Credit Transactions

By: Arnel Pineda

 Credit – the credit of a person means his ability to borrow money by virtue of the confidence or
trust respond in him by the lender that he will pay what he may promise.
- It is the trust or belief reposed by a person in another, of the latter’s ability to comply
with an obligation.

 Credit Transactions – agreements based on trust or belief of someone on the ability of another
person to comply with his obligations.
- Includes all transactions involving loans of money, goods or services extended to
another either gratuitously or onerously.

 Security – something promised or delivered to ensure the fulfillment of an obligation.

Kinds of Credit Transactions

(A) As contracts of security:

(1) Contracts of real property – supported by collateral/s or burned by an encumberance on
property such as mortgage and pledge.

(2) Contracts of personal property- contracts where performance by the principal debtor is not
supported by collateral/s but only by a promise to pay or by the personal undertaking or
commitment of another person. Examples : Surety, guaranty
- Unsecured transactions

(B) As to their existence:

(1) Principal Contracts- they can exist alone. Their existence does not depend on the existence
of another contract. Examples : commodatum, mutuum

(2) Accessory Contracts – they have to depend on another contract. Examples: Guaranty
proper, suretyship, pledge, mortgage and antichresis

(C) As to their consideration:

(1) Onerous- a contract where there is consideration or burden imposed like interest.

(2 ) Gratuitous- a contract where there is no consideration or burden imposed like commodatum

which is essentially free.

 Bailment- the delivery of a property of one person to another in trust for a specific purpose,
with a contract, express or implied, that the trust shall be faithfully executed and the property
returned or duly accounted for when the special purpose is accomplished or kept until the bailor
reclaims it.
- Generally, no fiduciary relationship is created by a bailment.

Personalities or Parties in Bailment.-

(1) Bailor- the one who gives or delivers the property bailed.
 - It is also known as comodatario or commodans.

(2) Bailee- the one who receives the things delivered or bailed.
- It is also known as comodante or commodatarius

 Letter of Credit- Trust Receipt Transaction Arrangement – a bank extend to a borrower a loan
covered by the letter of credit, with the trust receipt as a security of loan.

 Bridge Financing- to obtain funds through an interim loan, while the main loan is not yet
available.

TITLE XI – LOAN
Article 1933:

Two Kinds of Contracts of Loan:

 Contract of Commodatum- where one of the parties (bailor) delivers to another (bailee)
something not consumable so that the latter may use the same for a certain time and there
after returns it.

 Contracts of Mutuum- where money or other consumable thing is delivered by the lender to the
borrower subject to the condition that the same amount of the same kind and quality shall be
paid.

Consumable Vs. Non- consumable things

 Consumable- when it cannot be used in a manner appropriate to its nature without being
consumed. Examples: Food, firewood, gasoline

 Non- consumable- is a movable thing which can be used in a manner appropriate to its nature
without it being consumed. Examples: Car, television, radio

Fungible Vs. Non-fungible things

 Fungible- is one where the parties have agreed to allow the substitution of the things given or
delivered with an equivalent thing
 Non-fungible- is one where the parties have the intention of having the same identical thing
returned after the intended use.
Take note:
-as to whether a thing is consumable or not, depends upon the NATURE of the thing
-as to whether it is fungible or not, depends upon the INTENTION of the parties

Kinds of COMMODATUM:
(1) Precarium- where the bailor may demand the thing loaned at will under the conditions set forth
in Article 1947. The use of the thing by the bailee depends on the pleasure of the bailor.

(2) Ordinary Commodatum-where the bailor cannot just demand the return of the things at will
because there is a period agreed upon which must be respected.
Credit Vs Loan
 Credit- his ability to borrow money by virtue of the confidence or trust reposed by the lender
unto him that he will pay what he has promised
 Loan- the delivery by one party and the receipt by the other party of a given sum of money,
upon an agreement, express or implied, to repay the sum loaned, with or without interest

Loan Vs. Discount

 In discounts –interest is deducted in advance
- always on double-name paper
 In loans – interest is taken at the expiration of a credit
- On a single-name paper

Loan Vs. Rent or Lease

 Rent – the owner of the property does not lose his ownership.
- He simply loses his control over the property rented during the period of the contract
- The relation between the contractors is that of a landlord and tenant
 Loan- the thing loaned becomes the property of the obligor
- The relation between the parties is that of obligor and oblige

Take Note:
 Deposit with Interest is LOAN

 Loan with stipulation of sale of land, in case of non-payment-

EFFECT: a parcel of land would be deemed sold to the lender for the amount of the loan is VALID

Article 1934:

 When can the contracts of Commodatum and Mutuum perfected?

- They require the delivery of the objects of the obligations
- No delivery, no contract
- They cannot be perfected by mere consent because they not consensual agreements
- They are real contracts which cannot be perfected until the delivery of the object of the
contract
 A Promise to deliver
EFFECT:
- If accepted, is BINDING upon the promissory and promissee because contracts are
obligatory when all the essential requisites for their validity are present.
- No special form required for the validity of a contract of loan
- In effect, the accepted promise to deliver something by way of a future loan becomes
consensual contract
- Its non-fulfillment will justify the filing of an action for damages

COMMODATUM VS. MUTUUM

BASIS COMMODATUM MUTUUM

1. Subject matter Non-consumable thing. Same thing Money or consumable thing. The
must be returned equivalent amount of same kind
and quality is to be returned
 2. Nature Essentially gratuitous May be gratuitous or onerous (as
when interest is agreed upon)
3. Purpose It is a loan for use or temporary It is a loan for consumption
possession ( Art 1935 )
4. Kind of property Real or Personal property Only personal property
involved
5. Risk of loss Lender or bailor retains ownership Ownership transmitted to the
of the property borrower or bailee
6. Time of payment May be returnable at the end of Not returnable until the end of the
the period in case of urgent need period
7. Character of the Purely personal in character(1939) Not personal in character
contract

LOAN vs DEPOSIT

BASIS LOAN DEPOSIT

1. Purpose Lender grants the borrower the Safekeeping of the thing
use of the things loaned deposited. Generally, the
depositary cannot use the
thing deposited
2. Time of Payment Generally, borrower pays at the Depositor can demand the
end of the period return of the thing deposited
at any time
3. Applicability of compensation Compensation of credits Compensation not applicable
applicable to things deposited
4. Juridical relations Relationship is one of lender and Relationship is one of
borrower; or creditor and debtor depositor and depositary

CHAPTER 1
NATURE of COMMODATUM

Article 1935:

 Characteristics of Commodatum:
1. It is essentially gratuitous.
2. Its purpose is to transfer the temporary use of the thing loaned to the bailee.
3. The use of the thing is for a “certain time”.
4. It is a real contract because:
-it requires delivery of the object
5. It is a principal contract because:
-it does not depend upon another contract
6. It is a unilateral contract because:
-after the object had been delivered by the bailor,(lender) it creates obligations to be performed
by the bailee alone(borrower)
7. It is purely personal because:
- of the trust and belief reposed on the bailee

Take Note:
 GENERAL RULE: The bailor does not enjoy the fruits

 EXCEPTION: When there is a stipulation in the contract allowing the bailee to enjoy the fruits of
the thing loaned (Article 1940)

Article 1936:

 Subject of Commodatum
- Must be NON-CONSUMABLE
- Not to consume them
Article 1937:

 Object of Commodatum
- Both movable and immovable property

Article 1938:

 The bailor of the thing in commodatum

- Need not to be the owner of the thing
THUS : the lessee may sublease and transfer the enjoyment of the thing leased to another for a
consideration, as long as there is no prohibition for the subleasing in the contract of lease

Article 1939:

Commodatum :
 Is purely a PERSONAL CONTRACT.
 THUS, the rights and obligations arising from the same are extinguished by:
- The death of either the bailor or the bailee

 The bailee can neither lend nor lease the object of the contract to a third person exept:
- The member of the household of the bailee
 Exception to the exception:
- There is stipulation to the contrary
- The nature of the thing forbids such use
Article 1940:
 A stipulation that the bailee may make use of the fruits of the thing loaned is valid.

 The enjoyment of the fruits :

-must only be INCIDENTAL to the use of the thing
-it should not be the main cause (usufruct)
OBLIGATIONS of the BAILEE

Article 1941:

 The Bailee is obliged to:

- Pay for the ordinary expenses for the use and preservation of the thing loaned
REASON:
- The bailee is under the obligation to return the identical thing to the bailor
- Consequently, it is understood that he should take good care of the thing with the
diligence of a good father of a family
 This Article applies only:
- To ORDINARY EXPENSES

 If the expenses incurred by the bailee are EXTRAORDINARY:

- The bailor must reimburse the bailee provided that before incurring them, he first
informs the bailee about it

 If the EXTRAORDINARY expenses are incurred during the actual use of the thing:
- The bailee and the bailor shall equally bear the expenses UNLESS there is a stipulation
to the contrary

Article 1942:

 GENERAL RULE : No person shall be responsible for those events which could not be foreseen,or
which, though foreseen, were inevitable (art 1174)
 EXCEPTION : The bailee is liable for the loss of the things 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.
REASON:
- He is in bad faith
- He deviated the purpose for which the thing was borrowed.

(2) If he keeps it longer than the period stipulated or after the accomplishment of the use for
which the commodatum has been constituted.
REASON:
- He is guilty of mora or default
- Liable due to delay

(3) If the thing loaned has been delivered with appraisal of its value, unless there is stipulation
exempting the bailee from responsibility in case of a fortuitous event
REASON:
- Assessment of its value serves as an early warning

(4) If he lends or leases he thing to a third peson who is not a member of his household.
REASON:
- Violated the pure personal character of the commodatum
- Abused the trust reposed in him by the bailor
 (5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter.
REASON:
- Committed an act tantamount to ingratitude

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

Article 1943:

 GENERAL RULE: Bailee does not answer for the deterioration of the thing loaned due only:
- To the use thereof ( wear and tear)
- Without his fault
 EXCEPTION: If the deterioration is caused by:
- The fault or negligence of the bailee

Article 1944:

 GENERAL RULE : Bailee has no right to retain the thing loaned on the ground that:
- The bailor owes him something including claims for extraordinary expenses by
him(bailee)
REASON:
- Bailment implied trust that as soon as the time has expired, or the purpose
accomplished, the bailed property must be restored by the bailor

 EXCEPTION: Bailee can retain the thing loaned when claims for damages which the bailee
suffered by reason of:
- Hidden defects or flaws of the thing loaned
- He was not warned or advised by the bailor
Take Note: He has no right to sell the thing to satisfy his claims for damages

Article 1945:

 Solidary Obligation – each one of the debtors is obliged to pay the entire obligation,
- and where each one of the creditors has the right to demand from any of the debtors ,
the payment or fulfillment of the entire obligation

TWO KINDS OF SOLIDARY OBLIGATIONS

(a) Passive Solidarity- which is the solidarity on the part of the debtors
(b) Active solidarity- which is the solidarity on the part of the creditors

OBLIGATIONS 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.
  EXCEPTION to the RULE : When the bailor in the meantime, has urgent need of the thing
loaned,he may demand its :
- Return , or;
- Its temporary use
Take note:
 in case of temporary use
-the commodatum is not extinguished
- it is merely suspended
 However, if the period had already expired
-the bailor can no longer demand the return of the thing
 Damages are not recoverable by the bailee in the absence of bad faith on the part of the bailor

 If the loan is executed for illegal or immoral purpose or use, the contract is VOID.

Article 1947:

 Precarium- the bailee(borrower) is bound to return the thing upon the demand of the bailor
(lender) in any of the following circumstances:

(1) If the duration of the contract had not been stipulated;

(2) If the use to which the thing loaned should be devoted had not been also stipulated; and
(3) If the use of the thing is merely by tolerance of the owner

Article 1948:

 This applies to ORDINARY COMMODATUM

 The bailor may demand immediate return of the thing:

- If the bailee has committed acts of ingratitude

There is act of Ingratitude (Article 765):

(1) If the bailee should commit some offenses against the person, the honor or the property of the
bailor, or 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 act has been committed against the bailee
himself, his wife or children under his authority; and

(3) If the bailee unduly refuses the bailor support when the bailee is legally or morally bound to give
support to the bailor

Article 1949:

Rule in ORDINARY and EXTRAORDINARY expenses:

 Ordinary expenses for the use and preservation of the thing shall:
 - Shall be paid by the bailee or borrower
- Because he has the obligation to return the thing at the proper time and in good
condition

 Extraordinary Expenses shall be borne:

- By the bailor (lender)
- The bailor shall fully refund to the bailee
- The bailor must have been notified before the expenses were incurred
HOWEVER the requirement of notice is not necessary when:
- There is urgency in the repair of preservation to the thing loaned which means that
delay will cause imminent danger to the property.

 Extraordinary Expenses incurred by the bailee on the occasion of the actual use of the thing :
- Expenses shall be divided equally between the bailor and bailee.
REASON:
- The bailee pays one half because of the benefit derived from the use of the thing
loaned to him
- The bailor pays the other half because he is the owner of the thing and the thing will be
returned to him

Article 1950:

 The bailee is not entitled to:

-the refund of other expenses outside of those covered by Articles 1941 and 1949 incurred for
the purpose of making use of the thing
REASON:
-to prevent the bailee from incurring expenses which are not useful to the bailor
-hence, the bailor must not be compelled to make reimbursement to the bailee

Article 1951:

 If the bailor is AWARE of any defects or flaws of the thing loaned and failed to advise the bailee :
- There is tort or quasi-delict
- The bailor is liable
- The bailor is deemed to have acted in bad faith

 If the bailor is NOT AWARE of the flaws of the thing loaned:

- He cannot be liable for the resulting danger
- Because commodatum is essentially gratuitous and not onerous

 If BOTH parties are aware of the flaws or defects:

- The bailee is deemed to have assumed the risk
- The bailor is not liable for the damages suffered by the bailee

 REASON for Art 1951:

- If the person lends a thing, he ought to confer a benefit, and not to do mischief

 The bailee has the right to retain the thing loaned for damages he suffered
Article 1952:

 The bailor CANNOT EXEMPT HIMSELF from the payment of the expenses or damages by:
- Abandoning the thing to the bailee
 Renunciation of one’s right over the property is not sufficient to satisfy an obligation for
expenses incurred.

CHAPTER 2
SIMPLE LOAN OR MUTUUM

Article 1953:

 Mutuum- a contract whereby one of the parties called the lender delivers to another called the
borrower, money or other consumable thing with the condition or agreement that the same
amount of the same kind and quantity shall be paid.
 The cause in a contract of loan :
- As to the borrower : the acquisition of the thing
- As to the lender: the right to demand the return of the thing loaned or its equivalent
 Ownership of the thing is transferred:
- Borrower becomes the owner of the thing or property delivered to him

MUTUUM VS RENT

BASIS MUTUUM (Simple Loan) RENT or LEASE

1. Ownership Ownership of property is Ownership of property is not transferred
transferred to the borrower to lessee. However, possession is
temporarily relinquished to lessee for the
period of the lease contract
2. Nature Unilateral contract Bilateral Contract
3. Subject Matter Consumable thing Non-consumable
4. Juridical Relations Lender and borrower Lessor and lessee

Article 1954:

 Barter – a contract where one of the parties binds himself to give one thing to another in
consideration of the latter’s promise to give another thing.
- The transfer of an ownership of non-fungible things to a party with obligation on his
part to give things of the same kind quantity and quality to another party

LOAN VS. BARTER

BASIS LOAN BARTER

1. Subject Matter Money or other fungible things Non-fungible things
2. Nature Mutuum may be gratuitous or It is always onerous
onerous
 3. Effect While in mutuum, there is
transfer of ownership, there is
no sale
4. Return of the thing If the loan is a commodatum,
the borrower returns the things
after the expiration of the period
agreed upon
It is in effect, a mutual sale
resulting in the transfer of
ownership on both sides
The parties do not return the things
subject of the exchange

Article 1955:

FORM OF PAYMENT

 If the object is money – Payment must be made in the currency stipulated;

- otherwise it is payable in the currency which is legal tender in the Philippines.
- According to Art. 1955, Art.1250, is applicable in payments of loans.
 ART 1250 provides that in case of extraordinary inflation or devaluation, the value of the
currency at the time of the establishment of the obligation (not at the time of payment) should
be the basis for payment.

 If the object is a fungible thing other than money – Borrower must pay lender another thing of
the same kind, quality, and quantity.
 In case it is impossible to do so, the borrower shall pay its value at the time of the perfection of
the loan.

Article 1956:

This Applies to : INTEREST FOR USE OF MONEY.

 Interest- is nothing more than the compensation agreed to be paid by the borrower for the use
of the money lent to him by the lender

Classes of Interest
 Simple- which is paid for the use of the principal at a certain rate stipulated in writing by the
parties
 Compound- which is imposed upon the accrued interest that is, interest due and unpaid.
 Legal- that interest which the law directs to be paid in the absence of any agreement as to the
rate. It is fixed 6% per annum.

Requisites for Recovery of Interest:

1. The payment of interest must be expressly stipulated.

2. in writing

Stipulation of interest

1. The interest rate stipulated by the parties, not the legal rate of interest, is applicable.
 2. Default rule: If the parties do not stipulate an interest rate, the legal rate for loans and
forbearances of money is 12%.
- For other sources of obligations, such as sale, and damages arising from injury to
persons and loss of property which do not involve a loan, the legal rate of interest is 6%.

3. Increases in interest must also be expressly stipulated.

4. It is only in contracts of loan, with or without security, that interest may be stipulated and
demanded.

5. Stipulation of interest must be mutually agreed upon by the parties and may not be
unilaterally increased by only one of the parties. This would violate consensuality and
mutuality of contract (PNB v. CA).

The borrower is liable for interest even without a stipulation:

 Indemnity for damages – The debtor in delay is liable to pay legal interest as indemnity for
damages even without a stipulation for the payment of interest.
 Where to base the rate of damages:
a. Rate in the penalty clause agreed upon by the parties
b. If there is no penalty clause, additional interest based on the regular interest rate of
the loan
c. If there is no regular interest, additional interest is equivalent to the legal interest rate
(12%)

 Interest accruing from unpaid interest – Interest due shall earn interest from the time it
is judicially demanded although the obligation may be silent on this point (Art. 2212.)
If interest is payable in kind:
If interest 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.

 General Rule: Accrued interest shall not earn interest

 Exceptions:
- When judicially demanded (Art. 2212)
- Express stipulation – Also called compounding interest where the parties agree that
accrued interest shall be added to the principal and the resulting total amount shall
earninterest.
 A stipulation as to compounding interest must be in writing.

 The borrower pays interest when there is no stipulation providing for it:
- If the debtor pays unstipulated interest by mistake, he may recover, since this is a case
of solution indebiti or undue payment.
- But if the debtor voluntarily pays interest (either unstipulated or stipulated by not in
writing) because of some moral obligation, he cannot later recover. The obligation to
return the interest is a natural obligation.