy. Now in relation to Article
1941, don’t forget the obligation imposed in Article 1163,
the obligation to take good care of the thing, with the
diligence of a good father of the family.
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.
So in relation to that, you take care of the ordinary
expenses. If what you loaned is a car, you should be liable
for the gas, for the change oil, among others.
We have Article 1942.
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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 have the latter.
While the general rule is that the bailee is not liable for the
loss or damage due to a fortuitous event, again applying
the principle of res perit domino, you have the exceptions
under Article 1942. In relation to that, you have the case of
the Republic of the Philippines vs Bagtas.
RP vs Bagtas
Facts: Bagtas borrowed from RP 3 bulls for a period of 1
year, subject to breeding fee of 10% of the book value.
One of the bulls died due to stray bullets during a Huk
raid and the said bull was in the possession of Bagtas
even after the expiration of the period of the contract.
Issue: WON Bagtas was exempt from liability: NO
Ruling: In Art. 1942, bailee is liable for loss through FE if
he keeps it longer than stipulated and the thing loaned
has been delivered with appraisal of its value, unless
there is a stipulation exempting liability in case of FE.
Q1: So here, is there a commodatum or not?
A1: No, there was a breeding fee.
Q2: Considering that there was compensation, can you say
that there is no liability anymore?
Again, a contract of commodatum is essentially
gratuitous. In the agreement here between the State and
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Bagtas, there was a breeding fee to be considered as a 3. If the thing loaned has There is an intention for
compensation. As such, it would be considered as a been delivered with the borrower to be held
contract of lease, wherein the lessee would be subject appraisal of its value, liable. Why? Because you
to the responsibilities of a possessor in bad faith. unless there is a put value of the thing that
Why? Because Bagtas, as well as his surviving spouse, stipulation exempting the is subject of
continued possession of the bull after the expiry of the bailee from responsibility commodatum. Take note,
contract. With that, he could be held liable. in case of a fortuitous if there is a stipulation
event; exempting from liability.
Even assuming that it was a contract of
commodatum, the spouse (Bagtas died) would still be 4. If he lends or leases Go back to the ratio of
liable under Article 1942. The bailee is liable for the loss of the thing to a third person, commodatum, personal in
the thing, even if it should be through a fortuitous event:xxx who is not a member of nature.
his household
(2) If he keeps it longer than the period stipulated or
after the accomplishment of the use for which the 5. If, being able to save It is considered
commodatum has been constituted; either the thing borrowed ingratitude because
or his own thing, he chose remember it was loaned to
(3) If the thing loaned has been delivered with appraisal to have the latter you, essentially,
of its value, unless there is a stipulation exempting the gratuitously.
bailee from responsibility in case of a fortuitous event.xxx

So regardless of whether it was a lease or

commodatum, the fact remains that the bulls that were
subject of the lease or loan, if applicable, would still mean
that the surviving spouse would be held liable, or rather,
the estate of the deceased will be liable for the value
thereof, which has not been returned because it is still in
the custody of the estate, regardless of who is at fault,
regardless kung sino or kung paano namatay yung bull
because there was already delay.
Article 1943: The bailee does not answer for the
deterioration of the thing loaned due only to the use
thereof and without his fault.
So, ordinary wear and tear, depreciation, shall be
born by bailor. But bailee can be held liable if: (1) he is
at fault, or (2) negligent; or (3) uses it for any purpose
different.

Take a look at the exceptions in 1942 wherein,

essentially, these refer to improper acts on the part of the
bailee.
Improper Act
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
Rationale
It shows bad faith on the
part of bailee. Kotse,
syempre i-drive sa road
lang otherwise, obviously
that is a purpose different
from what it has been
loaned for.
That is delay. under 1169.
When there is delay, there
is liability on the part of the
debtor, in that case, the
bailee.
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.
General rule sa commodatum, the bailee has no
right to retain the thing loaned as security for things he
has against the bailor. Si bailee pinahiram ng sasakyan
pero si bailee nagpahiram din ng pera kay bailor. Si bailor
hindi binayaran yung utang kahit due na. The bailee
cannot say na I will not return the car to you unless
you have paid your monetary obligation to me. So yan
ang ibig sabihin sa 1944. The bailee cannot use that as a
defense. He, the bailor can demand the return of the thing.
But of course, his obligation to pay his monetary obligation
will remain the same. The only exception we have is
when we reach Article 1951, involving hidden defects.

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Catholic Vicar vs CA
Facts: Respondents were possessors, with claim of
ownership in good faith, of the lots in question from 1906
to 1951. Petitioner was in possession as borrower in
commodatum up to 1951 when it repudiated the trust
and declared the properties in its name for taxation
purposes. In 1962, Petitioner applied for registration of
the said lots claiming that its adverse claim ripened into
title by way of ordinary prescription.
Issue: WON Petitioner is entitled to register the land in
question by ordinary prescription: NO
Ruling: When Respondents allowed Petitioner’s free use
of the properties in question, they became bailors in
commodatum and the petitioner the bailee. The failure to
return the subject matter of the commodatum did not
mean adverse possession but that bailee only held in
trust the property.
Adverse possession came only in 1951 when it
declared the lots for taxation purposes. There could be
no title by way of ordinary acquisitive prescription
because of the absence of just title. Extraordinary
prescription requires 30 years. In this case, adverse
possession was only for 11 years.
Q1: Under the facts of this case, when did the adverse
possession on the part of the Petitioner begin?
A1: In 1951, when properties were declared by petitioners
for taxation purposes
Q2: What do you mean by adverse possession?
A2: Claim of ownership in the concept of an owner
Q3: Why is adverse possession relevant in this case?
A3: It is relevant for the determination of acquisitive
prescription. If the possession is in bad faith, the period of
possession required is 30 years, but if in good faith, only
for 10 years.
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Q4: In this case, what is the prescriptive period that should
have been applied?
A4: Since there was no just title, what should have been
applied is the 30-year requirement for extraordinary
prescription.
Q5: When did adverse possession begin? What is the
relevance of knowing the prescriptive period required when
you do not know when it began?
A5: The reckoning point is 1951. Until 1951, there was a
recognition of a commodatum. If there is a commodatum,
you acknowledge that you are merely a bailee. Thus, you
are in possession of the property, not in the concept of an
owner. So the prescriptive period, whether 10 or 30 years,
will not run. But because in 1951, petitioner declared the
properties for taxation purposes, adverse possession
began and thus the prescriptive period began to run.
In 1951, Petitioner repudiated the trust by declaring the
properties in his name for taxation purposes. So if you
declare it for taxation purposes, you are now claiming to be
in possession of the property in the concept of an owner.
So magiging relevant na yung 10 year or 30 year period.
Here, obviously he is in bad failth because prior to 1951,
there was an acknowledgement of the existence of a
commodatum—possession only in the concept of a bailee,
acknowledgment that there is another person who owns
the property.
Now when Petitioner applied for registration in 1962, he
had been in possession only for 11 years. You do not apply
the 10 year prescriptive period requirement, because the
possession from 1951 was not in good faith. It was in bad
faith so dapat 30 years ang mag-apply. Ordinary
acquisitive prescription or prescription in good faith
requires possession for 10 years but needs just title.
Extraordinary prescription requires 30 years.
Now here, while it is true that private respondent never
asked for the return of the house, they became bailors in
commodatum and the petitioner the bailee. The petitioner’s
failure to return the subject matter of commodatum to the
bailor did not mean adverse possession on the part of the
borrower until 1951. The bailee held in trust the property
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subject of the commodatum. The adverse claim of
petitioner came only in 1951 when it declared the lots for
taxation purposes. So, the action of petitioner by such
adverse claim could not ripen into title by way of ordinary
acquisitive prescription because of the absence of just title.
So here, take note, mere failure to return does not
constitute adverse possession. It does not mean that
you are already possessing the property in the concept
of an owner. There must be another act, noh, like in this
case, declaring the property in his name for taxation
purposes, to show that you have started possessing the
property in the concept of an owner. But just because you
did not return it, does not mean that the acquisitive
prescription period will now run. So that’s 1944.
Article 1945: When there are two or more bailees to
whom a thing is loaned in the same contract, they are
liable solidarily.
If one of them dies, the contract would still
continue. But with regard to the nature of their liability,
they shall be held solidarily liable. This is to safeguard
effectively the rights of the lender. It takes into account the
personal integrity and responsibility of all bailees.
Article1945 is an exception of 1207 and 1208.
1207---there is a solidary liability only when the
obligation expressly so states, or when the law or the
nature of the obligation requires solidarity;
1208--- presumption that an obligation is joint unless
otherwise stipulated by the parties.
Here, Article 1945 expressly so states that two or more
bailees shall be held solidarily liable.
Ateneo de Davao University
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SUMMARY: WHAT ARE THE OBLIGATIONS OF
THE BAILEE?
1.) To return the thing to the bailor
2.) To pay for ordinary expenses
3.) To take good care of the thing with the diligence of
a good father of a family
4.) With regard to expenses, for ostentatious
decorations, bailor shall be held liable
5.) For extraordinary expenses (we get to discuss that
in 1949)
6.) With regard to loss due to a fortuitous event,
bailee shall not be held liable unless it falls within the
exceptions under 1942
7.) For deterioration, ordinary wear and tear, bailee
will not be liable unless he is negligent or use property
for other purpose, or if stipulated by the parties
8.) No right to retain by bailee (exception, when we
get to 1951)
9.) Solidary liability under 1945
How about on the part of the Bailor?
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.
So here, the obligation of the bailor, to allow the use of
the thing loaned:
1.) till after the expiration of the period stipulated; or
2.) till after the accomplishment of the purpose
As we have pointed our earlier, when we talk about
commodatum, ‘use for a certain period of time’. Now, 1946
provides that if the bailor has an urgent need for the
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subject of the commodatum, he can seek for the return Q1: Do we have a commodatum here?
thereof, but the return is only temporary. So the effect
of such return or temporary use, is that the commodatum A1: Yes with respect to the furniture.
will be suspended while in the possession of the bailor.

Q2: What kind of commodatum?

Now, earlier, we mentioned that there are 2 kinds of
commodatum: A2: Precarium.

1.) ordinary commodatum

2.) precarium Q3: Why do you say there was a precarium?

What is a precarium? It is a kind of commodatum A3: Their agreement was to return the thing upon the
where bailor may demand the thing at will or at any time demand of the plaintiff

Quintos vs Beck
Q4: So since there was a precarium, what is now the
Facts: Defendant was a tenant of Plaintiff. Upon the liability of the defendant?
novation of the contract of lease, plaintiff gratuitously
granted to the defendant the use of the furniture subject A4: To return the furniture upon demand.
to the condition that defendant would return them upon
the plaintiff’s demand. Plaintiff sold the property to
Lopez. Plaintiff required defendant to return ALL the Q5: Did he return upon demand?
furniture but the latter informed the former that it could
not give up the 3 gas heaters and 4 electric lamps A5: No. What he did was to merely place them in the
because he would use them until the expiration of the custody of the sheriff.
lease. Plaintiff refused to get the furniture in view of the
fact that defendant declined to deliver ALL of them.
Upon the expiration of the lease, defendant deposited all
the furniture in a warehouse in the custody of the sheriff. Q6: Why was it necessary for him to deposit or consign to
the sheriff?
Issue: (1) WON Defendant complied with his obligation
to return the furniture upon Plaintiff’s demand: NO A6: Because Plaintiff refused to accept them.
(2) WON Plaintiff should bear the expenses of the
deposit: NO

Ruling: The contract entered into is a commodatum
because plaintiff gratuitously granted the use of the
furniture to the defendant reserving for himself the
ownership thereof. Defendant bound himself to return
the furniture upon demand but he did not comply with
it when he retained the gas heaters and lamps. The
court could not compel plaintiff to bear the expenses
occasioned by the deposit because the defendant as
bailee, was not entitled to place the furniture on
deposit nor was plaintiff under a duty to accept only
part of the all the furniture which the defendant was
under obligation to return upon demand.
Q7: Was the deposit of the furniture of the plaintiff proper?
A7: No.
Q8: Who should bear the cost of such deposit?
A8: It should be the defendant because he is the one who
has the obligation to return the thing and he did not
properly do so.
So what we have here is a precarium. Obviously, it is a
precarium, even if not expressly stated by the Supreme
Court because of the agreement here: ‘gratuitously granted

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to the latter the use of the furniture subject to the condition
that the defendant would return them to the plaintiff upon
the latter’s demand.’
Precarium- a kind of commodatum where the bailor
may demand the thing at will
-a contract by which the owner of a thing, at
the request of another person, gives the latter, the thing for
use as long as the owner shall please
So in this case, as long as the bailor shall please. Now,
when demand was already made, defendant failed to
return the furniture to the plaintiff. So, as the defendant had
voluntarily undertaken to return all the furniture to the
plaintiff upon the latter’s demand, but failed to do so, the
court could not legally compel her to bear the expenses
occasioned by the deposit of the furniture at the
defendant’s behest. The bailee was not entitled to place
the furniture on deposit, nor was the plaintiff under a duty
to accept the offer to return the furniture, because the
defendant wanted to retain the 3 gas heaters and the 4
electric lamps. Siya pa ang nagimpose ng condition, dapat
LAHAT kasi yun ang agreement.
The costs in both instances would be borne by the
defendant because the plaintiff is the prevailing party.
Remember, under Obligations and Contracts, the creditor
cannot be compelled to accept partial payment of
partial performance. So in this case, the bailor could not
be compelled to accept only a few of the furniture (wherein
the defendant retains the heaters and lamps.)
The defendant was the one who breached the contract
of commodatum, and without any reason he refused to
return and deliver all the furniture upon the demand of the
bailor. In these circumstances, it is just and equitable that
he pays the legal expenses and other judicial costs which
the plaintiff would not have otherwise defrayed. So that is
Article 1947.
Ateneo de Davao University
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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.
COMPARE this to ordinary commodatum where
possession of the bailee is more secured for he has the
right to retain the thing loaned:
1.) until the expiration of the period stipulated; or
2.) upon the accomplishment of the use for which the
commodatum has been constituted
Article 1948: The bailor may demand immediate
return of the thing if the bailee commits any acts of
ingratitude specified in Article 765.
So here, sa donation ito. Remember, awhile ago, there
are similarities between commodatum and donation
because they are gratuitous in nature. So the bailee, in
the case of commodatum would be unworthy of the trust
reposed upon him with his acts of ingratitude.
So even if it is ordinary commodatum, pwede mag-
demand ng return of the thing if any of the acts under 765
is committed.
Under Article 765 in relation to commodatum:
1.) if the bailee should COMMIT some offense against
the person, the honor or the property of the bailor, or of his
wife or children under his parental authority;
2.) if the bailee IMPUTES to the bailor any criminal
offense, or any act involving moral turpitude, even
though he should prove it, unless the crime or the act has
been committed against the bailee himself, his wife or
children under his authority;
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3.) if bailee unduly REFUSES bailor SUPPORT when the share it equally UNLESS they have stipulated for a
bailee is legally or morally bound to give support to the different sharing.
bailor.

Article 1950: If, for the purpose of making use of the

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.
thing, the bailee incurs expenses other than those
referred to in Articles 1941 and 1949, he is not
entitled to reimbursement.
1941---ordinary expenses
1949—extraordinary expenses
So ano yung covered ng Article 1950? Ito yung
ostentatious expenses or expenses for decoration. So
here, it shall be shouldered by the bailor.

This answers the question who shall bear the

EXTRAORDINARY EXPENSES? Consider whether it is: So Article 1951, this is the exception that we mentioned
earlier.
1.) for the PRESERVATION of the thing loaned; or

2.) arises on the occasion of the ACTUAL USE of the thing
loaned.
If the extraordinary expenses were incurred for the
PRESERVATION of the thing loaned, it shall be borne by
the bailor. For example when the property was damaged
by the interuptee. Why? There is no transfer of
ownership. So the bailor, when he incurs his extraordinary
expenses for the preservation of the thing loaned, he
profits by the said expenses.
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.
REQUISITES for applying 1951:
1.) There must be a flaw or defect on the thing loaned;
2.) The defect must be hidden or latent;

3.) The bailor must be aware of such defect;

If the bailee was the one who initially incurred these 4.)The bailor does not advise the bailee of the flaw or
expenses, the bailor has the obligation to refund the defect;
bailee. However, as a general rule, for the bailee to be
5.) The bailee suffers damages by reason of the flaw or
entitled to reimbursement, he must inform the bailor first
defect.
before incurring these extraordinary expenses. This
requirement of notification can be disregarded if it is urgent.

Now, if it is an extraordinary expense arising from If all of these requisites are present, then (the implication
ACTUAL USE of the thing loaned, like for example, the is):
repair of the car which is damaged due to a collision. The
rule is 50:50, half sa bailee, half sa bailor. Why? Because a.) bailor shall be liable to the bailee for the damages
here, it was derived from the use of the bailee and you will suffered; and
also return it to the bailor so it is just fair that they
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b.) the bailee is entitled to retain the thing, to hold the lease where there is a
thing subject of commodatum until he will be reimbursed valuable consideration
for the damages he has suffered.

So again this is the exception we mentioned earlier

under Article 1944. Article 1952: The bailor cannot exempt himself from
the payment of expenses or damages by abandoning
the thing to the bailee.

General rule: Bailee has NO RIGHT TO RETAIN.
Exception: If it falls under Article 1951(see requisites).
So, considering that the bailor is in bad faith under the
circumstances in Article 1951, the bailee is given the right
to retain until the damages are paid. Only the right to hold
the property, he cannot sell the property.
Like for example, subject of commodatum is a car and
apparently, there is a hidden defect with regard to the
brakes, the bailor knows it, he did not notify or inform the
bailee, then the bailee was involved in an accident and
suffered injuries. So 1951 will be applicable.
So let us say there were expenses incurred for example
arising from the extraordinary expenses for the
preservation of the thing loaned. Na-inform na man si bailor
pero hindi niya i-reimburse, sabi niya hindi ko na lang i-
reimburse, sayo na lang yung property.
Can he do so? No, Article 1952 provides that he cannot
do so. Why? Because the expenses for damages may
even exceed the value of the thing loaned which would
not be fair to the bailee. It would be unfair to allow the
bailor to just abandon the thing instead of paying for said
expenses for damages.
SUMMARY: WHAT ARE THE OBLIGATIONS OF
THE BAILOR?

1.) The right to demand the return of the thing

General rule: The bailor cannot demand until expiration
Take note: However if the bailee could have known or accomplishment of the purpose agreed upon by the
after inspection, the bailor is not liable. If he could have
parties (of course that refers to ordinary commodatum)
known after inspection, then, obviously, hindi siya
mahuhulog under Article 1951, why, because the defect is Exception: Upon urgent need (it is different if
not hidden. precarium because it can demand the return of the
thing at any time)
2.) Right to immediate return if the bailee has
committed acts of ingratitude
If it is not known to the bailor, the bailor may not be held
liable, why, because commodatum is essentially gratuitous. 3.) General Rule: Liable for extraordinary expenses for
Ito ang difference niya sa sale. preservation of the thing, FULL amount, provided
he has been informed before the bailee incurs the
Commodatum Sale expenses
Exception to the requisite notification: Urgent need
(with regard to hidden defects) 4.) Extraordinary expenses arising from the use of
the thing, 50:50
If bailor was not aware There could be breach of 5.) Liability for damages under Article 1951 for
thereof, he could not be warranty against hidden hidden defects
held liable because defects even if seller is in 6.) No right to abandon for expenses and damages.
commodatum is essentially good faith and with no
gratuitous, wala na man knowledge of the hidden
siyang makukuha diyan, defect So, that is commodatum, finish.
unlike than in a contract of
sale or even in a contract of

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Transcribed by: Glorybelle C. Resurreccion
We are done with commodatum. The other type of loan is
Simple Loan or Mutuum. It’s a contract whereby one of the
parties delivers to another money or other consumable
thing with the understanding that the same amount, the
same kind and quality shall be paid.
We have:
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)
Notice here, in Art. 1953, it is “bound to pay” not bound to
return. Why? Because what is involved here is return of the
equivalent only and not the identical thing. So, you do not
really return what you have borrowed. What you return is
something of the “same amount, of the same kind and
quality” that you have already borrowed. The return of the
equivalent only and not the identical thing because the
borrower acquires ownership thereof. Recall, this is one of
the main distinctions between Commodatum and Mutuum.
In Commodatum, there is no transfer of ownership unlike
that in Mutuum.
Yong Chan Kim vs. People
Petitioner Yong Chan Kim was employed as a
Researcher at SEAFDEC. Kim was issued Travel Order
No. 2222 which covered his travels to different places in
Luzon from 16 June to 21 July 1982. Under this travel
order, he received P6,438.00 as cash advance to defray
his travel expenses. Kim was issued another travel order,
T.O. 2268, requiring him to travel from the Head Station
at Tigbauan, Iloilo to Roxas City from 30 June to 4 July
1982, which he received a cash advance of P495.00.
Later, petitioner presented both travel orders for
liquidation. When the Travel Expense Reports were
audited, it was discovered that there was an overlap of
four (4) days (30 June to 3 July 1982) in the two (2)
travel orders for which petitioner collected per diems
twice. The dispute arose when Kim allegedly failed to
return P1,230.00 out of the cash advance which he
received under T.O. 2222. For the alleged failure of
petitioner to return such amount, he was charged with
the crime of Estafa under Article 315, par. 1(b) of the
Revised Penal Code in which he was found guilty by the
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trial court.
ISSUE: WON Kim was guilty of estafa; WON Kim was
under obligation to return the same money (cash
advance) which he had received
HELD:
Kim is NOT guilty of estafa and he has NO obligation to
return the money.
In order that a person can be convicted under Estafa, it
must be proven that he had the obligation to deliver or
return the same money, good or personal property that
he had received.
Liquidation simply means the settling of an indebtedness.
An employee, such as herein petitioner, who liquidates a
cash advance is in fact paying back his debt in the form
of a loan of money advanced to him by his employer,
as per diems and allowances.
Similarly, as stated in the assailed decision of the lower
court, "if the amount of the cash advance he received is
less than the amount he spent for actual travel, he has
the right to demand reimbursement from his employer
the amount he spent coming from his personal funds.
In other words, the money advanced by either party is
actually a loan to the other. Hence, petitioner was under
no legal obligation to return the same cash or
money, i.e., the bills or coins, which he received from the
private respondent. Ownership of the money was
transferred to the petitioner. It is a case of a simple loan
or mutuum.
Since ownership was transferred to him, no fiduciary
relationship was created. Absent this fiduciary
relationship between petitioner and private respondent,
which is an essential element of the crime of estafa by
misappropriation or conversion, petitioner could not have
committed estafa.
Additionally, it has been the policy of private respondent
that all cash advances not liquidated are to be deducted
correspondingly from the salary of the employee
concerned.
Q1: In this case, what were those cash advances for?
A1: For his allowance for his travels.
Q2: For what period?
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A2: First travel was from 16 June to 21 July 1982; and the
second from 30 June to 4 July 1982. So, there was an
overlap of four days (June 30 – July 3).
Q3: So what was the effect of this overlap?
A3: A case of estafa was filed against Kim for failure to
return the allowance he collected twice for those four days.
Q4: Specifically, what is the estafa involved here?
A4: That which involves fiduciary relationship
Q5: How is it related to our topic mutuum?
A5: There was in fact no fiduciary relationship involved
here. The SC here defined what liquidation is. Liquidation
simply means the settling of indebtedness. An employee,
such as Kim, who liquidates a cash advance is in fact
paying back his debt in the form of a loan of money
advanced to him by his employer, as per diems and
allowances. Ownership of the money was transferred to
Kim.
Q6: So we have a mutuum here?
A6: Yes
Q7: What is the effect of this in relation to the criminal case
of Estafa filed against Kim? [What is the basis here in
holding that it was a simple loan and there could be no
liability of estafa?]
A7: The criminal case must be dismissed. Since ownership
of the money (cash advance) was transferred to petitioner,
no fiduciary relationship was created. Absent this fiduciary
relationship between petitioner and private respondent,
which is an essential element of the crime of estafa by
misappropriation or conversion, petitioner could not have
committed estafa.
Q8: Does Kim have no liability at all?
A8: He has no criminal liability but he is liable to liquidate
the cash advance. And his failure to do so would result to
salary deduction against him. So, his liability is only civil.
Atty. Lozare: For a person to be convicted under Article
315, par. 1(b) of the Revised Penal Code, he must have
the obligation to return or deliver the same money, goods
or personal property that he had received. In this case, he
was asked to liquidate which simply means settling of an
indebtedness. The employee, such as herein Kim, who
liquidates a cash advance is in fact paying back his debt in
the form of a loan of money advanced to him by his
employer. Here, what was the effect?
Pagsobrayungbinigaysakanya, he has to liquidate and pay
back the company. It could not be considered as an estafa
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because when what he has received is less than what he
should have used as expenses for his travels, then he has
the right to demand from the employer. So here, if the
amount of the cash advance received is less than the
amount he spent for actual travel, he has the right to
demand reimbursement from his employer. Hence,
petitioner was under no legal obligation to return the same
cash or money which he received from his employer. Then,
what we have here is a simple loan. There is a transfer of
ownership to the petitioner. Because of that, there is no
fiduciary relationship created which would hold Kim
criminally liable for estafa. Absent this fiduciary
relationship, which is an essential element of the crime of
estafa by misappropriation or conversion, petitioner could
not have committed estafa.
Here, as a case of mutuum, the borrower can dispose of
the thing borrowed and his act cannot be considered as a
misappropriation.
Another thing you should not is the distinction between a
rent and a loan. A loan signifies delivery of some other
consumable thing to another with the promise to pay and
equivalent amount of the same kind and quality. Rent on
the other hand, signifies delivery to another some non-
consumable thing in order that the latter may use it during
a certain period and return it to the former for a
consideration. Parties in the loan – obligor and obligee
while in rent – landlord and tenant. In loan, creditor
receives payment, rent owner receives compensation or
price either in money or provisions.
Look again in Art. 1953 on the term “fungible thing”. These
are things dealt by number and measurement such as rice,
grain, oil, gasoline, so that any given unit or portion is
treated as any other unit or portion. These are those
belonging to the same genus or several species of the
same kind.
Recall the distinction last time as to the subject matter. We
talk about commodatum, it generally involves non-
consumable thing. As an exemption, consumable but with
purpose of exhibition. On the other hand, we have mutuum
– money or other consumable thing. Is there a difference
between consumable and fungible as used in Art. 1953?
None. When it comes to mutuum, those two are used
interchangeably. In the concept that the thing cannot be
used without being consumed under the old Civil Code is
precisely that of the consumable things that are also
considered in the contract of loan.
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BPI vs. CA
Sometime in 1980, Frank Roa sold a house and lot to
private respondents ALS and Antonio Litonjua
for P850,000. They paid P350k in cash and assumed
the P500k balance of Roa’s indebtedness with petitioner
BPI Investment Corp. (BPIIC). Said loan was mortgaged
with the said house and lot. BPIIC, however, was not
willing to extend the old interest rate (from Roa’s loan) to
private respondents and proposed to grant them a new
loan of P500,000 to be applied to Roa’s debt and
secured by the same property with new interest rate.
Consequently, private respondents executed a mortgage
deed containing the above stipulations with the provision
that payment of the monthly amortization shall
commence on May 1, 1981.
On September 13, 1982, BPIIC released to private
respondents P7,146.87, purporting to be what was left of
their loan after full payment of Roa’s loan.
Later, BPIIC instituted foreclosure proceedings against
private respondents on the ground that they failed to pay
the mortgage indebtedness from May 1, 1981 to June
30, 1984.
Private respondents maintained that they should not be
made to pay amortization before the actual release of
the P500,000 loan in August and September 1982.
ISSUE: When should the payment of the monthly
amortization commence?
HELD: A month after the release of the loan on Sept. 13,
1982. In the present case, the loan contract between BPI
and ALS and Litonjua was perfected only on September
13, 1982, the date of the second release of the loan.
Ratio: A loan contract is not a consensual contract but a
real contract. It is perfected only upon the delivery of the
object of the contract.
A contract of loan involves a reciprocal obligation,
wherein the obligation or promise of each party is the
consideration for that of the other. As averred by private
respondents, the promise of BPIIC to extend and deliver
the loan is upon the consideration that ALS and Litonjua
shall pay the monthly amortization commencing on May
1, 1981, one month after the supposed release of the
loan.
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It is a basic principle in reciprocal obligations that neither
party incurs in delay, if the other does not comply or is
not ready to comply in a proper manner with what is
incumbent upon him. Only when a party has performed
his part of the contract can he demand that the other
party also fulfills his own obligation and if the latter fails,
default sets in.
Consequently, petitioner could only demand for the
payment of the monthly amortization after September 13,
1982 for it was only then when it complied with its
obligation under the loan contract.
Therefore, in computing the amount due as of the date
when BPIIC extrajudicially caused the foreclosure of the
mortgage, the starting date is October 13, 1982 and
not May 1, 1981.
Q1: How is a contract of Mutuum perfected?
A1: By delivery
Q2:For example, there is a loan of money. If I issue a
check in your name and I delivered it to you, is the simple
loan or mutuum already perfected?
A2: Not yet. It would be perfected upon encashment.
Q3: When was the contract deemed perfected in this case?
A3: It was deemed perfected on Sept. 13, 1982
Q4: Why was there a need to determine the perfection of
the contract of loan?
A4: Because it would determine whether or not BPI may
validly foreclose the properties; and if there would already
be an obligation on the part of Litonjua to pay for the
monthly amortization; and when the payment of such
should start. In this case, the monthly amortization should
start not on May 1, 1981 [as they have stipulated in the
contract] but on Sept. 13, 1982.
Atty. Lozare: Here, it emphasizes simple loan is perfected
upon the delivery of the object of the contract and therefore
it is a real contract. The contract here was perfected only
on Sept. 13, 1982 even if the loan contract was signed on
March 31, 1981. It was only on Sept. 13 when the full loan
was released to private respondents. Take note, the court
here emphasized that in a loan agreement, you have
reciprocal obligations from each party where the obligation
or promise of each party is the consideration of the other
party. The consideration for BPI in entering into the loan
contract is the promise of private respondents to pay the
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monthly amortization. For the private respondents, it is the
promise of BPI to deliver the money.
In reciprocal obligations, neither of the parties incurs delay
if the other has not complied or is not ready to comply in
the proper manner with what is incumbent upon him.
Therefore, there was no delay when the private
respondents did not pay the monthly amortization on May
1, 1981 as it was only on Sept. 13, 1982 when petitioner
has fully complied with its obligation under the loan
contract.
Again, in mutuum, a loan contract is only perfected
upon delivery and that it involves reciprocal
obligations.
Sps. Tan vs. Villapaz
Villapaz issued a Philippine Bank of Communications
(PBCom) crossed check in the amount of P250,000.00,
payable to the order of petitioner Antonio Tan.
Villapaz filed a complaint for collection of sum of money
against Sps. Tan alleging that the check he issued was for
a loan to be settled in 6 months but the spouses failed to
settle the same.
Sps. Tan denied. They contended that since the alleged
loan was one with a period payable in six months and
where the amount exceeds P 500, it should have been
expressly stipulated upon in writing (under Art. 1358) by
the parties but it was not. Hence, the essential requisite for
the validity and enforceability of a loan is wanting; and the
check is inadmissible to prove the existence of a loan
Petitioners furthermore maintain that they were financially
stable,hence, there was no reason for them to borrow
money.
ISSUE: WON there was a contract of loan
HELD: Yes.
Sps. Tan’s reliance on Art. 1358 of the Civil Code is
misplaced for the requirement that contracts where the
amount involved exceeds P500.00 must appear in writing
is only for convenience.At all events, a check, the entries of
which are no doubt in writing, could prove a loan
transaction.
No written proof of the grant of the loan was executed was
credibly explained by respondent when he declared that
petitioners son being his godson, he, out of trust and
Ateneo de Davao University
Jacinto St., Davao City
respect, believed that the crossed check sufficed to prove
their transaction.
That petitioner Antonio Tan had, an outstanding balance of
more than P950,000.00 in his account at PBCom did not
rule out petitioners securing a loan. It is pure naivete to
believe that if a businessman has such an outstanding
balance in his bank account, he would have no need to
borrow a lesser amount.
Q1: How about the allegation here of Antonio Tan that
there could be no reason that he would borrow money
because he also has money in the bank?
A1: The same reason is untenable because anybody can
loan money. Corporations enter into contracts of loan even
if they have assets.
Atty. Lozare: What you have here is a contract of loan and
it is not required that there may be a separate contract, for
example a promissory note to show that the issuance of
the check was really considered as a simple loan or
mutuum.
One of the functions of a negotiable instrument is that the
instrument is an evidence of indebtedness. So, there is no
need for a separate promissory note to show that the
issuance of a check is because of a simple loan or
mutuum.
A check, the entries of which are no doubt in writing could
prove a loan transaction. Furthermore, it is not required
that there must be a separate contract for a contract of loan
to be valid and enforceable. Art. 1358 is only for
convenience. And if you look at Statute of Frauds, Art.
1403 (2), walanamangnakalagayd’yan with regard to a
contract of loan to be in writing to be enforceable.
Shifting gears…
Destruction of the thing loaned does not extinguish
one’s obligation to pay. In mutuum, what is your
obligation? Your obligation is to pay the money. If the
money was lost or you became insolvent or you were
robbed, will that extinguish the obligation? No. Genus
nunquamperit. Money is a generic thing. Therefore, even if
the money that you are supposed to pay the loan for was
destroyed, obligation is not extinguished 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)
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In here, there is a distinction between mutuum and barter.

As defined in Art. 1638 on barter: If the subject matter is a consumable thing, the obligation is
to deliver the same kind, quality and quantity (KQQ) even if
Article 1638. By the contract of barter or exchange one of it should change in value. If it is impossible, then the value
the parties binds himself to give one thing in consideration of the thing at the time the loan was perfected. Again, this
of the other's promise to give another thing. (1538a) applies only when it is IMPOSSIBLE to deliver the same
KQQ.
Commodatum Mutuum Barter
Subject matter is Subject matter is Non-fungible or Now we look at:
ordinarily non- money or other non-consumable Article 1956. No interest shall be due unless it has been
consumable consumable thing thing expressly stipulated in writing. (1755a)
Bailee is bound Same kind, The equivalent
to return the quality and thing is given in A bulk of our discussion here in mutuum revolves around
identical thing quantity only return for what interest. If you look at Art. 1956, you could say that we
borrowed equivalent has been have therein the requisites for recovery of interest. It must
thereof received be expressly stipulated and second, it must be in writing.
Essentially May be Always onerous Art. 1956 is under this chapter on mutuum. In other words,
gratuitous gratuitious the requirement for interest to be expressly stipulated in
writing is only applicable for simple loan. For other
Article 1955. The obligation of a person who borrows instances, there may be liability for interests, but it is not
money shall be governed by the provisions of articles 1249 required to be expressly stipulated in writing if it’s not a
and 1250 of this Code. loan.

Also, another requisite that is mentioned “there” is that the

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)
If the subject of mutuum is money, apply the principles in
Art. 1249 and Art. 1250.
Article 1249. The payment of debts in money shall be
made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal
tender in the Philippines.
The delivery of promissory notes payable to order, or bills
of exchange or other mercantile documents shall produce
the effect of payment only when they have been cashed, or
when through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the original
obligation shall be held in the abeyance. (1170)
Article 1250. In case an extraordinary inflation or deflation
of the currency stipulated should supervene, the value of
the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is an
agreement to the contrary. (n)
interest must be lawful [*personal note: I don’t know where
is “there” that this requisite has been mentioned. Lo
siento!]. But considering that the usury law has already
been suspended, then you do not simply follow it anymore.
What is applied nowadays is that the interest rate must be
conscionable. Otherwise, if it is unconscionable and
iniquitous, the courts may reduce it. Also recall in ObliCon,
contracting parties may stipulate freely on any adjustment
on the interest rate as one of their stipulations on the loan
or forbearance of money. But the law does not authorize
increase of interest rate by one party without the other
party’s consent. Any change must be mutually agreed by
the parties as one of the principles emphasized in ObliCon.
Now, we have the term “forbearance”.
PNB vs. Ibarrola
As payments for the purchase of medicines,
the Province of Isabela issued several checks drawn
against its accounts with petitioner Philippine National
Bank (PNB) in favor of the seller, private respondent
Ibarrola.
Ibarrola failed to receive the full payment, thus she filed an
action for a sum of money and damages against
the Province of Isabela and PNB among others.

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Jacinto St., Davao City
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RTC ruled in her favor ordering that she be paid “with
interest thereon at the legal rate from the date of the filing
of the complaint until the entire amount is fully paid”. CA
and SC affirmed. However, the three courts did not specify
whether the legal rate of interest referred to in the judgment
is 6% or 12%.
ISSUE: Whether in an action for damages, the legal rate of
interest is 6% as provided by Article 2209of the New Civil
Code or 12% as provided by CB Circular 416 series of
1974
HELD:
The case at bench does not involve a loan. When an
obligation arises from a contract of purchase and sale and
not from a contract of loan or mutuum, the applicable rate
is 6% per annum as provided in Article 2209 of the NCC
and not the rate of 12% per annum as provided in (CB) Cir.
No. 416.
The rate of 12% interest referred to in Cir. 416 applies only
to:
Loan or forbearance of money, or to cases where money is
transferred from one person to another and the obligation
to return the same or a portion thereof is adjudged. Any
other monetary judgment which does not involve or which
has nothing to do with loans or forbearance of any money,
goods or credit does not fall within its coverage for such
imposition is not within the ambit of the authority granted to
the Central Bank.
Therefore, the proper rate of interest referred to in the
judgment under execution is only 6%. However, once the
judgment becomes final and executory, the "interim period
from the finality of judgment awarding a monetary claim
and until payment thereof, is deemed to be equivalent to a
forbearance of credit. Thus, the rate of 12% p.a. should be
imposed, and to be computed from the time the judgment
became final and executory until fully satisfied.
Q1: How is the term “forbearance” defined in this case?
A1: In this case, forbearance of credit may mean to be or is
equivalent to the interim period from the finality of judgment
awarding a monetary claim until payment thereof
[*Forbearance is a refraining from the enforcement of
something (as a debt, right, or obligation) that is
due, as defined by Merriam-Webster]
Q2: In this case, do we have a loan or forbearance of
money?
Ateneo de Davao University
Jacinto St., Davao City
A2:There was none. It was merely a contract of sale
Q3: So what is the interest rate that should be imposed?
A3: The proper rate of interest is only 6%. However, once
the judgment becomes final and executory, in the interim
period from the finality of judgment awarding a monetary
claim and until payment thereof, the rate of 12% p.a.
should be imposed.
Q4: The 12% interest rate will commence at what period?
A4: From the time the judgment became final and
executory until fully satisfied.
Atty. Lozare: So in this case, SC mentioned that the 12%
interest rate referred to in BSP Cir. No. 416 applies only to
a loan or forbearance of money. In cases where money is
transferred from one person to another and the obligation
to return the same or the portion thereof is adjudged.
What do you have here? The liability arose from a contract
of sale. It did not involve a loan, forbearance of money or a
judgment involving a loan or forbearance of money. That is
why the applicable rate is 6% per annum. Again, the
obligation here did not constitute a breach of a loan.
However, the interim period from the finality of judgment
awarding a monetary claim and until payment thereof, is
deemed to be equivalent to a forbearance of credit wherein
the 12% interest rate should be imposed. So here, the rate
shall be 6% per annum from the time the complaint was
filed until full payment before finality of judgment. If the
amount adjudged remains unpaid, interest rate shall be
12% per annum computed from the time the judgment
became final and executory until fully satisfied.
Estores vs. Sps. Supangan
Petitioner HermojinaEstores and respondent-spouses
Arturo and Laura Supangan entered into a Conditional
Deed of Sale whereby petitioner offered to sell a parcel of
land.
After almost seven years from the time of the execution of
the contract and notwithstanding payment of P3.5 million
on the part of spouses, petitioner still failed to comply with
her obligation as expressly provided in the contract.
Spouses demanded the return of the amount of P3.5
million but Estores failed to do so, thus the complaint for
collection of sum of money.
Estores averred that she is willing to return the principal
amount of P3.5 million but without any interest since the
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Conditional Deed of Sale provided only for the return of the
downpayment in case of breach,hence she cannot be held
liable to pay legal interest as well.
ISSUE: WON Sps. Supangan are entitled of interest
HELD: Yes.
Interest may be imposed even in the absence of stipulation
in the contract.
Article 2210 of the Civil Code expressly provides that
"[i]nterest may, in the discretion of the court, be allowed
upon damages awarded for breach of contract." In this
case, there is no question that petitioner is legally obligated
to return the P3.5 million because of her failure to fulfil the
obligation under the Conditional Deed of Sale, despite
demand. She has in fact admitted that the conditions were
not fulfilled and that she was willing to return the full
amount of P3.5 million but has not actually done so.
Petitioner enjoyed the use of the money from the time it
was given to her until this moment.
The interest at the rate of 12% is applicable in the instant
case. The contract involved in this case is admittedly not a
loan but a Conditional Deed of Sale. However, the contract
provides that the seller must return the payment made by
the buyer if the conditions are not fulfilled, which happened
in this case. Petitioner’s unwarranted withholding of the
money which rightfully pertains to respondent-spouses
amounts to forbearance of money which can be considered
as an involuntary loan. Thus, the applicable rate of interest
is 12% per annum.
Q1: How is forbearance of money defined here?
*A1: Forbearance of money, goods or credits refers to
arrangements other than loan agreements, where a person
acquiesces to the temporary use of his money, goods or
credits pending happening of certain events or fulfilment of
certain conditions.
Q2:Is interest imposable here?
A2: Yes, even if the contract in this case does not stipulate
any interest to be imposed.
Q3: In this case, there was no loan. What is then the basis
of the claim of interest?What article [in NCC] did the SC
cite in its decision? Did it cite Art. 1956?
A3: No, it cited: Article 2210. Interest may, in the
discretion of the court, be allowed upon damages
awarded for breach of contract.
Ateneo de Davao University
Jacinto St., Davao City
[Therefore, the claim of interest is based on Art. 2210 on
damages awarded for breach of contract since in this case,
there was a breach.]
Q4: In this case, you have a conditional deed of sale. So
what is the rate of interest that should be imposed?
A4: The 12% rate per annum
Q5: Why not the 6% rate? Isn’t it that this is also a deed of
sale and as decided in Ibarrola case, SC ruled that the rate
should be 6%?
A5: Because the rate of 12% per annum is applied when
the contract is of loan or of forbearance of money. In this
case, there was a forbearance of money.
Q6: Why was it considered as a forbearance of money
even if it is based on a contract of sale?
A6: Because of the lapse of time (7 years), it would fall
under forbearance of money. During those times, the seller
already made use of the buyer’s money.
Atty. Lozare: Here, it is proper to impose interest
notwithstanding the absence of stipulation in the contract.
In this case, there is no loan or mutuum, so there is no
requirement that it should be expressly stipulated in writing.
The basis of the interest is Art. 2210.
As a general rule, interest shall be computed in accordance
with the stipulation of the parties. Absent such stipulation,
rate of interest shall be 12% per annum when the
obligation arises out of a loan or forbearance of money,
goods, or credits. In other cases, it shall be 6%.
While the SC recognizes the previous definition of
forbearance as "contractual obligation of lender or creditor
to refrain during a given period of time, from requiring the
borrower or debtor to repay a loan or debt then due and
payable"; in this case and other subsequent cases, the
definition of forbearance of money, goods, or credit was
expounded. It should now refer to arrangements other than
loan agreements. Why? The phrase "forbearance of
money, goods or credits" is meant to have a separate
meaning from a loan, otherwise there would have been no
need to add that phrase as a loan is already sufficiently
defined in the Civil Code.
Hence, definition of forbearance of money is… [refer to
*A1]
They have therefore allowed or granted forbearance to the
seller (petitioner) to use their money pending fulfillment of
the conditions. They were deprived of the use of their
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money for the period pending fulfillment of the conditions
and when those conditions were breached, they are
entitled not only to the return of the principal amount paid,
but also to compensation for the use of their money [which
is interest].
And the compensation for the use of their money, absent
any stipulation, should be the same rate of legal interest
applicable to a loan since the use or deprivation of funds is
similar to a loan.
Petitioner’s unwarranted withholding of the money which
rightfully pertains to respondent-spouses amounts to
forbearance of money which can be considered as an
involuntary loan. Thus, the applicable rate of interest is
12% per annum.
*With regard to these cases we have already discussed,
notice the importance of the distinction – when to apply 6%
or 12%. However, effective July 1, 2013, the legal interest
rate is already 6%. In other words, there is no need to
distinguish anymore. But we still need to discuss this
because for obligations with any interest that is due prior
July 1, 2013, we still have to make the distinction whether
to apply 6% or 12% on the interest rate.
November 19, 2015
Transcribed by: Ray Mark C. Gingco
In the case of Yong Chan Kim, in order for a
person to be convicted of estafa, it must be proven that
there is an obligation to deliver or return money, goods, or
personal property. In this case, he is just obligated to
liquidate. Liquidation here is the settling of indebtedness.
In the case of BPI, a loan, whether it is
commodatum or mutuum, is a real contract and not a
consensual contract. Therefore, it is perfected upon
delivery. The consideration of the BPI here is the promise
of private respondent to pay the monthly amortization. On
the part of the private respondent, the promise of BPI to
deliver the money. As mentioned, in reciprocal obligations,
neither party incurs delay if the other does not comply or is
not ready to comply in a proper manner with what is
Ateneo de Davao University
Jacinto St., Davao City
incumbent upon him. Here private respondents did not
incur in delay when they did not commence payment for
the monthly amortization because it was only on 13
September 1982 when BPI fully complied with its obligation
in the contract.
We have also discussed those having interests
particularly those involving forbearance of money and
goods. In the subsequent cases just like in the case of
Estores we mentioned that forbearance has a separate
meaning with loan. Forbearance is defines as a contractual
obligation of the lender or creditor to refrain during a given
period of time, from requiring the borrower or debtor to
repay a loan or debt then due and payable. Forbearance of
money, goods or credits should therefore refer to
arrangements other than loan agreements, where a person
acquiesces to the temporary use of his money, goods or
credits pending the happening of certain events or
fulfillment of certain conditions.
As distinguished in the case of Ibarrola, this case
does not involve a loan, forbearance of money, or
judgment involving a loan or forbearance of money as it
arose from a contract of sale where Ibarrola did not receive
the full payment for her merchandise. When an obligation
arises not from a contract of loan or forbearance of money
but from a contract of sale the applicable rate of interest is
6% per annum as provided under Article 2209 of the NCC.
As we all know, the law does not authorize the
increase of the interest rate without the consent of the
other contracting party. However, in the case of Pan
Pacific…
PAN PACIFIC vs EQUITABLE PCI BANK
FACTS: Pan Pacific is engaged in contracting mechanical
works on airconditioning system. They entered into a
contract of mechanical works with respondent for the total
consideration for the whole project was P23,311,410.30.
The Contract stipulated that Pan Pacific shall be entitled to
a price adjustment in case of increase in labor costs and
prices of materials under paragraphs 70.1 and 70.2 of the
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General Conditions for the Construction of PCIB Tower II
Extension.
Pan Pacific commenced the mechanical works in the
project site. In 1990, labor costs and prices of materials
escalated. On 5 April 1991, in accordance with the
escalation clause, Pan Pacific claimed a price adjustment
of P5,165,945.52. Respondents asked for a reduction in
the price adjustment. To show goodwill, Pan Pacific
reduced the price adjustment toP4,858,548.67.
Due to the extraordinary increases in the costs of labor and
materials, Pan Pacific’s operational capital was becoming
inadequate for the project. However, respondent withheld
the payment of the price adjustment under the escalation
clause despite Pan Pacifics repeated demands.
Instead, respondent offered Pan Pacific a loan of P1.8
million. Pan Pacific was constrained to execute a
promissory note in the amount of P1.8 million as a
requirement for the loan. Pan Pacific also posted a surety
bond. The P1.8 million was released directly to laborers
and suppliers and not a single centavo was given to Pan
Pacific.
Pan Pacific made several demands for payment on the
price adjustment but respondent merely kept on promising
to release the same. Meanwhile, the P1.8
million loan matured and respondent demanded payment
plus interest and penalty. Pan Pacific refused to pay the
loan. Pan Pacific insisted that it would not have incurred
the loan if respondent released the price adjustment on
time. Pan Pacific alleged that the promissory note did not
express the true agreement of the parties. Pan Pacific
maintained that the P1.8 million was to be considered as
an advance payment on the price adjustment. Therefore,
there was really no consideration for the promissory
note; hence, it is null and void from the beginning.
Respondent stood firm that it would not release any
amount of the price adjustment to Pan Pacific but it would
offset the price adjustment with Pan Pacifics outstanding
balance of P3,226,186.01, representing the loan, interests,
penalties and collection charges.
Pan Pacific refused the offsetting but agreed to receive the
reduced amount of P3,730,957.07 as recommended by the
TCGI Engineers for the purpose of extrajudicial settlement,
less P1.8 million and P414,942 as advance payments.
ISSUE: Whether the CA, in awarding the unpaid balance of
the price adjustment, erred in fixing the interest rate at 12%
instead of the 18% bank lending rate. YES
Ateneo de Davao University
Jacinto St., Davao City
HELD: The CA went beyond the intent of the parties by
requiring respondent to give its consent to the imposition of
interest before petitioners can hold respondent liable for
interest at the current bank lending rate. This is erroneous.
A review of Section 2.6 of the Agreement and Section
60.10 of the General Conditions shows that the consent of
the respondent is not needed for the imposition of interest
at the current bank lending rate, which occurs
upon any delay in payment.
Article 1956 of the Civil Code, which refers to monetary
interest, specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing.
Therefore, payment of monetary interest is allowed only if:
(1) there was an express stipulation for the payment of
interest; and
(2) the agreement for the payment of interest was reduced
in writing. The concurrence of the two conditions is
required for the payment of monetary interest.
The consent of the respondent is not needed in order to
impose interest at the current bank lending rate.
Under Article 2209 of the Civil Code, the appropriate
measure for damages in case of delay in discharging an
obligation consisting of the payment of a sum of money is
the payment of penalty interest at the rate agreed upon in
the contract of the parties. In the absence of a stipulation of
a particular rate of penalty interest, payment of additional
interest at a rate equal to the regular monetary interest
becomes due and payable. Finally, if no regular interest
had been agreed upon by the contracting parties, then the
damages payable will consist of payment of legal interest
which is 6%, or in the case of loans or forbearances of
money, 12% per annum. It is only when the parties to a
contract have failed to fix the rate of interest or when such
amount is unwarranted that the Court will apply the 12%
interest per annum on a loan or forbearance of money.
The written agreement entered into between petitioners
and respondent provides for an interest at the current bank
lending rate in case of delay in payment and the
promissory note charged an interest of 18%.
To prove petitioners entitlement to the 18% bank lending
rate of interest, petitioners presented the promissory note
prepared by respondent bank itself. This promissory note,
although declared void by the lower courts because it did
not express the real intention of the parties, is substantial
proof that the bank lending rate at the time of default was
18% per annum. Absent any evidence of fraud, undue
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influence or any vice of consent exercised by petitioners
against the respondent, the interest rate agreed upon is
binding on them.
Q1: What is the proper interest rate that should be
imposed?
A1: The interest rate that should be imposed is 18%.
Q2: Why?
A2: “Settled is the rule that the agreement or the
contract between the parties is the formal expression of the
parties’ rights, duties, and obligations. It is the best
evidence of the intention of the parties. Thus, when the
terms of an agreement have been reduced in writing it is
considered as containing all the terms agreed upon and
there can be, between the parties and their succesors-in-
interest, no evidence of such terms other than the contents
of the written agreement.”
Q3: Where was it stipulated?
A3: Under the General Conditions Section 60.10,
which provides that the CONTRACTOR may charge
interest at the current bank lending rates. The current bank
lending rate is at 18% p.a.
Q4: But isn’t it that the PN was considered void for
lack of consideration?
A4: The written agreement provides that the interest
be at the current bank lending rate in case there is delay in
payment. While it is true that the PN was declared void as
it did not express the real intention of the parties, it was
nevertheless considered as substantial proof that the bank
lending rate at that time of default is 18% p.a.
When the terms of the contract are clear and
leave no doubt as to the intention of the parties, the literal
meaning of the stipulation governs. Once, the parties agree
on the price adjustment after due consultation in
compliance with the provisions of the escalation clause, the
agreement is in effect an amendment to the original
Ateneo de Davao University
Jacinto St., Davao City
contract, and gives rise to the liability of the respondent to
pay the adjusted costs. Upon respondent’s failure to pay
within the time provided, then it shall be liable to pay the
stipulated interests. Therefore, the basis is the delay of
EPCI such that its consent is not anymore needed before it
can become liable for the adjusted price.
Article 1956, which refers to the monetary
interest, specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing.
Therefore, payment of the monetary interest is allowed only
if:
1. there was an express stipulation for the payment
of interest; and
2. the agreement for the payment of interest was
reduced in writing. The concurrence of the two
conditions is required for the payment of the
monetary interest.
Also, under Article 2209 of the NCC, the
appropriate measure for the damages in the case of delay
in discharging an obligation consisting of the payment of a
sum of money is the payment of the penalty interest at the
rate agreed upon in the contract of the parties. In the
absence of a stipulation of a particular rate of penalty
interest, payment of additional interest at a rate equal to
the regular monetary interest becomes due and payable.
Finally, if no regular interest had been agreed upon by the
contracting parties, then the damages payable will consist
of payment of legal interest, which is 6%, or in the case of
loans or forbearance of money, 12% p.a. It is only when
the parties to a contract have failed to fix the rate of interest
or when such amount is unwarranted that the Court will
apply the 12% interest p.a. on a loan or forbearance of
money.
Another thing that you should consider is the
difference between monetary and compensatory interests.
1. Monetary Interest – compensation for the use of
money;
2. Compensatory Interest – penalty or indemnity of
payment for damages.
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Debtor in delay is liable to pay the legal interest
as indemnity fro damages even in the absence of
stipulation of payment of interest. Those obliged to deliver
or to do something incur in delay from the time the oblige
judicially or extrajudicially demands from them the
fulfillment of the obligation. This is in relation to Article
1169.
We have the case of Prisma…
PRISMA CONSTRUCTION & DEVELOPMENT
CORPORATION and ROGELIO S. PANTALEON vs
ARTHUR F. MENCHAVEZ
FACTS: December 8, 1993, Pantaleon, President and
Chairman of the Board of PRISMA, obtained a P1M loan
from the respondent, with monthly interest of P40,000.00
payable for 6 months, or a total obligation of P1,240,000.00
payable within 6 months.
To secure the payment of the loan, Pantaleon issued a
promissory. Pantaleon signed the promissory note in his
personal capacity and as duly authorized by the Board of
Directors of PRISMA. The petitioners failed to completely
pay the loan within the 6-month period.
As of January 4, 1997, respondent found that the
petitioners still had an outstanding balance of
P1,364,151.00, to which respondent applied a 4% monthly
interest.
On August 28, 1997, respondent filed a complaint for sum
of money to enforce the unpaid balance, plus 4% monthly
interest. The petitioners admitted the loan of
P1,240,000.00, but denied the stipulation on the 4%
monthly interest, arguing that the interest was not provided
in the promissory note. Pantaleon also denied that he
made himself personally liable and that he made
representations that the loan would be repaid within six (6)
months.
RTC found that the respondent issued a check for P1M in
favor of the petitioners for a loan that would earn an
interest of 4% or P40,000.00 per month, or a total of
P240,000.00 for a 6-month period. RTC ordered the
petitioners to jointly and severally pay the respondent the
amount of P3,526,117.00 plus 4% per month interest from
February 11, 1999 until fully paid.
Petitioners appealed to CA insisting that there was no
express stipulation on the 4% monthly interest. CA favored
Ateneo de Davao University
Jacinto St., Davao City
respondent but noted that the interest of 4% per month, or
48% per annum, was unreasonable and should be reduced
to 12% per annum. MR denied hence this petition.
ISSUE: Whether the parties agreed to the 4% monthly
interest on the loan. If so, does the rate of interest apply to
the 6-month payment period only or until full payment of
the loan?
RULING: Interest due should be stipulated in writing;
otherwise, 12% per annum APPLIES.
Obligations arising from contracts have the force of law
between the contracting parties and should be complied
with in good faith. When the terms of a contract are clear
and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulations governs.
Courts have no authority to alter the contract by
construction or to make a new contract for the parties; a
court’s duty is confined to the interpretation of the contract
the parties made for themselves without regard to its
wisdom or folly, as the court cannot supply material
stipulations or read into the contract words the contract
does not contain. It is only when the contract is vague and
ambiguous that courts are permitted to resort to the
interpretation of its terms to determine the parties’ intent.
In the present case, the respondent issued a check for
P1M. In turn, Pantaleon, in his personal capacity and as
authorized by the Board, executed the promissory note.
Thus, the P1M loan shall be payable within 6 months. The
loan shall earn an interest of P40,000.00 per month, for a
total obligation of P1,240,000.00 for the six-month period.
We note that this agreed sum can be computed at 4%
interest per month, but no such rate of interest was
stipulated in the promissory note; rather a fixed sum
equivalent to this rate was agreed upon.
The collection of interest without any stipulation in writing is
prohibited by law.
The interest of P40,000.00 per month corresponds only to
the six-month period of the loan, or from January 8, 1994 to
June 8, 1994, as agreed upon by the parties in the
promissory note. Thereafter, the interest on the loan should
be at the legal interest rate of 12% per annum.
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
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demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
The facts show that the parties agreed to the payment of a
specific sum of money of P40,000.00 per month for six
months, not to a 4% rate of interest payable within a 6-
month period.
No issue on the excessiveness of the stipulated amount of
P40,000.00 per month was ever put in issue by the
petitioners; they only assailed the application of a 4%
interest rate, since it was not agreed upon.
It is a familiar doctrine in obligations and contracts that the
parties are bound by the stipulations, clauses, terms and
conditions they have agreed to, which is the law between
them, the only limitation being that these stipulations,
clauses, terms and conditions are not contrary to law,
morals, public order or public policy. The payment of the
specific sum of money of P40,000.00 per month was
voluntarily agreed upon by the petitioners and the
respondent. There is nothing from the records and, in fact,
there is no allegation showing that petitioners were victims
of fraud when they entered into the agreement with the
respondent.
Therefore, as agreed by the parties, the loan of P1M shall
earn P40,000.00 per month for a period of 6 months, for a
total principal and interest amount of P1,240,000.00.
Thereafter, interest at the rate of 12% per annum shall
apply. The amounts already paid by the petitioners during
the pendency of the suit, amounting toP1,228,772.00 as of
February 12, 1999, should be deducted from the total
amount due, computed as indicated above. We remand the
case to the trial court for the actual computation of the total
amount due.
Q1: What do you mean by interest?
A1: Interest is the charge for the privilege of
borrowing money, typically expressed as annual
percentage rate.
(As defined in the dictionary)
Q2: When is a person liable for interest?
Ateneo de Davao University
Jacinto St., Davao City
A2: He is liable for interest, generally, when he
borrows money. He is liable for the use of another person’s
money. It is a form of compensation.
Q3: Was there an agreement for interest?
A3: No. The 1M loan shall be payable within 6
months. During this period, the loan shall earn an interest
of 40k per month, for a total obligation of 1.24 M for the six-
month period. Note that this agreed sum can be computed
at 4% interest per month, but no such rate of interest was
stipulated in the PN rather a fixed sum equivalent to this
rate was agreed upon.
Q4: Why is there a need to determine the interest
rate?
A4: There is a need to determine the proper interest
rate that must be applied because there was non-payment
of the obligation. Going back to the definition of interest, it
is a form of compensation for the use of another
person’s money.
Q5: Why 12%?
A5: When the obligation is breached, and it consists
in the payment of a sum of money, i.e., a loan or a
forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the
rate of 12% p.a. to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the NCC.
Applying, Article 1956, which refers to the
monetary interest, specifically mandates that no interest
shall be due unless it has been expressly stipulated in
writing. Therefore, payment of the monetary interest is
allowed only if:
1. there was an express stipulation for the payment
of interest; and
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2. the agreement for the payment of interest was
reduced in writing. The concurrence of the two
conditions is required for the payment of the
monetary interest.
The Court finds that the interest rate of 40k per
month corresponds only to the 6-month period of the loan
as agreed upon by the parties in the PN. Thereafter, the
interest on the loan should be at 12% p.a.
WHAT ARE THE TYPES OF INTEREST UNDER THE
PHILIPPINE LAW?
1. Simple Interest – paid for the principal at a
certain rate as stipulated by the parties.
2. Compound Interest – Imposed upon interest due
and unpaid. Accrued interest is the interest
earned but not yet received. That is the nature of
a compound interest added to the principal sum
and the whole principal and interest is treated as
the new principal upon which the interest for the
next period is stipulated. As a general rule,
interest due and unpaid shall not earn interest.
So if the parties stipulated an interest, it is
considered simple. It becomes only compound
when there is a stipulation. In other words, a
compound interest cannot be demanded from the
borrower unless there is a stipulation.
3. Legal Interest – That which the law directly
charged in the absence of any agreement as to
liability between the parties.
4. Lawful Interest - Interest, which the law allows or
does not prohibit; that which is the maximum
interest allowed by law.
5. Unlawful Interest or Usurious – Interest rate
stipulated that is beyond the maximum rate
allowed by law.
Remember, that since the Usury Law has been
suspended, there is no more maximum interest FOR NOW.
WITH REGARD TO LAWFUL AND UNLAWFUL
INTEREST RATES
Ateneo de Davao University
Jacinto St., Davao City
In relation to that let us take into consideration
the provisions: Article 2209 to Article 2213. This is more in
related to torts and damages but these provisions of law
nonetheless deal with interest.
Article 2209.
If the obligation consists in the payment of a sum of money,
and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent p.a.
In 1974 it was at 12& p.a. but starting July 2013 it
was reduced to 6% p.a.
Article 2210.
Interest may, in the discretion of the court, be allowed upon
damages awarded for breach of contract.
Also, we have crimes and quasi delicts.
Article 2211.
In crimes and quasi-delicts, interest as part of the damages
may, in proper case, be adjudicated in the discretion of the
court.
Article 2212.
Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent
upon this point.
Article 2213.
Interest cannot be recovered upon unliquidated claims or
damages, except when the demand can be established
with reasonable certainty.
Since we already have an idea that the usury law
has been suspended, so what happens of the interest rates
are found to be excessive?
We have the case of Chua vs. Timan…
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CHUA vs. TIMAN
FACTS: In February and March 1999, petitioners Salvador
and Violeta Chua granted respondents Rodrigo, Ma. Lynn
and Lydia Timan the following loans: a) P100,000;
b) P200,000; c) P150,000; d) P107,000; e) P200,000; and
f) P107,000. These loans were evidenced by promissory
notes with interest of 7% per month, which was later
reduced to 5% per month.
Respondents paid the loans initially at 7% interest rate per
month until September 1999 and then at 5% interest rate
per month from October to December 1999. Sometime in
March 2000, respondents offered to pay the principal
amount of the loans through a Philippine National Bank
manager’s check worth P764,000, but petitioners refused
to accept the same insisting that the principal amount of
the loans totalled P864,000.
On May 3, 2000, respondents deposited P864,000 with the
Clerk of Court of the RTC of Quezon City. Later, they filed
a case for consignation and damages which was released
to the petitioners.
The RTC rendered a decision in favor of respondents
which was affirmed by the CA. It ruled that the original
stipulated interest rates of 7% and 5% per month were
excessive. It further ordered petitioners to refund to
respondents all interest payments in excess of the legal
rate of 1% per month or 12% per annum.
The Court of Appeals declared illegal the stipulated interest
rates of 7% and 5% per month for being excessive,
iniquitous, unconscionable and exorbitant.
Petitioners aver that the stipulated interest of 5% monthly
and higher cannot be considered unconscionable because
these rates are not usurious by virtue of Central Bank
(C.B.) Circular No. 905-82 which had expressly removed
the interest ceilings prescribed by the Usury Law.
Petitioners add that respondents were in pari delicto since
they agreed on the stipulated interest rates of 7% and 5%
per month. They further aver they honestly believed that
the interest rates they imposed on respondents’ loans were
not usurious.
ISSUE: Whether or not the original stipulated interest rates
of 7% and 5%, equivalent to 84% and 60% per annum, are
unconscionable
Ateneo de Davao University
Jacinto St., Davao City
RULING: Yes. The stipulated interest rates of 7% and 5%
per month imposed on respondents’ loans must be
equitably reduced to 1% per month or 12% per annum. We
need not unsettle the principle we had affirmed in a
plethora of cases that stipulated interest rates of 3% per
month and higher are excessive, iniquitous,
unconscionable and exorbitant. Such stipulations are void
for being contrary to morals, if not against the law. While
C.B. Circular No. 905-82, which took effect on January 1,
1983, effectively removed the ceiling on interest rates for
both secured and unsecured loans, regardless of
maturity,nothing in the said circular could possibly be read
as granting carte blanche authority to lenders to raise
interest rates to levels which would either enslave their
borrowers or lead to a hemorrhaging of their assets.
Petitioners cannot also raise the defenses of in pari
delicto and good faith. The defense of in pari delicto was
not raised in the RTC, hence, such an issue cannot be
raised for the first time on appeal. The defense of good
faith must also fail because such an issue is a question of
factwhich may not be properly raised in a petition for review
under Rule 45 of the Rules of Civil Procedure which allows
only questions of law.
As well set forth in Medel:
We agree … that the stipulated rate of interest at
5.5% per month on the P500,000.00 loan is excessive,
iniquitous, unconscionable and exorbitant. However, we
can not consider the rate "usurious" because this Court has
consistently held that Circular No. 905 of the Central Bank,
adopted on December 22, 1982, has expressly removed
the interest ceilings prescribed by the Usury Law and that
the Usury Law is now "legally inexistent."
In Security Bank and Trust Company vs. Regional Trial
Court of Makati, it was held that CB Circular No. 905
"did not repeal nor in any way amend the Usury Law
but simply suspended the latter’s effectivity." "Usury
has been legally non-existent in our jurisdiction.
Interest can now be charged as lender and borrower
may agree upon."
Nevertheless, we find the interest at 5.5% per month, or
66% per annum, stipulated upon by the parties in the
promissory note iniquitous or unconscionable, and,
hence, contrary to morals ("contra bonos mores"), if
not against the law. The stipulation is void.
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Q1: What is the effect if the interest is excessive and
iniquitous?
A1: It will be reduced by the Courts.
Q2: Since it was reduced, did the court considered it
unconscionable? What is the ruling as to the liability?
A2: Yes. The Court ruled that their liability is only at
1% per month or 12% p.a.
So even if there is a suspension of the usury law
it does not mean that the debtor shall not anymore be liable
for any interest if the stipulated rate was ruled as iniquitous.
The Courts will only reduce it.
In the case of Pilipinas Bank…
PILIPINAS BANK vs. COURT OF APPEALS
FACTS: Private respondent Lilia Echaus filed a complaint
against petitioner and its president, Constantino Bautista,
for collection of a sum of money. The complaint alleged: (1)
that petitioner and Greatland Realty Corporation executed
a "Dacion en Pago," wherein Greatland conveyed to
petitioner several parcels of land in consideration of the
sum of P7,776,335.69; (2) that Greatland assigned
P2,300,000.00 out of the total consideration of the Dacion
en Pago, in favor of private respondent; and (3) that
notwithstanding her demand for payment, petitioner in bad
faith, refused and failed to pay the said amount assigned to
her.
The trial court ordered petitioner and its co-defendant,
jointly and severally, to pay private respondent
P2,300,000.00 the total amount assigned by Greatland in
her favor out of the P2,300,000.00 liability of defendant
Pilipinas to Greatland plus legal interest from the dates of
assignments until fully paid.
On June 28, 1990, the Court of Appeals rendered a
decision in CA-G.R. No. CV-06017, which modified the
judgment and ordered Pilipinas Bank to pay 2,300,000,00
Pesos, representing the total amount assigned by
Greatland to her, with interest at the legal rate starting July
24, 1981, date when demand was first made.
Ateneo de Davao University
Jacinto St., Davao City
On September 4, 1990, petitioner filed a motion in the trial
court praying that private respondent to refund to her the
excess payment of P1,898,623.67 with interests at 6%.
Private respondent opposed the motion of petitioner with
respect to the rate of interest to be charged on the amount
of P2,300,000.00. According to private respondent, the
legal interest on the principal amount of P2,300,000.00 due
her should be 12% per annum pursuant to CB Circular No.
416 and not 6% per annum as computed by petitioner.
The Court of Appeals was of the theory that the action in
Civil Case No. 239-A filed by private respondent against
petitioner "involves forbearance of money, as the principal
award to plaintiff-appellee (private respondent) in the
amount of P2,300.000.00 was the overdue debt of
defendant-appellant to her since July 1981. The case is, in
effect, a simple collection of the money due to plaintiff-
appellee, as the unpaid creditor from the defendant bank,
the debtor" (Resolution, p.3; Rollo, p. 33). Applying Central
Bank Circular No. 416, the Court of Appeals held that the
applicable rate of interest is 12% per annum.
Petitioner argues that the applicable law is Article 2209 of
the Civil Code, not the Central Bank Circular No. 416.
ISSUE: Whether or not the legal rate of interest on the
amount of P2,300,000.00 adjudged to be paid by petitioner
to private respondent is 12% per annum.
RULING: Presidential Decree No. 116 authorized the
Monetary Board to prescribe the maximum rate or rates of
interest for the loan or renewal thereof or the forbearance
of any money, goods or credits and amended the Usury
Law (Act No. 2655) for that purpose.
As amended, the Usury Law now provides:
Sec. 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 express contract as to such
rate of interest, shall be six per centum per annum or such
rate as may be prescribed by the Monetary Board of the
Central Bank of the Philippines for that purpose in
accordance with the authority hereby granted.
Sec. 1-a. The Monetary Board is hereby authorized to
prescribe the maximum rate or rates of interest for the loan
or renewal thereof or the forbearance of any money, goods
or credits, and to charge such rate or rates whenever
warranted by prevailing economic and social
conditions:Provided, That such changes shall not be made
oftener that once every twelve months.
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In the exercise of the authority herein granted, the
Monetary Board may prescribe higher maximum rates for
consumer loans or renewals thereof as well as such loans
made by pawnshops, finance companies and other similar
credit institutions although the rates prescribed for these
institutions need not necessarily be uniform.
Acting on the authority vested on it by the Usury Law, as
amended by P.D. No. 116, the Monetary Board of Central
Bank issued Central Bank Circular No. 416, which
provides:
By virtue of the authority granted to it under Section 1 of
Act 2655, as amended, otherwise known as the "Usury
Law" the Monetary Board in its Resolution No. 1622 dated
July 29, 1974, has prescribed that 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 express contract as to such rate of interest, shall be
twelve (12%) per cent per annum. This Circular shall take
effect immediately.
Note that Circular No. 416, fixing the rate of interest at 12%
per annum, deals with (1) loans; (2) forbearance of any
money, goods or credit; and (3) judgments.
What then is the nature of the judgment ordering petitioner
to pay private respondent the amount of P2,300,000.00?
The said amount was a portion of the P7,776,335.69 which
petitioner was obligated to pay Greatland as consideration
for the sale of several parcels of land by Greatland to
petitioner. The amount of P2,300,000.00 was assigned by
Greatland in favor of private respondent. The said
obligation therefore arose from a contract of purchase and
sale and not from a contract of loan or mutuum. Hence,
what is applicable is the rate of 6% per annum as provided
in Article 2209 of the Civil Code of the Philippines and not
the rate of 12% per annum as provided in Circular No. 416.
Petitioner next contends that, consistent with its thesis that
Circular No. 416 applies only to judgments involving the
payment of loans or forbearance of money, goods and
credit, the Court of Appeals should have ordered private
respondent to pay interest at the rate of 12% on the
overpayment collected by her pursuant to the advance
execution of the judgment.
The Court agrees. Private respondent was paid in advance
the amount of P5,517,707.00 by petitioner to the order for
the execution pending appeal of the judgment of the trial
Ateneo de Davao University
Jacinto St., Davao City
court. On appeal, the Court of Appeals reduced the total
damages to P3,619,083.33, leaving a balance of
P1,898,623.67 to be refunded by private respondent to
petitioner. In an execution pending appeal, funds are
advanced by the losing party to the prevailing party with the
implied obligation of the latter to repay former, in case the
appellate court cancels or reduces the monetary award.
In the case before us, the excess amount ordered to
refunded by private respondent falls within the ruling in
Viloriaand Buiser that Circular No. 416 applies to cases
where money is transferred from one person to another
and the obligation to return the same or a portion thereof is
subsequently adjudged.
Q1: What is dacionenpago?
A1: Article 1245 provides that dation in payment,
whereby property is alienated to the creditor in satisfaction
of a debtin money, shall be governed by the law on sales.
Q2: Again, when do we apply the 12%?
A2: When the obligation is breached, and it consists
in the payment of a sum of money, i.e., a loan or a
forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time
it is judicially demanded. In the absence of stipulation, the
rate of 12% p.a. to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the NCC.
Q3: As to the 2.3 M what interest rate must be
applied? As to the excess?
A3: The said amount was a portion of the 7.7 M
petitioner was obligated to pay to Greatland as
consideration for the sale of several parcels of land by
Greatland to petitioner. The amount of 2.3 M was assigned
in favor of Lilia Echaus. The said obligation therefore arose
from a contract of purchase and sale and not from a
contract of loan or mutuum. Hence, what is applicable is
the rate of 6% p.a. a asprovided in Article 2209 of the NCC
and not the rate of 12% p.a. as provided in Circular No.
416.
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However, as to the excess, it shall earn interest
of 12% p.a. The reason is that the BSP Circular applies
only to judgments involving the payment of loans or
forbearance of money, goods and credit. Echaus must
refund the excess amount to Pilipinas Bank (parasiyang
payment of loan/forbearance that’s why i-apply ang 12% sa
excess; there is that obligation to return/refund.)
We also have the case of Eastern Shipping. This case
provided us with a guideline.
EASTERN SHIPPING LINES, INC. vs.
HON. COURT OF APPEALS AND MERCANTILE
INSURANCE COMPANY, INC
FACTS: This is an action against defendants shipping
company, arrastre operator and broker-forwarder for
damages sustained by a shipment while in defendants'
custody, filed by the insurer-subrogee who paid the
consignee the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were
shipped from Yokohama, Japan for delivery vessel "SS
EASTERN COMET" owned by defendant Eastern Shipping
Lines. The shipment was insured under plaintiff's Marine
Insurance Policy No. 81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12,
1981, it was discharged unto the custody of defendant
Metro Port Service, Inc. The latter excepted to one drum,
said to be in bad order, which damage was unknown to
plaintiff.
On January 7, 1982 defendant Allied Brokerage
Corporation received the shipment from defendant Metro
Port Service, Inc., one drum opened and without seal.
On January 8 and 14, 1982, defendant Allied Brokerage
Corporation made deliveries of the shipment to the
consignee's warehouse. The latter excepted to one drum
which contained spillages, while the rest of the contents
was adulterated/fake.
Plaintiff contended that due to the losses/damage
sustained by said drum, the consignee suffered losses
totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against defendants
who failed and refused to pay the same.
Ateneo de Davao University
Jacinto St., Davao City
BY: 2 MANRESA 2015-2016
As a consequence of the losses sustained, plaintiff was
compelled to pay the consignee P19,032.95 under the
aforestated marine insurance policy, so that it became
subrogated to all the rights of action of said consignee
against defendants
The Court, among others, ordered defendants to pay
plaintiff, jointly and severally The amount of P19,032.95,
with the present legal interest of 12% per annum from
October 1, 1982, the date of filing of this complaints, until
fully paid (the liability of defendant Eastern Shipping, Inc.
shall not exceed US$500 per case or the CIF value of the
loss, whichever is lesser, while the liability of defendant
Metro Port Service, Inc. shall be to the extent of the actual
invoice value of each package, crate box or container in no
case to exceed P5,000.00 each, pursuant to Section 6.01
of the Management Contract)
ISSUE:
1. Whether or not a claim for damage sustained on
a shipment of goods can be a solidary, or joint and several,
liability of the common carrier, the arrastre operator and the
customs broker. YES
2. Whether the payment of legal interest on an
award for loss or damage is to be computed from the time
the complaint is filed or from the date the decision
appealed from is rendered.
3. Whether the applicable rate of interest, referred
to above, is twelve percent (12%) or six percent (6%). 6%
HELD:
1. Solidary. Since it is the duty of the ARRASTRE to take
good care of the goods that are in its custody and to deliver
them in good condition to the consignee, such
responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with
the obligation to deliver the goods in good condition to the
consignee.
The common carrier's duty to observe the requisite
diligence in the shipment of goods lasts from the time the
articles are surrendered to or unconditionally placed in the
possession of, and received by, the carrier for
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transportation until delivered to, or until the lapse of a
reasonable time for their acceptance by, the person entitled
to receive them (Arts. 1736-1738, Civil Code; Ganzon vs.
Court of Appeals, 161 SCRA 646; KuiBai vs. Dollar
Steamship Lines, 52 Phil. 863). When the goods shipped
either are lost or arrive in damaged condition, a
presumption arises against the carrier of its failure to
observe that diligence, and there need not be an express
finding of negligence to hold it liable.
2. It may not be unwise, by way of clarification and
reconciliation, to suggest the following rules of thumb for
future guidance.
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, is imposed,
as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.
2. 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 begin to run
only from the date the judgment of the court is made (at
Ateneo de Davao University
Jacinto St., Davao City
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.
3. 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 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.
THEREFORE, the legal interest to be paid is SIX
PERCENT (6%) on the amount due computed from the
decision, dated 03 February 1988, of the court a quo. A
TWELVE PERCENT (12%) interest, in lieu of SIX
PERCENT (6%), shall be imposed on such amount
upon finality of this decision until the payment thereof
(pursuant to no.3 above.)
NOTE: The Central Bank Circular imposing the 12%
interest per annum applies only to loans or
forbearance of money, goods or credits, as well as to
judgments involving such loan or forbearance of
money, goods or credits, and that the 6% interest
under the Civil Code governs when the transaction
involves the payment of indemnities in the concept of
damage arising from the breach or a delay in the
performance of obligations in general. Observe, too,
that in these cases, a common time frame in the
computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until
the adjudged amount is fully paid.
Q1: Why do you think that is necessary for the SC to
lay down this guideline?
A1: Based on the rulings in the previous cases there
are variations depending upon the circumstances of each
case that is why it is necessary for the SC to reconcile
everything in one simple guideline.
Q2: So what is the imposable rate of interest?
A2: 6% p.a. because the contract is sale and
transportation of goods.
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Looking at this case it did not reverse the mode
of imposition of interest in the previous cases rather it just
presented a simpler guideline.
You will find out later in one case that even if the
legal interest rate has already been amended you still have
to be familiar with these cases kasi you should know what
interest rate should be applied specially those prior to July
1, 2013. You have to make some distinctions.
November 25, 2015
Transcribed by: Robelen Callanta
We have already emphasized that there is no more
usurious interest or unlawful interest due to the suspension
of the Usury Law. However, we have also discussed in the
case of Chua that despite the suspension of the Usury Law
imposing maximum interest rates or ceiling rate for interest,
parties or creditors cannot impose interest rates which are
deemed exorbitant, iniquitous or unconscionable. We have
also discussed in the case of Chua that the effect is that
the stipulation will be considered void and the interest will
be reduced accordingly by the Supreme Court.
What if it was the debtor who voluntarily agreed to such
interest rate? What happened in the case of Dio vs Japor?
Dio vs Spouses Japor
Facts: Spouses Virgilio Japor and Luz Roces Japor were
the owners of a residential lot including its improvements
situated in Lucena City.
On August 23, 1982, the respondents obtained a loan
of P90,000 from the Quezon Development Bank (QDB),
and as security therefor, they mortgaged the said lots, as
evidenced by a Deed of Real Estate Mortgage.
Subsequently, the parties amended the deed increasing
respondents’ loan to P128,000.
The respondents failed to pay their aforesaid loans.
However, before the bank could foreclose on the mortgage,
respondents offered to mortgage their properties to
petitioner Teresita Dio. Respondents mortgaged anew the
two properties already mortgaged with QDB to secure the
Ateneo de Davao University
Jacinto St., Davao City
timely payment of a P350,000 loan that respondents had
from petitioner Dio. Under the terms of the deed,
respondents agreed to pay the petitioner interest at the rate
of five percent (5%) a month, within a period of two months
or until April 14, 1989. In the event of default, an additional
interest equivalent to five percent (5%) of the amount then
due, for every month of delay, would be charged on them.
However, the respondents failed to settle their obligation to
petitioner on April 14, 1989, the agreed deadline for
settlement. On August 27, 1991, petitioner made written
demands upon the respondents to pay their debt. Despite
repeated demands, respondents did not pay, hence
petitioner applied for extrajudicial foreclosure of the
mortgage.
Issue: Won the stipulation of 5% interest within the 2
month period and 5% interest for every month of delay
after that is contrary to morals, if not, illegal.
Ruling: The stipulation as to the 5% interest for the two-
month period was sustained. However, the stipulation as to
the 5% interest for every month of delay after that
(compound interest) was deemed unconscionable.
The evidence shows that it was indeed the respondents
who proposed the 5% interest rate per month for two (2)
months. Having agreed to said rate, the parties are now
estopped from claiming otherwise. For the succeeding
period after the two months, however, the Court of Appeals
correctly reduced the interest rate to 12% per annum and
the penalty rate to 1% per month, in accordance with
Article 2227of the Civil Code.
The Usury Law is now legally inexistent. Interests may be
set at rates agreed upon. However, the interest rate albeit
technically cannot be considered as usurious, may be
equitably reduced should it be found by the courts as
iniquitous, unconscionable and hence, contrary to morals if
not against the law.
Q1: Was the 5% per month deemed unconscionable?
A1: Yes. In previous cases, even the interest rate of above
3% per month is already unconscionable. What is deemed
conscionable is 12% per year or 1% per month.
Q2: So what happened to the interest rate here agreed
upon? Was the 5% additional interest which was actually
the penalty for every month of delay sustained?
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A2: As to the 5% interest within the 2 months, it was
upheld by the court. (Maam interrupts the student)
Q3: Isn’t it that we mentioned that it is unconscionable?
A3: What is unconscionable is only the 2nd part of the
interest wherein there will be 5% interest within the
succeeding period after the 2 months. The 1st part was
upheld by the court because it was the debtor himself who
made the proposal regarding the interest rate of 5% per
month within the first 2 months.
Q4: Isn’t it that it was also their agreement that in case of a
default there will also be an additional 5% interest per
month? Why can’t we use the same reasoning (interest
rate voluntarily agreed upon) as to the penalty?
A4: It is because the Supreme Court recognizes the reality
that whenever a person would need money, he would bite
into any offer or any kind of arrangement even though it is
already iniquitous such as the 5% per month interest which
the Supreme Court has already held in previous cases as
iniquitous.
Q5: How about the 5% interest for the two-month period?
Why was it upheld by the court?
A5: Because it was the debtor himself who made such
offer and probably ma’am because it was only valid for the
2 month period and not absolute u til the entire debt is paid.
Q6: Let us change the facts a bit. What if it was voluntarily
offered by the debtor that he would be liable for interest of
5% per month until fully paid? What do you think should be
the judgment in that scenario?
A6: The SC would have to change the interest rate if it is
iniquitous.
Q7: What do we take into consideration to say that the
interest is iniquitous, unconscionable and exorbitant for the
Supreme Court to lower the interest rates?
A7: 1. Whether it is the debtor himself who made the
offer
2. Whether the interest rate is within the interest
rate that has been established by jurisprudence. It seems
that the mark established by jurisprudence is 3% per month
at most.
Ateneo de Davao University
Jacinto St., Davao City
Q8: But if we use that jurisprudence in the case of Prisma,
why is it that the 5% in the case of Dio was upheld? How
do you reconcile everything that we have discussed? What
I am trying to ask is what do we take into consideration to
say that the interest is unconscionable?
A8: What is iniquitous, unconscionable and exorbitant
would depend upon the FACTUAL CIRCUMSYANCES. In
this case, it was Dio who made the offer that it was 5% for
the first 2 months so it was upheld and the fact that it was
the creditor that offered the additional 5% penalty, it was
considered unconscionable.
First thing that you should consider in deeming the interest
rate as exorbitant, iniquitous and unconscionable are the
FACTUAL circumstances of each case. If you look at Dio,
Civil Code or Circulars or jurisprudence, there is no fixed
rate.
The court never said that interest of 3% and above is
automatically considered iniquitous or
unconscionable. Jurisprudence says that it can serve
as a guide but by itself, we cannot say that 3% and
above interest rate can be considered
unconscionable. What are the other factual
circumstances that can be considered by the court?
In the case of Dio vs Japor, the fact that it was the
respondents who proposed the interest for the two
months was also considered not only because they
were the once who proposed it but I think it was also
taken into consideration the period, the 2 month
period.
So that is why I asked what if it is the debtor who
voluntarily proposed the 5% interest per month, can
we say that it is iniquitous and unconscionable even
if it is the debtor who voluntarily offered for such
rate? I don’t think so. I think the Supreme Court
would also deduce that. Have you remembered
discussing the case of Medel in your Obligations and
Contracts? Because in the case of Medel, the rate
was already stipulated but the Court otherwised held
that it was iniquitous. I think it was also 5%. In Medel
vs CA, the stipulated rate of interest at 5.5% per
month is considered excessive, iniquitous and
unconscionable, so the interest imposed was 12%
per annum and additional 1% per month penalty.
With that, you cannot say that you could use the principle
of estoppel for the interest rate not to be equitably reduced
by the court. Recall also the case of Prisma. What was the
ground why the SC did not rule anymore as to the interest
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rate being unconscionable? Because it was never raised
during appeal and also taking into consideration that it was
a short period of time- 6 months. Again, there is no hand-
and-fast rule as to what is considered as iniquitous or
unconscionable interests for the courts to reducethe
interest rate. No fixed rates although nagserve as a guide
yung above 3%. The principle of estoppel or the fact that it
was voluntarily made by the respondent by itself cannot be
used.
Short span of time for the payment and failure to pay can
be taken into consideration. But all in all again, it depends
upon the factual circumstances of the case.
In this case, the Supreme Court held that the 5% for the 2
months was unconscionable and was subsequently
reduced to 12% per annum or 1 % per month. Also, with
regard to the surplus the SC held here that the surplus was
the result of the computation of the CA of the outstanding
liability based on the reduced rate of 12%. In the instant
case, there is no surplus to speak of because in adjusting
the interest and penalty rates from unconscionable levels,
what the court did was to reflect the true price of the land at
the time of the foreclosure sale. Please take note what are
to be considered unconscionable.
By the way, the case of Medel is GR No. 131162,
November 27, 1998.
Also, last time we already discussed the case of Eastern
Shipping. It provided the guideline on what is the interest
rate to be imposed and when should it start. As we also
discussed last time, the guidelines in Eastern Shipping has
already been amended due to the Circular which took
effect on July 1, 2013.
So applying the amendments we have the case of Nacar.
Dario Nacar vs Gallery Frames
Facts: Dario Nacar filed a labor case against Gallery
Frames and its owner Felipe Bordey, Jr. Nacar. On
October 15, 1998, the Labor Arbiter (LA) found Gallery
Frames guilty of illegal dismissal hence the Arbiter
awarded Nacar P158,919.92 in damages consisting of
backwages and separation pay. Gallery Frames appealed
all the way to the Supreme Court (SC). The Supreme Court
affirmed the decision of the Labor Arbiter and the decision
became final on May 27, 2002.
After the finality of the SC decision, Nacar filed a motion
before the LA for recomputation as he alleged that his
backwages should be computed from the time of his illegal
Ateneo de Davao University
Jacinto St., Davao City
dismissal (January 24, 1997) until the finality of the SC
decision (May 27, 2002) with interest. The LA denied the
motion as he ruled that the reckoning point of the
computation should only be from the time Nacar was
illegally dismissed (January 24, 1997) until the decision of
the LA (October 15, 1998). The LA reasoned that the said
date should be the reckoning point because Nacar did not
appeal hence as to him, that decision became final and
executory.
ISSUE: Whether or not the Labor Arbiter is correct.
HELD: No. There are two parts of a decision when it comes
to illegal dismissal cases (referring to cases where the
dismissed employee wins, or loses but wins on appeal).
The first part is the ruling that the employee was illegally
dismissed. This is immediately final even if the employer
appeals – but will be reversed if employer wins on appeal.
The second part is the ruling on the award of backwages
and/or separation pay. For backwages, it will be computed
from the date of illegal dismissal until the date of the
decision of the Labor Arbiter. But if the employer appeals,
then the end date shall be extended until the day when the
appellate court’s decision shall become final. Hence, as a
consequence, the liability of the employer, if he loses on
appeal, will increase – this is just but a risk that the
employer cannot avoid when it continued to seek recourses
against the Labor Arbiter’s decision. This is also in
accordance with Article 279 of the Labor Code.
To recapitulate and for future guidance, the guidelines laid
down in the case of Eastern Shipping Linesare accordingly
modified 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, is 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 demanded. In the absence of stipulation, the
rate of interest shall be 6% per annum to be computed
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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 begin 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 by then
an equivalent to a forbearance of credit.
Q1: When was the 12% interest rate imposed?
A1: The 12% interest was imposed on the award of
backwages from the finality of the decision on May 27,
2002.
Q2: Why 12%?
A2: It was 12 % first because they followed the ruling in
Eastern Shipping. The guideline in Eastern Shipping (3rd
paragraph) states that when the judgment of the court
awarding a sum of money becomes final and executory,
the interest to be imposed is 12%.
Q3: So what is May 27, 2002?
A3: The date when the resolution/decision of the court
became final and executory.
Q4: After that, what is the penalty to be imposed?
A5: The penalty to be imposed is 6% until full payment.
Ateneo de Davao University
Jacinto St., Davao City
BY: 2 MANRESA 2015-2016
Alright, what do we have here? This is actually emanating
from a case of dismissal with the NLRC wherein there was
a judgment for liability for Php 158,000 as backwages and
separation pay. The judgment became final and executory
on May 27, 2002 and there was a recomputation – from
Php 158,000, it became Php 417,000 plus because of the
interest rates. Backwages is computed from time of illegal
dismissal until final judgment. Separation pay is computed
from the time of employment until final judgment.
Interest rate of 12% per annum of the total monetary award
from May 27, 2002 (resolution became final and
executory). Thereafter, 6% from July 1, 2013 until full
satisfaction. Take note that Circular No. 799 issued by the
Bangko Sentral Monetary Board saying that the legal
interest is now 6% should be applied prospectively, not
retroactively. Consequently, the 12% interest shall run until
June 30, 2013. (By the way, walay 31 and June) So from
July 1, 2013, it is 6% per annum as the prevailing rate of
interest.
Again, that is the relevance of why we still discuss cases
applying the rule in Eastern Shipping. We have to make a
distinction for interest rates made applicable prior to July 1,
2013.
ECE Realty vs Hernandez
Facts: Haydn Hernandez filed a complaint for specific
performance with damages against EMIR and ECE Realty
due to the failure of the respondents to deliver a
condominium unit which he purchased from them. The
respondents allegedly promised to turn over to him the unit
by December 31, 1999, but failed to do so. Worse, he
learned that the actual area was only 26 square meters,
not 30 square meters as indicated in their contract to sell,
and the company refused to grant his corresponding
reduction in the purchase price; instead the companies told
him to settle his arrears in amortizations. He learned later
that that company sold Unit 808 to a third party.
The HLURB ruled in favour of the complainant and ordered
the company to reimburse the respondent the amount of
P452,551.65, plus legal interest, from the filing of the
complaint, and to pay the respondent P50,000.00 as moral
damages, P50,000.00 as attorney’s fees, and P50,000.00
as exemplary damages.
The CA affirmed the decision with modification and ruled
on the imposable interest:
We DIRECT petitioner ECE REALTY AND
DEVELOPMENT INC., to pay respondent Haydyn
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Hernandez, the amount of [?]452,551.65 (representing the
total amount respondent Hernandez paid petitioner ECE),
plus 6% interest per annum starting 07 September 2006,
and 12% interest per annum from the time the judgment
becomes final and executor[y], until fully paid.
Issue: What is the imposable interest rate on the damages
and refund awarded to Hernandez?
Ruling: SC affirmed the CA decision with modification, by
reducing the interest imposable after finality from twelve
percent (12%) to six percent (6%).
Eastern Shipping Lines, Inc. synthesized the rules on the
imposition of interest, if proper, and the applicable rate, as
follows: The 12% per annum rate under CB Circular No.
416 shall apply only to loans or forbearance of money,
goods, or credits, as well as to judgments involving such
loan or forbearance of money, goods, or credit, while the
6% per annum under Art. 2209 of the Civil Code applies
“when the transaction involves the payment of
indemnities in the concept of damage arising from the
breach or a delay in the performance of obligations in
general,” with the application of both rates reckoned “from
the time the complaint was filed until the [adjudged] amount
is fully paid
Thus, from the finality of the judgment awarding a sum of
money until it is satisfied, the award shall be considered a
forbearance of credit, regardless of whether the award in
fact pertained to one. Pursuant to Central Bank Circular
No. 416 issued on July 29, 1974, in the absence of written
stipulation the interest rate to be imposed in judgments
involving a forbearance of credit was twelve percent (12%)
per annum, up from six percent (6%) under Article 2209 of
the Civil Code. This was reiterated in Central Bank
Circular No. 905, which suspended the effectivity of the
Usury Law beginning on January 1, 1983.
But since July 1, 2013, the rate of twelve percent (12%) per
annum from finality of the judgment until satisfaction has
been brought back to six percent (6%). Section 1 of
Resolution No. 796 of the Monetary Board of the Bangko
Sentral ng Pilipinas dated May 16, 2013 provides: “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.” Thus, the rate of
interest to be imposed from finality of judgments is now
back at six percent (6%), the rate provided in Article 2209
of the Civil Code.
Ateneo de Davao University
Jacinto St., Davao City
Q1: Why is it here that the developer was liable to
Hernandez? Was their liability only for damages?
A1: No ma’am, it was also for the refund of the payments
made by Hernandez plus interest.
Q2: From what time is the 6% interest imposed?
A2: From the filing of the complaint until the finality of
judgment.
Q3: Why is it only 6% and not 12% prior to July 1, 2013?
A3: Because under the Eastern Shipping guideline, 6%
interest is imposable if what is involved is an obligation
other than loan or forbearance of money. What is involved
in this case is the refund of the payments made and also
payment for damages.
Q4: Until finality of judgment until fully paid, what is the
interest rate?
A4: Also, 6% maam.
Alright, take note here the relevance of the rule in Eastern
Shipping. It is very easy to remember the effect of the
amendment by Bangko Sentral Circular 799 because it is
6% whether or not it is a loan or forbearance of money,
goods or credit. Lahat yun sila 6%. Pero bakit natin sila
pinag-aaralan? Because here, a 2014 case, prior to July 1,
2013, we still take into consideration whether it is a loan or
forbearance of money. Here, 6% interest is imposed
because from the time of filing until finality, by way of actual
and compensatory damages, the obligation is not arising
from loan or forbearance of money. From finality until full
satisfaction, the total amount due now compounded with
interest due is 6%.
Also take note class that we have to make a distinction
between monetary and compensatory interest.
Article 1956.
MONETARY INTEREST COMPENSATORY
INTEREST
Article 1956 Article 2209, 2210 and also
those with regard to actual
and compensatory
damages
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With this amendment of the legal interest rate to be
imposed, let us try to connect it with what we have
discussed earlier. Kasi it is pretty much clear that if the
interest rate becomes unconscionable, the court will reduce
that. And it is fixed at 12% interest per annum. Of course,
differentiated from penalty. Kasi for penalty, it is like 1%
interest per month pero fixed yung 12% per annum or 1%
per month.
Take note, if you take a look at Article 2209, when the New
Civil Code took effect, the legal interest rate was still 6%
per annum. Here sa last phrase, “ and in the absence of
stipulation, the legal interest is 6% per annum.” Kailan siya
nagging 12%? Again, through a Central Bank Circular in
1974. Then, we have this Central Bank Circular 799 which
took effect on July 1, 2013 so 6% na naman siya.
Yung mga cases that we discussed, applying the interest
rate of 12% per annum are from 1974 until June 30, 2013.
Since the legal interest is now 6%, do you think that if the
interest rate is deemed unconscionable, the court will
reduce it to 6%, not 12%?
We have these cases. Please take note of this.
In Albos vs Sps. Embisan G.R. No. 210831, November
26,2014, the SC held that there was an agreement for 5%
per month that was deemed as unconscionable. The courts
reduced it at 12% interest per annum. This was already a
2014 ruling and the CB Circular 799 is already in effect.
The interest rate of 12% per annum was still imposed.
Instead of referring to it as legal interest, the court used the
term “simple interest” of 12% per annum.
Another case is MCMP vs Monark, G.R. No. 201001.
Again, it also reduced theinterest rate to 12%. What was its
guideline? Prevailing jurisprudence.
You take note that despite of the lowering of the legal
interest rate by CB Circular 799 to 6% per annum,
nevertheless, the SC has already ruled in newer cases that
unconscionable interests will still be reduced at 12% per
annum.
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.
Again, the Usury Law has already been suspended. Why
do we still mention it every now and then? Because of the
fact that it is suspended and anything suspended may be
lifted. Even if the Usury Law is suspended in 1983, it can
Ateneo de Davao University
Jacinto St., Davao City
still be lifted. When we talk of Usury, it is a prohibitive
interest for contracting party receiving any interest beyond
the amount allowed by law. Again, this was suspended.
There is no more ceiling as it will depend on the agreement
of the parties. However, the courts will reduce it if it is
found to be unconscionable depending on the factual
circumstances of each case.
Also, take note that if we talk about usury, it is only in
relation to the existence of a loan or forbearance of money.
If there is no loan or forbearance of money, goods or credit,
there is no usury to speak of.
What is the effect if you have a usurious or unconscionable
interest? Again, the stipulation will be invalidated and
considered void by the court, interest will be reduced but
the principal obligation will still stand.
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.
Differentiate it from Article 1955
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.
But if you are talking about the interest, time and place of
payment.
Compound interest was mentioned earlier.
Q1: What do you mean by compound interest?
A1: Compound interest is the interest of the principal
amount and the interest already due.
TAN vs CA
Facts: Tan obtained several loans from CCP as evidenced
by several promissory notes. Petitioner defaulted but after
a few partial payments he had the loans restructured by
respondent CCP, and petitioner accordingly executed a
promissory note P3,411,421.32 payable in five (5)
installments.
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The pertinent portion of the promissory note (Exhibit "A")
imposing interest and penalties provides that:
For value received, I/We jointly and severally promise to
pay to the CULTURAL CENTER OF THE PHILIPPINES
P3,411,421.32
With interest at the rate of FOURTEEN per cent (14%) per
annum from the date hereof until paid. PLUS THREE
PERCENT (3%) SERVICE CHARGE. In case of non-
payment of this note at maturity/on demand or upon default
of payment of any portion of it when due, I/We jointly and
severally agree to pay additional penalty charges at the
rate of TWO per cent (2%) per month on the total amount
due until paid, payable and computed monthly.
Petitioner Tan failed to pay any installment on the said
restructured loan of P3,411,421.32, the last installment
falling due on December 31, 1980.
CCP filed a complaint for the collection of sum of money.
The trial court rendered a decision ordering defendant to
pay plaintiff, the amount of P7,996,314.67, representing
defendant’s outstanding account as of August 28, 1986,
with the corresponding stipulated interest and charges
thereof, until fully paid, plus attorney’s fees in an amount
equivalent to 25% of said outstanding account. This was
upheld by the CA.
Issue: Whether the court committed an error in upholding
the decision of the trial court which compounded the
interest on surcharges. No.
Ruling: The stipulated fourteen percent (14%) per annum
interest charge until full payment of the loan constitutes the
monetary interest on the note and is allowed under Article
1956 of the New Civil Code.7 On the other hand, the
stipulated two percent (2%) per month penalty is in the
form of penalty charge which is separate and distinct from
the monetary interest on the principal of the loan.
The compounding of the penalty or compensatory interest
is sanctioned by and allowed pursuant to Article 1959 of
the New Civil Code considering that:
First, there is an express stipulation in the promissory note
permitting the compounding of interest. The fifth paragraph
of the said promissory note provides that: "Any interest
which may be due if not paid shall be added to the total
amount when due and shall become part thereof, the whole
amount to bear interest at the maximum rate allowed by
law."10 Therefore, any penalty interest not paid, when due,
Ateneo de Davao University
Jacinto St., Davao City
shall earn the legal interest of twelve percent (12%) per
annum, in the absence of express stipulation on the
specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that
"Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent
upon this point." In the instant case, interest likewise began
to run on the penalty interest upon the filing of the
complaint in court by respondent CCP on August 29, 1984.
Hence, the courts a quo did not err in ruling that the
petitioner is bound to pay the interest on the total amount
of the principal, the monetary interest and the penalty
interest.
Q1: What was the ruling of the court with regard to the 2%
penalty per month?
A1: This was upheld by the court because this was
expressly stipulated in their contract. If there is an express
stipulation in the promissory note, then it will be permitted
citing Article 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.
Q2: Aside from the fixed rate, simple interest rate of 2%
per month, are you saying that the same penalty is also
compounded? Do you have a compound interest in the
stipulation of the parties?
A2: Yes. It was in the contract.
So what do we have here? Imposition of penalty and
interest that was upheld by the court. The Civil Code
permits a penalty apart from the monetary interest. This is
what I mentioned earlier. You have to distinguish monetary
interest from compensatory interest. The 42% interest per
annum here which was upheld by the court was considered
a monetary interest. It complied with the requirements
under Article 1956. It was expressly stipulated in writing. As
to the 2% per month penalty, that refers to the
compensatory interest. The SC still held that such is valid.
Penalty clauses can be in the form of penalty or
compensatory interest. Thus, the compounding of the
penalty or compensatory interest is sanctioned and allowed
by Article 1959 pf the New Civil Code,
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
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capitalize the interest due and unpaid, which as added
principal, shall earn new interest
Here, the promissory note provides: Any interest which
may be due, if not paid, shall be added to the total amount
when due and shall become part thereof. The whole
amount of their interest at the maximum rate allowed by
law. Therefore, any amount of interest not paid when due,
shall earn the interest of 12% per annum in the absence of
an express stipulation of a specific rate of interest as in the
case at bar.
So when can there be compounding of interest? When you
have an Article where the stipulation is provided under
Article 1959.
Another ground for the imposition of a compounding
interest is Article 2212.
Article 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.
Under the facts of this case and by stipulation of the
parties, interest began to run on the penalty upon the filing
of the complaint on August 29, 1994. However, please take
note of the judgment here. The Supreme Court held that
the penalty charged was reduced to 12% per annum or 1%
per month starting August 28, 1996. Because from that
time, there were partial payments made so it took into
consideration the good faith on the part of Tan. That is why
it reduced it to 12% beginning August 28, 1996.
November 26 (1st hour)
Transcribed by: Kelvin John Du
Recap:
We emphasized the Guidelines in the case of Eastern
Shipping and how it was changed based by virtue of the
amendment under BankoSentral Circular No. 799, as seen
in the cases of Nacar as well as ECE.
In the cases we have discussed, if the interest is deemed
exorbitant or unconscionable, then it would be reduced. In
the cases before 2013 or previous cases, the SC has ruled
that the interest rate be reduced to 12% interest per
Ateneo de Davao University
Jacinto St., Davao City
annum. With the change or amendment in the legal interest
rate, it was still 12% by using prevailing jurisprudence,
under the cases of Albosvs. Embisan[GR No. 210831] and
MCMP vs. Monark[GR No. 201001].
We also looked at cases in determining whether the
interest is unconscionable or not. Always look at the factual
circumstances of the case. There is no definite interest rate
to say if it is unconscionable or not. Probably, we can take
into consideration if the parties failed to raise it as an issue,
as in the case of Prisma, or if it was voluntarily offered by
the debtor, as in the case of Dio.
Take note that the principle of estoppel by itself cannot be
used or cannot be based to say that the interest rate
cannot be deemed as unconscionable or not. The principle
of estoppel cannot be predicated on an illegal act. Validity
of a contract cannot be considered as valid by estoppel if it
is prohibited by law or contrary to public policy. Although in
the case of Dio, it is only for a 2-month period, but if you
look at the facts of the case, the SC did not say that you
apply the principle of estoppel, but it only said that it was
voluntarily offered and cannot now raise that defense that
he be bound by the stipulated interest.
Again, estoppel should not be used haphazardly in saying
that there is no problem since the debtor agreed to it. Look
at the other factual circumstances available in each case.
The principle of estoppel in itself, you cannot use that to
validate a stipulation in a contract which is illegal by law or
contrary to law or contrary to public policy.
We also discussed the compounding of interest:
General Rule: Accrued interest, interest due and unpaid,
shall not earn interest unless in 2 instances.
Exception: There is no compounding of interest unless:
1. Article 1959 – express stipulation
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.
2. Article 2212 – when it is judicially demanded
Article 2212. Interest due shall earn legal interest from the
time it is judicially demanded, although the obligation may
be silent upon this point.
Parties may stipulate on the imposition of both interest and
penalty in case of default on the part of the borrower. There
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is a distinction between monetary interest and
compensatory interest as discussed in the case of Tan vs.
CA.
What is the effect if the debtor has already paid interest but
it turns out therewas no express stipulation in writing? It is
a contractof simple loan but there is payment of interest but
it turns out there is no express stipulation in writing?
There is solutioindebiti.
What is solutioindebiti? There is a payment or delivery of a
sum of money to a person not entitled to it, by mistake.
Case: Sigaan vs. Villanueva
Facts:Sigaan is a PNO officer. Villanueva was approached
by Sigaan to offer a loan, since she needed it she availed
of it. The loan was not put in writing and there was no
stipulation of interest. Thereafter, Villanueva issued several
checks, the excess of which was to pay for the interest.
Sigaan vexed her to pay more, which amounted to 1.2
million. Villanueva then demanded the refund of the excess
of the amount since there was no stipulation as to interest
but Sigaan refused.
Issue: WON Sigaan has the obligation to refund Villanueva
Ruling: Yes, under Article 1960: If the borrower pays
interest when there has been no stipulation therefor, the
provisions of this Code concerning solutioindebiti, or
natural obligations, shall be applied, as the case may be.
The overpayment was in the form of solutioindebiti. The
creditor must refund back to the debtor. Here, it was
proven that the loan had no stipulation in writing, Sigaan
should refund the excess of the payment.
Q: But isn’t it that there are 2 kinds of interest? We have
monetary interest, the requisites of which are provided in
Article 1956, that there must be an express stipulation in
writing. But the other instance is if there is default-
compensatory interest. Can the petitioner here be liable for
compensatory interest?
A: No. There is no showing or evidence that Villanueva had
difficulty or defaulted in paying the loan.
Article 1960. If the borrower pays interest when there has
been no stipulation therefor, the provisions of this Code
concerning solutioindebiti, or natural obligations, shall be
applied, as the case may be.
Ateneo de Davao University
Jacinto St., Davao City
The phrase “no stipulation therefor” refers to Article 1956,
in reference to simple loan or mutuum.
Here, if there is a stipulated interest by mistake, the debtor
can recover based on the principle ofsolutioindebiti or
undue payment, or even if by natural obligation.
Natural obligation – it is an obligation not based on law
but on equity and natural law; it does not grant a right of
action to enforce their performance but after voluntary
fulfillment by the obligor, they authorize the retention of
what has been delivered or rendered by reason thereof
In the case of Sigaan, he already paid 660,000 in excess of
the principal amount. Considering that there was no
express stipulation in writing for the said interest, he should
not have been held liable to the creditor. With that, the
creditor has the obligation to return it to the debtor or
petitioner in this case as provided under Article 1960.
The principle of solutioindebiti applies where a payment
is made where there exists no binding relation between the
payor who has no duty to pay and the person received the
payment, and the payment is made through mistake and
not through liberality or some other cause.
How about for compensatory interest?
The SC held that the respondent should not also be liable
for compensatory interest as it was not proven that
respondent defaulted in paying the loan. As earlier found,
no interest was due on the loan because there was no
written agreement as regards to the payment of interest.
In this case, there was no monetary interest, no default, no
compensatory interest.
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.
As we have pointed out numerous times already, usury is
now legally non-existent. The interest legally chargeable
depends upon the agreement between the lender and the
borrower.
Usury – defined as contracting for or receiving something
in excess of the amount allowed by law for the loan or
forbearance of money; the taking of more interest for the
use of money than the law allows.
There can be no usury of there is no loan or forbearance of
money to speak of.
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Act No. 2655 otherwise known asThe Usury Law was
enacted in 1916. Its purpose was for the protection of the
borrowers from the imposition of unscrupulous lenders who
take undue advantage of the necessities of others.
Under the Usury Law, the Monetary Board was authorized
to prescribe the maximum rate of interest for the loan or
renewal thereof or the forbearanceof money, goods or
credits. By virtue of the authority given to the Monetary
Board, the MB prescribed in 1974 that the rate of interest
for loan or forbearance of money, goods or credits, in the
absence of express contract as to such rates of interest,
shall be 12% per annum.
That is why in the Civil Code, the Usury Law is mentioned
even in theprovisions under mutuum, because the Usury
Law was in effect at the time the New Civil Code was
promulgated. Thereafter it was suspended.
Q: When was the Usury Law suspended?
A: The suspension took effect in January 1, 1983.
Case: Solidbank vs. Permanent Homes
Facts: Permanent Homes is a real estate development
company and to finance its Buena Vida project, it was
granted an omnibus credit line facility by Solidbank. To
secure the loan, it mortgaged units within its project.
Issue: WON the increases in the interest rates should be
void for being unilaterally imposed
Ruling: No.The Usury Law had been rendered legally
ineffective by Resolution No. 224 dated 3 December 1982
of the Monetary Board of the Central Bank, and later by
Central Bank Circular No. 905 which took effect on 1
January 1983. These circulars removed the ceiling on
interest rates for secured and unsecured loans regardless
of maturity. The effect of these circulars is to allow the
parties to agree on any interest that may be charged on a
loan. The virtual repeal of the Usury Law is within the range
of judicial notice which courts are bound to take into
account.Although interest rates are no longer subject to a
ceiling, the lender still does not have an unbridled license
to impose increased interest rates. The lender and the
borrower should agree on the imposed rate, and such
imposed rate should be in writing.
The stipulations on interest rate repricing are valid because
(1) the parties mutually agreed on said stipulations; (2)
repricing takes effect only upon Solidbank’s written notice
Ateneo de Davao University
Jacinto St., Davao City
to Permanent of the new interest rate; and (3) Permanent
has the option to prepay its loan if Permanent and
Solidbank do not agree on the new interest rate. The
phrases "irrevocably authorize," "at any time" and
"adjustment of the interest rate shall be effective from the
date indicated in the written notice sent to us by the bank,
or if no date is indicated, from the time the notice was
sent," emphasize that Permanent should receive a written
notice from Solidbank as a condition for the adjustment of
the interest rates.
Q: What did they agree upon as to the interest rates
imposed as to the loans? Can Solidbank increase the
interest rates?
A: They agreed in their promissory notes that an increase
or decrease in the interest rates shall be mutually agreed
by the parties.
Q: Is that agreement considered valid?
A: Yes, the SC said it is valid. First, the parties mutually
agreed on the said stipulations. Second, the repricing only
takes effect uponSolidbank’s written notice to Permanent of
the new interest rate. Third, Permanent has the option to
repay its loan, if they do not agree on the new interest rate.
Q: Since the stipulation was valid, was it proper for
Solidbank to impose the increased rates to Permanent
Homes? From what time? From the time the interest rates
were already increased? What was the reason behind the
increase of interest rates by Solidbank? This was taken
into consideration by the court. Why was there a need for
Solidbank to increase the rates? What happened?
A: As contained in the promissory notes, there was a
provision stating that they irrevocably authorize Solidbank
to increase or decrease at any time the interest rate agreed
in the note, or in the business thereof, or the prevailing
rates in the local or international capital markets.
Q: What was the factor that made Solidbank increase the
interest rate to be imposed on the loans of Permanent?
A: Because of the Asian financial crisis during that time.
Q: With that, they increased the rate. The SC the increase
was proper and it was not unconscionable because of the
Asian financial crisis. We are saying that the stipulation is
valid. However, was it already proper for Solidbank to
impose the interest rate?
A: Permanent should first receive a written notice from
Solidbank as a condition for the adjustment of the interest.
In this case, they did not receive any notice.
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Although as we have mentioned earlier, the Usury Law has
already been legally ineffective or suspended since
January 1, 1983, and that there is no more ceiling in
interest rates, the lenders still do not have unbridled license
to impose increased interest rates.
Here, the stipulations on interest rate repricing are valid
because (1) the parties mutually agreed on said
stipulations; (2) repricing takes effect only upon Solidbank’s
written notice to Permanent of the new interest rate; and
(3) Permanent has the option to prepay its loan if
Permanent and Solidbank do not agree on the new interest
rate. The phrases "irrevocably authorize," "at any time" and
"adjustment of the interest rate shall be effective from the
date indicated in the written notice sent to us by the bank,
or if no date is indicated, from the time the notice was
sent," emphasize that Permanent should receive a written
notice from Solidbank as a condition for the adjustment of
the interest rates.
In relation to (1), take note that for parties to agree in any
increase in the interest rates, which is an escalation
clause, there must also be a provision that in case of lower
interest rates due to the financial markets, it should also be
present in the contract. In other words, there is an
escalation clause and a de-escalation clause, which are
both present in the agreement between the parties.
Again, while the stipulation is considered valid, Solidbank’s
computation of the interest due from Permanent should be
adjusted to take effect only upon Permanent’s receipt of
the written notice from Solidbank. In this case, Solidbank
did not present any written memorandum to support its
allegation that it promptly advised Permanent of the
change in interest rates.
The repricing in interest rates under the facts of this case
were held to be not unconscionably out of line with the
upper range of lending rates to other borrowers since it
happened at theheight of the Asian financial crisis in 1997.
Here, the repricing of the interest rate was not deemed
unconscionable. Remember- factual circumstances of the
case.
Why do we still discuss the Usury Law? Because it was
merely suspended.
Elements for usury to exist:
1. There is a loan or forbearance of money, goods
or credits; and
2. There is an agreement or understanding between
the parties that the loan shall or may be returned
Ateneo de Davao University
Jacinto St., Davao City
For the interest to be considered usurious, there must be
unlawful intent on the part of the creditor to take more that
the legal rate for the use of money or its equivalent, and
that the takingor agreeing to take for the use of the loan of
something in excess of what is allowed by law.
Purpose of the Usury Law: For the protection ofborrowers
from the imposition of unscrupulous lenders who take
undue advantage of the necessities of others.
Nevertheless, despite its suspension, the interest of
borrowers is still protected by the rulings of the SC as to
what interest is considered unconscionable or exorbitant.
Usury is not applicable in:
1. Rentals
2. Contracts of lease
3. Bona fide sale
4. Increase in price of things sold as a result of a
sale on credit
5. True pacto de retro sale
Just take note of that in case the Usury Law is no longer
suspended.
Part IV: Deposit
I. Deposit in General and its Different Kinds
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.
Who are the parties in a contract of deposit?
1. Depositary or the depositorio – the recipient
2. Depositor or the depositante – the one who gives
There is no requirement in a contract of deposit that the
depositor be the owner of the thing delivered for
safekeeping as there is no transfer of ownership involved in
a contract of deposit.
Similar to a contract of loan, a contract of deposit is a real
contract as it is perfected by delivery. It can be a unilateral
contact if gratuitous, and bilateral if for compensation.
Under Article 1962, it is clear that the principal purpose of
deposit is that it is for safekeeping. If safekeeping is only
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an accessory obligation, it could not be considered as a
contract of deposit; it could be a contract of lease, a
commodatum or even a contract of agency, wherein the
purpose of safekeeping is only ancillary to the main
objective or main purpose in the contract
• Delivery of money to a person with payment or
delivery of records or documents to a lawyer
hired to represent a party – That is not a contract
of deposit but it is a contract of agency wherein
the money or the documentsdelivered will be
kept by the depositary, but it is only ancillary to
his principal obligation as that of an agent
• Balance of commission or account in agent’s
possession at the principal’s disposal – It is a
deposit which the agent must return or restore to
the principal when demanded. The agent can be
held liable for estafa if he misappropriates it or
diverts its use to another purpose.
Case: BPI vs. IAC
Facts: This involves $3,000 which Zshornack gave to BPI
for safekeeping. However, BPI sold the dollar accounts and
converted it to peso which they deposited to the account of
Zshornack. BPI was not able to deliver the said amount
demanded by Zshornack.
Issue: WON there is a contract of deposit
Ruling: Yes, the real intention of the parties was for BPI to
safekeep the amounts for Zshornack.
Q: If it is a contract of deposit then the bank will be held
liable to Zshornack?
A: Yes for the return of the exact amount, but the SC held
that Zshornack cannot anymore recover damages since
the contract is considered to be void since there is an
existing Circular issued by the BangkoSentral stating that
foreign currencies should be sold 1 day after they are
received by the bank. Although the parties entered into a
contract of deposit, it is contrary to law as there was an
existing Circular prohibiting the said act. He cannot recover
damages.
What do we have here? It is clear that the purpose of the
delivery of the $3,000 was for safekeeping. So, it is
contract of deposit. But what did the employee of the bank
do? He converted the $ to Php, and the peso equivalent
was deposited to the account of Zhornack.
Here, the issue in relation to our case is with regard to
damages because instead of returning the exact same
thing subject of the contract of deposit, what happened was
that they converted it to their peso equivalent.
The SC heldit is true that there was a contract of deposit.
As earlier stated, the document and the subsequent acts of
the parties show that they intended the bank to safekeep
the foreign exchange, and return it later to Zshornack, who
alleged in his complaint that he is a Philippine resident. The
parties did not intended to sell the US dollars to the Central
Bank within one business day from receipt. Otherwise, the
contract of depositum would never have been entered into
at all.
Since the mere safekeeping of the greenbacks, without
selling them to the Central Bank within one business day
from receipt, is a transaction which is not authorized by CB
Circular No. 20, it must be considered as one which falls
under the general class of prohibited transactions. Hence,
pursuant to Article 5 of the Civil Code, it is void, having
been executed against the provisions of a
mandatory/prohibitory law. More importantly, it affords
neither of the parties a cause of action against the
other. That is why Zhornack cannot recover for the second
cause of action for damages.
Take note, maybe under this case, the employee did not
understand or was mistaken as to the deposit; that is why it
is important to take note of the distinction between deposit
and mutuum.
What is the difference between deposit and mutuum?
Deposit Mutuum
Subject It can be a Only involves
matter movable or an money or other
immovable thing consumable thing
Principal The principal The principal
purpose purpose is for purpose is for use
safekeeping or consumption
Parties Parties are the Parties are the
depositor and the lender and the
depositary borrower
The depositor can The lender must
demand the wait until the
return of the thing expiration of the
or subject matter period granted to
at will, as a the debtor
general rule
Generally May be subject to
gratuitous compensation

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more persons, each of whom believes

himself entitled to the thing deposited
Another distinction or another important thing why we need b. Necessarydeposit – made in
to distinguish between these 2 contracts is under Article compliance with either a legal
1287 in relation to compensation or set-off. obligation, on the occasion of any
calamity, or by travelers in hotels or
Article 1287. Compensation shall not be proper when one inns or by travelers with common
of the debts arises from a depositum or from the carriers
obligations of a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who Judicial Deposit Extrajudicial Deposit
has a claim for support due by gratuitous title, without Through the will of the Through the will of the
prejudice to the provisions of paragraph 2 of article 301. court parties of the contract
Ensures the right of the It is for custody and
Depositum – contract of deposit as defined under Article party to property or to safekeeping
1962. recover in case of a
favorable judgment
In both commodatum and depositum, compensation or Generally involves Generally involves movables
offset is not available. But, we can do so and it is immovables only
applicable or available to extinguish the obligations of the Always onerous Generally gratuitous
parties if what is involved is onlymutuum or simple loan. The thing is returned only Upon the demand of the
upon order of the court or depositor
Depositum Commodatum when the litigation has
For safekeeping For transfer of the use already ended
May be gratuitous Essentially gratuitous On behalf of the person On behalf of the depositor,
As to extrajudicial deposit, Can have movable or who has a right or thing or person
only movable properties immovable property designated
are involved
Article 1965. A deposit is a gratuitous contract, except
Article 1963. An agreement to constitute a deposit is when there is an agreement to the contrary, or unless the
binding, but the deposit itself is not perfected until the depositary is engaged in the business of storing goods.
delivery of the thing.
General rule: A contract of deposit is gratuitous.
This emphasizes the nature of a deposit being a real Exceptions:
contract- it is perfected by mere delivery. 1. By stipulation of the parties as long as it is not
contrary to law, morals, good customs, public
If you agree to enter into a contract of deposit what you order and public policy
have is merely a consensual contract, an ordinary contract, 2. When the depositary is engaged in the business
and it will not yet give rise to a perfected deposit until the of storing goods; such as a warehouseman
thing is delivered- same as that of a commodatum and where it is for compensation and not out of pure
simple loan or mutuum. Unless it is delivered, it will not generosity
give rise to a commodatum. 3. If the property is saved from the destruction
without the knowledge of the owner. There is an
Article 1964. A deposit may be constituted judicially or involuntary deposit wherein the owner of the
extrajudicially. property is bound to pay just compensation.

2 kinds of deposit: Article 1966. Only movable things may be the object of a
1. Judicial or sequestration – takes place when deposit.
an attachment or seizure of property in litigation
is ordered Obviously, this refers to an extrajudicial deposit. Only
2. Extrajudicial – 2 kinds: movable or personal property may be the object of an
a. Voluntary deposit – delivery is made extrajudicial deposit, whether it is voluntary or necessary.
by the will of the depositor, or by two or The purpose is for safekeeping.The possibility that the
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thing may disappear or may be lost or stolen is not present
in a real property. However in judicial deposit, it may cover
movable or immovable properties but generally it involves
immovable properties.
Notice that the contract of deposit does not embrace
incorporeal or intangible property because incorporeal or
intangible property follows the person of the owner, where
he goes. Essentially, you do not deliver since there is no
physical form for these kinds of property. How can it give
rise to a contract of deposit when you cannot even
physically deliver?
Article 1967. An extrajudicial deposit is either voluntary or
necessary.
General rule: A deposit is voluntary.
Exception: It is necessary only in 3 instances:
1. When there is a legal obligation
2. On the occasion of any calamity
3. For travelers in hotels and inns
II. Voluntary Deposit
We now go to the first kind of extrajudicial deposit which is
the voluntary deposit.
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.
In voluntary deposit, the delivery is made by the will of the
depositor. He gets to choose to whom he will deposit the
thing for safekeeping.
Ordinarily, voluntary deposit involves two persons but three
persons may be involved under the second sentence of
Article 1968. In such case, the third persons assumes the
obligation to deliver it to the one to whom it belongs.
In case there are two persons who are contesting as to
who is entitled to the return of the thing, the third person
will now assume the obligation to deliver it to the one to
whom it belongs.
Ex. A thing is delivered to him then there is another person
who claims it as the owner. What is the option here on the
part of the third person? If he returns it to one of them then
he might be mistaken, and vice versa. Under special civil
actions, there is what we call interpleader. This is filed by
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the third person. He will implead the two persons for the
judge to determine who the owner is, and in the meantime
the third person will keep the thing.
Interpleader – a special civil action whereby a person who
has property in his possession, or an obligation to render
wholly or partially without claiming any right therein or an
interest which is not disputed by the claimant/s, comes to
court and asks that the persons entitled to demand
compliance with the obligation be required to litigate among
themselves in order to determine finally who is entitled to
the same.
With that, it can still be considered a voluntary deposit
under the second sentence of Article 1968.
As pointed out earlier, the main distinction between
voluntary and necessary deposit is that in voluntary
deposit, the depositor has complete freedom in choosing
the depositary; wherein such freedom is lacking in a
necessary deposit. It lacks the free choice on the part of
the depositor.
As mentioned earlier, there is no transfer of ownership in a
contract of deposit. It is not required that the depositor
must be the owner. The thing deposited maybelong to a
person other than the depositor.
Ex. Carrier, agent, lessee
They may temporarily deposit goods in their possession
since a contract of deposit does not involve transfer of
ownership.
November 26 (2nd hour)
Transcribed by: Kamille Buhay
CALIBO V CA
FACTS: Pablo purchased an agricultural tractor. He asked
his son Mike to safe-keep it for him. Mike was renting a
house, owned by Calibo, for residential purposes. He kept
the tractor in the garage of the house. Sometime later,
Mike failed to pay his obligations to Calibo. However, the
former assured the latter that the account shall be settled
with the tractor as a security. Thereafter, despite demands
from Calibo, Mike was not able to pay his outstanding
obligations. When Pablo discovered this, he went to Calibo
to obtain possession of the tractor. Calibo denied this and
insisted that the tractor was given as security by Mike.
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Pablo offered to pay Mike’s indebtedness with checks.
Calibo wanted that Mike’s electric bills be included in the
check. Pablo did not consent to this demand and this is
where he instituted an action for replevin, claiming
ownership over the tractor. However, according to Calibo,
he has valid claim to keep he tractor because Mike has not
yet paid his obligations.
ISSUE: W/N CALIBO CAN VALIDLY HOLD ON TO THE
TRACTOR BECAUSE THERE IS AN ALLEGED
CONTRACT OF DEPOSIT BETWEEN HIM AND MIKE.
NO.
HELD: In a Contract of Deposit there must be an intention
between the parties to safe-keep the object. However, in
this case, Calibo himself said that he received the tractor
not for safekeeping but as a security for the payment of
Mike’s obligations. Therefore, there was no deposit and the
principal purpose was for security. Consequently, Calibo
had no right to refuse the delivery of the tractor to the true
owner who is Pablo. Pablo as owner had every right to
seek to repossess the tractor as well as the institution of
the present action for replevin.
Q: While it is true that there is no Contract of Deposit
between Mike and Calibo because the purpose of the
delivery of the tractor was not for safekeeping. However,
why can’t Calibo retain possession of the tractor despite
the fact that Mike delivered it for security?
A: Because Mike was not the owner of the tractor.
Q: Why would ownership be an issue? Because it was said
earlier that ownership is not required in a Contract of
Deposit? So the reason why the Supreme Court held that
there’s no deposit is because when it was delivered the
purpose is not for safekeeping and Calibo said that it’s not
for safekeeping but to act as a security for the obligations
of Mike. Why is it that Calibo cannot retain possession of
the tractor despite his allegation that it was for the security
of Mike’s obligation to pay?
A: Because Calibo raised the issue on pledge. For a
contract of pledge to be valid it is necessary that the pledge
is constituted to secure the fulfillment of a principal
obligation and the pledgor to be the absolute owner of the
thing pledged. Here, Mike is not the owner of the tractor
and therefore there is a necessity to return the object.
Q: So under the facts of this case there was no Contract of
Deposit at all?
A: There is a Contract of Deposit between Pablo and Mike.
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Ok. Because it is clear that when Pablo delivered the
tractor to Mike, the purpose was for safekeeping. However,
between Mike and Calibo, there was no Contract of
Deposit.
Take note here the reason whyCalibo retained possession
of the tractor was because Mike delivered it as a security
for his obligation. So, it is a Contract of Pledge. However,
there is no valid pledge because for a Contract of Pledge to
be valid, the pledgor must be the absolute owner of the
thing pledged. In this case, Mike, the pledgor, is not the
owner of the tractor. So, there is no valid pledge. Also, it is
alleged that there should be a Contract of Agency here,
however, the Supreme Court held that there is no Contract
of Agency as the purpose of the delivery to Mike was for
safekeeping. Mike was acting not only without appellee’s
authority but without the latter’s knowledge as well. Mike
here could not be considered as an agent of Pablo when
he delivered the tractor to Calibo. And lastly, in relation to
what we are discussing right now, there is no valid deposit.
Here, the purpose is not for safekeeping but as a form of
security for the payment of Mike’s obligation. There is no
deposit where the principal purpose for receiving the object
is not for safekeeping.
So again, take note of the principal purpose: that is for
safekeeping.
Article 1969. A contract of deposit may be entered into
orally or in writing.
Contracts therefore shall be obligatory in whatever form
they may have been entered into provided all essential
requisites for their validity are present. (Article 1356)
So here, 1969 just tells us that even if it was orally entered
into or even if it is in writing, you relate this to Article 1963:
As long as there is a delivery, there is a perfected contract
of deposit. Of course, the purpose is for safekeeping. Other
than that, there are no other formalities required for the
existence of the contract.
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.
So with that we can say that as long as the depository is
capacitated, he is subject to the obligations of a depositary
regardless of the capacity or incapacity of the depositor. If
the depositor is incapacitated, the depositary must return
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the property to the legal representative or to the depositor
himself if he should acquire capacity.
Q: What is the status of the contract if one of the parties is
incapacitated?
A: Voidable.
Q: What if both parties are incapacitated?
A: Unenforceable
So that is still the same case here. If it turns out that the
depositor is incapacitated who can demand the return? If
you are the depositary and you know that the depositor is
incapacitated, would you return the subject matter to him?
What is the effect if you would return the subject matter of
the deposit to the incapacitated depositor? Will it extinguish
your obligation as a depositary? Remember that for
payment or performance, the person receiving the payment
or the performance must be capacitated. Diba? So here, if
the depositor is incapacitated, what is the effect of the
obligation? It will not necessarily extinguish your obligation
as a depositary. So here, to whom will you return the thing
deposited if the depositor is incapacitated? Legal
representative, or the incapacitated if he has already
acquired capacity. That is the same thing/premise that you
have learned in your obligations and contracts. However,
take note that as a depositary if the thing is demanded from
you to be returned to the depositor who is incapacitated,
you cannot refuse to return it allegedly because the
contract is voidable. Why? Because again under Contracts,
persons who are capable cannot allege the incapacity of
those with whom they contract. That’s under Article 1397.
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 be 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.
As to the depositary who is incapacitated, he does not
incur the obligations of a depositary as provided in this
chapter. However, 1971 states that such incapacitated
depositary shall be liable for the thing deposited while it is
still in his possession or to pay the depositor the amount by
which he may have benefited himself with the thing or its
price subject to the right of any third person who acquired
the thing in good faith. Notice it’s not the value of the
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property but the price or the extent that the incapacitated
depositary was benefited.
Let us say you have a depositary who is a minor and
received the things from the depositor for safekeeping. He
sold it to a third person. What did he do with the purchase
price? Punta siyang Jollibee; kainsiya. The value of the
property is let us say P1000 for safekeeping. Peroyunnga,
hindingatalagaalam kung magkanotalaga so let us say that
the purchase price is only P500, ok? So to what extent can
you demand from the incapacitated depositary? Only to the
extent that he may have benefited himself, yungbinilinyasa
Jollibee na P500 or kung hindi man nabenefit,
nandunlangsakanyayungpera, pwedeyun.
What if subject to the right of any third person who
acquired the thing in good faith. What if
binentanyaperohindi pa nadeliveryung purchase price? For
what price niyabinenta? P500. So tinanongsi incapacitated
depositary, saannayung thing? Ay binentakokay X.
Magkano? P500. Saannayungbinayad? Wala pa man
siyanagbayadsa akin. So puntahanmosi third person
nanakabili. Anong liability nung third person? Yung price
lang if he is in good faith. Not the value of the property. If
the third person is in bad faith, in other words he had
knowledge that the depositary who sold the thing to him is
indeed incapacitated, then the depositor may recover the
thing from the said third person. If the third person is in
good faith, the depositor’s action only against the
depositary to compel him the price received or the amount
which he may have benefited himself.
Obligations of the depositary
Article 1972. The depositary is obliged to keep the thing
safely ad 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.
1972 emphasizes the two primary obligations of the
depositary: 1) Safe-keep the thing and 2) return the thing
when required. Also this article emphasizes the degree of
care or diligence on the part of the depositary: same
diligence he would exercise over his own property.
Remember that considering that the purpose of deposit is
for safekeeping, then there must be some confidence on
the depositary. In a contract of deposit, it involves
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depositor’s confidence in his good faith and trust. He takes
into account the diligence which the depositary is
accustomed with respect to his own property. The
depositary cannot excuse himself from liability in case of
loss by claiming that he exercised the same amount of care
toward the thing deposited as he would toward his own.
What if nagdanghag (hahaha), by nature, yungsi
depositary.And then yung thing that was deposited to him
for safekeeping walana-take care. So can we say na“kung
akuanamaopudnaangmahitabo?” Obviously hindi. Why?
Because that would be less than required under the
circumstances. Again recall, what is the standard diligence
required in obligatioins? Diligence of a good father of a
family, unless, there is a different degree required by law or
by stipulations between the parties. So that is Article 1163
of Obligations and Contracts.
Likewise, under ObliCon, you have Article 1170: A debtor
shall be liable for loss if the loss is due to his fault or
negligence. And Article 1265. Loss of the thing while in
possession of the debtor; it will give rise to the presumption
that the fault is on his part. If the contract of deposit is
gratuitous, due care is still required, as found in the second
paragraph of 1972. If it is for compensation, a higher
degree of care is required than if it is a gratuitous contract
of deposit.
CHAN V MACEDA
FACTS: Mr. Maceda obtained a loan from the
Development Bank of the Phils. (DBP). This was for the
construction of a hotel project in Tacloban. Maceda
engaged the services of Moreman Builders Corporation
wherein they had a contract wherein Moreman was going
to build the project until December 1977. Afterwards
Moreman obtained several construction materials and
equipment and these were deposited to certain Spouses
Chan in their warehouse. This deposit was then free of
charge (gratuitous deposit). The contract of deposit was
between Moreman and Spouses Chan. Now Moreman
here failed to build the project which prompted Mr. Maceda
to file an action for rescission and damages against
Moreman. While the case was pending, Moreman pulled
out the said construction materials and equipment from
Sps. Chan. After the case was pursued, Mr. Maceda
wanted to withdraw the said materials and equipment from
Sps Chan contending that he is the owner the same; that
he was the one that contracted with Moreman for the
construction of the hotel project which was the purpose for
the purchase of the said materials. Meanwhile, Sps. Chan
contend that the materials were already withdrawn from
them and were no longer in their possession. This time, Mr.
Maceda filed an action against Sps. Chan because he
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alleges that he is the rightful owner of the said materials
and that he should be the one who should have the right to
withdraw the said deposited materials and not Moreman.
ISSUE: W/N MR. MACEDA HAS THE RIGHT TO
DEMAND THE RELEASE OF THE SAID MATERIALS OR
CLAIM DAMAGES THEREOF. NO.
HELD: He has no right to claim damages nor does he have
the right to recover the said materials. In this case, the
Supreme Court noted that Mr. Maceda is not a party in the
contract of deposit between Moreman and the Sps. Chan.
And in this case, not being a party to the contract of
deposit, Mr. Maceda has no right to withdraw the said
materials based on the principle of Privity of Contracts.
Q: Now, in the Privity of Contracts, who is entitled to claim
demand and the obligation arising from the contract?
In the Privity of Contracts under the Civil Code, the ones
who are entitled to the rights is the party himself, his heirs
and assigns.
So in this case, Maceda is not any of those three. But is it
not that under the privity of contracts there are exceptions?
Q: Can we apply any of the exceptions here in the case of
Maceda
A: In this case, the exceptions cannot be applied because
Maceda failed to prove that he has the right to the saide
materials. What he can do is to go after Moreman and not
Sps. Chan.
Recall Article 1311 under oblicon which grants right to third
persons to demand the obligation arising from a contract
even if he is not a party nor an heir nor an assignee.
Q: What stipulation would that be so that a third person
would be entitled to the right arising from a contract? What
do you call that stipulation in favor of a third
person?Because that was one of the allegations here that
there was a need to prove that stipulation.
A: Stipulation pouratrui.
So, here, remember that there are exceptions to the
principle of privity of contract, one of which is stipulation
pour atrui under 1311. In this case however, there was a
failure to prove the existence of that stipulation in favor of
Maceda. In other words, there was no stipulation pour atrui.
Here, remember that the contract of deposit was between
Sps. Chan and Moreman. Applying 1311, contracts are
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binding upon the parties (and their assigns and heirs) who
execute them. When there is no privity of contract, there is
likewise no obligation or liability to speak about and thus no
cause of action arises. Specifically, in an action against the
depositary, the burden is on the plaintiff to prove the
bailment or deposit and the performance of conditions
precedent to the right of action.A depositary is obliged to
return the thing to the depositor, or to his heirs or
successors, or to the person who may have been
designated in the contract. In the present case, the record
is bereft of any contractof deposit between petitioner and
respondent if at all, it was only between Moreman and Sps.
Chan. Granting that there was indeed a deposit between
petitioners and Moreman, it is still incumbent upon
respondent to prove its existence and that it was executed
in his favor. In other words, we are looking for if there was
a stipulation pour atruidito. But respondent miserably failed
to do so. Here, he only produced unsigned delivery
receipts. Since there was no contract of deposit and
respondent also failed to prove that there were construction
materials and equipment in petitioners warehouse at the
time he made a demand for their returnthe Supreme Court
holds that he has no right whatsoever to claim for
damages. Take note of that.
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.
So the rule here is different. The exceptions here are
different with that of a commodatum. The same
siyasacommodatum in the sense that a depositary here is
not allowed to deposit the thing with a third person.
Sacommodatum not allowed sa third persons to use the
thing. A depositary cannot allow third persons as this is
founded on trust and confidence. Exception: if authorized
by express stipulation.
In case of loss, the depositary shall be liable (take note of
this) if he transfers the deposit with a third person without
authority of the depositor although there is no negligence
on the part of the depositary and the part of the third
person. So if he deposited it for safekeeping with a third
person without the consent of the depositor, even if the
thing was lost because of a fortuitous event, the depositary
shall be held liable; no need for negligence. If he deposits
the thing with a third person who is manifestly careless or
unfit, even if authorized, then the depositary may be liable,
even in the absence of negligence on his part. So dito, he
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was authorized to deposit the thing with the third person
but if it is proven that the third person is manifestly careless
or unfit, the depositary shall be held liable.
And lastly, if the thing is lost through negligence of his
employees, then the depositary may be held liable,
whether the employees are manifestly careless or not. So
with these three instances, the depositary shall be held
liable for the loss. So with that, when can he not be held
liable for the loss? If the depositary deposits the thing with
a third person when he was allowed to do so and the thing
was lost without the negligence of the third person and
such third person is not manifestly careless or unfit. All the
elements must be present. 1) Loss without negligence; 2)
allowed to deposit to a third person, and 3) third person
was not manifestly careless or unfit. If all those are present
the depositary is exempted from liability.
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.
Obligation on the depositary to change the way or the
manner of adeposit if there are circumstances indicating
that the depositor would consent to the change. However, it
is required that the depositary should notify the depositor
and wait for the latter’s decision, unless delay would cause
danger as to the subject matter. This is in keeping with the
obligation of the depositary to exercise the diligence of a
good father of a family. Ano bang way or manner?
Probably, how it is stored, packaging, among others
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.
So here, obligations on the depositary of the thing
deposited which earns interest:
1) To collect the interest as it becomes due, (of
course, also the capital itself when it is due) and
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2) To take such steps as may be necessary to
preserve its value and the rights corresponding to
it.
Notice the last paragraph in 1975; the above provision shall
not apply to contracts for the rent of safety deposit boxes.
Q: What’s the difference between a contract of lease and
lending of safety deposit boxes?
A: In a contract of lease, the renters possess the said
property. Meanwhile, in a contract of rent of a safety
deposit box, it is a special kind of deposit where the
absolute possession and control of the safety box is not
given to the renters.
CA AGRO-INDUSTRIAL DEV. CORP. V. CA
FACTS: CA Agro through its president, purchased parcels
of land from Sps. Pugao. Among terms and conditions of
the agreement were that the titles to the lots shall be
transferred to CA Agro upon full payment of the purchase
price and that the owner’s copies of certificates of titles
thereto, shall be deposited in a safety deposit box in any
bank. The same could be withdrawn only upon the joint
signatures of a representative of CA Agro and the spouses
upon full payment of the purchase price.
CA Agro and the spouses then rented a safety deposit box
of private respondent Security Bank and Trust Company
and for this purpose they signed a contract of lease, which
contains inter alia, the following conditions. x xx “13. The
bank is not a depositary of the contents of the safe and has
no interest whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no liability in
connection therewith.” Subsequently, two keys were given:
1 to CA Agro and 1 the Sps. Pugao. There is also a guard
key which remained in the possession of the bank. The
safety deposit box can only be opened with the use of the
guard key and any one of the other keys simultaneously.
Thereafter, a certain Margarita Ramos offered to buy from
CA Agro the property at a higher price. When the safety
deposit box was opened in the presence of CA Agro, the
spouses, and the bank’s representative, the box yielded no
certificates of title. Because of the delay in the
reconstitution of the title, Ramos withdrew her earlier offer
to purchase the lots; as a consequence thereof, CA Agro,
petitioner, allegedly failed to realize its expected profits.
Hence, CA Agro filed a complaint for damages against the
respondent bank. In its answer, the bank alleged that CA
Agro had no cause of action because of paragraphs 13 and
14 of the contract of lease.
Ateneo de Davao University
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(The contents of the safety deposit box which can be
opened only with the use of one of the two renter’s keys
given to the joint renters and by a guard key in the
possession of the bank were missing.)
ISSUE:
1) W/N THE CONTRACT IS AN ORDINARY
CONTRACT OF LEASE.
2) W/N THE PROVISIONS CITED IN THE
CONTRACT ARE VALID.
3) W/N THE RESPONDENT BANK IS LIABLE
FOR DAMAGES.
HELD: The contract of rent of a safety deposit box is not
an ordinary contract of lease but a special kind of deposit
because 1) the full and absolute possession of the safety
deposit box was not given to the petitioner and spouses
Pugao, 2) the guard key remained in the possession of the
bank and without this key neither of the renters could open
the box.
Q: What is a special kind of deposit because the purpose
here is for safekeeping? So what makes it a special kind of
deposit? We have already mentioned earlier that how it is
different from an ordinary contract of lease. But how will it
be considered as a special kind of deposit?
A: The possession of the thing does not remain in the
renters but remains in the possession of the bank.
Q: But that’s a purpose of a deposit. You deliver it to the
depositary for purposes of safekeeping. But what is in a
special kind of deposit? You already know that it’s not an
ordinary contract of lease. You mentioned it’s a special
kind of deposit. Why is it special?
Who has access to the contents of the safety deposit box?
A: The Bank really. Because even if there is the presence
of duplicate keys which are in the possession of CA Agro
and the spouses, none of them could open the box without
the guard key which remains with the respondent bank.
In other words, the depositary bank here does not have full
access. While the safety deposit box is within its premises,
it cannot open the same without the keys in possession of
the depositor.
Q: Now, how about the provisions in the contract of lease
that were in dispute here? What were these provisions and
were they upheld by the Supreme Court?
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A: The Supreme Court did not uphold the provisions which
provide that the respondent bank is not a depositary of the
contents of the safe and has no interest whatsoever in said
contents, except herein expressly provided, and that it
assumes absolutely no liability in connection therewith.
Q: Why are these two provisions not valid?
A: Because the prevailing view is that the relation between
the bank renting out safe deposits boxes and its customer
with respect to the contents of the box is that of a bail or/
and bailee, the bailment being for hire and mutual benefits.
That prevailing rule has been adopted in Section 72 of the
General Banking Act.
Section 72. In addition to the operations specifically
authorized elsewhere in this Act, banking institutions other
that building and loan associations may perform the
following services:
(a) Receive in custody funds, document and valuable
objects and rents safety deposits taxes for the safeguard of
such effects.
xxxxxxxxx
The bank shall perform the services permitted under
subsections (a) (b) and (c) of this section as depositories or
as agents.
Q: Why would those provisions under the general banking
act make the stipulations you mentioned in the contract of
lease not valid?
The first (par. 13), why is it considered void?
A: Because the Supreme Court said in this case that the
condition under paragraph 13, it is on a wrong premise. It is
not correct to assert that the bank has neither the
possession nor the control of the contents of the box
because in fact the safety deposit box itself is located in its
premises under its absolute control and moreover, the
respondent bank keeps the guard key of the said box. And
as stated earlier, the renters cannot open the subject box
unless the bank cooperates by using the guard key.
In addition, the stipulation there that the bank is not a
depositary is not binding to the parties because the nature
of a contract is determined by the intention of the parties
and not by the nomenclatures of the contract that they
entered into. So here, despite of the stipulation, this is a
deposit. Although it is special kind of deposit, nevertheless
a deposit with the bank considered as a depositary.
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Q: How about paragraph 14? Why is it considered void?
What does par.14 state?
A: Par. 14. The bank has no interest whatsoever in said
contents, except herein expressly provided, and itassumes
absolutely no liability in connection therewith.
Q: Why is it void? Doon pa langsa “absolutely no liability in
connection therewith.” What does that mean?
So here, again, the contract for the rent of a safety deposit
box is not an ordinary contract of lease but is considered a
special kind of deposit. It is not characterized as an
ordinary contract of lease because the full and absolute
possession and control of the safety deposit box was not
given to the renters: petitioner and Pugaos in this case.
The guard key of the box remained with the bank. The
bank could not likewise open the box without the renter’s
key. This is clear that the depositary cannot open the box
without the renter being present. In other words, that
makes it a special kind of deposit.
The contractual relation between a commercial bank and
another party in a contract of rent of a safety deposit box
with respect to its contents placed by the latter is one of a
bailor and bailee, thebailment being for hire and mutual
benefit, and it is not an ordinary deposit but special kind of
deposit. There is an annual payment for the rent.
(Anybody here who has worked in a bank; has seen a
safety deposit box?)
So here, the Supreme Court held also that the contract of
deposit may be entered into orally or in writing and parties
may establish such stipulations, clauses, terms and
conditions as they may deem convenient provided that they
are not contrary to law, morals, good customs, public order
or public policy. Paragraphs 13 and 14 are considered void
as they are contrary to law and public policy. Paragraph 13:
bank is not a depositary neither the possession nor the
control of the same. The safety deposit box is located in its
premises and is under its absolute control. Moreover the
bank keeps the guard key to the said box. In other words,
as a depositary, it has to some extent possession and
control of the subject matter.
As to par.14: the bank has no interest whatsoever to the
said contents, except as herein expressly provided, and
itassumes absolutely no liability in connection therewith.
What would that mean? Hindi siya mag-exercise ng due
diligence as to the subject matter. And again that is
considered as void.
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Now, is the bank liable in this case? The Supreme Court
held NO. No competent proof was presented to show that
respondent Bank was aware of the agreement between the
petitioner and the Pugaos to the effect that the certificates
of title were withdrawable from the safety deposit box only
upon both parties' joint signatures, and that no evidence
was submitted to reveal that the loss of the certificates of
title was due to the fraud or negligence of the respondent
Bank. It was obvious that either of them could ask the
Bank for access to the safety deposit box.
Q: What happens in a safety deposit box?
Isipinnalangninyoyungmga Borne Identity namga movie,
diba. Yung mag-access sila, yunmga spy-spy,
yungibathumbmark, yungibasusi..yungibasamata..thenma-
open yungisa..
mapansinninyoyungtagabankowalajanpag.open. So
makitaninyo may baril, may passport…o ganyan. Deposit
box yan. Perodito, di kapwedemaglagayngbarilkaybawal
man magdalangbarilsabanko. Pero here, what’s the
practice in a safety deposit box? Dalawayung keyholes.
One is kept by the bank and one saiyo. Ikaw may option
kanyankungdalawa kayo magkaroonng access or ikaw
lang. Perodalawangsusi yang ibigaysaiyo. Angisa,
saiyoangisapwedesaiyongkilala, and then meron yang
authority; kasamayansa form kung sinoang authorized to
access the safety deposit box. Meronyansilang picture
doonsa form. Every time na mag-access ka, you have to
affix your signature. So icheckng bank
kungikawbayungtaonapwede mag access. So what do you
mean by that? Even if I give you the key, if you are not the
depositor mentioned therein whocan access the safety
deposit box, hindikanyanbasta-bastapayaganngbangko. So
that’s something which we should consider.
So, what happened here? Dalawangsusi: Pugaos and the
petitioner. They never informed the bank nadapatisabay.
Kasiang ordinary agreement talagasa bank anyone who
has the key authorized, kumbaga OR silahindi “and”,
pwedemaka-access. So here, the bank was not liable
because the one who came, the spouses Pugao most
probably, had key. Looking at their forms, that person was
authorized to access the safety deposit box. So therefore,
may access, ino-pen nila, kung may nilagay or may kinuha,
walasilangalam. Di yanalamngbangko
kunganoanglamanng safety deposit box. Yung bank, it
does not know kung anoangnilagay mo. Kung
angnilagaymojan titles sa property, jewelry, love
letters..(chika2hehe) This is an available service to most of
the banks here in the Philippines.
Q: If the bank has no knowledge of what is inside the
safety deposit box, do they practice some precautionary
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measures like for example I keep an illegal drug or
something.
A: Wala. The bank would not be held liable for the contents
of the said safety deposit box. Why? Because if you try to
rent a safety deposit box, igoranasila mag-turn sa key.
Walakang i-fifill-up na form kung
anoanginilagaymosaloobng box. You just affix your
signature and indicate the time you went out. Yun lang. So
if you placed something illegal, the bank wouldn’t be held
liable, well unless it would be found that it had knowledge.
Ikawang liable kasiiyo man yunna safety deposit box.
(Mga 5k daw per year and rent sa safety deposit box. Avail
na kayo. :p)
December 2, 2015
Transcribed by: Jodivie Malnegro
So, still with the VOLUNTARY DEPOSIT. The last article
that we have discussed is Art 1975 with emphasis as to the
next sentence therein, The above provision (the first
paragraph of 1975) shall not apply to contracts for the rent
of safety deposit boxes. Again, take note of the distinctions
between a contract of lease and a lease of a safety deposit
box:
In the case of CA Agro, it was emphasized that the
(1) lease of a safety deposit box is a special kind of
deposit. It cannot be characterized as an ordinary
contract of lease because the full and absolute
control of the safety deposit box was not given to
the lessees or renters. The guard key remains as
in the case, with the bank and the bank could not
open the box without the renter’s key.
(2) The relation between a bank renting out a safety
deposit box and its customer with respect to the
contents of the box is that of a bailor and bailee.
Bailment being for hire and mutual benefits.
Now, we also have this case of
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Sia v CA
Facts: Sia here has 2 stamp collections and he decided to
deposit them in the safety deposit box. Flood occurred in 2
instances. However, the bank did not notify Sia and as a
result of which, it aggravated the damage to the stamp. Sia
filed a claim for damages against SBTC. However, on its
defense claim that it was just an ordinary contract of lease.
So their liability is only with respect to preventing anyone
from opening the safety deposit box.
Issue: WON the rental of a safety deposit box is a mere
contract of lease
SC Ruled: Negative. As discussed earlier in Compana
Agricola, it is not a mere contract of lease. The rent of a
safety deposit box is a special kind of deposit. In this case,
SC held that SBTC was negligent and thus not exempt
from any liability.
Q1: But isn’t it that In their contract of lease, there was a
stipulation that the bank will be exempted from liability in
case of damage of things deposited in the deposit box?
A1: Yes Maam. However, that is contained in Conditions 9
and 13 of the contract but the SC nullified the provisions
and that the bank cannot exempt itself from liability. They
are void as they are contrary to law and public policy. They
should exercise due diligence in the care of the safety
deposit box.
Q2: What was the reason that the stamps kept in the safety
deposit box were damaged?
A2: The safety deposit box was located in the lowest part.
And despite the fact that there were two floods, they still
did not inform Sia, therefore, the water seeped into the
stamps.
Q3: But with that, can the bank now raise a defense or
fortuitous event? That the loss or damage resulting from a
fortuitous event, the bank here could not be held liable.
A3: Yeah. however they were held negligent for failure to
notify Sia and that the court held that they did not go to
court with clean hands
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Q4: How about the fact as defense that they could not
have access to the said safety deposit box?
A4: The least they could do was notify Sia so that he could
take his stamps from the safety deposit box.
So, in this case of SIA v CA, the Court pointed
out that the provisions in the contract that are similar to
those struck out in the case of CA Agro. So in this case, it
is not at all difficult to conclude that the conditions in no. 9
and 13 in the lease agreement must be stricken down for
being contrary to law and public policy as they are meant to
exempt the bank from liability for any damage, loss or
destruction of the contents of the safety deposit box. Now
take not here, the proximate cause of the damage caused
to the stamps placed in the safety deposit box was due to a
flood, but that fortuitous event cannot be used by the bank
because it is guilty of negligence. The negligence here on
the part of the was that they should have lost no time in
notifying Sia, that the box could have been opened to
retrieve the stamps to avoid any further deterioration. But
they failed to do so. In fact, notice there were 2 floods – (in)
1985 and 1986. But they did not do anything. So the
defense of fortuitous event is not available because if you
recall the requisites under your Obligations (and
Contracts); the obligor must be free from any participation
to the aggravation of the injuries resulting to the creditor.
So in this case, fortuitous event is not available as a
defense. The fact that the key or the other key is in
possession of Sia was also not available as a defense.
Because here, the cause of action is damages due to the
negligence on the part of the bank.
So, a rent of a safety deposit box is again, not an
ordinary contract of lease. It’s a special kind of deposit. It is
not strictly governed by the provisions on deposit. The
contracts and laws under the Civil Code governing deposit
may be suppletorily applied but since it’s a special kind of
deposit, what will govern will be:
1. Agreement of the parties – as long as it is not
contrary to law, public policy, customs, public
order among others
2. General Banking Law – as pointed out in the
case of CA Agro and Sia, it was pointed out with
regards to the functions of the banks as lessors
of safety deposit box
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ART. 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.
General rule: The depositary is permitted to commingle
grain or other articles of the same kind and quality.
Various depositaries of commingled goods shall own the
entire mass in common and each depositor shall be
entitled to such portion of the entire mass as the amount
deposited by him bears to the whole.
purpose is use and not safekeeping, then that will be
considered as commodatum. Unauthorized use makes the
depositary liable for damages. However, there may be
instances where in the depositary may use the thing even
without the express permission of the depositor when such
use is for the preservation of the thing. But the use must be
limited only for that purpose – to preserve the thing.
[example: car paandarin mo but do not drive it from Dvo-
Tagum, hindi na for preservation yan]
What is the effect if the purpose is safekeeping
but the depositary made use of it?

Exemption: by stipulation. If the parties stipulated not to
commingle such grains or other articles, then that should
govern.
However, if it’s not of the same kind and quality; the duty of
the depositary is to keep them separate or at the very least,
identifiable as he must return to each depositor the
identical article delivered.
ART. 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.

Why would this be relevant? Baron v David

In case of loss, like for example you have several sacks of
rice. You put them in the same corner, in tne same place,
they are of the same kind and quality. So, we apply the
general rule that they can be commingled. What if there is
a flood or there is a fire and only portion of the sacks of rice
were damaged? Who will shoulder the said damage? As
long as the depositary is not at fault or negligent, like for
example the cause is a fortuitous event, then who will bear
the loss? The owners, but proportionate. They cannot say,
sa baba lang yung nadamage, sayo yan kasi ikaw yung
unang nagdeposit. They cannot do so, because we have a
rule here in Art 1976, proportionate interest in the mass. As
there are 5 depositors, they will divide the loss among
themselves.
Facts: Silvestra and Guillermo Baron are the aunt and
uncle of Pablo David, who is running a rice mill. Silvestra
placed 1, 012 cavans of rice, Guillermo 1, 865 cavans of
rice. On January 17, 1921; a fire occurred in the rice mill
which destroyed the palay which were in the possession of
Pablo David. Therefore Silvestra and Guillermo seek to
recover the value of their palay which were deposited in the
rice mill of David. However, David claims here that the
palay was deposited subject to future withdrawal and he
seeks to be relieved from liability because it was a
fortuitous event which was the fire.
Issue 1: What is the nature of the contract entered into by
David and Baron?

ART. 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.
So again, the principle purpose for a contract of
deposit is for safekeeping, not use. Because if the principal
Issue 2: WON David is liable for the value of the palay
SC Ruled: [The contract entered between the parties is
one of commodatum. Under Art 1978 of NCC When the
depositary has permission to use the thing deposited, the
contract loses the concept of a deposit and becomes a
loan or commodatum. And by appropriating the thing, the
bailee becomes liable for its value....]

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Q1: What is the nature of a commodatum?
A1: it is essentially gratuitous
Q2: What is the subject matter of the commodatum?
A2: non-consumable
Q3: What is the subject matter in this case?
A3: palay
Q4: Is it consumable or nonconsumable?
A4: Consumable
Q5: When can a consumable object or thing be the subject
matter in a contract of commodatum?
A5:
You said there was a commodatum. We have a
palay, cavans of palay being the object. But you mentioned
that palay is a consumable thing, even though generally
the subject matter of a commodatum is a nonconsumable
thing. So why do you say that we have a commodatum
here?
Q6: Did the SC state here that the contract involved is a
loan or a commodatum?
A6: I think Maam, the contract that the parties entered into
here Maam was a contract of sale because there was a
payment made by David to Baron.
Q7: Based on the findings here of the SC, what was the
nature of the agreement between David and Baron(s)?
A7: It was a contract of sale
Q8: Why sale?
A9: it met the requisites of a contract of sale Maam. there
was a payment made by David
Q10: Why can it not be considered as a deposit?
A10: Because David can’t deliver it to use or consume the
palay Maam by giving it to the Barons
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Q11: What is his obligation if he will not now include these
palays delivered in the milling process?
A11: He will be liable for the palay Maam
The practice here is if you deliver sacks of palay
to the miller (David) then he will include it and then mill it
and he will pay the one who delivered the palay the value
because he has the intention to sell what has been milled –
grains to sya dba to other buyers.
Q12: Now, what is the relevance here in determining if this
is really a deposit or a contract of sale?
A12: If it’s a contract of sale, David will be liable.
Q13: What will be the basis of his liability? It was alleged
here that the reason for the loss of the sacks of palay was
a fire. What is the effect of that cause to the liability of
David?
A13: If it is a contract of sale then there is already a
delivery.
Q14: What happens in delivery?
A14: There is transfer of ownership, Maam.
Q15: What happens when there’s a fortuitous event which
will damage or deteriorate the object or the subject matter
that has been delivered? Who bears the loss in case of a
fortuitous event?
A15: The owner, Maam bears the loss. There was already
a delivery to Baron so therefore he is liable to pay for the
value of the palay which was delivered to David.
Q16: How would that be different if this was really a
contract of deposit?
A16: In a contract of deposit, David here will not be liable
because the occurrence f fire is a fortuitous event. (But
there was a delivery to him?) In a contract of deposit, he is
obliged to return the same thing to Baron and due to
fortuitous event, it is now impossible to return the palay.
So here, take note, David is held liable. There
was an understanding between the parties that the
defendant (David) was at the liberty to convert palay into
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rice and dispose of it at his venture. So from palay, i-mill
nya magiging rice diba. So again, it’s really my question,
Palay – rice- and then rice. Walay conversion? May
conversion. So for sacks of rice burned in fire, what do you
call them? So there’s no, what’s the translation in Tagalog?
Palay, is yung hindi pa sya namill. Pag namill nay un yung
rice or bigas. Pag naluto na sya, kanin pero rice parin sya.
Then meron pang tutong, sa Bisaya dukot.
So back in the case, considering that the
defendant has milled and doubtlessly sold the rice prior to
the date of fire, 1920 dineliver yung palay, fire occurred
January 1921. It was customary in this instance that when
palay is delivered it will be milled. So what happened here,
it results that David will be bound to the Barons for its value
and his liability was not extinguish by the occurrence of fire.
What will be his liability now? Yung value of the said rice. It
was really in a character of sale. Even supposing that the
palay had been delivered in the character of deposit
subject to future sale, nevertheless, if it was understood
that the defendant might mill the palay and has in fact
appropriated it for his own use, he is of course bound to
account for its value. In this case, as provided in Art 1978
NCC, it is mentioned that it does not necessarily mean that
what we have here is a loan or commodatum because:
First, it will not be a commodatum because:
1. In a commodatum, it is essentially gratuitous
2. The subject matter is a consumable thing
3. Nothing in the facts of the case that the purpose
was merely for exhibition
Second, will it be considered as a contract of loan? What
will be your obligation in a simple loan? You deliver the
same kind and quality. But what you are going to deliver
here is the value. So, the closest here to consider is a
contract of sale. So, with that, the fire did not extinguish the
obligation unlike if it was a true contract of deposit, the
damage or the loss of the thing subject of a deposit due to
a fortuitous event will extinguish the obligation of the
depositary as long as there is no negligence on his part.
Reiterates Art 1978. So here:
1. If the thing deposited is not consumable but
allowed to use it, it will lose the character of a
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contract of deposit and it will be considered as a
commodatum as long as it conforms with the
requisites thereof, despite being denominated as
a deposit, unless safekeeping is still the principal
purpose.
2. If the thing deposited is money or a consumable
thing and the depositary is allowed to use it and it
results to consumption and converts it to a simple
loan or mutuum with the obligation to deliver the
same kind and quality.
3. If, however safekeeping is the principal purpose,
then it will be considered as a deposit but an
irregular one.
Q1: Now, what’s the difference between a contract of loan
and a deposit?
A1: In a contract of loan, there is an obligation to return the
equivalent of the thing of the same kind and quality but in a
contract of deposit, to return the exact same thing.
Javellana v Lim
Facts: They enter into a contract which was initially
referred to as a contract of deposit, whereas if you look into
the contents of the contract, it states that “We have
received from Angel Javellana the sum with interest
P2,658.58 which will be returned to the said gentleman
jointly and severally on January 20, 1898. However, the
circumstances that follow would show that there was
actually a contract of loan because first, when the amount
was supposed to be returned to Javellana, Lim was not
able to return the said amount. However, he asked for an
extension of time. Moreover, there was also an interest
which was added to the original amount which was
supposedly deposited to Lim.
Issue: WON the agreement between the parties is a
contract of loan or a contract of deposit.
SC Ruled: It was a contract of loan of money although it
was denominated as a deposit, because of the earlier
circumstances discussed, therefore, it was a contract of
loan.
Q1: Isn’t it that there were 2 contracts that were executed
here? The first contract was denominated as a deposit, the
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second one was a contract of loan. Can you say that there
was a conversion here of the contract between the parties
form deposit to loan?
A1: There was no conversion. As SC held, there was only
a renewal of a contract of loan and that the first contract
which was denominated as a deposit was already a real
contract of loan. [Despite the term that was used by the
parties that it was a contract of deposit.]
So, you have here the document of indebtedness
states the plaintiff left on deposit a sum of money they will
jointly and severally oblige to return on a certain day. Now
in the second document which is a real loan of money with
interest as appears perfectly defined. However, the SC
ruled here that at the very beginning, the contract entered
into between the parties is one of loan. They did not
engage to return the same coins received and of which the
amount deposited consisted and they could have
accomplished the return agreed upon by delivering the sum
equal to the one received by them. Debtors are therefore
lawfully authorized to make use of the amount deposited
which they have done however when the payment was
demanded, they were not able to pay it or return it to the
creditor. So, it was really a contract of loan and not a
deposit. Remember, the depositary cannot make use of the
thing deposited without the express permission of the
depositor. In fact here, the creditor, by granting the debtors
extension, confirmed the express permission previously
given to them to use and dispose of the amount stated as
having been deposited. Further, there was no renewal of
the contract of deposit converted into a loan because the
defendant received the amount by virtue of a real contract
(of loan) under the name of deposit since the so-called
bailees were forthwith authorized to dispose of the amount
deposited.
Again, do not confuse loan from deposit. Always
look at the intention of the parties and what are their
respective obligations. The contract will not be defined by
the terms used therein but as to what the law says such
contracts will be considered.
Also consider, permission to use is not presumed
under Article 1978 when such use is necessary for the
preservation of the thing deposited and the burden is upon
the depositary to prove that permission has been given.
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ART. 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 him-self
may have been authorized to use the same.
General Rule: Depositary is not liable for the loss of the
thing deposited due to a fortuitous event as long as
depositary is without fault.
Exception: Article 1979
Notice under Article 1979, there is no negligence.
But in the case of Sia v CA, there was negligence which
was the reason for the bank to be held liable despite the
damage due to a fortuitous event. So, what is the basis
there? Go back to the general rule under obligations and
contracts under Article 1170 [Article 1170. Those who in
the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.]
Art. 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loan. (n)
As I mentioned a while ago, if the thing deposited
is money and you allow the depositary to use it, what do
you have? It is still considered as a deposit but an irregular
one. Let’s assume you have money in the bank. Why will
you put the money in the bank? Interest? Primarily, it is for
safekeeping. It is a deposit in that sense. But when you
withdraw your money, will it be the exact same thing, same
money, same serial number that you deposited? No. And
what does the bank do with the money that you deposit?
They use it, to invest or loan to other person. So with that,
what do you mean by an irregular deposit?
Q1: What is an irregular deposit? We have a special kind of
deposit which is the safety deposit box, but this is irregular
deposit. What makes it irregular?
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A1: In a regular deposit, the benefit goes to the depositor.
As compared to an irregular deposit which will benefit both
parties.
Compania Agricola v Nepomuceno
Facts: It involves the Mariano Velasco & Company which
was declared as insolvent. In this case, Compania Agricola
filed a claim against one of the companies under Mariano
Velasco &Co. It claimed that it deposited an amount of
money to the said Company before. It presented a receipt
which stated that “Marina Velasco & Co received from
Compania Agricola the sum of ten thousand Philippine
pesos as a deposit at the interest of six per cent annually,
for the term of three months from date.” This was used as
evidence by Compania Agricola in its claim to be declared
as a preferred creditor in the proceedings of the insolvency
of Mariano Velasco & Co.
transaction is the necessity of the borrower. In a
loan for money, the benefit is for both of the
parties,
2. In an irregular deposit, the depositor can demand
the return of the item at any time, while in a loan;
the lender is bound by the stipulation in the
contract and cannot seek restitution until the time
for payment, as provided in the contract, has
arisen.
So, it is clear in this case of Companis Agricola
that the transaction is not a contract of deposit but a
contract of loan since it was not mainly for the benefit of
Compania Agricola but for both parties. And neither could
the alleged depositor demand payment but should wait for
the term stipulated that is three months after.
Q2: What is the effect that it is now regarded as a loan?
What if it’s a loan and not a deposit, what’s the relevance?
Why did we have to determine if it’s a loan or a deposit?

Issue: WON there was indeed a deposit as evidenced by A2: To determine if they have a preferred claim.
the document
Q3: When will it be considered as a preferred claim?
SC Ruled: There was indeed a deposit in this case. SC
referred to the case of Gavieres v De Tavera, Javellana v A3: If it is a deposit.
Lim and Rogers v Smith. The case of Gavieres is very
similar to the case at bar which involved a delivery of So, in this case of Compania v Nepomuceno, the
P3000 which was evidenced by an agreement which was Court emphasized the distinctions between a loan and an
similar to the agreement made by Compania Agricola and irregular deposit.
Velasco & Co. The Court ruled that although the document
Irregular Deposit Loan
questioned said that it was a deposit, it nevertheless is a
As to That which accrues Necessity of the
contract of loan since an examination of the entire
benefit solely to the depositor borrower
document would clearly show the intention of the parties
Right to Depositor can demand Lender is bound
which was a loan and not a deposit since it also stipulated
Demand return at any time by provisions of
the interest and a term if three months.
Return of contract cannot
Q1: Will it not be considered as an irregular deposit? Item seek restitution
until the time for
A1: Even though it is not a deposit, it cannot also be payment, as
regarded as an irregular deposit. In this case also cited the provided in the
case of Rogers v Smith citing Manresa, the court contract, has
differentiated deposit from an irregular deposit. Some of arisen
the distinctions mentioned are:
Q1: What do we have in the case of Rogers v Smith, is
1. In an irregular deposit, the benefit is solely for the there an irregular deposit or a loan?
depositor while in a loan, the cause for the

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A1: A contract of loan and not a deposit nor an irregular
deposit
Rogers v Smith
Facts: Sometime in the late 1800s, Jose Rogers deposited
a sum of P12,000 worth of gold in Smith, Bell & Co with
interest of 8% per annum which accrued beginning 1876
and from then on for more than 20 years, Rogers received
such interest every month from Smith. Now, here happens
the act of the Congress which converted the currency of
the Philippines form silver to gold. Before such, Rogers
received the interests in silver currency from Smith and
following the act of congress, Rogers sent a letter of
protest to Smith alleging that since he deposited the
currencies in gold back in 1876, he is entitled now to the
same gold. Apparently, when he deposited the money in
gold, the value of silver was much higher but it all changed
when the act of the congress arrived, now that the value of
the gold was much higher than silver and it is actually
doubled. Since it was favourable to him, Rogers alleged
that it was a contract of deposit and that Smith must give
him the same gold that he deposited from 1876.
Issue: Whether it was a contract of deposit
SC Ruled: No. The Court found it ridiculous since he was
receiving such interest and he will invoke at the same time
that it was a contract of deposit, and demanded the Smith,
Bell & Co to give him the same gold that he deposited.
There was also a discussion whether it was an irregular
deposit or a contract of loan.
In an irregular deposit, the benefit is one-sided
and it is only for the benefit of the depositor, while in a loan
the contract is for the benefit of both. On the part of the
depositor/lender is the interest, and on the part of the
borrower/debtor is the money he can appropriate for
business.
Secondly, in terms of when the lender/ depositor
demand the deposit; in an irregular deposit, he can actually
demand the return of the thing at any time while in a loan;
he must wait for the expiration or whatever stipulation they
have agreed upon.
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As to preference to the distribution of the
properties of the debtor, the depositor has the preference
while the creditor in a loan does not have such preference.
The Court said that it was actually a contract of
loan and though the court did not state estoppels, it
somehow like that way because for more than 20 years he
has been receiving silver and now just because of the act
of congress which he actually construed erroneously, he is
now estopped in demanding that he is entitled to receive
gold.
Q2: Is there a remaining liability since it is a loan, so aside
from the payment of interest, you have to give back the
principal. How about the principal here, is there a
remaining obligation as to the principal? To return the value
of the principal? What was the cause of action in this case.
A2: The cause of action was for the return of 12,000 pesos
worth of gold or 24, 000 pesos worth of silver.
So here, it is a contract of loan, not a deposit so
there is no obligation to return the exact same thing which
was the gold. However, since it is a loan, you must return
the same kind and quality or the value thereof.
Q3: So how about as to the principal obligation as to the
principal contract of loan? Was there any ruling of the
Court or was there any fact presented that it was already
made? What’s the obligation here?
A3: The return of the money itself or the original deposit
Maam.
He is entitled to recover the 12, 000 pesos which
is the value. So there is still a liability. No extinguishment of
the obligation but no obligation to return what he has
deposited nor what he has delivered because here, again,
it is a loan and not a deposit. No obligation to return the
exact same thing that was delivered but rather the
equivalent value thereof.
Here, again, the distinctions are emphasized.
Aside from the benefits, if it’s for loan of money, for the
benefit of both parties otherwise it is an irregular deposit.
An irregular deposit is solely accruing for the benefit of the
depositor. Here the benefit of Smith Bell & Co received was
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the use of money and the benefit which Rogers received is depositor of the borrower
the interest of his money.
II. Depositor can demand A lender in a loan, as found
In an irregular deposit, the depositor can demand the return of the article at by the provisions of the
the return of the article at any time while the lender is anytime contract, cannot seek
bound by the provisions of the contract and cannot seek restitution until the time for
restitution until the time for payment. In this case, plaintiff payment as provided in the
cannot demand his money at any time. contract has arisen

And the other distinction that was pointed out and III. The depositor has a Wherein if it is a contract of
it was emphasized in the case of Compania, in an irregular preference over other loan, it is not considered as
depositor, teh depositor has a preference over other creditors in the distribution a preferred credit
creditors in the distribution of the debtor’s property unlike of debtor’s property
that in a contract of loan.

So, the document in question is evidence of an

ordinary loan despite that they used the term deposit. And,
a loan was created between the plaintiff and the defendant
and therefore the relationship was that of between a
creditor and debtor and not that of a depositor and a
depositary.
Article 1979. Liability in case of fortuitous event:
ART. 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;

December 3, 2015 (1st Hour)
(4) If he allows others to use it, even though he him-self
Transcribed by: Jing Lomondot
may have been authorized to use the same.
So the last article we discussed was Article 1978
And then Article 1980:
wherein we have discussed that the contract of deposit
loses its concept as such when the depositary has Article 1980. Fixed, savings, and current deposits of
permission to use the thing deposited and the said contract money in banks and similar institutions shall be governed
will now be considered a loan or commodatum except by the provisions concerning simple loan. (n)
where safekeeping is still the principal purpose of the
contract. The cases of Rogers vs. Smith and Compania
Agri-cola are those cases which discuss the distinction
In the case of Javellana vs. Lim, in recent cases between simple loan and irregular deposit.
the SC pointed out three distinctions between a contract of
loan, this refers to a simple loan, and that of an irregular What is the nature of a bank deposit? A bank
deposit: deposit is an irregular deposit but the provisions on the
contract of loan will be applied.
IRREGULAR DEPOSIT SIMPLE LOAN
What happened in the case of BPI vs. Court of
I. The only benefit is that The essential cause for the Appeals?
which accrues to the transaction is the necessity

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BPI vs. COURT OF APPEALS
FACTS:Respondents Eastern Plywood Corporation
(Eastern) and Benigno D. Lim (Lim), an officer and
stockholder of Eastern, held one joint bank account with
the Commercial Bank and Trust Co. (CBTC), the
predecessor-in-interest of petitioner BPI.
Subsequently, a joint checking account in the amount of
P120,000.00 was opened in the name of Lim and Mariano
Velasco with funds withdrawn from the account of Eastern
and/or Lim.
Velasco died. At the time of his death, the outstanding
balance of the account stood at P662,522.87. By virtue of
an Indemnity Undertaking executed by Lim, one-half of this
amount, P331,261.44, was provisionally released and
transferred to one of the bank accounts of Eastern with
CBTC.
Thereafter, Eastern obtained a loan of P73,000.00 from
CBTC. Eastern issued a negotiable promissory note for
P73,000.00 payable on demand to the order of CBTC. In
addition, the loan was also secured by the joint checking
account of Velasco and Lim with a balance of P331,261.44
by virtue of a “Holdout Agreement” signed by Eastern and
Lim and CBTC wherein CBTC acceptsa holdout on the
joint account in the names of Lim and Velasco to the full
extent of their alleged interests.
On the other hand, a case for the settlement of Velasco's
estate was filed. In the said case, the whole balance of
P331,261.44 in the aforesaid joint account of Velasco and
Lim was being claimed as part of Velasco's estate. The
intestate court granted motion of the heirs of Velasco to
withdraw the balance and authorized the heirs to divide
among themselves the amount withdrawn.
BPI filed with the RTC a complaint against Lim and Eastern
demanding payment of the promissory note for
P73,000.00. Defendants Lim and Eastern, in turn, filed a
counterclaim against BPI for the return of the balance in
the disputed joint account of Lim and Velasco that is the
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subject of the Holdout Agreement and the interests thereon
after deducting the amount due on the promissory note.
RTC dismissed the complaint. CA affirmed the decision
that that it was the duty of CBTC to to set off the loan of
P73,000.00 covered by the promissory noteto the joint
account of Lim and Velasco.
ISSUE:WON BPI is liable to the private respondents on the
account subject of the Holdout Agreement after its
withdrawal by the heirs of Velasco? YES
HELD:It should be noted that BPI cannot be compelled to
set-off Lim and Velasco's joint account to the payment of
the note for the loan obtained by Eastern in the amount of
P73,000. The Holdout Agreement only conferred on CBTC
a power, not a duty. Generally, a bank is under no duty or
obligation to make the application. To apply the deposit to
the payment of a loan is a privilege, a right of set-off which
the bank has the option to exercise. Hence, BPI can
demand payment of the loan of P73,000.00 despite the
existence of the Holdout Agreement
However, BPI was not specifically ordered to release the
account to the heirs of Velasco; hence, it was under no
judicial compulsion to do so. , The order of the court merely
authorized the said heirs to withdraw the account. The
disputed joint account was proved and established to
belong to Eastern even if it was deposited in the names of
Lim and Velasco. As the real creditor of the bank, Eastern
has the right to withdraw it or to demand payment thereof.
SC held that bank deposits are in the nature of irregular
deposits; they are really loans because they earn interest.
The relationship then between a depositor and a bank is
one of creditor and debtor. The deposit under the
questioned account was an ordinary bank deposit; hence, it
was payable on demand of the depositor.
Because the ownership of the deposit remained
undetermined, BPI, as the debtor, had no right to pay to
persons other than those in whose favor the obligation was
constituted or whose right or authority to receive payment
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is indisputable. Payment made by the debtor to the wrong
party does not extinguish the obligation as to the creditor
who is without fault or negligence, even if the debtor acted
in utmost good faith and by mistake as to the person of the
creditor, or through error induced by fraud of a third person.
The payment then by BPI to the heirs of Velasco, even if
done in good faith, did not extinguish its obligation to the
true depositor, Eastern.
Q1: In whose name was the joint account that is at dispute
here?
A1: In the name of Lim and Velasco.
Q2:The one who is claiming against BPI is Eastern. What
was the basis of Eastern’s claim as to the money in that
joint account of Lim and Velasco?
A2: The basis is the fact that the money which was used to
open the checking account is that of the money of Eastern.
That’s why Eastern is claiming the half of the amount which
was still in the joint checking account. So the Court here
ruled that BPI is liable to Eastern because there was a
hold-out agreement and the nature of the contract between
Eastern and the bank is one of a loan. So there is a
creditor-debtor relationship between them.
Q3: Who is the creditor?
A3:Eastern and the debtor is the bank. So the bank, BPI,
should pay Eastern because although it is a deposit, it is an
irregular deposit and the nature of it is a loan. That’s why
BPI should pay Eastern.
Discussion: Here, it was emphasized that bank
deposits are in the nature of irregular deposits wherein they
are really loans because they earn interest. Relationship
between a depositor and a bank is one of creditor and
debtor and the deposit under the questioned joint account
in the name of Lim and Velasco was an ordinary bank
deposit. Hence, it was payable on demand of the depositor.
The account was proved and established to
belong to Eastern. That was necessary. Why? Because
here if it cannot be proven that the bank had knowledge
that the amount belongs to Eastern, then Eastern has no
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claim as to the half portion of that account. Because really,
the account here was in the name of Lim and Velasco, it
was proven here that the account belonged to Eastern as
the real creditor of the bank. Eastern has the right to
withdraw it or demand payment thereof. BPI should not
have allowed such withdrawal releasing half of the money
to the estate of Velasco because the bank had already
admitted in the hold-out agreement the question of
ownership of the money deposited in the account.
So take note here, bank deposit are in the nature
of irregular deposits wherein applying Article 1980, we
apply the provisions on loans. So here the distinction in
the previous cases we have discussed is not that too
technical in form. Wala masyado defining line kung ano
iyong irregular deposit and loan when it comes to laid back
deposit. Very specific siya.
Recall in the previous cases we had, Compania
and Rogers vs. Smith, the transaction involved there did
not involve a bank. Partnership ang meron pero it was not
a bank deposit. So in those instances, the distinction
between irregular deposit and loan was really relevant. But
when it comes to bank deposits, it is clear that they are in
the nature of an irregular deposit but nevertheless they are
considered still as loans because they earn interest.
Interest in the sense that you put the money in the bank for
the purpose of safekeeping, you get to earn interest. The
bank gets to use it, invest it, lend it to other people and
earn interest on it as well.
Now another case that we have is the case of Metrobank.
What happened in this case?
METROBANK vs. B.A. FINANCE
FACTS: Lamberto Bitanga obtained from respondent BA
Finance Corporation a loan, to secure which, hemortgaged
his car to respondent BA Finance. Bitanga had the
mortgaged car insured by respondentMalayan Insurance.
The car was stolen. On Bitanga’s claim, Malayan Insurance
issued a check payable to the order of "B.A. Finance
Corporation and Lamberto Bitanga", drawn against
China.The check was crossed with the notation “For
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Deposit Payees’ Account Only. Without the indorsement or
authority of his co-payee BA Finance, Bitanga deposited
the check to his account with the Asianbank, now merged
with herein petitioner Metrobank. Bitanga subsequently
withdrew the entire proceeds of the check. In the
meantime, Bitanga’s loan became past due, but despite
demands, he failed to settle it.
BA Finance eventually learned of the loss of the car and
of Malayan Insurance’s issuance of a crossed check
payable to it and Bitanga, and of Bitanga’s depositing it in
his account at Asian bank and withdrawing the entire
proceeds thereof. BA Finance thereupon demanded the
payment of the value of the check from Asian bank but to
no avail, prompting it to file a complaint for sum of money
and damages against Asian bank and Bitanga, alleging
that it is entitled to the entire proceeds of the check.
ISSUE: WON Metrobank should be held liable for allowing
Bitanga to withdraw the whole proceeds of the check
without proper indorsement from BA Finance? YES
HELD: Section 41 of the Negotiable Instruments Law
provides: Where an instrument is payable to the order of
two or more payees or indorsees who are not partners, all
must indorse unless the one indorsing has authority to
indorse for the others.
Bitanga alone endorsed the crossed check, and petitioner
allowed the deposit and release of the proceeds thereof,
despite the absence of authority of Bitanga’s co -payee BA
Finance to endorse it on its behalf. The payment of an
instrument over a missing indorsement is the equivalent of
payment on a forged indorsement or an unauthorized
indorsement in itself in the case of joint payees. Clearly,
petitioner,through its employee, was negligent when it
allowed the deposit of the crossed check, despite the lone
endorsement of Bitanga, ostensibly ignoring the fact that
the check did not, it bears repeating, carry the indorsement
of BA Finance.
The SC does not agree, however, to the CA’s affirmance of
the trial court’s grant of legal interest of 12% per annum on
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the value of the check since the obligation in this case did
not arise out of a loan or forbearance of money, goods or
credit. Article 1980 does not find application in this case
since the nature of the relationship between BA Finance
and petitioner is one of agency whereby petitioner, as
collecting bank, is to collect for BA Finance the
corresponding proceeds from the check.
Not being a loan or forbearance of money, the interest
should be 6% per annum computed from the date of
extrajudicial demand until finality of judgment; and 12% per
annum from finality of judgment until payment.
Q1:Who is/are the payee/s of the check?
A1: Bitanga and BA Finance.
Q2:What does that mean that they are the payees and it is
a cross-checked. You mentioned that it is for deposit only.
For deposit to whom?
A2:For deposit to both (Bitanga and BA Finance) ma’am.
Q3: Can you apply here Article 1980 of the Civil Code that
the transaction here is between that of a creditor and
debtor applying the provisions of a loan?
A3:No ma’am.
Q4: Why was there an issue as to the applicability of Article
1980?
A4:The Court ruled ma’am that Section 41 of the
Negotiable Instruments Law is applicable.
Q5: How about our topic right now, Article 1980, is the
transaction involved in this case related to Article 1980?
What is the relevance of Article 1980 here? Why was it
necessary for the Court to determine whether Article 1980
is applicable or not? Is there a debtor-creditor relationship
between the bank and BA Finance?
A5: No ma’am.
Q6: What is their relationship between these two entites?
A6: Contract of Agency ma’am.
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Q7: Who is the agent? Not being a loan or forbearance of money, interest is 6%
per annum from the day of extrajudicial demand until
A7: The bank ma’am. finality of judgment and 12% from finality until payment.
Q8: Okay, the bank is the agent of BA Finance. Why What happened in the case of Reyes vs. Court of Appeals?
would that be relevant? Agency and no debtor-creditor
relationship, no loan?

A8: The relationship of Metrobank and BA Finance is one REYES vs. COURT OF APPEALS
of agency ma’am where Metrobank, as a collecting bank, is
to collect for BA Finance the proceeds relating to the FACTS: Philippine Racing Club, Inc. (PRCI) sent 4
check. But it failed to do so. delegates to the 20th Asian Racing Conference to be held
in Sydney, Australia. Petitioner Gregorio H. Reyes sent
Q9: What now? Why was it necessary for the SC to Godofredo Reyes to Far East Bank and Trust Company
discuss that this is an agency and not a loan? (respondent) to apply for a foreign exchange demand draft
in Australian dollars (AU$1,610.00).
A9: In this case ma’am, the Court held that in order to
determine the applicable interest ma’am. The bank’s assistant cashier first denied the application for
the reason that respondent bank did not have an Australian
Q10: Okay. So since this is agency and not a loan, what is dollar account in any bank in Sydney. Since Godofredo
the applicable interest? asked if there could be a way for respondent bank to
accommodate PRCI's urgent need to remit Australian
A10: In this case ma’am, if it is not a loan then the
dollars to Sydney, the cashier informed him of another way
applicable interest is 6% per annum. That was the finding
of effecting the requested remittance.
of the SC.
The respondent bank would draw a demand draft against
Discussion:Here, relate this to your Negotiable
Westpac-Sydney and have the latter reimburse itself from
Instruments when you get to Section 41, Indorsement of
the U.S. dollar account of the respondent in Westpac-New
two or more payees.
York. This arrangement has been customarily resorted to
Here, the bank was negligent because it allowed Bitanga to since the 1960's and the procedure has proven to be
withdraw the proceeds of the check even if the payees are problem-free.
both Bitanga and B.A. Finance. So that was the
The respondent bank approved the said application of
negligence on the part of the bank. Remember a bank is
PRCI and issued a Foreign Exchange Demand Draft
imbued with public interest such that the highest degree of
(FXDD) in the sum applied forpayable to the order of the
diligence and the highest standards of integrity and
20th Asian Racing Conference Secretariat of Sydney,
performance are expected of banks in order to maintain the
Australia, and addressed to Westpac-Sydney as the
trust and confidence of the public in general in the banking
drawee bank.
sector.
Upon due presentment of the FXDD the same was
Further the SC emphasized that the obligation in this case
dishonored stating that“No account held with Westpac."
did not arise out of a loan or forbearance of money, goods,
Meanwhile, Wespac-New York sent a cable to respondent
or credits. They did not have a bank deposit in this
bank informing the latter that its dollar account in the sum
account, so walay creditor and debtor relationship. Article
of AU$ 1,610.00 was debited. The respondent bank
1980 is not applicable since the nature of the relationship
informed Wespac-New York requesting the latter to honor
between B.A. Finance and petitioner is one of agency.
the reimbursement claim of Wespac-Sydney. Upon its
Whereby petitioner, as collecting bank, was to collect for
second presentment for payment, the FXDD was again
B.A. Finance the corresponding proceeds of the check.

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dishonored by Westpac-Sydney for the same reason.
When petitioner Reyes arrived in Sydney, he went directly
to the lobby of Hotel Regent Sydney to register as a
conference delegate. At the registration desk, the
conference secretariat said that he could not register
because the FXDD for his registration fee had been
dishonored for the second time. The same situation was
experienced by his wife Consuelo who is a member of the
House of Rep representing the District of Makati, Metro
Manila.
The petitioners filed a complaint for damages against
FEBTC. Claiming that as a result of the dishonor of the
said demand draft, they were exposed to unnecessary
shock, social humiliation, and deep mental anguish in a
foreign country, and in the presence of an international
audience. RTC and CA ruled in favor of respondent.
ISSUE: WON the respondent bank was negligent?NO
HELD: The evidence shows that the respondent bank did
everything within its power to prevent the dishonor of the
subject foreign exchange demand draft. An employee of
Westpac-Sydney mistakenly read the printed figures in the
SWIFT cable message of respondent bank as "MT799"
instead of as "MT199". Such erroneous reading of its cable
message by a Westpac-Sydney employee could not have
been foreseen by the respondent bank. The respondent
bank had to re-confirm and repeatedly notify Westpac-New
York to debit its (respondent bank's) deposit dollar account
with it and to transfer or credit the corresponding amount to
Westpac-Sydney to cover the amount of the said demand
draft.
The degree of diligence required of banks is more than that
of a good father of a family where the fiduciary nature of
their relationship with their depositors is concerned. In
other words banks are duty bound to treat the deposit
accounts of their depositors with the highest degree of
care. But the said ruling applies only to cases where banks
act under their fiduciary capacity, that is, as depositary of
the deposits of their depositors. But the same higher
Ateneo de Davao University
Jacinto St., Davao City
degree of diligence is not expected to be exerted by banks
in commercial transactions that do not involve their
fiduciary relationship with their depositors.
The case at bar does not involve the handling of
petitioners' deposit. Instead, the relationship involved was
that of a buyer and seller, that is, between the respondent
bank as the seller of the subject foreign exchange demand
draft, and PRCI as the buyer of the same, with the 20th
Asian Racing conference Secretariat in Sydney, Australia
as the payee thereof. The FXDD was intended for the
payment of the registration fees of the petitioners as
delegates of the PRCI. Hence, respondent bank was not
required to exert more than the diligence of a good father
of a family in regard to the sale and issuance of the subject
FXDD.
Q1: What was the diligence required of the bank in this
case?
A1:Degree of diligence required is more than that of a
good father of a family but it only applies to fiduciary
relationships wherein the bank was handling the deposit of
a client. But in this case, there was no fiduciary
relationship between Far East bank and Reyes because it
was treated more like of a sales transaction wherein Reyes
bought the deman draft from Far East bank. Therefore, the
diligence required from Far East bank was simply that of a
good father of a family and not more than of that.
Q2:So with that, is the bank liable to Reyes?
A2:No ma’am. It was held that the bank did exercise the
diligence of a good father of a family.
Discussion:The Court emphasized that the degree of
diligence required of banks more than that of a good father
of a family is required when there is a fiduciary nature of
their relationship with their depositors. So you have here a
contract between the parties which does not involve a
deposit account. When we say higher degree of diligence,
more than the standard of diligence of a good father of
family, that is only applicable for contracts of deposits that
are covered in Article 1980.
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In this case, however, there’s no contract of deposit.
Highest degree of care applies only to cases where banks
act under their fiduciary capacity that is as depositary of the
deposits of their depositors. Same higher degree of
diligence is not expected to be exerted by banks in
commercial transactions that do not involve their fiduciary
relationship with their depositors. Respondent bank is not
required to exert more than the diligence of a good father
of a family in regard to – what happened here? Sale and
issuance of a foreign exchange demand draft. The case at
bar does not involve the handling of petitioner’s deposit,
instead what we have here is a buyer and seller
relationship.
Under the facts of the case, it was proven that the
respondent bank acted in good faith and in fact did not
cause the embarrassment of the petitioners in Sydney,
Australia as the error, mali ang pagpasok sa number, was
not on the part of Far East bank but rather of West-pac
Sydney. The employee of West-pac Sydney made such
error, so therefore the bank here was not held liable.
What happened in the case of Guingona vs. City Fiscal?
GUINGONA vs. CITY FISCAL
FACTS: Respondent David invested with the Nation
Savings and Loan Association (NSLA) the sum of
P1,145,546.20 on nine deposits, P13,531.94 on savings
account deposits (jointly with his sister, Denise Kuhne),
US$10,000.00 on time deposit, US$15,000.00 under a
receipt and guarantee of payment and US$50,000.00
(jointly with Denise Kuhne). David alleged that he was
induced into making the aforestated investments by Robert
Marshall an Australian national who was allegedly a close
associate of petitioner Guingona Jr., then NSLA President.
NSLA was placed under receivership by the Central Bank,
so that David filed claims therewith for his investments and
those of his sister. Thereafter, Guingona and Martin, upon
David’s request, assumed the bank’s obligation to David by
executing a joint promissory note in favor of private
respondent acknowledging an indebtedness of
Pl,336,614.02 and US$75,000.00. This promissory note
was based on the statement of account as prepared by the
Ateneo de Davao University
Jacinto St., Davao City
respondent. The amount of indebtedness assumed
appears to be bigger than the original claim because of the
added interest and the inclusion of other deposits of private
respondent's sister.
Petitioners Guingona and Martin agreed to divide the said
indebtedness, and Guingona executed another promissory
note whereby he personally acknowledged an
indebtedness of P668,307.01 and US$37,500.00 in favor of
David. Subsequently, David received a report from the
Central Bank that only P305,821.92 of those investments
were entered in the records of NSLA.
David charged petitioners with estafa and violation of
Central Bank Circular No. 364 and related regulations on
foreign exchange transactions in the Office of the City
Fiscal.
Petitioners moved to dismiss the charges against them for
lack of jurisdiction because David’s claims allegedly
comprised a purely civil obligation, but the motion was
denied. After the presentation of David’s principal
witness, petitioners filed this petition for prohibition and
injunction because the production of various documents
showed that the transactions between David and NSLA
were simple loans i.e., civil obligations which were novated
when Guingona and Martin assumed them
ISSUE: WON the contract perfected was a contract of
simple loan?YES.
HELD: It must be pointed out that when private respondent
David invested his money with NSLA, the contract that was
perfected was a contract of simple loan or mutuum and not
a contract of deposit. Thus, Article 1980 of the New Civil
Code provides that “fixed, savings, and current deposits of-
money in banks and similar institutions shall be governed
by the provisions concerning simple loan.”
Bank deposits are in the nature of irregular deposits. They
are really 'loans because they earn interest. All kinds of
bank deposits, whether fixed, savings, or current are to be
treated as loans and are to be covered by the law on loans.
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Current and saving deposits, are loans to a bank because
it can use the same.
Hence, the relationship between the private respondent
and the Nation Savings and Loan Association is that of
creditor and debtor; consequently, the ownership of the
amount deposited was transmitted to the Bank upon the
perfection of the contract and it can make use of the
amount deposited for its banking operations, such as to
pay interests on deposits and to pay withdrawals. While the
Bank has the obligation to return the amount deposited, it
has, however, no obligation to return or deliver the same
money that was deposited. And the failure of the Bank to
return the amount deposited will not constitute estafa
through misappropriation punishable under Article 315, par.
l(b) of the Revised Penal Code, but it will only give rise to
civil liability.
But even granting that the failure of the bank to pay the
time and savings deposits of private respondent David
would constitute a violation of paragraph 1(b) of Article 315
of the Revised Penal Code, nevertheless any incipient
criminal liability was deemed avoided, because when the
aforesaid bank was placed under receivership by the
Central Bank, petitioners Guingona and Martin assumed
the obligation of the bank to private respondent David,
thereby resulting in the novation of the original contractual
obligation arising from deposit into a contract of loan and
converting the original trust relation between the bank and
private respondent David into an ordinary debtor-creditor
relation between the petitioners and private respondent.
Consequently, the failure of the bank or petitioners
Guingona and Martin to pay the deposits of private
respondent would not constitute a breach of trust but would
merely be a failure to pay the obligation as a debtor.
Q1: Who is Guingona here?
A1: Guingona here is one of the officers of NSLA ma’am
who prompted David to invest.
Q2: To whom was these deposits made?
A2: To the bank.
Ateneo de Davao University
Jacinto St., Davao City
Q3: Was there liability for Estafa?
A3:The SC held here ma’am that there was no liability for
Estafa because here, although the various pleadings and
documents filed by David indisputably showed that he
invested money in time and savings deposit with NSLA, it
has already been ruled in several cases by the SC that
these arrangements are not actually deposits but are
actually in the form of mutuum or loan. So the SC further
discussed ma’am that because of this, failure of the bank to
honor the time deposit is failure to pay its obligation as a
debtor and it is not a breach of trust arising from a
depositary’s failure to return the subject matter of deposit.
If we would recall our lesson in Criminal Law II, one of the
essential elements of the crime of Estafa is breach of trust
wherein the offender is not able to return a thing that was
entrusted to him. In this case, the SC held that because it
is only a mutuum, a loan, that ownership of the money
transferred from David to Guingona, et.al through the bank
and because of that there was no fiduciary relationship that
was violated.
Q4: So in other words, there was no liability here at all?
The bank and Guingona would not be liable anymore?
A4: There was only no liability for Estafa, however, there
will still be civil liability for the said amount ma’am.
Discussion:Here, again the Court emphasized that when
you put money on the bank in the form of a deposit, that is
a simple loan or mutuum, not a contract of deposit for main
purpose of safekeeping in depositum. While it is true that
people may put money in the bank for principally for
safekeeping, again, it is clear under Article 1980 that such
bank deposits will be governed by the provisions of loan.
As a loan or simple mutuum, there is a transfer of
ownership to the debtor in this case the bank. So here it
was again emphasized bank deposits are in the nature of
irregular deposits, they are really loans because they earn
interest. All kinds of bank deposits are to be treated as
loans and are to be covered by law on loans. Failure of the
respondent bank to honor the time deposit is failure to pay
its obligation as a debtor and not in breach of trust arising
from the depositary’s failure to return the subject matter of
the deposit.
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Ownership of the amount was transmitted to the bank upon
perfection of the contract and therefore the bank can make
use of the amount deposited for its banking operation.
There was no obligation to return or deliver the same
money that was deposited. The failure of the bank to
return the amount deposited will not constitute estafa
through misappropriation but it will only give rise to a civil
liability over which, remember City Fiscals ang respondents
dito, so public respondents have no jurisdiction. They can
have a claim as to the bank but I think it’s under
receivership so what you have here is simple loan can be
included as an ordinary credit not a preferred credit.
forged another contract of lease with Marina Port Services,
over a ten-hectare portion of the BASECO property.
PCGG filed for annulment of sale, principally assailing the
validity of the tax delinquency sale of the BASECO
property in favor of petitioner Province of Bataan. It filed
an “Urgent Motion to Deposit Lease Rentals,” alleging that
the rentals amounting to “Hundreds of Millions of Pesos”
are “in danger of being unlawfully spent, squandered and
dissipated to the great and irreparable damage of
plaintiffs(the Republic of the Philippines, BASECO and
others) who are the rightful owners of the property leased.”

However, take note, that it was also pointed out here in the
court that it appears there was a novation of the original
contractual obligation wherein there is now an ordinary
creditor-debtor relationship between petitioners and private
respondents. The failure of the bank or Guingona to pay
the deposit, again will still not constitute a breach of trust
but merely failure to pay the obligation of a debtor, only civil
liability.
What is Escrow? An escrow is a written instrument wherein
the terms thereof purports a legal obligation wherein it is
deposited by the grantor or is delivered to a third party for
the depositary to keep it until the performance of a
condition or the happening of a certain event.
Escrow was discussed in the case of Province of Bataan
vs. Villafuerte. What happened here?
The lower court granted the PCGG’s urgent motion and
ordered the defendant Province of Bataan to remit to the
court the lease rentals it may receive from the defendant 7-
R Port Services and the Marina Port Services from the
receipt of this order. It also ordered the clerk of court to
deposit the amount under special time deposit with the
Land Bank in the name or account of the Court to be held
in trust for the person, natural or juridical, who may lawfully
be entitled thereto.
According to petitioner, “the escrow orders in question are
null and void ab initio for having been issued absent any
legal basis” and are “merely calculated to prejudice the
petitioner province without any practical or worthwhile,
much less legal objective.”

ISSUE: WON the deposit of rentals in escrow was

proper?YES
PROVINCE OF BATAAN vs. VILLAFUERTE

FACTS: Pursuant to PD 464, otherwise known as the Real

Property Tax Code of 1974, the Provincial Treasurer of
Bataan advertised for auction sale the BASECO property
due to real estate tax delinquency amounting to
P7,914,281.72, inclusive of penalties. After its auction
sale, the property was acquired by petitioner Province of
Bataan and subsequently title over the same was
consolidated in its name.
HELD: An escrow is a written instrument which by its
terms imports a legal obligation and which is deposited by
the grantor, promisor, or obligor, or his agent with a
stranger or third party, to be kept by the depositary until the
performance of a condition or the happening of a certain
event, and then to be delivered over to the grantee,
promisee, or obligee.

Eventually, petitioner, entered into a ten-year contract of While originally, the doctrine of escrow applied only to
lease with 7-R Port Services, Inc., whereby portions of the deeds by way of grant, or as otherwise stated, instruments
BASECO property were leased to the latter. Petitioner for the conveyance of land, under modern theories of law,

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the term escrow is not limited in its application to deeds,
but is applied to the deposit of any written instrument with a
third person. Particular instruments which have been held
to be the subject of an escrow include bonds or covenants,
deeds, mortgages, oil and gas leases, contracts for the
sale of land or for the purchase of personal property,
corporate stocks and stock subscriptions, promissory notes
or other commercial paper, insurance applications and
policies, contracts for the settlement of will-contest cases,
indentures of apprenticeship, receipts assigning
concessions and discontinuances and releases of causes
of action. Moreover, it is no longer open to question
that money may be delivered in escrow.
The lower court, in the course of adjudicating and resolving
the issues presented in the main suit, is clearly empowered
to control the proceedings therein through the adoption,
formulation and issuance of orders and other ancillary
writs, including the authority to place the properties
in custodia legis, for the purpose of effectuating its
judgment or decree and protecting further the interests of
the rightful claimants of the subject property.
To trace its source, the court’s authority proceeds from its
jurisdiction and power to decide, adjudicate and resolve the
issues raised in the principal suit. Stated differently, the
deposit of the rentals in escrow with the bank, in the name
of the lower court, “is only an incident in the main
proceeding.” To be sure, placing property in litigation
under judicial possession, whether in the hands of a
receiver, and administrator, or as in this case, in a
government bank is an ancient and accepted procedure.
Q1: What was the subject matter of this case?
A1: The lease rentals ma’am.
Q2:So money can be subject of an escrow. Where was the
money put?
A2:It was ordered to be deposited in the bank ma’am.
Discussion:So it’s in the bank. It served as an escrow.
Again we look at here the definition of an escrow, but it is in
the form of a deposit, you put money in the bank. So in
Ateneo de Davao University
Jacinto St., Davao City
other words, I think it was also mentioned here that it was a
time deposit, so it’s really a bank account deposit wherein
we could apply Article 1980. But again the conditions of
putting the money, in this case, in the bank is because by
virtue of the order of the court in the form of an escrow.
Escrow here is not a common practice but it is allowed
under our jurisdiction. It is a written instrument which by its
terms imports a legal obligation and which is deposited with
the grantor, depositor or obligor or his agentwith a stranger
or third party to be kept by the depositary until the
performance of a condition or the happening of a certain
event and and then to be delivered over to the grantee,
promisee, or obligee.
Escrow is not limited in its application to deeds, but is
applied to the deposit of any written instrument with a third
person. It can be bonds, covenants, deeds, mortgages,
leases, contracts for the sale, stock subscriptions,
promissory notes, insurance applications, contracts for will-
contest cases, indentures, among other kinds of
documents.
So if this is the subject matter you put it in the depositary,
what you have here is a contract of deposit for the purpose
of safekeeping in the meantime wala pa natapos iyong
transaction. However, here the SC likewise emphasized
that it is no longer open to question that the money may be
delivered in an escrow arrangement. So that is what
happened in this case. The deposit of the rentals, money,
in escrow with the bank happened and this was upheld by
the SC. This is only an incident to the main proceeding.
Since the money here was put into escrow by virtue of a
deposit account, we would say that Article 1980 is
applicable. So just take note of that.
So those are the cases in relation to Article 1980. Again,
take note here, governed by the provisions concerning the
loan, deposits of money in banks that are fixed, savings
and current are really loans to a bank, so the bank is the
creditor (?) and you are the debtor (?).
They are really loans to a bank because the bank can use
the same in its ordinary transactions and for the banking
business in which it is engaged. And as what we have
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seen in the cases that we have discussed, in this kind of
deposit, banks are required to exercise higher diligence,
more than the diligence of a good father of a family.
Also take note, as in this instance, you say there is a
contract of loan, they’re simple mutuum, Estafa or
misappropriation the bank would not be held liable.
Also take note, recall your obligations and contract with
regard to compensation or offset. You cannot apply
compensation or offset if what you have is a contract of
depositum through contract of deposit. But if you’d say
contract of loan in the form of a bank deposit, then
compensation can be applied. Most probably we’ve
already discussed, may utang ka sa banko, nag loan ka,
and at the same time you have a savings account deposit
and then due na iyong loan mo, hindi ka pa rin
nagbabayad. What could the bank do? It can hold or it can
withdraw the amount from your savings account to pay off
your obligation. Can they do that? Yes, kung
compensation or set off, a mode of extinguishing an
obligation.
Let’s proceed to Articles 1981 and 1982.
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.
Ateneo de Davao University
Jacinto St., Davao City
BY: 2 MANRESA 2015-2016
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.
So these articles point out other obligations of a depositary:
1. Return the thing deposited when delivered,
closed and sealed in the same condition.
2. Obligation to pay for damages should the seal or
lock be broken through his fault. Remember
there is a presumption that if the seal or lock is
broken, he is presumed at fault unless proven
otherwise.
3. Likewise, he has the obligation to keep secret of
the deposit, the contents thereof, when the seal
or lock is broken regardless if he is at fault or not
Why would be this relevant? Because again this
emphasizes the fiduciary nature of a contract of deposit.
Just because accidentally na-open or nasira iyong lock
does not mean that you are now entitled to divulge the
contents thereof. So otherwise, that would be considered
as a violation of trust. Although that if it is open
accidentally without the fault of the depositary and then you
discovered it has illegal subject matter, then I think it is
much proper that you report it to the authorities.
4. Respect the secrets which the depositor desires
to keep in guard. Statement here on the part of
the depositor is a prima facie evidence only.
And take note under Article 1982, instances when the
depositary is authorized to open the said box. If there is a
presumed authority, 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. In
other words, there is a necessity to open it as well.
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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.
So we already know, fruits, accessions and accessories
should pertain to the owner. Depositor is the owner or
represents the owner of the thing deposited and therefore
the products, accessories and accessions should be
returned to him. Return the thing itself, subject of the
deposit, plus the fruits, accessions and accessories which
are consequence of ownership.
Depositary has no right to make use thereof and we are
through with that. And also take note in Article 1983 there
is reference to Article 1896, that is under agency.
Depositary is in delay or has used the money is liable for
interest as indemnity. He owes interest on the sums he
has applied to his own use from the day on which he did
so, and those which he still owes after the extinguishment
of the deposit.
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.
Alright, so here the depositary cannot require the depositor
to show proof that he is the owner of the thing deposited as
a condition for the return.
Ateneo de Davao University
Jacinto St., Davao City
Remember ownership is not essential for the perfection of
a contract of deposit. Now, we have this rule here on not
requiring ownership because otherwise it may open ?? to
bad faith.The depositary may use it as a ground to refuse
to return the thing to the depositor. But the person who
personally deposited and delivered the thing to him on the
pretense of requiring proof of ownership, he will now be
able to retain the thing even if it turns out that he is in bad
faith. Maghimo lang siya reason that “You are not the
owner so I will not return it.” Again, ownership is not
required in contract of deposit.
But what if the depositary has knowledge that the depositor
is not the true owner thereof. What are the steps that he
should take?
1. If it appears that a third person is the
owner of the thing deposited, to be
relieved of all the responsibility the
depositor must advise the true owner
that he has in his possession the thing
that he own. Of course this is subject
that he has knowledge kung sino iyong
may-ari. Otherwise, if he has no
knowledge that who is the true owner,
how could he inform the said owner.
2. After he has informed the true owner, he
will give that owner one month period to
claim. Why is there we have this one
month period? For the protection of the
depositary so that otherwise, he has to
wait forever, “Ill just wait until the true
owner will claim.” So one month lang.
3. What happens after the one month
period has expired? The depositary can
return the thing to the depositor without
any liability to the depositor and without
any liability to the true owner whom he
has already informed of the said thing in
his possession. But of course, the true
owner can still go after the depositor or
the one who is in possession of the
thing, can assert his right by the delivery
of the personal property to him by filing,
for example, an action for replevin.
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What if he does not know who is the true owner but the
depositary has reasonable grounds to believe that it has
not been lawfully acquired by the depositor?
Example: The depositor delivered several jewelries for
safekeeping. No need to require ownership so you just
accept it for safekeeping. The next day that the depositary
found out that a pawnshop was robbed several jewelries
were stolen. He does not know really kung sino ang true
owner or he does not really know kungito ba iyong jewelry
na nandoon. At the same time he has knowledge that the
depositor does not have the capacity to have this much
jewelry.
So what is his remedy? Return the thing, those jewelries, to
the depositor. Return if there is reasonable grounds to
believe that the thing has not been lawfully acquired by the
depositor.
Now however, if you take a look at Article 1984, it does not
state what would happen or what should happen if the true
owner was informed and within the one month period the
depositor will now demand the return of of the thing? If we
take into consideration the nature of the contract of deposit,
the depositary has the obligation to return the thing, di ba
iyan ang kanyang primary obligation. Otherwise, if he
refuses then it would be contrary to the nature of a deposit.
But on the other hand, it is also risky on the part of the
depositary having knowledge that there is a different owner
of the subject property. So what is the best thing to do on
the part of the depositary? He can file and action for
interpleader. You have the depositor here who’s
demanding for the return of the thing to him and then you
have, on the other hand, its true owner who alleges in
some form that he is the true owner of the subject property.
So better for the depositary to file an action for
interpleader. These two parties will litigate among
themselves who really has the better right to the
possession of the real property.
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
Ateneo de Davao University
Jacinto St., Davao City
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.
What we have here? Two or more depositors. Take note
the assumption here is they are only joint depositors, not
solidary. If the thing deposited is divisible, and the
depositors are not solidary, then each depositor can
demand only his share.
So let us say the two depositors delivered 100 sacks of rice
to the depositary. Subject matter is divisible, depositors
are not solidary, presumption applies that they are joint.
So when one of them demands for the delivery or the
return of the sacks of rice, it’s only as to the extent of their
proportionate shares. So 50 sacks lang ang mademand ng
isang depositor.
However, if it is stipulated that the depositors are solidary
depositors or the thing deposited is not divisible, then we
apply the rule on active solidarity, these are discussed
under obligations.
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.
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.
However, take note of the last sentence, if there is a
stipulation that the thing should be returned to one of the
depositors, dapat sa kanya lang. Depositary siya with only
to the person designated even if such person has not yet
made any demand.
Return of the deposits stipulated bound to return it only to
the person designated, although he has not made any
demand for its return.
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.
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Alright, if at the time of the contract of deposit was Article 1251. Payment shall be made in the place
perfected, one of the parties is incapacitated, we already designated in the obligation.
know the contract is voidable.

But what if at the time the contract was perfected or both

parties were capacitated but subsequently they became
incapacitated. So we take into consideration what we have
discussed before in relation to Article 1986. If the depositor
subsequently became incapacitated, the property must be
return to his guardian or administrator or the person who
made the deposit or to the depositor himself if he should
acquire capacity. Article 1970, in relation to Article 1986, it
cannot be returned to the same depositor since he has
already lost his capacity except to the persons who may
have the administration of his property and rights.
There being no express stipulation and if the undertaking is
to deliver a determinate thing, the payment shall be made
wherever the thing might be at the moment the obligation
was constituted.
In any other case the place of payment shall be the
domicile of the debtor.

Ito iyong sabi ko last time when we discussed Article 1970.
Again, what is the effect if you delivered to the other party
who was already incapacitated? That will not extinguish
your obligation. So to extinguish your obligation as a
depositary, deliver it to one who administers the property
and rights of the incapacitated 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.
Place to return. Obviously if there is a stipulation, then it
should be at that place agreed upon wherein the expenses
shall be borne by the depositor.
In the absence of stipulation, where the thing deposited
might be even if it is not the same place where the original
deposit was made provided, that the transfer was
accomplished without malice on the part of the depositary.
Differentiate this from the general rules as to delivery under
Article 1251.
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If the debtor changes his domicile in bad faith or after he
has incurred in delay, the additional expenses shall be
borne by him.
These provisions are without prejudice to venue under the
Rules of Court.
If there’s no express stipulation and the subject matter is a
determinate thing, place of delivery is wherever the thing
might be at the moment the obligation was constituted
which is different here in Article 1987.
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.
When we distinguish depositum from mutuum, we have
already emphasized that as to a depositum, the general
rule is that the depositor can demand the return of the thing
deposited at will whether a period has been stipulated or
not.
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Whenever a period is agreed, the same is for the benefit of
the depositor and therefore when he demands for the
return of the thing before the period, it means that he has
waived it and he can validly waive such period because it is
for his benefit. However, if the deposit is for compensation,
while the depositor can demand for the return of the thing,
the depositary is nevertheless entitled to the compensation
corresponding to the entire period.
Article 1988, however, provides for the exceptions wherein
the depositor cannot compel the depositary to return the
thing:
1. When the thing is judicially attached while in
depositary’s possession. Otherwise, the
depositary will be disobeying the judicial order of
attachment.
2. Notified of the opposition of a third person to the
return or the removal of the thing deposited.
However, as the exception provided in Article 1988 is really
prone to abuse. The depositary should only be authorized
in case of conflicting claims to consign the thing in court
through again an action of interpleader.
What is the effect notified and here comes a third person
who asserts his right over the subject property despite such
demand, if you are the depositary and then you return it to
the depositor? Mamaya ikaw ang hahabolin ng third
person. So what’s the best thing? Again, for the depositary
to file an action for interpleader.
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.
Take it into consideration, if it’s gratuitous, the depositary
may likewise return the thing deposited notwithstanding
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that a period has been fixed but it must be for a justifiable
reason.
If the depositor refuses to receive the thing, the remedy
available for the depositary is to deposit the thing at the
disposal of judicial authority through consignation.
However, if the contract of deposit is for a valuable
consideration, compensation, depositary has no right to
return the thing deposited before the expiration of the time
designated even if he should suffer any convenience as a
consequence.
Distinguish Article 1988 from Article 1989:
ART. 1988 ART. 1989
It refers to the kind of Refers to the depositary to
depositor to demand the return the thing
return the thing at anytime. notwithstanding it has been
fixed, if it is gratuitous,
cannot return if it is subject
for a valuable consideration.
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.
Recall one of the primary obligations of a depositary, to
return the exact thing that has been deposited.
Now what happens in Article 1990? The thing was lost due
to a force majeure or government order. In this case, the
depositary shall not be liable for loss. However, if the
depositary receives something in exchange for the loss of
the thing, money or other thing, then he has the duty to
deliver to the depositor what he has received. Otherwise,
he will have unjust enrichment, he would unjustly enrich
himself at the expense of the depositor.
Article 1991. The depositor's heir who in good faith may
have sold the thing which he did not know was deposited,
shall only be bound to return the price he may have
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received or to assign his right of action against the buyer in
case the price has not been paid him.
Alright, so what happens here? Take note here nakalagay
dyan depositor’s heir but it should be depositary. Bakit? In
possession man of the thing. So the depositary already
died and it’s the heir who has sold the thing subject of the
deposit. So take note, it must be depositary instead of
depositor.
If the depositary dies, the object is left to the heir. The heir
has no knowledge that it was subject to a contract of
deposit. So what does he do? He sells it in good faith. So
what would now be the obligation of the heir? Return the
price received or assign the right to collect the same if he
has not been paid. Take note, again it refers to price and
to the value of the thing.
However, if the heir is in bad faith, in other words he has
knowledge that the thing was subject to a deposit, then
there will be liability for damages.
So with that, we could say that the following are the
obligations of the depositary:
1. Under Article 1972, to keep the thing safely.
2. The same article, to return the thing. General
rule, upon demand. However, if gratuitous
there must be justifiable reason, return the
thing plus accessories and accession.
However, if the thing was lost due to a force
majeure or government order, obligation to
return money or another thing that was
received in its place.
3. Where to return? By agreement or where the
thing is deposited.
4. Obligation not to deposit in the third person
unless authorized.
5. Under Article 1974, to change the way of
deposit.
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6. To earn interest under Article 1980. Again,
differentiate from rent of safety deposit box.
7. Collect interest from capital to preserve its
value, that’s Article 1975.
8. Obligation not commingle the thing if so
stipulated and if it’s of different kind and
quality.
9. Obligation not to make use of the thing
deposited unless authorized.
10. Liability for loss in case of fortuitous event.
What are those instances? Take note of that.
11. Obligation when the thing deposited is
delivered sealed and closed
12. Obligation to pay interest on sums converted
to personal use if deposit consist of money.
13. And advise the true owner if discovered that
the thing deposited was stolen.
December 3, 2015 (2nd hour)
Transcribed by: Cid Benedict D. Pabalan
Obligations of the Depositor
Art. 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)
This article only applies to gratuitous deposit. This is based
on gratuity. The depositor then would have incurred just the
same. Otherwise, the depositor would unjustly enrich
himself at the expense of the depositary.
This is different from commodatum---it is the bailee who
pays for the expenses.
Unlike in commodatum, there is a distinction for ordinary
and extraordinary expenses for preservation. With regard
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to depositum, there is no distinction because the right to
reimbursement here covers all expenses for preservation
whether ordinary or extra ordinarybut these must be
necessary expenses. Useful expenses or luxurious
expenses for mere pleasure are not covered in this article.
If the deposit is subject to compensation:
General Rule: The expenses for the preservation of the
thing shall be borne by the depositary because the
expenses are already included in the compensation paid to
the depositary as agreed upon by the parties.
Exception:
Unless otherwise stipulated by the parties.
Art. 1993. The depositor shall reimburse the depositary for
any loss arising from the character of the thing deposited,
unless at the time of the constitution of the deposit the
former was not aware of, or was not expected to know the
dangerous character of the thing, or unless he notified the
depositary of the same, or the latter was aware of it without
advice from the depositor. (n)
General rule:
The depositary shall be reimbursed for any loss suffered by
him because of the character of the thing deposited;
flammable, chemical, breakable. In case of loss arising
from the character of the thingdeposited it will be the
depositor who will bear the loss. You have to reimburse the
depositary.
Exceptions:
(1) At the time of the constitution of the deposit the
depositor was not aware of it;
(2) Depositor was not expected to know the dangerous
character of the thing;
(3) Depositary was notified of the character of the thing and
should have exercised the proper care;
(4) Depositary was aware of it even without the advice of
the depositor.
Art. 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)
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This is different from commodatum. Under 1994, the
depositary has the right to hold or retain the thing until he is
paid of what is due him by reason of the deposit.
In 1994, there is a contract of pledge created by operation
of law. The thing deposited acts as a security for the
obligation of the depositor. The thing retained serves as a
security for what may be due to the depositary by reason of
the deposit.
This is similar to a contract of agency, the right of the agent
to retain but different from that of commodatum.
Art. 1995. A deposit its extinguished:
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either
the depositor or the depositary. (n)
First, the modes of extinguishing a contract of deposit are
not exclusively stated in 1995 because obviously there are
other causes for the extinguishment of a contract of deposit
which may be applied here:
(1) when the thing is returned
(2) in case there is novation
(3) merger
(4) expiration of the term
(5) fulfillment of the resolutory condition.
If the contract of deposit is gratuitous then either of the
depositor or the depositary shall extinguish the contract of
deposit. The depositary will not be obliged to continue with
the contract of deposit and return it to the heirs of the
depositor.
If the deposit was for compensation, the contract of deposit
shall not be extinguished by the death of either party. It is
an onerous deposit thus it is not personal in nature.
In 1978, rights of transmission are transmissible to their
respective heirs and the heirs if either party have a right to
terminate the deposit even before the expiration of the term
and even if it is for compensation. It is however automatic.
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NECESSARY DEPOSIT
Art. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity,
such as fire, storm, flood, pillage, shipwreck, or other
similar events. (1781a)
Art. 1997. The deposit referred to in No. 1 of the preceding
article shall be governed by the provisions of the law
establishing it, and in case of its deficiency, by the rules on
voluntary deposit.
The deposit mentioned in No. 2 of the preceding article
shall be regulated by the provisions concerning voluntary
deposit and by Article 2168. (1782)
In necessary deposit there is no freedom to choose who
will be the depositary unlike in a voluntary deposit.
Kinds of necessary deposits
1. (1996)When it is made in compliance with a legal
obligation
2. (1196)When it takes place on the occasion of any
calamity, such as fire, storm, flood, pillage, shipwreck, or
other similar events.
3. (1998) Travelers in hotels and inns
4. (1754) Passengers in common carriers
First type of deposit:
Par1: Those made in compliance with a legal obligation:
1. Article 538: Judicial deposit of a thing, the possession of
which is being disputed in a litigation by two or more
persons
2. Article 586: Deposit in the bank or public institution of
public bonds payable to order or bearer
3. Article 2104: The deposit of a thing pledge when the
creditor uses the thing without the authority of the owner or
uses it in any other way.
4. Those required in suits as provided in the Rules of
Court.
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5. Those constituted to guarantee contracts with the
government. In this case the deposit arises from an
obligation of a public or administrative character.
Second type of deposit:
2nd Par.: Those that take place on the occasion of any
calamity, such as fire, storm, flood, pillage, shipwreck, or
other similar events.
The law imposes on the recipient the obligations of a
bailee.
The object here is not for safekeeping but to save the
property. It is still considered as a necessary deposit. It is
also considered as a quasi bailment, involuntary bailment
or involuntary deposit or depositum miserable. The cause
of relation here is between the calamity and the constitution
of the deposit.
The governing rule with regard to this deposit is 2168 on
quasi contract. During a calamity, the properties saved
from destruction by another person without the knowledge
of the owner the latter is to pay the former just
compensation otherwise unjust enrichment. This is a
negotiorumgestio quasi contract.
Art. 1998. The deposit of effects made by the travellers in
hotels or inns shall also be regarded as necessary. The
keepers of hotels or inns shall be responsible for them as
depositaries, provided that notice was given to them, or to
their employees, of the effects brought by the guests and
that, on the part of the latter, they take the precautions
which said hotel-keepers or their substitutes advised
relative to the care and vigilance of their effects. (1783)
Art. 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)
The third type of necessary deposit is under Articles 1998
and 1999.
The terms travelers and guests are used here
synonymously. This refers to transients and not boarders.
They shall be governed by the rules on contract of lease.
Hotel keeper and in keeper are used synonymously under
the civil code.
Hotel is a building of many rooms chiefly for overnight
accommodation of transients and several floors served by
elevators usually with large open street-level lobby.
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Innis a public house for the lodging of travelers for
compensation and until capacity is reached; a place of
public entertainment that does not provide lodging.
Motel is an establishment which provides lodging and
parking and in which the rooms are usually accessible from
an outdoor parking area.
Hotel keepers and in-keepers may be held responsible as
depositaries with regard to the effects of their guests;
1. Previously informed about the effects brought by the
guests
2. The guests have taken precaution prescribed regarding
the safekeeping of their effects.
The liability is not limited to the effects lost or damaged in
the hotel rooms which come under the term the term
baggage or articles such as clothing as are ordinarily used
by travelers but includes those lost or damaged in hotel
annexes such as vehicles in the hotel‘s garage.
“DURBAN APARTMENTS CORPORATION vs. PIONEER
INSURANCE AND SURETY CORPORATION,” G.R. No.
179419 (January 12, 2011),
The Supreme Court passed upon the liability of hotels for
providing valet parking to guests.
FACTS:
This arose after a hotel guest, and Pioneer’s insured,
checked into the City Garden hotel in Makati. The hotel’s
parking attendant and co-defendant got the keys to the
guest’s vehicle and parked it an adjacent lot owned by a
third party. The guest was subsequently awakened so as
to be advised that his car had been taken. The guest made
the necessary reports and thereafter filed a claim for
insurance with Pioneer which paid the same as indemnity
for the vehicle’s loss. Pioneer alleged that the loss was an
offshoot of the hotel’s negligence and accordingly filed a
claim by means of subrogation, against the hotel and its
parking valet. It was established that there was a previous
similar incident and yet no “no necessary precautions were
taken to prevent its repetition xxx”. Pioneer argued that the
hotel was “was wanting in due diligence in the selection
and supervision of its employees particularly its parking
valet.”
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The Hotel argued that the insured was not a guest of the
hotel but a visitor therein, that its valet did not get his keys
but it was the insured who requested him to find a space
wherever one was available, that valet parking was
provided for convenience of its customers and that it was a
special privilege that was given to the insured. The vehicle
was taken without using the key which was even turned
over to the owner. Its valet even tried to run after the
carnappers to no avail.
The guest testified that he drove his vehicle in front of the
hotel where the parking attendant approached and asked
him for his key, and issued a “valet parking customer’s
claim stub.” He then checked in at the hotel with a
companion. At around 1 a.m., he was advised of the
carnapping incident. An adjuster testified that based on
his investigation, the hotel would assist guests in parking,
and with only 12 parking slots, entered into an agreement
with an adjacent bank to use the latter’s space at night. He
discovered that a van had been carnapped from the same
lot barely a month before.
The lower court ruled in favor of Pioneer and ordered
Durban to pay the “sum of P1,163,250.00 with legal
interest thereon from July 22, 2003 until the obligation is
fully paid and attorney’s fees and litigation expenses
amounting to P120,000.00.” This was affirmed by the
Court of Appeals.
RULING:
The High Court upheld the ruling that the hotel was in
“default for failure to appear at the pre-trial conference and
to file a pre-trial brief, and thus, correctly allowed
respondent to present evidence ex-parte.” It also affirmed
the finding that it was liable for the loss of the vehicle. The
procedural aspect will not be dealt with in detail here.
Despite the finding of default, the Supreme Court
emphasized that “defendant’s (petitioner’s) preclusion from
presenting evidence during trial does not automatically
result in a judgment in favor of plaintiff (respondent). The
plaintiff must still substantiate the allegations in its
complaint.”
It found that the allegations of Pioneer in the complaint
were substantiated, “i.e., a contract of necessary deposit
existed between the insured xxx and petitioner. On this
score, we find no error in the following disquisition of the
appellate court:
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[The] records also reveal that upon arrival at the City
Garden Hotel, See gave notice to the doorman and parking
attendant of the said hotel, x xxJustimbaste, about his
Vitara when he entrusted its ignition key to the latter. x
xxJustimbaste issued a valet parking customer claim stub
to See, parked the Vitara at the Equitable PCI Bank
parking area, and placed the ignition key inside a safety
key box while See proceeded to the hotel lobby to check in.
The Equitable PCI Bank parking area became an annex of
City Garden Hotel when the management of the said bank
allowed the parking of the vehicles of hotel guests thereat
in the evening after banking hours. “
Interesting is the finding that the bank’s parking area was
deemed an “annex” to the hotel. A hotel’s use of an
adjacent lot appears to subject the same to its control.
The Court cited Article 1962, in relation to Article 1998, of
the Civil Code:
“Art. 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and returning the same. If the
safekeeping of the thing delivered is not the principal
purpose of the contract, there is no deposit but some other
contract.
Art. 1998. The deposit of effects made by travelers in
hotels or inns shall also be regarded as necessary. The
keepers of hotels or inns shall be responsible for them as
depositaries, provided that notice was given to them, or to
their employees, of the effects brought by the guests and
that, on the part of the latter, they take the precautions
which said hotel-keepers or their substitutes advised
relative to the care and vigilance of their effects.”
The insured deposited the vehicle for safekeeping with the
hotel, through its employee. This employee issued a claim
stub to the insured. The contract of deposit was perfected
from the delivery of the vehicle, when the keys were
handed over to the hotel’s employee, and which he
“received with the obligation of safely keeping and
returning it.”
This could conceivably be used as basis for users of mall
and other public parking lots to claim indemnity for loss or
damage to their vehicles. It would be interesting to see if
the practice of placing disclaimers of liability in the parking
stub, as well as in signages, would be upheld by the courts
as binding on the users. It does stand to reason that when
you are made to park and pay, parking lot providers owe a
degree of care to insure your vehicle is kept safe and
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sound. And if they fail to adhere to this standard, then they
should be sorry they didn’t, as in this case.
You have here a contract of a necessary deposit.
Regardless of the facts that see was not a recorded or
checking guest of the hotel, remember that the parking
attendant of the hotel duly accepted the keys thus there
was a contract of deposit perfected even if the car was not
parked in the hotel premises. So with that see deposited
his car for safekeeping with petitioner who is its employee
and therefore they should have exerted the diligence
required in taking care of the subject car. Notice that this
was actually the second time that such incident happened.
So in this case the hotel was made liable.
Take note, the liability is not limited to the effects lost or
damaged in the hotel rooms which come under the term
the term baggage or articles such as clothing as are
ordinarily used by travelers but includes those lost or
damaged in hotel annexes such as vehicles in the hotel‘s
garage.
Art. 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.
Art. 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.
Art. 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.
Arts 2000-2002 further discusses the liability of the hotel-
keeper. Hotel-keeper is responsible regardless of the
amount of care exercised if:
1) There is loss or injury caused by his servants or
employees, as well as strangers, provided all the elements
in Art 1998 are present;
(2) If the loss is caused by the act of a thief or robber,
without the use of arms or irresistible force, then the hotel-
keeper is liable; because in that case, the hotel-keeper is
considered negligent.
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When is the hotel-keeper not liable?
(1) If the loss or injury is caused by force majeure; (2000)
(2) Theft or robbery committed by a stranger, not the
employee or the servant of the hotel-keeper, with the use
of arms and irresistible force (unless the hotel-keeper is
guilty of fault or negligence) (2001)
(3) 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. (2002)
With regard again to theft or robbery by a stranger, you
have to consider whether there was use of arms or
irresistible force. If it is done without the use of arms or
irresistible force, hotel-keeper is liable. However, if it is with
the use of arms or irresistible force, the general rule is that
the hotel-keeper is not liable; except if the hotel-keeper is
found to be negligent or at fault failing to provide against
the loss or injury. If the loss is due to the employee or
servant of the hotel-keeper, do not take into consideration,
whether there was use of firearms or not. Servants and
employees are deemed to be under the direct supervision
and control of the hotel-keeper. That‘s why if such loss is
due to the act of servant or employee of the hotel-keeper,
the hotel-keeper will be liable. If loss is due to the acts of
the guest, his family, servants or visitors, the hotel will not
be held liable. As well as if the loss arises from the
character of the thing brought into the hotel These 2
instances are provided under Art 2002.
Art. 2003. The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not
liable for the articles brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in articles 1998 to
2001 is suppressed or diminished shall be void.
This similar to the law on common carriers which does not
allow a common carrier to dispense with or limit its
responsibility by stipulation or posting of notices as this is
against the law morals and public policy.
Therefore, hotel-keepers or inn-keepers as depositary
should be subject to extraordinary degree of care for the
protection and safety of travelers who have no alternative
but to rely on the good faith and care of those with whom
they make lodging.
Ateneo de Davao University
Jacinto St., Davao City
YHT Realty Corp. v. CA, et al., G.R. No. 126780,
February 17, 2005
Facts:
Maurice Peaches McLoughlin is an Australian
businessman-philanthropist who used to stay at the
Sheraton Hotel during his trips to the Philippines prior to
1984. He met Brunhilda Mata-Tan who befriended him and
showed him around. Tan convinced Mcloughlin to transfer
to the Tropicana from the Sheraton where afterwards he
stayed during his trips from Dec 1984 to Sept 1987.
— On 30 Oct 1987, McLoughlin arrived from Australia
and registered with Tropicana. He rented a safety deposit
box as his usual practice. The box required two keys, the
guest had one and one from the management. He placed
US $10,000 in one envelope and US$5,000 in another ,
AU$10,000 in another envelope and other envelopes with
his passport and credit cards. On 12 Dec 1987, he took
from the box the envelope with US$5,000 and the one with
AU$10,000 to go to Hong Kong for a short visit, because
he was not checking out. When he arrived in HK, the
envelope with US$5,000 only contained US$3,000, but
because he had no idea if the safety deposit box has been
tampered, he thought it was just bad accounting.
— After returning to Manila, he checked out of the
Tropicana on 18 Dec 1987 and left for Australia. When he
arrived he discovered that the envelope with US$10,000
was short of US$5,000. He also noticed that the jewelry he
bought in Hong Kong which he stored in the safety deposit
box upon his return to Tropicana was likewise missing,
except for a diamond bracelet.
— He went back to the PH on 4 Apr 1988 and asked
Lainez (who had custody of the management key) if some
money was missing or returned to her, to which the latter
answered there was not. He again registered at the
Tropicana and rented a safety deposit box. He placed an
envelope containing US$15,000, another of AU$10,000.
On 16 Apr, he opened his safety deposit box and noticed
that US$2,000 and AU$4,500 was missing from the
envelopes.
— He immediately confronted Lainez and Payam who
admitted that Tan opened the safety deposit box with the
key assigned to McLoughlin. McLoughlin went up to his
room where Tan was staying and confronted her. Tan
admitted that she had stolen McLoughlin’s key and was
able to open the safety deposit box with the assistance of
Lopez, Payam and Lainez. Lopez also told McLoughlin that
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Tan stole the key assigned to McLoughlin while the latter
was asleep.
— McLoughlin requested the management for an
investigation of the incident. Lopez got in touch with Tan
and arranged for a meeting with the police and McLoughlin.
When the police did not arrive, Lopez and Tan went to the
room of McLoughlin at Tropicana and thereat, Lopez wrote
on a piece of paper a promissory note.
— He made Lopez and Tan sign a promissory note for
him for the loss. However, Lopez refused liability on behalf
of the hotel, reasoning that McLoughlin signed an
"Undertaking for the Use of Safety Deposit Box" which
disclaims any liability of the hotel for things put inside the
box.
— On 17 May 1988 McLoughlin went back to AU and
consulted his lawyers. They wrote a letter addressed to
Pres. Cory Aquino which was pushed back to the DOJ and
the Western Police District. He went back from the PH to
AU several times more to attend business and follow up
but the matter was only filed on 3 Dec 1990 since he was
not there to personally follow up.
— McLoughlin filed an action against YHT Realty
Corporation, Lopez, Lainez, Payam and Tan.
— The RTC rendered judgment in favor of McLoughlin.
The CA modified only the amount of damages awarded.
— Tan and Lopez, however, were not served with
summons, and trial proceeded with only Lainez, Payam
and YHT Realty Corporation as defendants.
(a) whether the loss of money and jewelry is supported
by the evidence. YES.
Where the credibility of a witness is an issue, the
established rule is that great respect is accorded to the
evaluation of the credibility of witnesses by the trial court.
The trial court is in the best position to assess the
credibility of witnesses and their testimonies because of its
unique opportunity to observe the witnesses firsthand and
note their demeanor, conduct and attitude under grilling
examination.
(b) whether there was gross negligence on the part of
the innkeepers
Payam and Lainez, who were employees of Tropicana, had
custody of the master key of the management when the
loss took place. They even admitted that they assisted Tan
Ateneo de Davao University
Jacinto St., Davao City
on three separate occasions in opening McLoughlin’s
safety deposit box.
The management contends that McLoughlin made its
employees believe that Tan was his spouse for she was
always with him most of the time. The evidence on record
is bereft of any showing that McLoughlin introduced Tan to
the management as his wife. Mere close companionship
and intimacy are not enough to warrant such conclusion.
They should have confronted him as to his relationship with
Tan considering that the latter had been observed opening
McLoughlin’s safety deposit box a number of times at the
early hours of the morning.
Art 2180, par (4) of the same Code provides that the
owners and managers of an establishment or enterprise
are likewise responsible for damages caused by their
employees in the service of the branches in which the latter
are employed or on the occasion of their functions. Given
the fact that the loss of McLoughlin’s money was
consummated through the negligence of Tropicana’s
employees both the employees and YHT, as owner of
Tropicana, should be held solidarily liable pursuant to Art
2193.
WON the "Undertaking for the Use of the Safety
Deposit Box" is null and void.
Yes, it is null and void. Art. 2003[1] is controlling.
This is an expression of public policy that the hotel
business like common carriers are imbued with public
interest. This responsibility cannot be waived away by any
contrary stipulation in so-called "undertakings" that
ordinarily appear in prepared forms imposed by hotel
keepers on guests for their signature.
The CA (former case) even ruled before that hotelkeepers
are liable even though the effects are not delivered to them
or their employees, but it is enough that the effects are
within the hotel or inn.
Pars. 2 and 4 of the undertaking manifestly contravene Art.
2003 of the NCC. Meanwhile, the defense that Art. 2002
exempts the hotel-keeper from liability if the loss is due to
the acts of the guest, family or visitors falls because the
hotel is guilty of negligence as well. This provision
presupposes that the hotel-keeper is not guilty of
concurrent negligence or has not contributed in any degree
to the occurrence of the loss.
Q: Isn‘t it that in Art 2002 if the loss is due to the act of the
guest, the hotel is not liable? Can we not apply 2002
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saying that the loss is due to the act of the guest or family
of the guest?
A: There was negligence on the part of the hotel-keeper as
they merely assumed that Tan is the wife of the guest, thus
Art 2002 is not applicable.
Q: What is the ruling of the court with respect to Art 2002?
In order to apply Art 2002, what is required for the inn-
keeper?
Here you have a contract of deposit between the guest of
the hotel for the use of a safety deposit box. Under the
provisions of the Civil Code, this is considered as a
necessary deposit. In this case, a person (Tan) other than
the one who is registered as guest, had access to the
safety deposit box. Therefore Tropicana Hotel should be
held liable for damage due to the negligence of their
employee. Take note that the depositary also possess a
key that is needed to open the safety box. The depositary
must ascertain the authority of the person who wants to
access the box. In this case, there was no instruction from
McLaughlin that Tan would be allowed to access the said
safety-deposit box.
Suspicious circumstances also surround this case. When
would Tan usually open? Dawn or early morning. The very
least that the hotel could have done is to call McLaughlin
and inquire whether Tan is authorized to access the
deposit box. In relation to the agreement and undertaking
executed that lease of that safety deposit box, this is again
similar to the provisions on stipulations limiting liability in
the previous cases that we had. Paragraphs (2) and (4) of
the ―undertaking‖ manifestly contravene Article 2003 of
the New Civil Code for they allow Tropicana to be released
from liability arising from any loss in the contents and/or
use of the safety deposit box for any cause whatsoever.
Remember that such provision in the contract is void for
being contrary to public policy. The hotel business like the
common carrier‘s business is imbued with public interest.
Also with regard to the effects of their guests, the SC held
that it is not necessary that they be actually delivered to the
innkeepers or their employees. It is enough that such
effects are within the hotel or inn. With greater reason
should the liability of the hotelkeeper be enforced when the
missing items are taken without the guest‘s knowledge and
consent from a safety deposit box provided by the hotel
itself.
The responsibility of the hotel-keeper shall extend to loss
of, or injury to, the personal property of the guests even if
caused by servants or employees ofthe keepers of hotels
Ateneo de Davao University
Jacinto St., Davao City
or inns as well as by strangers, except as it may proceed
from any force majeure.
In the case at bar, there is no showing that the act of the
thief or robber was done with the use of arms or through an
irresistible force to qualify the same as force majeure. With
regard to the application of Art 2002, wherein the hotel
anchors their defense, this provision presupposes that the
hotel-keeper is not guilty of concurrent negligence or has
not contributed to the loss.A depositary is not responsible
for the loss of goods by theft, unless his actionable
negligence contributes to the loss. Here Tropicana is guilty
of concurrent negligence in allowing Tan, who is not the
registered guest, to open the safety-deposit box of
McLaughlin.
This provision (Art 2003) it similar to that of the common
carrier, which does not allow a common carrier to dispense
with or limit its liability by posting notices. Such notices
(limiting liability) is obviously contrary to law and public
policy. Hotel-keepers or inn-keepers as depositary should
be subject to extraordinary degree of care as this is a
necessary deposit.
TAKE NOTE:
Hotelkeepers are liable even though the effects are not
delivered to them or their employees, but it is enough
that the effects are within the hotel or inn.
Art. 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)
Art 2004, is another instance wherein a contract of pledge
is created by law. This is given to the hotel-keepers to
compensate them for the liability imposed upon them by
law.
This is different from the general rule in commmodatum,
because the bailee can retain the thing for reason of
hidden defect.
However if you remember in your Criminal Law, the act of
not paying the hotel for accommodation constitutes estafa
and not only civil liability.
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December 9, 2015
Transcribed by: Luna Acosta
We are already done with the two kinds of extrajudicial
deposit, voluntary and necessary deposit. Now let’s go
over the second kind of deposit which is judicial deposit,
also known as sequestration.
Article 2005. A judicial deposit or sequestration takes
place when an attachment or seizure of property in
litigation is ordered.
Article 2006. Movable as well as immovable property may
be the object of sequestration.
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.
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.
A judicial deposit or sequestration takes place when an
attachment or seizure of property in litigation is ordered.
The properties here may be attached by the sheriff upon
the filing of a complaint or a receiver may be appointed by
the court to administer and preserve the property in
litigation. If it is a personal property, it may be seized by the
sheriff in actions such as replevin or manual delivery of
personal property.
Is a notice of lis pendens equivalent to a judicial deposit?
No
What is the effect of a notice of lis pendens? It serves as a
notice to third persons that the property is under litigation.
Los Banos Rural Bank vs Africa
In June 1989, the Quezon City Hall building where the
Register of Deeds was then holding office was razed by
fire, destroying some of its records/ documents among
which was the original Transfer Certificate of Title covering
a parcel of land situated in Diliman, Quezon City, and
registered in the name of Pacita Africa. The aforesaid
property was part of the conjugal property of Pacita and her
late husband Alberto Africa.
Ateneo de Davao University
Jacinto St., Davao City
On request of Pacita, respondent Macy Africa, the
common-law wife of petitioner Antonio Africa, worked for
the reconstitution of the aforesaid TCT. The same was
done and a new Transfer Certificate of Title was issued in
the name of Pacita Africa. While the reconstituted title was
in her possession, Macy allegedly forged, or caused the
forgery of, Pacitas signature on a Deed of Absolute Sale
dated December 29, 1992, purporting to transfer ownership
of the subject property to Macy. On the strength of the
forged Deed of Absolute Sale, Macy was able to cause the
issuance of the title in her name. Macy caused the
preparation of a fake title in the name of Pacita, which the
former showed to the latter to make Pacita believe that the
said title was issued in Pacita’s name.
Sometime in March 1994, petitioners discovered private
respondents fraudulent act. They likewise came to know
that the subject property was mortgaged by Macy to the
respondent bank. To protect their interests over the subject
property, petitioners lodged an action in court against Macy
and the respondent bank for Annulment of Title, Deed of
Absolute Sale and Deed of Mortgage. The respondent
bank foreclosed the subject property on June 11, 1996
without due notice to the petitioners, prompting the
petitioners to amend the complaint, this time incorporating
therein a prayer for the issuance of a temporary restraining
order and/or writ of preliminary injunction, to stop the
respondent bank from, among others, consolidating title to
the subject property.
Issue 1: Whether or not the issuance of the writ of
preliminary injunction was proper.
Ruling: Yes. Injunction is a preservative remedy aimed at
no other purpose than to protect the complainants
substantive rights and interests during the pendency of the
principal action. A preliminary injunction, as the term itself
suggests, is merely temporary, It is to be resorted to only
when there is a pressing necessity to avoid injurious
consequences that cannot be remedied under any
standard of compensation.
Moreover, injunction, like other equitable remedies,
should be issued only at the instance of a suitor who has
sufficient interest in or title to the right or the property
sought to be protected. It is proper only when the plaintiff
appears to be entitled to the relief demanded in the
complaint. In particular, the existence of the right and the
violation thereof must appear in the allegations of the
complaint and must constitute at least a prima facie
showing of a right to the final relief. Thus, there are two
requisite conditions for the issuance of a preliminary
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injunction, namely, (1) the right to be protected exists prima

facie, and (2) the acts sought to be enjoined are violative of Take note of the distinction between judicial and
that right. It must be proven that the violation sought to be extrajudicial deposit:
prevented would cause an irreparable injustice. Judicial Extra Judicial
How it By the will of the By the will of the
Further, while a clear showing of the right is happens court parties (contract)
necessary, its existence need not be conclusively Security (secure For the safekeeping
established. In fact, the evidence required to justify the the right of the of the property
issuance of a writ of preliminary injunction in the hearing party in case of a
thereon need not be conclusive or complete. The evidence favorable
need only be a sampling intended merely to give the court judgement)
an idea of the justification for the preliminary injunction, Subject matter Generally Only movable
pending the decision of the case on the merits. Thus, to be immovable property
entitled to the writ, respondents are only required to show property
that they have the ostensible right to the final relief prayed Remuneration Always onerous May be gratuitous or
for in their Complaint. subject to
compensation
Issue 2: Is a notice of lis pendens enough to protect For whom In behalf of the In behalf of the
the rights of the petitioners such that a writ of person who in depositor or third
preliminary injunction is no longer needed? judgment has a party who deposited
right
Ruling: No. A notice of lis pendens serves as an Right of return Through the Upon demand of the
announcement to the whole world that a particular real order of the court depositor
property is in litigation and as a warning that those who or when litigation
acquire an interest in the property do so at their own risk -- has ended
they gamble on the result of the litigation over it. However,
the cancellation of such notice may be ordered by the court
Article 2009. As to matters not provided for in this Code,
that has jurisdiction over it at any given time. Its
judicial sequestration shall be governed by the Rules of
continuance or removal -- like the continuance or the
Court.
removal of a preliminary attachment or injunction -- is not
contingent on the existence of a final judgment on the
action and ordinarily has no effect on the merits thereof. Judicial deposit is remedial or procedural in nature,
Thus, the notice of lis pendens does not suffice to protect therefore the Rules of Court are applicable.
herein respondents rights over the property. It does not
provide complete and ample protection. Now let’s go to the warehouse receipts law and the trust
receipts law. We will discuss this because it is still included
A notice of lis pendens is not equivalent to a judicial in the syllabus for the Bar. These two laws are special
deposit. It merely serves as an announcement to the whole credit transactions which are covered under your
world that the property in question is subject to litigation, commercial law.
and as a warning that those who have an interest in the
property do so at their own risk. RA 2137: Warehouse Receipts Law

The purpose of a judicial deposit is to maintain the status
quo ante during the litigation or to ensure the rights of the
parties to the property in case there is a favorable
judgment. It is merely auxiliary to a case pending in court.
The depositary of the sequestrated property or the property
subject of judicial deposit is the person appointed by the
court, and under Article 2008, has the obligation to take
care of the property with the diligence of a good father of
the family and may not be relieved of this responsibility
until the litigation is ended or the court so orders.
What is the purpose of Warehouse Receipts Law?
1. To regulate the status, rights, and liabilities of a person
in a warehousing contract;
2. To protect those who in good faith and for value, acquire
negotiable warehouse receipts by negotiation;
3. To render the title to and right of possession of property
stored in warehouses more easily convertible;
4. To facilitate the use of warehouse receipts as
documents of title;
5. To place greater responsibility on the warehouseman

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Jacinto St., Davao City
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What is the scope of the Warehouse Receipts Law? It An original bearer An original bearer
covers all types of warehouses whether public or private instrument will always be instrument subsequently
warehouses bonded or not bonded. However there is a considered a bearer indorsed, it becomes an
special law towards bonded warehouses (General Bonded instrument, thus can be order instrument
Warehouse Act). negotiated by mere
delivery
GBWA regulates and supervises warehouses which puts There is a concept of There is no concept of
up a bond. While the WRL, describes mutual duties and holder in due course who holder in due course In
rights of a warehouseman who issues warehouse receipts has a better title than the negotiable instruments, an
to the depositor; and covers all warehouses whether transferor originally bearer instrument,
bonded or not. can still be negotiated by
delivery even if it has been
Applicability of the WRL: it applies to warehouse receipts indorsed.
issued by a warehouseman as defined under Section 58 of
the WRL. The civil code (specifically provisions on In warehouse receipt, even if it is originally bearer, once it
documents of title) is applied to all other instances where is especially indorsed it is considered an order document or
the receipt is not issued by the warehouseman. This is in receipt.
connection to a contract of deposit wherein you deliver the
goods to a warehouse man for the purpose of security. Under Section 9 of the Negotiable Instruments Law, even if
However, a depositary is not necessarily a holder of a it is originally an order instrument, when the last or only
warehouse receipt. endorsement is an endorsement in blank, that can be
considered as a bearer instrument. We do not have the
Warehouse receipts are considered as a negotiable same rule with regard to a warehouse receipt. A bearer
document of title, as distinguished from your negotiable instrument if specially endorsed becomes an order
instruments. instrument under the WRL.

Warehouseman is a person lawfully engaged in the Sec. 2. Form of receipts; essential terms. Warehouse
business of storing goods for profit. Warehouse, on the receipts need not be in any particular form but every such
other hand, is defined as a building or place where the receipt must embody within its written or printed terms:
goods are deposited and stored for profit. (a) The location of the warehouse where the goods are
stored,
Take note of what is described as a warehouse receipt. It (b) The date of the issue of the receipt,
is a written acknowledgment by a warehouseman that he (c) The consecutive number of the receipt,
has received and holds certain goods therein described in (d) A statement whether the goods received will be
store for the person whom it is issued. As document of title delivered to the bearer, to a specified person or to a
it is provided under Art 1636. specified person or his order,
(e) The rate of storage charges,
It therefore has a threefold nature: (f) A description of the goods or of the packages containing
(1) A contract – a contract of deposit or a contract of them,
carriage (g) The signature of the warehouseman which may be
(2) Evidence of receipt of goods made by his authorized agent,
(3) Operates as a transferable document of title (h) If the receipt is issued for goods of which the
warehouseman is owner, either solely or jointly or in
What is the difference between a negotiable warehouse common with others, the fact of such ownership, and
reciept and a negotiable instrument? (i) A statement of the amount of advances made and of
liabilities incurred for which the warehouseman claims a
NIL NWR lien.
Subject matter is money Subject matter is goods
Object of value is the Object of value refers to the If the precise amount of such advances made or of such
instrument itself goods deposited liabilities incurred is, at the time of the issue of, unknown to
There are parties No parties that are the warehouseman or to his agent who issues it, a
secondarily liable secondarily liable statement of the fact that advances have been made or

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liabilities incurred and the purpose thereof is sufficient. A
warehouseman shall be liable to any person injured
thereby for all damages caused by the omission from a
negotiable receipt of any of the terms herein required.
If the goods are improperly described, it does not make the
warehouse receipt ineffective, as long as the identity of the
goods be fully established by evidence.
What is the effect of omission of these essential terms in
the warehouse receipt? The validity of the warehouse
receipt is not affected. What can happen? The
warehouseman be liable for damages. In any case, the
negotiability of the receipt will not be affected and the
contract will be converted to ordinary deposit wherein it will
be the civil code which is applicable. Just like any contract,
the warehouse receipt shall not contain stipulations that are
contrary to public policy, and laws. It also must not contain
a stipulation exempting the warehouseman from liability for
misdelivery or negligence. Any provision to that note will be
void.
Sec. 3. Form of receipts. — What terms may be inserted. A
warehouseman may insert in a receipt issued by him any
other terms and conditions provided that such terms and
conditions shall not: (a) Be contrary to the provisions of this
Act. (b) In any wise impair his obligation to exercise that
degree of care in the safekeeping of the goods entrusted to
him which is reasonably careful man would exercise in
regard to similar goods of his own.
Section 3 provides for the power of a warehouseman to
insert specific terms and conditions subject to the limitation
provided under Sec 3.
Sec. 4. Definition of non-negotiable receipt. — A receipt in
which it is stated that the goods received will be delivered
to the depositor or to any other specified person, is a non-
negotiable receipt.
Sec. 5. Definition of negotiable receipt. — A receipt in
which it is stated that the goods received will be delivered
to the bearer or to the order of any person named in such
receipt is a negotiable receipt. No provision shall be
inserted in a negotiable receipt that it is non-negotiable.
Such provision, if inserted shall be void.
There are two kinds of warehouse receipt
1. Negotiable
2. Non-negotiable
To be considered negotiable it must be indicated therein
that the goods are deliverable to bearer or order. We have
Ateneo de Davao University
Jacinto St., Davao City
here the terms of negotiability similar to negotiable
instruments. However as seen under sections 4 and 5, a
provision in the negotiable warehouse receipt that the
instrument is non-negotiable is void. The word “negotiable”
is usually printed on the face of the negotiable warehouse
receipt. The failure to mark it as negotiable however does
not necessarily render it non-negotiable. As long as it is
indicated therein or it bears the terms of negotiability,
“bearer” or “order”, it could still be considered as negotiable
document or a negotiable receipt even though it is
indicated as non-negotiable
A document is non-negotiable when it is deliverable to the
depositor or any specified person. As a general rule, it
should be stamped on its face as nonnegotiable or not
negotiable. It cannot be negotiated, but it can be
transferred or assigned. Failure to mark it as non-
negotiable shall make it negotiable if it carries the terms of
negotiability. A negotiable warehouse receipt is negotiated
by delivery if it is a bearer document. If there is a special
endorsement, it becomes an order instrument and it has to
be indorsed plus delivered for a valid negotiation.
If the warehouse receipt is non-negotiable, transferee of
the non-negotiable warehouse receipt must notify the
warehouseman of the transfer to him of such receipt.
Notice is required. Prior notice will not affect the levy of
attachment or execution. If the warehouse receipt is
negotiable, notice is not required. It is as if the
warehouseman directly issued the receipt to the person in
possession.
Obligations of a warehouseman
The warehouseman issues the warehouse receipt, take
good care of the goods and to deliver the goods to the
person lawfully entitled (taking into consideration of it is
negotiable or not). There is also a rule not to comingle the
goods even if they are of the same kind and quality, unlike
in an ordinary deposit where it is not an issue if the goods
are mixed if they are the same. There are also obligations
to ensure the goods under certain circumstances, to mark
a non-negotiable receipt as such, to mark as such the
duplicates of a warehouse receipt, to give proper notice in
case of the sale of the goods, to take out and cancel the
warehouse receipt when the goods are delivered. The
warehouseman shall not be liable for non-delivery without
surrender of the warehouse receipt. In the absence of the
warehouse receipt, you cannot demand the delivery of the
goods from the warehouseman kasi dyan siya magdepend
if whether or not you are entitled to the goods.
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What happens in the absence of the warehouse receipt,
walang duplicate and hindi talaga mahanap?
Section 14. Lost or destroyed receipts. — Where a
negotiable receipt has been lost or destroyed, a court of
competent jurisdiction may order the delivery of the goods
upon satisfactory proof of such loss or destruction and
upon the giving of a bond with sufficient sureties to be
approved by the court to protect the warehouseman from
any liability or expense, which he or any person injured by
such delivery may incur by reason of the original receipt
remaining outstanding. The court may also in its discretion
order the payment of the warehouseman's reasonable
costs and counsel fees.
Section 25. Attachment or levy upon goods for which a
negotiable receipt has been issued. If goods are delivered
to a warehouseman by the owner or by a person whose act
in conveying the title to them to a purchaser in good faith
for value would bind the owner, and a negotiable receipt is
issued for them, they can not thereafter, while in the
possession of the warehouseman, be attached by
garnishment or otherwise, or be levied upon under an
execution unless the receipt be first surrendered to the
warehouseman or its negotiation enjoined. The
warehouseman shall in no case be compelled to deliver up
the actual possession of the goods until the receipt is
surrendered to him or impounded by the court.
Goods covered by the negotiable receipt cannot be
attached or levied upon directly and creditors must resort to
attaching or levying the receipts in the hands of a debtor-
transferor. If it is in the hands of the holder, it may be free
from legal attachment or levy of transferors creditors.
Rights of a warehouseman
A warehouseman has the right to be paid, he has the right
to exercise his lien on the goods if not paid, to refuse
delivery for proper legal circumstances
Sec. 27. What claims are included in the warehouseman's
lien Subject to the provisions of section thirty, a
warehouseman shall have a lien on goods deposited or on
the proceeds thereof in his hands, for all lawful charges for
storage and preservation of the goods; also for all lawful
claims for money advanced, interest, insurance,
transportation, labor, weighing, coopering and other
charges and expenses in relation to such goods, also for all
reasonable charges and expenses for notice, and
advertisements of sale, and for sale of the goods where
default had been made in satisfying the warehouseman's
lien.
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In case the warehouseman is not paid he has the right to
exercise his lien on the goods wherein it is a form of
security on his part. Just like a pledge or mortgage, this is
for the payment of the charges, money advanced and other
expenses provided in section 27.
Sec. 30. Negotiable receipt must state charges for which
the lien is claimed. If a negotiable receipt is issued for
goods, the warehouseman shall have no lien thereon
except for charges for storage of goods subsequent to the
date of the receipt unless the receipt expressly enumerated
other charges for which a lien is claimed. In such case,
there shall be a lien for the charges enumerated so far as
they are within the terms of section twenty-seven although
the amount of the charges so enumerated is not stated in
the receipt.
Unless the charges are so specified in a negotiable receipt,
then it is understood that the warehouseman’s lien is
limited to charges for storage of the goods subsequent to
the date of receipt.
Under Section 36 the remedies available to the warehouse
man in enforcing his lien.
Sec. 36. Effect of sale. After goods have been lawfully sold
to satisfy a warehouseman's lien, or have been lawfully
sold or disposed of because of their perishable or
hazardous nature, the warehouseman shall not thereafter
be liable for failure to deliver the goods to the depositor or
owner of the goods or to a holder of the receipt given for
the goods when they were deposited, even if such receipt
be negotiable.
A warehouseman can exercise lien over the goods
deposited to him however if he remains unpaid he can
refuse to deliver the goods until the lien is satisfied.
Another remedy available to him is to cause the extra-
judicial sale of the property and apply the proceeds to the
value of the lien. This right is provided under sections 33
and 34. Another option is to file an action for the collection
of unpaid charges or by way of counterclaim he claims an
action to recover the property for him, or other such
remedies as allowed by law.
Proper negotiation under Section 41, ipso jure grants to the
holder of the warehouse receipt, not only the title of the
transferor of the goods but also the title of the depositor,
the person who actually delivered the goods to the
warehouseman. There is also a direct obligation of the
warehouseman to hold possession of the goods for him,
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the holder, without need of notice. If the warehouseman
releases the goods to a person who is not the holder of the
warehouse receipt, the warehouseman can be held liable.
Sec. 42. Rights of person to whom receipt has been
transferred. — A person to whom a receipt has been
transferred but not negotiated acquires thereby, as against
the transferor, the title of the goods subject to the terms of
any agreement with the transferor. If the receipt is non-
negotiable, such person also acquires the right to notify the
warehouseman of the transfer to him of such receipt and
thereby to acquire the direct obligation of the
warehouseman to hold possession of the goods for him
according to the terms of the receipt. Prior to the
notification of the warehouseman by the transferor or
transferee of a non-negotiable receipt, the title of the
transferee to the goods and the right to acquire the
obligation of the warehouseman may be defeated by the
levy of an attachment or execution upon the goods by a
creditor of the transferor or by a notification to the
warehouseman by the transferor or a subsequent
purchaser from the transferor of a subsequent sale of the
goods by the transferor.
If you have an order warehouse receipt, it must be
endorsed and delivered for a valid negotiation. Under
Section 42, if such order receipt is delivered without
endorsement, the mere delivery of the negotiable receipt
transfers title to the goods to the holder as against the
transferor. This also grants the holder the right to compel
transfer or to endorse the receipt but the effects of
negotiation shall take place after actual endorsement. This
is similar to the provisions of negotiable instruments.
What if the negotiable receipt has warranties?
Sec. 44. Warranties of a sale of receipt. A person who, for
value, negotiates or transfers a receipt by indorsement or
delivery, including one who assigns for value a claim
secured by a receipt, unless a contrary intention appears,
warrants: (a) That the receipt is genuine, (b) That he has a
legal right to negotiate or transfer it, (c) That he has
knowledge of no fact which would impair the validity or
worth of the receipt, and (d) That he has a right to transfer
the title to the goods and that the goods are merchantable
or fit for a particular purpose whenever such warranties
would have been implied, if the contract of the parties had
been to transfer without a receipt of the goods represented
thereby.
Warranties of sale of receipt:
1. That the receipt is genuine
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2. That the transferor has legal right to negotiate or transfer
it
3. That the transferor has no knowledge of any defect that
may impair the validity or worth of the receipt
4. The right to transfer the title to the goods and that the
goods are merchantable or fit for a particular purpose
The transferor may be held liable for breach of any of the
warranties provided.
Sec. 45. Indorser not a guarantor. — The indorsement of a
receipt shall not make the indorser liable for any failure on
the part of the warehouseman or previous indorsers of the
receipt to fulfill their respective obligations.
Indorsement of a negotiable receipt does not make an
indorser liable for the failure of the warehouseman or
previous indorsers to comply with their obligations.
Sec. 46. No warranty implied from accepting payment of a
debt. A mortgagee, pledgee, or holder for security of a
receipt who, in good faith, demands or receives payment of
the debt for which such receipt is security, whether from a
party to a draft drawn for such debt or from any other
person, shall not, by so doing, be deemed to represent or
to warrant the genuineness of such receipt or the quantity
or quality of the goods therein described.
We have a mortgagee or pledgee who subjected the goods
covered by the warehouse receipt as a security for the
payment of an obligation. A mortgagee, pledgee, or holder
for security who demands or receives payment for the debt
for which such receipt is security such receipt of payment
shall not be deemed to represent or to warrant the
genuineness of the receipt nor the quality or quantity of
goods. When the goods are delivered to the mortgagee,
pledgee, or holder for security by virtue of their right as
such, the warranties under section 46 is not applicable.
Sec. 49. Negotiation defeats vendor's lien. Where a
negotiable receipt has been issued for goods, no seller's
lien or right of stoppage in transitu shall defeat the rights of
any purchaser for value in good faith to whom such receipt
has been negotiated, whether such negotiation be prior or
subsequent to the notification to the warehouseman who
issued such receipt of the seller's claim to a lien or right of
stoppage in transitu. Nor shall the warehouseman be
obliged to deliver or justified in delivering the goods to an
unpaid seller unless the receipt is first surrendered for
cancellation.
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No seller‘s lien or right of stoppage in transitu shall defeat
the rights of any purchaser for value in good faith to whom
such receipt has been negotiated. If the goods covered in
that warehouse receipt are in the possession of the
warehouseman, the goods are still in transit, and you have
an unpaid seller, if he wants to exercise his right to
stoppage in transitu, his right to stop the goods in transit
will have to give way to the right of an innocent purchaser
for value; one who purchase the warehouse receipt from
the buyer. In stoppage in transitu under sales, the general
rule is the unpaid seller can exercise his right to stoppage
in transit and his right will prevail over that of the buyer.
The exception here is when the goods are covered by a
warehouse receipt and are validly negotiated to an
innocent purchaser for value; a purchaser who has no
knowledge that the unpaid seller has already exercised his
right to stoppage in transitu. What is important is the buyer
has in his possession the warehouse receipt, he can validly
negotiate it to another person and that person must have
no knowledge of the right to stoppage in transitu as
exercised by the unpaid seller.
With regard to levy and attachment if the warehouse
receipt is negotiable, there must be surrender of the receipt
or negotiation is enjoined or the receipt is impounded by
the court. If it is a negotiable receipt, hindi basta basta
maclaim ang goods unless you present the warehouse
receipt itself. The depositor who originally deposited the
goods actually has no title over the same unless he has the
warehouse receipt. If it has been negotiated, even if he is
the depositor, he cannot claim the goods without the
receipt. But if it is non-negotiable it can be attached with
prior notification to the warehouseman.
Trust Receipts Law
When is there liability for estafa for violation of the trust
receipts law?
When the entrustee fails to turn over the proceeds of the
sale of goods covered by the trust receipt, or when the
entrustee fails to return the goods of the trust receipt if not
disposed in accordance with the agreement of the trust
receipt.
Under section 4 of the trust receipt law trust receipt is
defined as a written document signed by the trustee in
favor of the entruster whereby the latter releases the goods
to the possession of the former upon the trustee‘s promise
to hold the said goods in trust for the entruster (the one
who delivered the goods) to sell or dispose of the goods
and to return the proceeds thereof to the extent of the
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amount owing to the entruster or to return the goods if
unsold or not otherwise disposed.
Purpose of the law:
(1) To punish dishonesty and abuse of one who tends in
the handling of money or goods to the prejudice of the
owner regardless of whether or not the latter is the owner.
(crime of estafa);
(2) To encourage and promote the use of trust receipts as
an additional and convenient aid to commerce and trade;
(3) To provide for the regulation of trust receipts
transactions in order to assure the protection of the rights
and enforcement of obligations of the parties involved
therein;
(4) To declare the misuse and/or misappropriation of goods
or proceeds realized from the sale of goods, released
under trust receipts as a criminal offense punishable under
the revised penal code.
The trust receipt need not be in any particular form
however it must substantially contain the following
essential terms:
(a) a description of the goods, value of the goods,
undertaking or a commitment of the entrustee to hold in
trust for the entruster the goods;
(b) to dispose of them in the manner provided for in the
trust receipt; and
(c) to turn over the proceeds of the sale of the goods
Generally, there is no contract of agency established
wherein you have a trust receipt. However, the entrustee‘s
breach of trust may subject him to criminal and civil liability
like for estafa.
A trust receipt is applied to items destined for sale or items
process as a component of a product ultimately sold and
manufactured and used to repair equipment used in the
business. The trust receipt law does not cover the sale of
goods, document or instruments by a person in the
business of selling goods, documents or instruments for
profit who has general property rights in such goods
documents or instruments or sells the same to the buyer on
credit retaining title and other interest as security of the
payment of the purchase price.
Trust receipt vs. consignment
There is no processing transaction if the assignment is for
the mere consignment of the goods. If you are going to
apply the trust receipts law it is more than the arrangement
of the consignor and consignee. There are similarities
because you are delivering goods to the entrustee. But if
you are going to apply the trust receipt law, again take not
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of what is the purpose therein. Because there is no trust
receipt transaction if it is for mere consignment of the
goods with the obligation on the part of the person to whom
it is delivered to release proceeds or to return if unsold.
Essentially in trust receipt you have here the seller does
not retain title to the property. In consignment you have a
transaction to consider between the consignor and
consignee wherein the consignor retains ownership over
the property.
Trust receipt vs. pledge
In a transaction covered by a trust receipt, the person
financed possesses the property, the entrustee. In pledge,
it is the financer that possesses the property or the creditor.
I trust receipt agreement there is no sale.
Trust receipt vs. Chattel mortgage
In trust receipt there is no lien stated over the property in
chattel mortgage is subject the property to a lien.
Parties to a Trust Receipt
With regard to trust receipt there are three parties, the
entruster, entrustee, and the seller. When you talk about
the entruster you have a lender or financier. He is the
person who has title over the goods, not necessarily the
owner of the goods but merely the holder of security
interest. Entrustee is the borrower, buyer, or the importer to
whom the goods are delivered for sale with the obligation
to return the proceeds of the same. The entrustee is
considered the owner of the goods purchased and the law
imposes on him the risk of loss of the goods. The seller is
not actually a party to the trust receipt contract but to the
contract of sale under the trust receipt.
Rights of an entruster:
(1) entitled to the proceeds
(2) entitled to the return of the goods if unsold
(3) as against an innocent purchaser for value the entruster
is not preferred. But as against creditors of the entrustee,
the entrustor has a preferred claim over the goods covered
by the receipt. (Section 11)
(4) the entruter has the right to transfer the trust take
possession of the goods and to sell the goods in a public
sale (Section 12)
(5) the entruster likewise has the right to purchase the
same goods at the intended public sale(Section 7)
Obligations of an entruster
(1) to give possession of the goods to the entrustee and to
give at least 5 day notice to the entrustee of the intention to
sell the goods at an intended public sale. The entrustee on
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the other hand has the right to receive the surplus in case
of a public sale as provided under section 7.
(2) To have possession of the goods as a condition for his
liability.
Obligations of the entrustee
(1) To hold the goods or the sale proceeds;
(2) To return the goods in the event of non-sale or upon
demand of the entruster;
(3) To comply with his alternative obligation to return the
proceeds or the goods. The return of the proceeds “enbre
garla”. The obligation to deliver the goods “vevol vera”.
(4) To ensure against loss of the goods
(5) To keep the goods and sale proceeds separate and
identifiable
(6) If there are other conditions provided under the trust
receipt, observe those conditions.
Letters of Credit
There are instances wherein banks would resort to
agreements like trust receipts. This letter of credit is mostly
used in international transactions. It is actually a bank to
bank transaction. It is actually easier because banks can
be trusted more than individuals, lalo na kung kilala na ang
bank.
What happens here? If you have for example X in the
Philippines who wants to purchase goods from Y in Hong
Kong, he cannot just send his payment and hope that the
goods will be delivered, there is no assurance or security
as to the agreement. On the part of Y, he cannot expect
that the goods he will send will be paid immediately by X.
What would happen is X will apply from a bank a letter of
credit. The bank will guarantee that X will actually make the
payment. It is actually like a contract of loan wherein the
bank lends X the money and X is expected to pay the
bank, but the money does not actually go to X but to Y’s
bank. Y will then send the goods. What happens next is
there will be a trust receipts agreement between X and his
bank wherein the bank will be the entruster and X will be
the entrustee. The goods will be delivered to X but there is
the expectation that the bank will be paid. The purpose of
the trust receipt was merely for security of the loan
obtained by X thru the letter of credit.
This is not strictly a trust receipts agreement, we have to
make a distinction. If X refuses to pay in this case, this
does not necessarily mean that he is liable for estafa just
like in a regular trust receipts agreement. Since this is a
mutuum or loan and the trust receipt was only issues as a
security, then there is no criminal liability for estafa, there
can only be a recovery of sum of money and damages, civil
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case lang. Kung hindi makabayad si X sa bank, the
obligation to pay did not arise from the trust receipt but
through the contract of loan. Hindi napunta ang title ng
goods sa bank, hinawakan lang nila ang title as security. In
a real trust receipts agreement, the entruster has the title to
the goods and the title is not passed to the entrustee. The
money and goods never belonged to the entrustee, what
the entrustee does is merely to hold the goods and sell
them, if unsold, return them, but not to take possession
over the goods or the money when the goods are sold.
Ipasa lang niya, hindi niya inagkin na kanya.
In cases of letters of credit and trust receipts agreements,
you have to take into consideration what the real
agreement of the parties is. Sometimes it may really be
closer to a trust receipt agreement than to a mutuum and
that will open up the possibility for estafa. You really have
to distinguish between the two possible transactions. If the
goods are held merely as a security, then it can be
considered as a simple loan. If there is an intention by the
bank or financial institution to maintain the title to the
goods, then it can be a trust receipt agreement.
As a guide you can check the case of Rosario Textile Mills
vs Home Bankers. Take into consideration the discussion
of res perit domino, wherein the same does not apply when
what you have is a real trust receipts agreement.
Rosario Textile Mills vs Home Bankers
Rosario Textile Mills Corporation (RTMC) applied from
Home Bankers Savings & Trust Co. for an Omnibus Credit
Line for P10 million. The bank approved RTMCs credit line
but for only P8 million. Yujuico signed a Surety Agreement
in favor of the bank, in which he bound himself jointly and
severally with RTMC for the payment of all RTMCs
indebtedness to the bank from 1989 to 1990. RTMC
availed of the credit line by making numerous drawdowns,
each drawdown being covered by a separate promissory
note and trust receipt. RTMC, represented by Yujuico,
executed in favor of the bank a total of eleven (11)
promissory notes.
Despite the lapse of the respective due dates under the
promissory notes and notwithstanding the banks demand
letters, RTMC failed to pay its loans. Hence the bank filed a
complaint for sum of money against RTMC and Yujuico
RTMC and Yujuico contend that they should be absolved
from liability. They claimed that although the grant of the
credit line and the execution of the suretyship agreement
are admitted, the bank gave assurance that the suretyship
agreement was merely a formality under which Yujuico will
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not be personally liable. They argue that the importation of
raw materials under the credit line was with a grant of
option to them to turn-over to the bank the imported raw
materials should these fail to meet their manufacturing
requirements. RTMC offered to make such turn-over since
the imported materials did not conform to the required
specifications. However, the bank refused to accept the
same, until the materials were destroyed by a fire which
gutted down RTMCs premises. RTMC and Yujuico contend
that under the trust receipt contracts between the
parties, they merely held the goods described therein in
trust for respondent Home Bankers Savings and Trust
Company (the bank) which owns the same. Since the
ownership of the goods remains with the bank, then it
should bear the loss. With the destruction of the goods by
fire, petitioners should have been relieved of any obligation
to pay.
Issue: Whether or not the concept of res perit domino
applies in this case
Ruling: No.
It is thus clear that the principal transaction between
petitioner RTMC and the bank is a contract of loan. RTMC
used the proceeds of this loan to purchase raw materials
from a supplier abroad. In order to secure the payment of
the loan, RTMC delivered the raw materials to the bank as
collateral. Trust receipts were executed by the parties to
evidence this security arrangement. Simply stated, the trust
receipts were mere securities.
A trust receipt as a security transaction intended to aid in
financing importers and retail dealers who do not have
sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral, of the
merchandise imported or purchased. It secures an
indebtedness and there can be no such thing as
security interest that secures no obligation.
If under the trust receipt, the bank is made to appear as the
owner, it was but an artificial expedient, more of legal
fiction than fact, for if it were really so, it could dispose of
the goods in any manner it wants, which it cannot do, just
to give consistency with purpose of the trust receipt of
giving a stronger security for the loan obtained by the
importer. To consider the bank as the true owner from
the inception of the transaction would be to disregard
the loan feature thereof...
The contract between the parties is a loan. What
respondent bank sought to collect as creditor was the loan
it granted to petitioners, not the proceeds from the sale of
the goods under a trust receipt.
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You can also read the case of Land Bank vs Lamberto
Perez:
Land Bank vs Lamberto Perez
On June 7, 1999, LBP filed a complaint for estafa against
the respondents. LBP extended a credit accommodation to
ACDC through the execution of an Omnibus Credit Line
Agreement (Agreement). In various instances, ACDC used
the Letters of Credit/Trust Receipts Facility of the
Agreement to buy construction materials. The respondents,
as officers and representatives of ACDC, executed trust
receipts in connection with the construction materials.. The
trust receipts matured, but ACDC failed to return to LBP
the proceeds of the construction projects or the
construction materials subject of the trust receipts. LBP
sent ACDC a demand letter for the payment of its debts,
including those under the Trust Receipts Facility. When
ACDC failed to comply with the demand letter, LBP filed
the complaint for estafa.
The respondents contended that the trust receipts in this
case do not contain (1) a description of the goods placed in
trust, (2) their invoice values, and (3) their maturity dates,
in violation of Section 5(a) of P.D. 115. Moreover, they
alleged that ACDC acted as a subcontractor for
government projects and its clients for the construction
projects, which were the general contractors of these
projects, have not yet paid them; thus, ACDC had yet to
receive the proceeds of the materials that were the subject
of the trust receipts and were allegedly used for these
constructions. As there were no proceeds received from
these clients, no misappropriation thereof could have taken
place.
Issue: Whether or not the transactions were trust
receipt agreements
Ruling: No.
There are two obligations in a trust receipt
transaction. The first is covered by the provision that refers
to money under the obligation to deliver it (entregarla) to
the owner of the merchandise sold. The second is covered
by the provision referring to merchandise received under
the obligation to return it (devolvera) to the owner. Thus,
under the Trust Receipts Law, intent to defraud is
presumed when (1) the entrustee fails to turn over the
proceeds of the sale of goods covered by the trust receipt
to the entruster; or (2) when the entrustee fails to return the
goods under trust, if they are not disposed of in accordance
with the terms of the trust receipts.
In all trust receipt transactions, both obligations
on the part of the trustee exist in the alternative the return
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of the proceeds of the sale or the return or recovery of the
goods, whether raw or processed. When both parties enter
into an agreement knowing that the return of the goods
subject of the trust receipt is not possible even without any
fault on the part of the trustee, it is not a trust receipt
transaction penalized under Section 13 of P.D. 115; the
only obligation actually agreed upon by the parties would
be the return of the proceeds of the sale transaction. This
transaction becomes a mere loan, where the borrower is
obligated to pay the bank the amount spent for the
purchase of the goods.
In concluding that the transaction was a loan and not a
trust receipt, we noted in that the industry or line of work
that the borrowers were engaged in was construction. We
pointed out that the borrowers were not importers acquiring
goods for resale. Indeed, goods sold in retail are often
within the custody or control of the trustee until they are
purchased. In the case of materials used in the
manufacture of finished products, these finished products if
not the raw materials or their components similarly remain
in the possession of the trustee until they are sold. But the
goods and the materials that are used for a construction
project are often placed under the control and custody of
the clients employing the contractor, who can only be
compelled to return the materials if they fail to pay the
contractor and often only after the requisite legal
proceedings. The contractors difficulty and uncertainty in
claiming these materials (or the buildings and structures
which they become part of), as soon as the bank demands
them, disqualify them from being covered by trust receipt
agreements.
Based on these premises, we cannot consider
the agreements between the parties in this case to be trust
receipt transactions because (1) from the start, the parties
were aware that ACDC could not possibly be obligated to
reconvey to LBP the materials or the end product for which
they were used; and (2) from the moment the materials
were used for the government projects, they became
public, not LBPs, property. Since these transactions are not
trust receipts, an action for estafa should not be brought
against the respondents, who are liable only for a loan.
~END OF PRELIMS COVERAGE~
“If it’s easy, it will not last; because everything that
lasts is not easy....” ☺
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