Part III

Credit Transactions
What is Credit Transaction?
 It includes all transactions involving purchase or loan of goods, services, or money in the
present with a promise to pay or deliver in the future.
 Credit transactions are contracts of security.

Two types of Credit Transactions

1. Secured Transactions or Contracts of Real security
 Those supported by a collateral or an encumbrance of property.
2. Unsecured Transactions or Contracts of Personal Security
 Those the fulfillment of which by the principal debtor is secured or supported
only by promise or personal commitment of another such as guarantor or surety.
Meaning of Security
Something given, deposited, or serving as a means to ensure fulfillment or enforcement
of an obligation of a person to another, or of protecting some interest in property.
Kinds of Security
1. Personal Security – when an individual becomes a surety or a guarantor.
2. Property or Real Security – when mortgage, pledge, antichresis, charge or lien or other
device is used to have property held, out of which the person can be compensated for
loss.
Kinds of Bailment
Defined as the delivery of property by 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.
Parties in Bailment
1. Bailor – the giver, the party who delivers the possession or custody of the thing bailed.
2. Bailee – the recipient, the party who receives the possession or custody of the thing
delivered.
Subject Matter of Bailment
 Bailment involves transfer or possession of personal or movable property.
 However transferring of land does not constitute a bailment.
  Under our law, both movable and immovable property may be the object of
commodatum.
Loan
General Provisions
Article 1933
By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it; in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall be paid, in which case the contract is simply
called a loan or mutuum.
 Commodatum is essentially gratuitous.
 Simple loan may be gratuitous or with a stipulation to pay interest.
 In commodatum, the bailor retains the ownership of the thing loaned, while in simple
loan, ownership passes to the borrower.
Definition and Characteristics of Contract of Loan
1. Real contract – the delivery of the thing is necessary for the perfection of the contract.
2. Unilateral contract – because once the subject matter has been delivered, it creates
obligations on the part of only one parties i.e. Borrower.
Cause or Consideration in a Contract of Loan
1. As to the borrower, the acquisition of the things
2. As to the lender, the right to demand its return or its equivalent
Kinds of Loan
1. Commodatum – the bailor (lender) delivers the thing to the bailee (borrower) a non-
consumable thing so that the latter may use it for a certain time and return the identical
thing.
2. Simple loan or mutuum – the lender delivers to the borrower money or other
consumable thing upon the condition that the latter shall pay the same amount of the
same kind and quality.
A thing is consumable when it is consumed in a manner appropriate to its purpose or nature.
Commodatum and Mutuum Distinguished
Commodatum Mutuum
1. Ordinarily involves non-consumable Money or other consumable
2. The ownership is retained by the The ownership is transferred to the borrower
lender
3. Essentially gratuitous May be gratuitous or onerous
 4. The borrower must return the same
thing loaned
5. May involve both personal and real
property
6. Loan for use
7. The bailor may demand the return of
the thing loaned before the expiration
of the term in case of urgent need
8. The loss is suffered by the bailor since
he is the owner
The borrower need only to pay the same
amount of the same kind and quality
Only personal property (movable)
Loan for consumption
The lender may not demand its return before
the lapse of the term agreed upon
The borrower suffers the loss

What do you mean by Precarium?

One whereby the bailor may demand the thing loaned at will.
Article 1934
An accepted promise to deliver something by way of commodatum or simple loan is binding
upon the parties, but the commodatum or simple loan itself shall not be perfected until the
deliver of the object of the contract.
What is the nature of the Contract of Loan?
Commodatum and loan are real contracts. They are perfected by the delivery of the object
loaned.
Need for delivery
To effect either commodatum or a mutuum, a delivery, either real or constructive, is
essential. This is so because unless there is a delivery, the borrower in Commodatum cannot
exercise due diligence over the thing loaned.
Consent of the Parties
 The borrower and the lender must of course consent either personally or through an
authorized agent, as in every obligation founded upon a contract.
 However, the necessary acceptance need not be actual but may be implied from
circumstances.
Consensual Contract of Future Loans
 Aside from the real contracts of Commodatum and loan, there can also be a consensual
contract created by an accepted promise to deliver something by way of Commodatum or
simple loan.
Example:
A promised to lend P1Million to B. The promise was accepted by B. This contract
(consensual) is already binding upon the parties so that if A does not fulfill his promise,
 B has the right to demand compliance thereof. But note here, that the real contract of loan
does not yet exist.
Chapter 1
Nature of Commodatum
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.
Commodatum essentially gratuitous.
Commodatum is essentially gratuitous. Hence, the contract ceases to be a commodatum if
any compensation is to be paid by the borrower who acquires the use. In such a case, there arises
a lease contract.
What is the extent of bailee’s right of use?
The right to use is limited to the thing loaned but not to its fruits unless there is a
stipulation to the contrary. As owner of the thing loaned, the bailor is naturally entitled to its
fruits.
Is commodatum similar to a donation?
Commodatum is similar to a donation in that it confers a benefit to the recipient. The
presumption is that the bailor has loaned the thing having no need therefor.
What is the purpose of the contract of Commodatum?
 The purpose of the contract of commodatum must be the use of the thing loaned “for a
certain time”.
 If the bailee is not entitled to the use of the thing, the contract may be a deposit.
Features or Characteristics of Commodatum as a Contract
1. Real (perfected by delivery)
2. Principal (can stand by itself)
3. Gratuitous (otherwise, the contract is one of lease)
4. Personal in nature (because of the trust)
Article 1936
Consumable goods may be the subject of commodatum if the purpose of the contract is
not the consumption of the object, as when it is merely for exhibition.
Article 1937
Movable or immovable property may be the object of commodatum
Subject Matter of the contract
 In commodatum, the subject matter is generally non-consumable things whether real or
personal.
 If the purpose of the contract is not the consumption of the object as when it is merely for
exhibition, consumable goods may be the subject of commodatum.
Properties that may be the subject matter of commodatum
1. Immovable property
2. Movable property
Example of Commodatum Involving Land
A borrowed B’s land so that he can erect thereon a small barong-barong to be used for the time
that A works in B’s province. If there is no rental this is a case of commodatum, but if rental is
paid, this would be a lease.
Article 1938
The bailor in commodatum need not be the owner of the thing loaned.
Is it necessary that the bailor in commodatum be the owner of the thing loaned?
 In commodatum, the bailor need not be the owner of the thing loaned since by the loan,
ownership does not pass to the borrower. Hence, a mere lessee of the thing or a
usufructuary (one entitle to the use of the thing and the fruits of property belonging to
another) may lend.
 However, the borrower or bailee himself may not lend nor lease the thing loaned to him
to a third person.
Example
Mercado, the occupant of a stall in the Batangas market, allowed Aguilar to occupy the same
gratuitously with the promise of Aguilar to return it upon demand. Aguilar claims that Mercado
has no right to demand because Mercado, being a mere lessee of the Batangas municipality had
no right to cede its occupancy in commodatum.
Answer
Mercado HAD THE RIGHT to give it in commodatum. If a lessee, by a contract of a sub-lease,
may transfer to another the enjoyment of the thing leased for a consideration, there is no reason
why he should be unable to cede gratuitously its use to the commodatory. Aguilar should return
the stall.
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.
Example of 1st paragraph
A loaned to B the former’s car by way of commodatum. If either A or B dies, the contract is
extinguished.
Example of 2nd paragraph
A loaned to B a home theater component by way of commodatum. B cannot lend or lease this to
a friend. But children of B in his household may use the same unless there is a stipulation to the
contrary. But said component cannot be used as a chair, because the nature of the thing forbids
such use.
Generally, the bailee can neither lend nor lease the object of the contract to a third person.
However, the use of the thing loaned, may extend to the members of the bailee’s household (who
are not considered third persons) EXCEPT in two (2) cases:
1. There is a stipulation to the contrary;
2. 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.
Does Bailee have the right to use the fruits?
1. As a rule, the bailee is not entitled to the fruits, otherwise the contract may be one of usufruct.
It should be noted that the right to use is distinct from the right to enjoy the fruits, since under the
law, fruits should as a rule pertain to the owner of the thing producing the fruits.
2. However, to stipulate that the bailee makes use of the fruits would not destroy the essence of
commodatum, for liberality is still the actual cause or consideration of the contract.
Example:
A is the bailee in commodatum of B’s land. Incidentally, they may stipulate that A can get some
lanzones from a lanzones tree on the land. Unless there is such stipulation, A would not be
entitled to the lanzones.
Article 1941
The bailee is obliged to pay for the ordinary expenses for the use and preservation of the
thing loaned.
Liability for ordinary expenses
 It is logical that the borrower should defray the expenses for the use and preservation of
the thing loaned for after all he acquires the use of the same, and he is supposed to return
the identical thing.
 As a rule, the borrower must take good care of the thing with the diligence of a good
father of a family
Examples
1. A borrowed an automatic Rolls Royce automobile. He repay for the gasoline, motor oil, and
expenses of greasing and spraying. He cannot ask reimbursement for these.
2. A borrowed a horse for journey. If the horse is exhausted, rest must be given to the horse;
otherwise, if A continues the journey with a tired horse, he should be responsible for the
consequences of his folly.
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 commodatum has been constituted;
3. If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;
4. If he lends or leases the thing to a third person, who is not a member of his household;
5. If, being able to save either the thing borrowed or his own thing, he chose to save the
latter.
Liability for loss due to a fortuitous event
As a rule, a debtor of a thing is not responsible for its loss through a fortuitous event. This
article gives the exceptions in a case of commodatum.
Reason for the law
a. Paragraph 1 – This amounts to bad faith or abuse of generosity considering the fact that
commodatum is gratuitous;
b. Paragraph 2 – He is guilty of a certain kind of default;
c. Paragraph 3 – Evidently, the giving of the value was made to hold the bailee liable for after all
this is not a sale, neither is ownership transferred in commodatum;
d. Paragraph 4 – This is prohibited by the law for it amounts to a violation of the personal
character of a commodatum;
e. Paragraph 5 – This amounts to an act of ingratitude and to failure to exercise due diligence,
considering the fact that commodatum is gratuitous.

Article 1943
The bailee does not answer for the deterioration of the thing loaned due only to the use
thereof and without his fault.
Liability for deterioration of thing loaned
 The parties to the contract know that the thing borrowed cannot be used without
deterioration due to ordinary wear and tear. Hence, in the absence of agreement to the
contrary, the depreciation is borne by the bailor.
 The bailee is liable if he is guilty of fault or negligence or if he devotes the thing to any
purpose different from that for which it has been loaned.
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.
Right of retention of the thing loaned
Except for a claim for damages mentioned in Article 1951, the borrower has no right to retain the
thing loaned as security for claims he has against the lender, even though they may be by reason
for extraordinary expenses.
1. Ownership remains in bailor – the borrower acquires only the use of the thing the ownership
of which remains in the lender. Furthermore, the bailee would be violating the bailor’s trust in
him to return the thing. Therefore, the law imposes upon him the obligation to return the same.
2. Only temporary use given to bailee – furthermore, the bailee would be violating the bailor’s
trust in him to return the thing as soon as the period stipulated expires or the purpose has been
accomplished. Therefore, the law imposes upon him the obligation to return the same.
Example:
A is indebted to B for P500,000. B later borrowed A’s car but refused to return it on the ground
that A owed him some money. B has no right to do this. This is so even if A had borrowed after
B had borrowed the car.
Reason for the Law:
Bailment implies a trust that as soon as the time has expired, or the purpose accomplished, the
bailed property must be restored to the bailor.
Article 1945
When there are two or more bailees to whom a thing is loaned in the same contract, they
are liable solidarily.
This is one more instance when solidary liability is imposed by law.
The law presumes that the bailor takes into account the personal integrity and responsibility of
all the bailees and that, therefore, he would not have constituted the commodatum if there were
only one bailee.
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.
Obligation to respect duration of loan
 The primary obligation of the bailor is to allow the bailee the use of the thing loaned for
the duration of the period stipulated or until the accomplishment of the purpose for which
the commodatum was constituted.
 The reason is that the bailor is bound by the terms of the contract of commodatum which
is for a certain time.
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.
Precarium defined.
 Precarium is a kind of commodatum where the bailor may demand the thing at will.
 It has been defined as 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.”
Cases when contract is precarium
In either of the two (2) cases mentioned in Article 1947, it is presumed that the use of the
thing has been granted subject to revocation by the bailor at any time. Hence, the name
precarium.
Article 1948
The bailor may demand the immediate return of the thing if the bailee commits any act of
ingratitude specified in Article 765.
What constitute acts of ingratitude under Article 765?
1. If the bailee should commit some offenses 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;
3. If the bailee unduly refuses the bailor support when the bailee is legally or morally bound to
give support to the bailor.
Article 765 is applicable because like a donation, commodatum is essentially gratuitous. The
bailee who commits any acts of ingratitude makes him unworthy of the trust reposed upon him
by the bailor.
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.
Extraordinary expenses for the PRESERVATION of the thing loaned
 It shall be borne by the bailor (e.g. expenses for repairing borrowed house damaged by a
typhoon).
 The reason is that the bailor who profits by said expenses. If they are incurred by the
bailee, the bailor must refund them provided the bailee brings the same to the knowledge
of the bailor before incurring them.
Extraordinary expenses (caused by fortuitous event) arising on the occasion of the actual
use of the thing loaned
(e.g. expenses for repairing a borrowed jeep damaged in a collision) shall be borne by the
bailor and bailee alike on a 50-50 basis. The foregoing is an equitable solution. The bailee pays
one-half (1/2) of the benefit derived from the use of the thing loaned to him and the bailor pays
the other one-half (1/2) because he is the owner, and the thing will be returned to him.
Example:
A borrowed a motorbike from B. While A was riding on it, he met an accident which greatly
damaged the bike. A was not at fault for he was driving carefully. Both A and B should share
equally in the extraordinary expenses unless there is a stipulation to the contrary.
Article 1950
If, for the purpose of making use of the thing, the bailee incurs expenses other than those
referred to in Articles 1941 and 1949, he is not entitled to reimbursement.
No obligation to assume all other expenses
All expenses other than those referred to in Arts. 1941 and 1949 “for the purpose of making use
of the thing” (e.g. borrower buys extra tire to be used as a reserve on a trip) must be shouldered
by the borrower. This is only proper since he makes use of the thing. Expenses for ostentation
are to be borne by the bailee because they are not necessary for the preservation of the thing.
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.
Liability to pay damages for known hidden flaws
The following are the requisites which must concur for the application of the above article.
1. There is a flaw or defect in the thing loaned;
2. The flaw or defect is hidden;
3. The bailor is aware thereof;
4. He does not advise the bailee of the same; and
5. The bailee suffers damages by reason of said flaw or defect.
Example
If L lends to B his car without informing the latter that its brake is not working properly. L will
be liable in case B is injured by reason thereof. The liability imposed by law is a just sanction for
the bad faith committed by L.
Reason for the law
When a person lends, he ought to confer benefit, and not to do mischief. If he does not reveal the
flaws, he is liable for his bad faith.
Example
A lent B a fisher & Paykel, the electric connections of which were defective. If although he
knows said defect, A does not inform B thereof, A will be liable in case B is injured by reason
thereof.
Right of Retention
For the damages spoken of in this Article, the bailee has the right of retention until paid
of said damages.
Nature of Flaws
It is evident that the flaws referred to in this Article are hidden defects, not obvious one.
Article 1952
The bailor cannot exempt himself from the payment of expenses or damages by
abandoning the thing to the bailee.
No right of abandonment for expenses and damages
The reason for the above rule is that the expenses and damages may exceed the value of
the thing loaned, and it would, therefore, be unfair to allow the bailor to just abandon the thing
instead of paying for said expenses and for damages.
Example
For extraordinary expenses on A’s car, B the borrower spent P125,000. A cannot exempt
himself from payment thereof by just giving B the thing borrowed.
Reason for the Law
The value of the thing borrowed might be less than the value of the expenses or damages.