1.

General Provision

Article 1933.
CONTRACT OF LOAN; defined
- A contract where one of the parties delivers to another, either:
1. 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;
2. 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.
- Characteristics of a contract of loan:
1. Real contract- delivery of the thing loaned is necessary for the perfection of the contract
because the purpose of the contract is to transfer either the use or the ownership of the
thing loaned.
2. Unilateral contract- once the subject matter has been delivered, it creates obligation on
the part of only one of the parties.
- Kinds of loan:
1. Commodatum- where the bailor delivers to the bailee a non-consumable thing so that
the latter may use for a certain time and return the identical thing.
2. Mutuum or simple loan- Where the lender delivers to the borrower money or other
consumable thing upon the condition that the latter shall pay the same amount of the
same kind and quality.

Commodatum V. Mutuum

Commodatum Mutuum
As to object
General rule: Non-consumable / Non-fungible General rule: Consumable / Fungible
Exception: If the purpose of the contract is not
the consumption of the object.
As to cause
Essentially gratuitous Generally gratuitous although it may also be
onerous for there may be stipulations of interest.
As to purpose
Use or temporary possession Consumption
As to subject matter
Any property Personal property
As to ownership of the thing
Retained by bailor Passes to the debtor
As to return of the thing
Exact thing loaned Equal amount of the same kind and quality
As to risk of loss
Bailor Debtor or bailee
As to time of return
Im case of urgent need and commission of any Upon expiration of the term only.
acts of ingratitude, even before the expiration of
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 the term.
NOTE: Both are real contracts

Article 1934.
- An accepted promise to make a future loan is a consensual contract, and therefore binding upon
the parties. However, it is only after the delivery of the subject matter, will the real contract of
loan arise.

CASES:

❶ CATHOLIC VICAR VS. CA

Facts:
Vicar who is the petitioner in this case, filed with the court an application for the registration of
title over lots 1, 2, 3 and 4 situated in Poblacion Central, Benguet, said lots being used as sites of the
Catholic Church, building, convents, high school building, school gymnasium, dormitories, social hall and
stonewalls.
Months later the heirs of Valdez and Heirs of Octaviano claimed that they have ownership over
lots 1, 2 and 3. The land registration court confirmed the registrable title of Vicar to lots 1 , 2, 3 and 4.
Upon appeal by the private respondents (heirs), the decision of the lower court was reversed and the
title for lots 2 and 3 were cancelled.
VICAR filed with the Supreme Court a petition for review on certiorari of the decision of the
Court of Appeals dismissing his  application for registration of Lots 2 and 3. During trial, the Heirs of
Octaviano presented one witness, who testified on the alleged ownership of the land in question (Lot 3)
by their predecessor-in-interest; his written demand to Vicar for the return of the land to them; and the
reasonable rentals for the use of the land at P10,000 per month. On the other hand, Vicar presented the
Register of Deeds for the Province of Benguet, Atty. Sison, who testified that the land in question is not
covered by any title in the name of Egmidio Octaviano or any of the heirs. Vicar dispensed with the
testimony of Mons. Brasseur when the heirs admitted that the witness if called to the witness stand,
would testify that Vicar has been in possession of Lot 3, for 75 years continuously and peacefully and has
constructed permanent structures thereon.

Issue:
1. Whether Vicar had been in possession of lots 2 and 3 merely as bailee borrower in commodatum, a
gratuitous loan for use.
2. Whether the failure to return the subject matter of commodatum constitutes an adverse possession
on the part of the owner

Held:
1. YES. Private respondents were able to prove that their predecessors' house was borrowed by
petitioner Vicar after the church and the convent were destroyed. They never asked for the return of the
house, but when they allowed its free use, they became bailors in commodatum and the petitioner the
bailee.

P a g e 2 | 22
2. No. The bailees’ failure to return the subject matter of commodatum to the bailor did not mean
adverse possession on the part of the borrower. The bailee held in trust the property subject matter of
commodatum.

Petitioner repudiated the trust by declaring the properties in its name for taxation purposes.
Ratio: The Court of Appeals found that petitioner Vicar did not meet the requirement of 30 years
possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10
years possession for ordinary acquisitive prescription because of the absence of just title. The appellate
court did not believe the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase
and Lot 3 was acquired also by purchase from Egmidio Octaviano by petitioner Vicar because there was
absolutely no documentary evidence to support the same and the alleged purchases were never
mentioned in the application for registration.
Ruling: WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, by
respondent Court of Appeals is AFFIRMED, with costs against petitioner.

❷ ACME SHOE, RUBBER AND PLASTIC CORPORATION v. CA

Facts:

Chua Pac, president and general manager of Acme Shoe, Rubber and Plastic Corporation,
executed a chattel mortgage in favor of Producers Bank of the Philippines, as a security for a corporate
loan in the amount of P3M. The chattel mortgage contained a clause that provided for the mortgage to
stand as security for all other obligations contracted before, during and after the constitution of the
mortgage.
The P3M was paid. Subsequently, the corporation obtained additional financial accommodations
totalling P2.7M. This was also paid on the due date. Again, the bank extended another loan to the
corporation in the amount of P1M, covered by four promissory notes. However, the corporation was
unable to pay this at maturity. Thereupon, the bank applied for an extra-judicial foreclosure of
mortgage.
For its part, the corporation filed an action for injunction with prayer for damages. The lower
court ultimately dismissed the case and ordered the extra-judicial foreclosure of mortgage. Hence, this
appeal.

Issues:
1. Whether extra-judicial foreclosure of the chattel mortgage is proper
2. If not proper, W/N the corporation is entitled to damages as a result of the extra-judicial foreclosure

Held:

Contracts of Security

Contracts of security are either personal or real. In contracts of personal security, such as a
guaranty or suretyship, the faithful performance of the obligation by the principal debtor is secured by

P a g e 3 | 22
the personal commitment of another (the guarantor or surety). In contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property -- in
pledge, the placing of movable property in the possession of the creditor; in chattel mortgage by the
execution of the corresponding and substantially in teh form prescribed by law; in real estate mortgage,
by the execution of a public instrument encumbering the real property covered thereby; and in
antichresis, by a written instrument granting to the creditor the right to receive the fruits of an
immovable property with the obligation to apply such fruits to the payment of interest, if owing, and
thereafter to the principal of his credit -- upon the essential condition that if the obligation becomes due
and the debtor defaults, then the property encumbered can be alienated for the payment of the
obligation, but that should the obligation be duly paid, then the contract is automatically extinguished
proceeding from the accessory character of the agreement. As the law so puts it, once the obligation is
complied with, then the contract of security becomes, ipso facto, null and void.

After-incurred Obligations

While a pledge, real estate mortgage, or antichresis may exceptionaly secure after-incurred
obligations so long as these future debts are accurately described, a chattel mortgage, however, can
only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in
a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can
be compelled upon, the security itself, however, does not come into existence or arise until after a
chattel mortgage agreement covered the newly contracted debt is executed either by concluding a fresh
chattel mortgage or by amending the old contract conformably with the Chattel Mortgage Law. Refusal
on the part of borrower to execute the agreement so as to cover the after-incurred obligation can
constitute as an act of default on the part of the borrower of the financing agreement wherein the
promise is written, but, of course, the remedy of foreclosure can only cover the debts extant at the time
of constitution and during the life of the chattel mortgage sought to be foreclosed.

In the case at bar, the chattel mortgage was terminated when payment for the P3M loan was
made so there was no chattel mortgage to even foreclose at the time the bank instituted the extra-
judicial foreclosure.

❸BPI INVESTMENT CORPORATION V. CA

DOCTRINE:
 A simple loan is perfected upon the delivery of the object of the contract, hence a real contract.

Facts:
 Ayala Investment and Development Corporation (AIDC), [BPIIC] granted a loan to Frank Roa for
the construction of a house on his lot in Muntinlupa for 500,000 with an interest of 16.25%. Roa
executed a mortgaged over said property to secure said loan. Subsequently, in 1980 the said property
was sold to ALS and Antonio Litonjua for 850,000. Buyers of the property assumed the500,000 and paid
cash of 350,000 to Frank Roa. However AIDC is not amenable to extend the same terms to ALS and

P a g e 4 | 22
Antonio Litonjua, instead a new loan of 500,000 at 20% interest with monthly amortization of 9,996.58
for ten years. 
In March 1981, private respondents executed a mortgage deed to effect the new stipulations
with the amortization to start on 01 May 1981. On13 August 1982, ALC and Litonjua paid Roa’s
arrearages by paying 190,601.35. Outstanding balance from the old loan was reduced to 457,204.90,
and applying the new loan of ALC and Litonjua, BPIIC returned 7,146.87 pertaining to the excess of the
proceeds of their loan against the balance of Roa’s loan. In June 1984, BPIIC moved for the foreclosure
of the mortgage on the grounds that respondents failed to pay from May 1, 1981 to June 30, 1984,
amounted toP475,585.31. On 28 February 1985, ALS and Litonjua filed a case against BPIIC, alleging that
they were not in arrears, maintaining that they should not have been made to answer for the
amortization (Roa’s arrearages) before the actual release of their loan in August and
September1982. Further they alleged that they only received 464,351.77 out of their 500,000, hence
applying legal compensation, the balance of 35,648.23 should be applied on the initial monthly
amortization. RTC ruled in favor of ALS Management and Development Corporation and Litonjua. CA
affirmed the decision of RTC

Issue:
  Whether a contract of loan is a consensual contract

Held:
No 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.
  In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on
the other, was perfected only on September 13, 1982, the date of the second release of the loan.
Following the intentions of the parties on the commencement of the monthly amortization, as found by
the Court of Appeals, private respondents’ obligation to pay commenced only on October 13, 1982, a
month after the perfection of the contract.
  We also agree with private respondents that a contract of loan involves a reciprocalobligation,
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. 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, 1982and not May 1, 1981.

❹NAVOA v. CA

P a g e 5 | 22
Facts:
Domdoma gave Olivia Navoa a loan. The first instance is when Teresita gave Olivia a diamond
ring valued at 15,000.00 which was secured by a PCIB check under the condition that if the ring was not
returned within 15 days from August 15, 1977 the ring is considered sold. Teresita attempted to deposit
the check on November 1977 but the check was not honored for lack of funds.
After this instance, there were other loans, totaling of 6 loans, of various amounts that were
extended by Teresita to Olivia, These loans were secured by PCIB checks, which were all dated to 1
month after the loan. All these checks were not honored under the same reason as the first loan.
Statement of the Case.
On 17 December 1977 private respondents filed with the Regional Trial Court of Manila an
action against petitioners for collection of various sums of money based on loans obtained by the latter.
On 3 January 1978 petitioners filed a motion to dismiss the complaint on the ground that the
complaint stated no cause of action and that plaintiffs had no capacity to sue.
The trial court dismissed the case and the motion to reconsider the dismissal was denied.
Private respondents appealed to the Court of Appeals which modified the order of dismissal "by
returning the records of this case for trial on the merits,

Issue
Was the decision of the RTC to dismiss the case due to having no cause of action valid?

Held:
No. A cause of action is the fact or combination of facts which affords a party a right to judicial
interference in his behalf. For the first loan it is a fact, that the ring was considered sold to Olivia Navoa
15 days after August 15, 1977, and even then, Olivia Navoa failed to pay the price for the ring when the
payment was due because of the check issued that was not honored. Thus it is confirmed that Teresita’s
right under the agreement was violated.
The other loans extended by Teresita to Olivia were all secured by PCIB checks. It can be
inferred that since the checks were all dated to 1 month after the loan, it follows that the loans are then
payable 1 month after they were contracted, and also these checks were dishonored by the bank for
lack of funds. Olivia and Ernesto Navoa failed to make good the checks that were issued as
payment for their obligations. The continuing refusal of Olivia and Ernesto Navoa to comply with the
demand of payment shows the existence of a cause of action.
All the loans granted to petitioners are secured by corresponding checks dated a month after
each loan was obtained. In this regard, the term security is defined as a means of ensuring the
enforcement of an obligation or of protecting some interest in property. It may be personal, as when an
individual becomes a surety or a guarantor; or a property security, as when a mortgage, pledge, charge,
lien, or other device is used to have property held, out of which the person to be made secure can be
compensated for loss. Security is something to answer for as a promissory note. That is why a secured
creditor is one who holds a security from his debtor for payment of a debt. From the allegations in the
complaint there is no other fair inference than that the loans were payable one month after they were
contracted and the checks issued by petitioners were drawn to answer for their debts to private
respondents.

P a g e 6 | 22
 The trial court erred in dismissing the case on the ground of lack of cause of action. Respondent
Court of Appeals therefore is correct in remanding the case to the trial court for the filing of an answer
by petitioners and to try the case on the merits.

❺SAURA IMPORT AND EXPORT CO. INC. v. DBP

 
DOCTRINE:
 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 delivery of the object
of the contract.

Facts:
Saura, Inc. applied to the RFC, for an industrial loan of P500,000.00 which approved by the latter
and to be secured by a mortgage. Loan documents were executed: the promissory note and the
corresponding deed of mortgage, which was duly registered. Subsequently in a meeting of RFC board to
which the President of Saura, Inc. was present, the loan was reduced to 300,000. Saura Inc. However
that the loan of 500,000 be approved. 
RFC accepted and approved the loan application subject to some conditions which Saura
admitted it could not comply with. Correspondence and negotiations came to a halt and Saura, Inc.
did not pursue further and instead requested the cancellation of mortgage and was delivered to the
President of Saura, Inc. 
Almost nine years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc.,
the latter commenced the present suit for damages, alleging failure of RFC (DBP) to comply with its
obligation to release the proceeds of the loan applied for and approved, thereby preventing the plaintiff
from completing or paying contractual commitments it had entered into, in connection with its jute mill
project.

Issues:
1. Whether there was there a perfected consensual contract?2.
2. Whether there was a real contract of loan which would warrant recovery of damages arisingout of
breach of such contract?

Held:
 1. Yes. There was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil
Code, which provides: 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 delivery of the object of the contract. There was undoubtedly offer and acceptance in this case:
the application of Saura, Inc. for a loan ofP500,000.00 was approved by resolution of the defendant, and
the corresponding mortgage was executed and registered. But this fact alone falls short of resolving the
basic claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to
recover damages.
 

P a g e 7 | 22
2.None. Evidently Saura, Inc. realized that it could not meet the conditions required by RFC, and so
wrote its letter asking that out of the loan agreed upon the sum of P67,586.09be released "for raw
materials and labor." This was a deviation from the terms laid down in Resolution No. 145 and
embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to
purposes other than those agreed upon. 
When RFC turned down the request in its letter the negotiations which had been going on for
the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position to
comply with RFC's conditions. So instead of doing so and insisting that the loan be released as agreed
upon, Saura, Inc. asked that the mortgage be cancelled. The action thus taken by both parties was in the
nature of mutual desistance — what Manresaterms "mutuo disenso" — which is a mode
of extinguishing obligations. It is a concept

❻ BONNEVIE v. CA

DOCTRINE:
 A mortgage contract does not become invalid by mere failure of debtor to get the mortgageconsiderati
on on the date the mortgage was executed. A loan is a consensual contract.

Facts:
Spouses Lozano mortgaged their property to secure the payment of a loan amounting to 75K
with private respondent Philippine Bank of Communication (PBCom). The deed of mortgage was
executed on 12-6-66, but the loan proceeeds were received only on 12-12-66.
Two days after the execution of the deed of mortgage, the spouses sold the property to the
petitioner Bonnevie for and in consideration of 100k—25K of which payable to the spouses and 75K as
payment to PBCom. Afterwhich, Bonnevie defaulted payments to PBCom prompting the latter to auction
the property after Bonnivie failed to settle despite subsequent demands, in order to recover the amount
loaned.
The latter now assails the validity of the mortgage between Lozano and Pbcom arguing that on
the day the deed was executed there was yet no principal obligation to secure as the loan of P75,000.00
was not received by the Lozano spouses, so that in the absence of a principal obligation, there is want of
consideration in the accessory contract, which consequently impairs its validity and fatally affects its
very existence.

Issue:
Was there a perfected contract of loan?

Held:
Yes. From the recitals of the mortgage deed itself, it is clearly seen that the mortgage deed was
executed for and on condition of the loan granted to the Lozano spouses. The fact that the latter did not
collect from the respondent Bank the consideration of the mortgage on the date it was executed is
immaterial. A contract of loan being a consensual contract, the herein contract of loan was perfected at
the same time the contract of mortgage was executed. The promissory note executed on December 12,

P a g e 8 | 22
1966 is only an evidence of indebtedness and does not indicate lack of consideration of the mortgage at
the time of its execution.

❼ CENTRAL BANK v. CA

Facts:
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves,
Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next
day.
The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual
installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M. Tolentino
shall use the loan proceeds solely as an additional capital to develop his other property into a
subdivision. The loan called for a lump sum of P80,000, repayable in semi-annual installments for 3 yrs,
with 12% annual interest.
After the agreement, a mere P17,000 partial release of the loan was made by the bank and
Tolentino and his wife signed a promissory note for the P17,000 at 12% annual interest payable w/in 3
yrs. An advance interest was deducted fr the partial release but this prededucted interest was refunded
to Tolentino after being informed that there was no fund yet for the release of the P63,000 balance.
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank
was suffering liquidity problems, issued Resolution No. 1049, which provides the prohibition of the bank
from making new loans and investments [except investments in government securities] excluding
extensions or renewals of already approved loans, provided that such extensions or renewals shall be
subject to review by the Superintendent of Banks, who may impose such limitations as may be
necessary to insure correction of the bank’s deficiency as soon as possible.

Issues:
Can the action of Sulpicio M. Tolentino for specific performance prosper?

Held:
In reciprocal obligations, the obligation or promise of each party is the consideration for that of
the other and when one party has performed or is ready and willing to perform his part of the contract,
the other party who has not performed or is not ready and willing to perform incurs in delay (Art. 1169
of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the obligation
of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate
mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, the
obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank’s delay in
furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the
Monetary Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited
Island Savings Bank from doing further business. Such prohibition made it legally impossible for Island
Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the Monetary

P a g e 9 | 22
Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R.A.
No. 265, which took effect on June 15, 1948, the validity of which is not in question.

❽ HERRERA V. PETRO PHIL CORP.

Facts:
On December 5, 1969, Herrera and ESSO Standard, (later substituted by Petrophil Corp.,)
entered into a lease agreement, whereby the former leased to the latter a portion of his property
for a period of 20yrs. subject to the condition that monthly rentals should be paid and there
should be an advance payment of rentals for the first eight years of the contract, to which ESSO
paid on December 31, 1969. However, ESSO deducted the amount of 101, 010.73 as interest
or discount for the eight years advance rental.
ESSO informed Herrera that there had been a mistake in the
computation of the interest and paid an additional sum of 2,182.70; thus, it was reduced to
98, 828.03. As such, Herrera sued ESSO for the sum of 98, 828.03, with interest, claiming that
this had been illegally deducted to him in violation of the Usury Law.
ESSO argued that amount deducted was not usurious interest but rather a discount
given to it for paying the rentals in advance. Judgment on the pleadings was rendered in
favor of ESSO. Thus, the matter was elevated to the SC for only questions of law was
involve.

Issue: W/N the contract between the parties is one of loan or lease.

Held:
Contract between the parties is one of lease and not of loan. It is clearly denominated
a "LEASE AGREEMENT." Nowhere in the contract is there any showing that the parties
intended a loan rather than a lease. The provision for the payment of rentals in advance
cannot be construed as a repayment of a loan because there was no grant or forbearance of
money as to constitute an indebtedness on the part of the lessor. On the contrary, the
defendant-appellee was discharging its obligation in advance by paying the eight years
rentals, and it was for this advance payment that it was getting a rebate or discount.
There is no usury in this case because no money was given by the defendant-
appellee to the plaintiff-appellant, nor did it allow him to use its money already in his
possession. There was neither loan nor forbearance but a mere discount which the plaintiff-
appellant allowed the defendant-appellee to deduct from the total payments because they
were being made in advance for eight years. The discount was in effect a reduction of the
rentals which the lessor had the right to determine, and any reduction thereof, by any
amount, would not contravene the Usury Law.
The difference between a discount and a loan or forbearance is that the former does
not have to be repaid. The loan or forbearance is subject to repayment and is therefore
governed by the laws on usury.

P a g e 10 | 22
2.) COMMODATUM

a.) Nature of Commodatum

- General rule: Bailee acquires the temporary use of the thing but not its fruits since the bailor
remains the owner. ( Art. 1935)
- Rationale: The right to use a thing is distinct from the right to enjoy the fruits. The fruits pertain
to the owner of the thing producing the fruits. ( Art. 441)
- Exception: When there is a stipulation to make use of the thing loaned. ( Art. 1940) Provided,
that the use of the fruits is merely incidental, otherwise, it is usufruct.
- Note: Such stipulation to enjoy the fruits cannot be presumed.
- Note: If the bailee is not entitled to the use of the thing, the contract is deposit. ( Art.1962)
-
 Characteristic of commodatum
1. Real- perfected by delivery
2. Principal- it can stand alone by itself
3. Gratuitous- the cause of which is the mere liberality of the benefactor.
4. Personal in nature- because of the trust.

 Kinds of commodatum
1. Ordinary commodatum= use of the thing bailee is for a certain period of time.
2. Precarium- one whereby the bailor may demand the thing loaned at will. ( Art.
1947). A contract is precarium when:
2.a The duration and purpose of the contract are not stipulated; or
2.b. The use of the thing is merely tolerated by the owner. ( Art. 1947)

 Subject Matter
- General Rule: Non-consumable goods, whether movable or immovable property.
- Exception: Consumable goods may be the subject matter of commodatum if the purpose of the
contract is not the consumption of the object. ( Art 1936)

 Bailor need not to be the owner of the thing loaned ( Art. 1938)
- It is sufficient that the bailor has:
1. Possessory interest; or
2. The right to use which he may assert against the bailee or third persons but not the
rightful owner.

 Effects of the principle that commodatum is purely personal ( Art. 1939)

1. The death of either the bailor or bailee extinguishes the contract.
a. Exception:
i. When there is a contrary stipulation that that the commodtum is
transmitted to the heirs of either or both parties; (Art. 1306)
ii. If there are two or more borrowers, the death of one does not
extinguish the contract in the absence of stipulation to the contrary.

P a g e 11 | 22
 2. The bailee can neither lend nor lease the object of the contract to a third person.
a. Exception:
i. Understanding or agreement to the contrary; and
ii. Members of the household may make use of the thing loaned.

b.) Obligation of the bailee

- Principal Obligations:
1. Take care of the thing with diligence of a goof father of a good family; and
2. Return the identical thing loaned upon expiration of the term or upon the
accomplishment of the purpose.

- Other Obligations:
1. Pay for the ordinary expenses for the use and preservation of the thing loaned. (Art.
1941)
- Reason: The bailee is supposed tp return the identical thing.
2. Liability for loss due to fortuitous event. (Art. 1942)
- General rule: He is not liable because ownership remains with the bailor.
- Exception: He is liable for loss even if it should be through a fortuitous event in
the following cases (Art. 1942):
I.) When he keeps it longer than the period stipulated, or after the
accomplishment of its use;
II.) When he lends or leases it to third persons who are not
members of his household;
III.) When the thing loaned has been delivered with appraisal of its
value unless there is a stipulation exempting the bailee from
responsibility in case of fortuitous event;
IV.) When, being able to save either the thing borrowed or his own
things, he chose to save the latter.
V.) When the bailee devoted the thing for a different use from that
agreed upon
3. Liability for deterioration due to the use of the thing; ( Art. 1943)
- General rule: Bailee is not liable
- Exception:
I.) If expressly stipulated;
II.) If guilty of fault or negligence;
III.) If he devotes the thing to any purpose different from that for which it has
been loaned;
IV.) If he uses the thing beyond the period stipulated
4. Pay for extraordinary expenses arising from the actual use of the thing, even though the
bailee acted without fault . In this case, the bailor and the bailee shall bear the expenses
equally. (Art. 1949)
5. To pay for the expenses other than those under Art. 1941 and 1949 of the civil code for
the purpose of making use of the thing. (Art. 1950)
P a g e 12 | 22
 - Reason: To effectively safeguard the rights of the bailor.

c.) Obligation of the bailor

- The following are the obligations of a bailor:
1. Respect the duration of the loan. ( Art. 1946)
- General rule: He cannot demand return before expiration of the period or
accomplishment of the use.
- Exception:
I.) In case of urgent need of the thing , he may demand its return or temporary
use;
II.) If the bailee commits any act of ingratitude.
2. Refund to the bailee extraordinary expenses incurred for the preservation of the thing,
provided that the bailee brings the same to the knowledge of the bailor before incurring
them, except when the reply to the notification cannot be awaited without danger.
(Art. 1949)
3. Be liable to the bailee for damages for known hidden flaws (Art. 1951)
- Requisites:
I.) Existence of flaw or defect;
II.) The flaw or defect is hidden;
III.) The bailor is aware thereof;
IV.) Bailor does not advise the bailee of the same; and
V.) The bailee suffers damages by reason of said flaw or defect.
- Notes:
If the above requisites concur, the bailee has the right of retention for damages.
The bailor is liable for his bad faith.
If the defect is not known to the bailor, he is not liable because commodatum is
gratuitous.

d.) Cases

❶ REPUBLIC V. BAGTAS

Facts:
Jose Bagtas borrowed from the Bureau of Animal Industry three bulls for a period of one year
for breeding purposes subject to a government charge of breeding fee of 10% of the book value of the
books. Upon the expiration of the contract, Bagtas asked for a renewal for another one year, however,
the Secretary of Agriculture and Natural Resources approved only the renewal for one bull and other
two bulls be returned.
Bagtas then wrote a letter to the Director of Animal Industry that he would pay the value of the
three bulls with a deduction of yearly depreciation. The Director advised him that the value cannot be
depreciated and asked Bagtas to either return the bulls or pay their book value. Bagtas neither paid nor
returned the bulls. The Republic then commenced an action against Bagtas ordering him to return the
bulls or pay their book value.
P a g e 13 | 22
 After hearing, the trial Court ruled in favor of the Republic, as such, the Republic moved ex parte
for a writ of execution which the court granted.
Felicidad Bagtas, the surviving spouse and administrator of Bagtas' estate, returned the two
bulls and filed a motion to quash the writ of execution since one bull cannot be returned for it was killed
by gunshot during a Huk raid. The Court denied her motion hence, this appeal certified by the Court of
Appeals because only questions of law are raised.

Issue:

Whether or not the contract entered into between Bagtas and the Republic is that of
commodatum making Bagtas not liable for the death of the bull.

Held:

A contract of commodatum is essentially gratuitous. If the breeding fee be considered

compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil Code the
lessee would be subject to the responsibilities of a possessor in bad faith because she had continued
possession of the bull after the expiry of the contract. Even if the contract be commodatum, still
Bagtas is iable because article 1942 of the Civil Code provides that a bailee in a contract of
commodatum is liable for loss of the things even if it should be through a fortuitous event if he keeps it
longer than the period stipulated or 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. The
loan of one bull was renewed for another period of one year but Bagtas kept and used the bull more
than one year where during a Huk raid it was killed by stray bullets.

Furthermore, when lent and delivered to the deceased husband of Bagtas, the bulls had each
an appraised book value. It was not stipulated that in case of loss of the bull due to fortuitous event the
late husband of the appellant would be exempt from liability.

❷REPUBLIC V. CA

Facts:

The heirs of Domingo Baloy, represented by Ricardo Baloy, filed an application for land
registration with a possessory title acquired under the provisions of the Spanish Mortgage Law. The
Court of First Instance of Zambales, denied the application thus it was interposed on appeal to the Court
of Appeals. The appellate court, thru its Fifth Division reversed the decision and approved the
application for registration. The petitioners filed their Motion for reconsideration and was denied.

A communication/letter which contains an official statement, recognizes the fact that Domingo
Baloy and/or his heirs have been in continuous possession of the said land since 1894, as attested by an
“Informacion Possessoria” Title, which was granted by the Spanish Government. And was interrupted
only by the occupation of the land by the US Navy in 1945
P a g e 14 | 22
Issues:

1. Whether or not there is a need for a court order for a private land to be deemed to have
become public land.
2. Whether or not the private respondents’ rights by virtue of their possessory information title
was lost by prescription.

Held:

The appealed decision is AFFIRMED.

Under Sec 3 Act 827. Private land could be deemed to have become public land by virtue of a
judicial declaration after due process and hearing. Without a judgement or order declaring the land to
be public, its private character and the possessory information title over it must be respected.

During the interim of 57 years from November 26, 1902 to December 17, 1959 the possessory
rights of Baloy or his heirs were merely suspended and not lost by prescription. The occupancy of the
US Navy was not in the concept of owner. It partakes of the character of a commodatum. One’s
ownership of a thing may be lost by prescription by reason of another’s possession if such possession be
under claim of ownership, not where the possession is only intended to be transient, in which case the
owner is not divested of his title, although it cannot be exercised in the meantime.

❸ MINA V. PASCUAL

 Facts:
Francisco Fontanilla and Andres Fontanilla were brothers. Francisco
Fontanilla acquired a lot. Andres, with the consent of his brother Francisco, erected a warehouse
on a part of the said lot. Both Francisco and Andres died and their children became their respective
heirs: Mina for Francisco and Pascual for Andres.
Pascual sold his share of the warehouse and lot. However, Mina opposed arguing that the lot is
hers because her predecessor (Francisco) never parted with the ownership of the lot when he let Andres
construct a warehouse, hence, it was a contract of commodatum.
Issue: 
Whether the nature of the contract of Francisco and Andres is commodatum.
Held:
The Supreme Court held that it was NOT a commodatum. It is an essential feature
of commodatum that the use of the thing belonging to another shall be for a certain period. The
parties never fixed a definite period during which Andres could use the lot and afterwards return it.

P a g e 15 | 22
❹ PAJUYO V. CA

Facts:
Pajuyo entrusted a house to Guevara for the latter's use provided he should return the same
upon demand and with the condition that Guevara should be responsible of the maintenance of the
property. Upon demand Guevara refused to return the property to Pajuyo. The petitioner then filed an
ejectment case against Guevara with the MTC who ruled in favor of the petitioner. On appeal with the
CA, the appellate court reversed the judgment of the lower court on the ground that both parties are
illegal settlers on the property thus have no legal right so that the Court should leave the present
situation with respect to possession of the property as it is, and ruling further that the contractual
relationship of Pajuyo and Guevara was that of a commodatum.

Issue:
Is the contractual relationship of Pajuyo and Guevara that of a commodatum?

Held:
No. The Court of Appeals’ theory that the Kasunduan is one of commodatum is devoid of merit.
In a contract of commodatum, one of the parties delivers to another something not consumable so that
the latter may use the same for a certain time and return it. An essential feature of commodatum is that
it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is for a
certain period. Thus, the bailor cannot demand the return of the thing loaned until after expiration of
the period stipulated, or after accomplishment of the use for which the commodatum is constituted.
If the bailor should have urgent need of the thing, he may demand its return for temporary use.
If the use of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in
which case the contractual relation is called a precarium. Under the Civil Code, precarium is a kind of
commodatum.
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not
essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to
maintain the property in good condition. The imposition of this obligation makes the Kasunduan a
contract different from a commodatum.
The effects of the Kasunduan are also different from that of a commodatum. Case law on
ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant
relationship where the withdrawal of permission would result in the termination of the lease. The
tenant’s withholding of the property would then be unlawful.

❺ PRODUCERS BANK V. CA

Facts:

Vives (will be the creditor in this case) was asked by his friend Sanchez to help the latter’s friend,
Doronilla (will be the debtor in this case) in incorporating Doronilla’s business “Strela”. This “help”
basically involved Vives depositing a certain amount of money in Strela’s bank account for purposes of
incorporation (rationale: Doronilla had to show that he had sufficient funds for incorporation). This
amount shall later be returned to Vives.
P a g e 16 | 22
 Relying on the assurances and representations of Sanchez and Doronilla, Vives issued a check of
P200,00 in favor of Strela and deposited the same into Strela’s newly-opened bank account (the
passbook was given to the wife of Vives and the passbook had an instruction that no
withdrawals/deposits will be allowed unless the passbook is presented).

Later on, Vives learned that Strela was no longer holding office in the address previously given
to him. He later found out that the funds had already been withdrawn leaving only a balance of P90,000.
The Vives spouses tried to withdraw the amount, but it was unable to since the balance had to answer
for certain postdated checks issued by Doronilla.

Doronilla made various tenders of check in favor of Vives in order to pay his debt. All of which
were dishonored.

Hence, Vives filed an action for recovery of sum against Doronilla, Sanchez, Dumagpi and
Producer’s Bank. The trial court and Court of appeals both ruled in favor of Vives.

Issues:

1. Whether the transaction is a commodatum or a mutuum.

2. Whether the fact that there is an additional P 12,000 (allegedly representing interest) in the
amount to be returned to Vives converts the transaction from commodatum to mutuum.
3. WON Producer’s Bank is solidarily liable to Vives, considering that it was not privy to the
transaction between Vives and Doronilla.

Held:

The transaction is a commodatum. Civil code Art. 1933, a provision distinguishing between the
two kinds of loans, seem to imply that if the subject of the contract is a consummable thing, such as
money, the contract would be a mutuum. However, there are instances when a commodatum may have
for its object a consummable thing. Such can be found in CC 1936 which states that “consummable
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”. In this case, the intention of the parties was merely for
exhibition. Vives agreed to deposit his money in Strela’s account specifically for purpose of making it
appear that Streal had sufficient capitalization for incorporation, with the promise that the amount
should be returned withing 30 days.

CC 1935 states that “the bailee in commodatum acquires the use of the thing loaned but not its fruits”.
In this case, the additional P 12,000 corresponds to the fruits of the lending of the P 200,000.

Atienza, the Branch Manager of Producer’s Bank, allowed the withdrawals on the account of
Strela despite the rule written in the passbook that neither a deposit, nor a withdrawal will be permitted
except upon the production of the passbook (recall in this case that the passbook was in the possession
of the wife of Vives all along). Hence, this only proves to show that Atienza allowed the withdrawals
because he was party to Doronilla’s scheme of defrauding Vives. By virtue of CC 2180, PNB, as
employer, is held primarily and solidarily liable for damages caused by their employees acting within the
scope of their assigned tasks. Atienza’s acts, in helpong Doronilla, a customer of the bank, were
obviously done in furtherance of the business of the bank, even though in the process, Atienza violated
some rules.

P a g e 17 | 22
❻ QUINTOS V. BECK

Facts:

Quintos and Beck entered into a contract of lease, whereby the latter occupied the former’s
house. On January 14, 1936, the contract of lease was novated, wherein the Quintos gratuitously
granted to Beck the use of the furniture, subject to the condition that Beck should return the furniture
to Quintos upon demand. Thereafter, Quintos sold the property to Maria and Rosario Lopez. Beck was
notified of the conveyance and given him 60 days to vacate the premises. IN addition, Quintos required
Beck to returnall the furniture. Beck refused to return 3 gas heaters and 4 electric lamps since he would
use them until the lease was due to expire. Quintos refused to get the furniture since Beck had declined
to return all of them. Beck deposited all the furniture belonging to Quintos to the sheriff.

Issue:

Whether Beck complied with his obligation of returning the furniture to Quintos when it
deposited the furniture to the sheriff.

Ruling:

The contract entered into between the parties is one of commadatum, because under it the
plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the
ownership thereof; by this contract the defendant bound himself to return the furniture to the plaintiff,
upon the latter’s demand. The obligation voluntarily assumed by the defendant to return the furniture
upon the plaintiff's demand, means that he should return all of them to the plaintiff at the latter's
residence or house.

The defendant did not comply with this obligation when he merely placed them at the disposal
of the plaintiff, retaining for his benefit the three gas heaters and the four electric lamps. As the
defendant had voluntarily undertaken to return all the furniture to the plaintiff, upon the latter's
demand, the Court could not legally compel her to bear the expenses occasioned by the deposit of the
furniture at the defendant's behest. The latter, as 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 three gas heaters and the four electric lamps.

❼ GARCIA V. THIO

Facts:

            Respondent Thio received from petitioner Garcia two crossed checks which amount to
US$100,000 and US$500,000, respectively, payable to the order of Marilou Santiago. According to
petitioner, respondent failed to pay the principal amounts of the loans when they fell due and so she
filed a complaint for sum of money and damages with the RTC. Respondent denied that she contracted
the two loans and countered that it was Marilou Satiago to whom petitioner lent the money. She
claimed she was merely asked y petitioner to give the checks to Santiago. She issued the checks for

P a g e 18 | 22
P76,000 and P20,000 not as payment of interest but to accommodate petitioner’s request that
respondent use her own checks instead of Santiago’s.

            RTC ruled in favor of petitioner. CA reversed RTC and ruled that there was no contract of loan
between the parties.

Issue:

1. Whether or not there was a contract of loan between petitioner and respondent.

2. Who borrowed money from petitioner, the respondent or Marilou Santiago?

Held:

1.) The Court held in the affirmative. A loan is a real contract, not consensual, and as such I perfected
only upon the delivery of the object of the contract. Upon delivery of the contract of loan (in this case
the money received by the debtor when the checks were encashed) the debtor acquires ownership of
such money or loan proceeds and is bound to pay the creditor an equal amount. It is undisputed that
the checks were delivered to respondent.

2.) However, the checks were crossed and payable not to the order of the respondent but to the order
of a certain Marilou Santiago. Delivery is the act by which the res or substance is thereof placed within
the actual or constructive possession or control of another. Although respondent did not physically
receive the proceeds of the checks, these instruments were placed in her control and possession under
an arrangement whereby she actually re-lent the amount to Santiago.

Petition granted; judgment and resolution reversed and set aside.

❽ SPOUSES ABELLA V. SPOUSES ABELLA

Facts:

In their Complaint, petitioners alleged that respondents obtained a loan from them in the
amount of P500,000.00. The loan was evidenced by an acknowledgment receipt dated March 22, 1999
and was payable within one (1) year. Petitioners added that respondents were able to pay a... total of
P200,000.00—P100,000.00 paid on two separate occasions—leaving an unpaid balance of P300,000.00.

Respondents alleged that the amount involved did not pertain to a loan they obtained from
petitioners but was part of the capital for a joint venture involving the lending of money. Respondents
further alleged that the one year averred by petitioners was not a deadline for payment but the term
within which they were to return the money placed by petitioners should the joint venture prove to be
not lucrative.

P a g e 19 | 22
 They claimed that the entire amount of P500,000.00 was disposed of in accordance with their
agreed terms and... conditions and that petitioners terminated the joint venture, prompting them to
collect from the joint venture's borrowers. They were, however, able to collect only to the extent of
P200,000.00; hence, the P300,000.00 balance remained unpaid.

The Court of Appeals noted that while the acknowledgement receipt showed that interest was
to be charged, no particular interest rate was specified at the time respondents were making interest
payments of 2.5% per month, these interest payments were invalid for not being properly stipulated by
the parties.

Noted that interest in the concept of actual or compensatory damages accrues only from the
time that demand (whether judicial or extrajudicial) is made. It reasoned that since respondents
received petitioners' demand letter only on July 12, 2002, any interest in the concept of actual or
compensatory damages due should be reckoned only from then. Thus, the payments for the 2.5%
monthly interest made after the perfection of the loan in 1999 but before the demand was made in
2002 were invalid.

Petitioners insist that respondents' consistent payment of interest in the year following the
perfection of the loan showed that interest at 2.5% per month was properly agreed upon despite its not
having been expressly stated in the acknowledgment receipt. They add that during the proceedings
before the Regional Trial Court, respondents admitted that interest was due on the loan. Respondents
entered into a simple loan or mutuum, rather than a joint venture, with petitioners.

This is to acknowledge receipt of the Amount of Five Hundred Thousand (P500,000.00) Pesos
from Mrs. Alma R. Abella, payable within one (1) year from date hereof with interest.

Issue::

Whether interest accrued on respondents' loan from petitioners, If so, at what rate?

Held:

As noted by the Court of Appeals and the Regional Trial Court, respondents entered into a
simple loan or mutuum, rather than a joint venture, with petitioners.

Respondents' claims, as articulated in their testimonies before the trial court, cannot prevail
over the clear terms of the document attesting to the relation of the parties. "If the terms of a contract
are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control."

Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual
relation is one of simple loan or mutuum:

Art. 1933. By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that the

P a g e 20 | 22
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.

Art. 1953. A person who receives a loan of money or any other fungible thing acquires the
ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.
(Emphasis supplied)

The text of the acknowledgment receipt is uncomplicated and straightforward. It attests to: first,
respondents' receipt of the sum of P500,000.00 from petitioner Alma Abella; second, respondents' duty
to pay tack this amount within one (1) year from March 22, 1999; and third, respondents' duty to pay
interest. Consistent with what typifies a simple loan, petitioners delivered to respondents with the
corresponding condition that respondents shall pay the same amount to petitioners within one (1) year.

❾ PRODUCER BANK OF THE PHILIPPINES V. CA (2003)

Facts:
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend
Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his business,
the Sterela Marketing and Services (“Sterela” for brevity).  Specifically, Sanchez asked private
respondent to deposit in a bank a certain amount of money in the bank account of Sterela for purposes
of its incorporation.  She assured private respondent that he could withdraw his money from said
account within a month’s time. With this, Mrs. Vivies, Sanchez and a certain Estrella Dumagpi, secretary
of Doronilla, went to the bank to open an account with Mrs. Vives and Sanchez as signatories. A
passbook was then issued to Mrs. Vives. Subsequently, private respondent learned that part of the
money was withdrawn without presentment of the passbook as it was his wife got hold of such. Mrs.
Vives could not also withdraw said remaining amount because it had to answer for some postdated
checks issued by Doronilla who opened a current account for Sterela and authorized the bank to debit
savings.
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla
for the return of his client’s money.  Doronilla issued another check for P212,000.00 in private
respondent’s favor but the check was again dishonored for insufficiency of funds.

Private respondent instituted an action for recovery of sum of money in the Regional Trial Court
(RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner.  The RTC ruled in favor
of the private respondent which was also affirmed in toto by the CA. Hence this petition.

P a g e 21 | 22
Issue: 

Whether the transaction between Doronilla and respondent Vives was a simple loan?

Held:

No. A circumspect examination of the records reveals that the transaction between them was a
commodatum.  Article 1933 of the Civil Code distinguishes between the two kinds of loans in this wise:

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.

The foregoing provision seems to imply that if the subject of the contract is a consumable thing,
such as money, the contract would be a mutuum.  However, there are some instances where a
commodatum may have for its object a consumable thing.  Article 1936 of the Civil Code provides:

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.

Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of
the parties is to lend consumable goods and to have the very same goods returned at the end of the
period agreed upon, the loan is a commodatum and not a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract. In case of doubt, the contemporaneous and subsequent
acts of the parties shall be considered in such determination.

P a g e 22 | 22