4.
The possession of the bailee is for a specific
CREDIT TRANSACTIONS
Credit – a person’s liability to borrow money by
virtue of confidence/trust reposed in him by the
lender that he will pay what he may promise
Credit transaction – agreement based on trust or
belief of someone on the ability of another person
to comply w/ his obligations
Credit transactions include all transactions
involving loans of:
1. Goods
2. Services
3. Money extended to another either gratuitously or
onerously w/ a promise to pay or deliver in the
future
Types of Credit Transactions
1. Secured transactions or contracts of real security –
supported by a collateral or an encumbrance of
property or some other security intended to secure
the fulfillment of the principal obligation
2. Unsecured transactions or contracts of personal
security – the fulfillment of w/c by the principal
debtor is secured or supported only by a promise to
pay or the personal commitment of the debtor
Security
Security – something given, deposited, or serving
as a means to ensure the fulfillment or enforcement
of an obligation or of protecting some interest in
property
2 types of security
1. Personal security – as when an individual becomes
a surety or guarantor
2. Real security – as when a mortgage, pledge,
antichresis, charge or lien or other device used to
have property held, out of w/c the person to be
made secure can be compensated for loss
Bailment
Bailment – the delivery of property of one person to
another in trust for a specific purpose, w/ a contract
express or implied that the trust shall be faithfully
executed & the property returned or duly accounted
for when the special purpose is accomplished/kept
until the bailor reclaims it
Parties to a 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 thus delivered
Elements of a bailment
1. The bailor retains title of the personal property
2. The possession/temporary control of the property is
delivered/transferred
3. The bailee accepts possession of the property
purpose
5. The parties intend that the identical property will be
returned to the bailor at the end of the bailment
unless the bailor directs that it be given to another
person or its disposal by the bailee
Notes on bailment
- Involves the transfer or possession of personal or
movable property
- There is no requirement that the agreement be in
writing
- It doesn’t necessarily mean that an agreement is
always necessary to create bailment
Kinds of bailment
1. Those for the sole benefit of the bailor
2. Those for the sole benefit of the bailee
3. Those for the benefit of both parties
a. Bailments of mere keeping
b. Bailments of carriage
c. Bailments of goods delivered to another to do work
upon
d. Bailments of goods delivered to another to work
with
e. Bailments for security
f. Bailments of vendor in possession after sale
4. Fortuitous bailments
Kinds of bailment for hire
Bailment for hire – when goods are left with the
bailee for some use/service by him & is always for
some compensation
1. Hire of things – where goods are delivered for the
temporary use of the hirer
2. Hire of service – where goods are delivered for
some work upon it by the bailee
3. Hire for carriage of goods – goods are delivered
either to a common carrier or to a private person for
the purpose of being carried from place to place
4. Hire of custody – goods are delivered for storage
LOAN
Loan – a contract by w/c 1 of the parties delivers to
another, either something not consumable so that
the latter may use it for a certain time & return it, in
w/c case it is called a commodatum, or money or
some other consumable thing upon the condition
that the same amount of the same kind & quality
shall be paid, in w/c case it is called a mutuum (Art.
1933)
Characteristics of a loan:
- Real contract
o Delivery is essential for perfection of the contract of
loan
o An accepted promise to loan is nevertheless
binding, it being a consensual contract
- Unilateral contract
o Creates obligations on only one party
 o The cause is, as to the borrower, the acquisition of Exception: when there is stipulation to the contrary
the thing, & as to the lender, the right to demand (Art. 1940). In cases where there is such a
its return or its equivalent stipulation, enjoyment of the fruits must be
incidental to the use of the thing itself. Otherwise, if
Kinds of Loan: the use of the fruits is the main cause, the contract
Commodatum Mutuum may be one of usufruct. (Art. 562)
Ordinarily involves Involves money or Notes on Commodatum:
something not other consumable thing
consumable* (Art. - The effect of an accepted promise to deliver by way
1936) of commodatum or mutuum is that it is binding
Ownership of the thing Ownership is upon the parties, but the contract of loan shall not
loaned is retained by transferred to the be perfected until delivery of the contract (Art.
the lender (Art. 1933) borrower 1934)
Essentially gratuitous May be gratuitous or it - The purpose must be the temporary use of the
(Art. 1933) may be onerous
thing loaned. It bailee is not entitled to use the
Borrower must return Borrower need only
thing, the contract may be a deposit.
the same thing loaned pay the same amount
(Art. 1933) of the same kind & - The bailor may be anyone. The bailor need not be
quality the owner of the thing loaned. (Art. 1938)
May involve real or Refers only to personal o But the bailee himself may not lend or lease the
personal property (Art. property thing loaned to him to a 3rd person (Art. 1939[2])
1937)
General rule: commodatum is purely personal in
Loan for use or Loan for consumption
temporary possession character (Art. 1939) such that:
(Art. 1935) 1. Death of either party extinguishes the contract
Bailor may demand the Lender may not 2. Bailee can neither lend nor lease the thing lent to
return of the thing demand its return
him to a 3rd person
loaned before the before the lapse of the
expiration of the term in term agreed upon Exception: members of the bailee’s household may
case of urgent need make use of the thing loaned
(Art. 1946)
Bailor suffers the loss Borrower suffers the Exception to the exception: bailee’s household may
of the subject matter loss even if cause by a NOT use it when:
since he is the owner fortuitous event & he is
(Art. 1942; Art. 1174) not, therefore, 1. There is stipulation to the contrary
discharged from his 2. The nature of the thing forbids such use
duty to pay
Not purely personal in Purely personal in
Extinguishment of the contract
character character 1. The expiration of the stipulated period or
accomplishment of the use of the thing (Art. 1933)
- A thing is consumable when it is used in a manner 2. Return by the bailee of the thing after demand by
appropriate to its purpose of nature (Art. 418). the bailor if the bailor has urgent need of the thing
- General rule: if the subject of the contract is a (Art. 1946)
consumable thing, the contract would be a mutuum 3. The return of the thing, in case of a precarium or if
o Exception: consumable goods may be the subject bailee commits any act of ingratitude (Arts. 1947-
of commodatum if the purpose of the contract is 1948)
not consumption as when it is merely for 4. Loss of the thing
exhibition (Art. 1936) 5. Death of either the bailor or bailee

Obligations of the bailee

Commodatum
2 kinds of commodatum
1. Ordinary commodatum (Art. 1933)
2. Precarium – the bailor may demand the thing
loaned at will; exists in cases where:
a. Neither the duration of the contract nor the use to
w/c the thing loaned should be devoted has been
stipulated
b. If the use of the thing is merely tolerated by the
owner (Art. 1947)
General rule: in a commodatum, the right to use is
limited to the thing loaned, & not to its frutis
1. Pay for the ordinary expenses for the use &
preservation of the thing loaned (Art. 1941)
2. Take good care of the thing with the diligence of a
good father of a family (Art. 1163)
3. Liability for loss, even if loss through fortuitous
event, in certain circumstance (Art. 1942)
4. Liability for deterioration of the thing loaned, except
under certain circumstances (Art. 1943)
5. Return the thing upon expiration of the term or
upon demand in case of urgent need
6. Solidary obligation where there are 2 or more
bailees to whom the thing was loaned in the same
contract (Art. 1945)
 General rule: bailee isn’t liable for loss/damage due
to a fortuitous event (Art. 1174) since the bailor
retains ownership of the thing
Exception: bailee is liable even for loss due to
fortuitous event (Art. 1942) when:
1. He devotes the thing to any purpose different from
that for which it is loaned
2. He keeps it longer than the period stipulated or
after the accomplishment of the use for w/c the
commodatum has been constituted
3. The thing loaned has been delivered w/ appraisal of
its value, unless there is stipulation exempting the
bailee from responsibility in case of a fortuitous
event
4. He lends or leases the thing to a 3rd person who is
not a member of this household
5. Being able to save either the thing borrowed or his
own thing, he chose to save the latter.
General rule: bailee is liable for deterioration of the
thing loaned
Exception: the deterioration is due only to the use
thereof & w/o his fault (Art. 1943)
General rule: bailee has no right of retention of the
thing loaned, on the ground that the bailor owes
him something.
Exception: bailee has right of retention for damages
for known hidden flaws mentioned in Art. 1951 (Art.
1944)
Requisites for application of Art. 1951
1. There is a flaw/defect in the thing loaned
2. The flaw/defect is hidden
3. The bailor is aware thereof
4. He doesn’t advise the bailee of the same
5. The bailee suffers damages by reason of said
flaw/defect
Obligations of the bailor
1. To allow the bailee the use of the thing loaned for
the duration of period stipulated or until the
accomplishment of the purpose for w/c the
commodatum was constituted.
a. Exceptions:
i. Urgent need during w/c time the commodatum is
suspended (Art. 1946)
ii. Precarium (Art. 1947)
1. If duration hasn’t been stipulated
2. If use/purpose hasn’t been stipulated
3. If use is merely tolerated by the bailor
iii. Bailee commits an act of ingratitude specified in
Art. 765 (Art. 1948):
1. Commission of offenses against the person,
honor or property of bailor, or of wife/children
under his parental authority
2. Imputing 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/children under his parental authority
3. Undue refusal to give the bailor support when
the bailee is legally or morally bound to
b. Note: Art. 765 is applicable because commodatum
is essentially gratuitous (Art. 1933[2])
2. To refund the extraordinary expenses for the
preservation of the thing loaned provided bailor is
notified before the expenses were incurred (Art.
1949)
a. Exception: urgent need hence no notice is
necessary
3. To refund 50% of the extraordinary expenses
arising from the actual use of bailee of the thing
loaned (Art. 1949)
a. Exception: contrary stipulation
4. To pay damages to bailee for known hidden flaws
in the thing loaned
Note: bailor has no right of abandonment; he can’t
exempt himself from payment of expenses to bailee
by abandoning the thing to the latter (Art. 1952)
Summary of rules on expenses (Art. 1950)
1. Ordinary expenses for use of the thing – bailee (Art.
1941)
2. Ordinary expenses for the preservation – bailee
(Arts. 1941; 1949)
3. Extraordinary expenses for the preservation –
bailor (Art. 1949)
4. Extraordinary expenses arising from the actual use
of the thing – equally by bailor & bailee (Art. 1949)
5. Other expenses for the use of the thing – bailee
(Art. 1950)
Mutuum or Simple Loan
Mutuum – a contract by w/c a person/creditor
delivers to another/debtor money/other consumable
thing w/ the understanding that the same amount of
the same kind & quality shall be paid (Art. 1953)
Mutuum vs Lease
Mutuum Lease
Object is money or any Object may be any
consumable (fungible) thing, whether movable
thing or immovable, fungible
or non-fungible
Thing loaned becomes Owner doesn’t lose his
property of debtor right to ownership
Relationship created is Relationship created is
that of debtor & creditor landlord & tenant or
lessor & lessee
Mutuum & Commodatum vs. Barter
1. Mutuum – subject matter is money or any other
fungible thing; barter – non-fungible things
2. Commodatum – bailee is bound to return the
identical thing borrowed; barter – equivalent thing is
given in return for what has been received
3. Mutuum may be gratuitous & commodatum is
always gratuitous. Barter is onerous
 Barter – contract whereby one of the parties binds
himself to give one thing in consideration of the
other’s promise to give another thing (Art. 1968)
Characteristics of mutuum:
1. Real – delivery is necessary for the perfection
2. Unilateral – once the subject matter has been
delivered, it creates obligation on the part of only
one of the parties
3. Nominate
4. Principal – existence isn’t depended on another
contract
5. Informal – no form is generally required
6. Gratuitous – if no stipulation to pay interest;
onerous – if there is a stipulation to pay interest
Obligations of the borrower:
1. Pay the lender an equal amount of the same kind &
quality (Art. 1953)
2. Pay interest if expressly stipulated in writing (Art.
1956)
Fungible things – those w/c are usually dealt w/ by
number, weight, or measure so that any given unit
or portion is treated as the equivalent of any other
unit or portion
Consumable vs. Fungible
- Whether a thing is consumable or not depends on
its nature & whether it is fungible or not depends on
the intention of the parties
- Thus, while wine is consumable by its nature, it’s
non-fungible if the intention is merely for display or
exhibition.
INTEREST
Interest – the compensation allowed by law or fixed
by the parties for the loan/forbearance of money,
goods, or credits
Kinds of Interest
1. Simple interest – paid for the principal at a certain
rate fixed/stipulated by the parties
2. Compound interest – that w/c is imposed upon
interest due & unpaid
3. Legal interest – that w/c the law directs to be
charged in the absence of any agreement as to the
rate between the parties
4. Lawful interest – that w/c the laws allow/don’t
prohibit
5. Unlawful/usurious interest – paid or stipulated to be
paid beyond the maximum fixed by law. However,
by virtue of CB Circular No. 905, usury has become
“legally inexistent”
When is compound interest allowed?
1. When there is an express written stipulation to that
effect (Art. 1959)
2. Upon judicial demand. However, debtor isn’t liable
to pay compound interest even after judicial
demand when there is no stipulation for payment of
interest. (Art. 2212)
Requisites for interest to be chargeable
1. Payment must be expressly stipulated
2. Agreement to pay must be in writing (Art. 1956)
3. Must be lawful
Exceptions to requisite of express stipulation
1. Debtor in delay is liable to pay legal interest (6% or
12%) as indemnity for damages (Art. 2209)
2. Interest accruing from unpaid interest – interest
demanded shall earn interest from the time it is
judicially demanded (Art. 2212) or where there is an
express stipulation (Art. 1959)
Rules for award of interest in the concept of
actual & compensatory damages (Nacar v.
Gallery Frames)
1. When an obligation, regardless of its source, is
breached, the contravenor can be held liable for
damages. Provisions under Damages govern in
determining the measure for recoverable damages.
2. w/ regard particularly to an award of interest in the
concept of actual & compensatory damages, the
rate of interest, as well as the accrual thereof, is
imposed, as follows:
a. When the obligation is breached, & it consists in the
payment of a sum of money, the interest due
should be that w/c may have been stipulated in
writing. Also, the interest due shall itself earn legal
interest from the time it is judicially demanded. In
the absence of stipulation, the rate shall be 6%
per annum to be computed from default.
b. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per
annum. No interest shall be adjudged on
unliquidated claims or damages, except when or
until the demand can be established w/
reasonable certainty.
c. When judgment of the court awarding a sum of
money becomes final & executory, the rate of
legal interest, whether case falls under par. a. or
b., shall be 6% per annum from such finality until
its satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of
credit.
USURY LAW
- It is an act fixing interest rates upon loans &
declaring the effect of receiving or taking usurious
rates & for other purposes (Arevalo v. Dimayuga)
- CB Circular No. 905 – abolished interest rate
ceilings. With the promulgation of such circular,
usury has become “legally inexistent” as the parties
can now legally agree on any interest that may be
charged on the loan
Elements of usury:
1. A loan or forbearance of money
2. An understanding between parties that the loan
shall & may be returned
3. An unlawful intent to take more than the legal rate
for the use of money or its equivalent
4. The taking or agreeing to take for the use of the
loan of something in excess of what is allowed by
law
DEPOSIT
Deposit – constituted from the moment a person
receives a thing belonging to another, w/ the
obligation of safely keeping it & of returning the
same. If the safekeeping of the thing delivered isn’t
the principal purpose, there is no deposit but some
other contract. (Art. 1962)
Kinds of Deposit (Art. 1964)
- Deposit may be entered into orally or in writing.
(Art. 1969)
- If person having capacity accepts a deposit made
by one who is incapacitated, the former shall be
subject to all the obligations of a depositary & may
be compelled to return the thing by the guardian or
the person himself if he acquired capacity. (Art.
1970)
- If deposit made by capacitated person to someone
who is not, depositor shall only have action to
recover the thing while still in latter’s possession or
compel latter to pay him the amount w/c he may be
enriched
o However, if a 3rd person who acquired the thing
acted in bad faith, the depositor may bring an
action against him for its recovery (Art. 1971)
- The depositary isn’t liable in cases of loss by force
majeure or by gov’t order. HOWEVER, he has the
duty to deliver to the depositor money or another
thing he receives in place of the thing. (Art. 1990)

1. Judicial – takes place when an attachment or Deposit vs. Mutuum & Commodatum
seizure or property in litigation is ordered (Arts.
2005-2008) Deposit vs. Mutuum
2. Extra-judicial (Art. 1967) Deposit Mutuum
a. Voluntary – delivery is made by the will of the Principal purpose is Principal purpose is
depositor or by 2 or more persons each of whom safekeeping consumption of the
believes himself entitled to the thing deposited subject matter
(Art. 1968) Depositor can demand Lender must wait until
b. Necessary – made in compliance w/ a legal return of the subject expiration of the period
obligation, or on the occasion of any calamity, or matter at will granted to the debtor
by travelers in hotels & inns (Arts. 1996-2004) or Both movable & Only money or any
by travelers w/ common carriers (Arts. 1734-1735) immovable may be the other fungible may be
object the object
Characteristics:
1. Real – perfected by the delivery of the subject Deposit vs. Commodatum
matter
2. Principal purpose is the safekeeping of the thing Deposit Commodatum
delivered Principal purpose is Principal purpose is
3. If gratuitous, it is unilateral; if onerous, it is bilateral safekeeping transfer of use
May be gratuitous Always & essentially
Parties to the contract: gratuitous
In extrajudicial deposit, Both movable &
1. Depositor – the one who gives only movable immovable may be the
2. Depositary – the one who receives (corporeal) things may object
be the object. But for
Notes: judicial deposits, object
may be movable or
- The principal purpose is safekeeping, so that if it is
immovable
only accessory or secondary obligation, deposit
isn’t constituted
- Contract of deposit is generally gratuitous (Art. Obligations of the Depositary
1965)
o There is a contrary stipulation 1. Depositary is obliged to keep the thing safely &
o Depositary is in the business of storing goods to return it when required, even though a
o Property saved from destruction during calamity specified term may have been stipulated in the
w/o owner’s knowledge; just compensation should contract (Art. 1972)
be given the depository (Art. 1996[2] & 1997[2]) 2. Depositary is liable if the loss occurs through
- Only movable things may be the object of a deposit his fault or negligence (Art. 1972 in rel. to Art.
(Art. 1966) if the deposit is either voluntary (Art. 1163); loss of the thing while in the depositary’s
1968) or necessary (Art. 1995). possession raises a presumption of fault (Art.
o HOWEVER, a judicial deposit may cover movable 1265); required degree of care is greater if the
as well as immovable property, its purpose being deposit is for compensation than when it is
to protect the rights of parties to the suit. gratuitous.
3. Depositary is not allowed to deposit the thing
with a 3rd person.
Exception: There is a contrary stipulation.
Note: Depositary is liable for the loss of the thing
deposited if:
a. He transfers the deposit with a third person
without authority although there is no
negligence on his part and the third person;
b. He deposits the thing with a third person
who is manifestly careless or unfit although
authorized, even in the absence of
negligence; or
c. The thing is lost through the negligence of
his employees whether the latter are
manifestly careless or not.
EXEMPTION FROM LIABILITY: Depositary is not
responsible for loss of thing without negligence of
the third person with whom he was allowed to
deposit the thing if such third person is not
“manifestly careless or unfit.”
4. Depositary is obliged not to change way of
deposit. He may change the way or manner of
deposit only if there are circumstances indicating
that the depositor would consent to the change and
notice is given to depositor. HOWEVER, notice is
not required if delay will cause danger. (Art.1974)
5. If thing deposited should earn interest, the
depositary is under obligation (1) to collect the
interest as it becomes due and (2) to take such
steps as may be necessary to preserve its value
and the rights corresponding to it. The depositary
is bound to collect not only the interest but also the
capital itself when due. (Art.1975)
6. Depositary has the obligation not to commingle
things deposited if so stipulated, even if they are of
the same kind and quality. (Art. 1976)
General rule: The depositary is permitted to
commingle grain or other articles of the same kind
and quality.
Exception: When there is a stipulation to the
contrary
Effect of commingling:
a. The various depositors of the mingled
goods shall own the entire mass in
common.
b. Each depositor shall be entitled to such
portion of the entire as the amount
deposited by him bears the whole.
7. Depositary is under obligation not to make use
of the thing deposited; otherwise he shall be
liable for damages. (Art.1977)
Exceptions:
a. Express permission from the depositor
b. Preservation of the thing deposited required
its use.
8. Depositary is liable for loss of the thing through
a fortuitous event:
a. if it is so stipulated
b. if he uses the thing w/o the depositor’s permission
c. if he delays its return
d. if he allows others to use it, even though he himself
may have been authorized to use the same (Art.
1979)
9. Where thing deposited is delivered closed and
sealed, depositary has obligation to:
a. Return the thing deposited when delivery closed &
sealed
b. Pay for damages should seal or lock be broken
through his fault, w/c is presumed unless proven
otherwise
c. Keep secret of the deposit when seal/lock is
broken, w/ or w/o his fault (Art. 1982)
10. Depositary is obliged to return the products,
accessories and accessions of the thing
deposited. (Art.1983)
11. Depositary is obliged to pay interest on sums
converted to personal use. (Art.1983)
12. Depositary who receives the thing in deposit
cannot require that the depositor prove his
ownership over the thing (Art. 1984)
13. Where the thing appears to be stolen and the
depositary knows the true owner, he must advise
the true owner about the deposit. If the owner, in
spite of such information, does not claim it within
the period of one month, the depositary is relieved
from liability. (Art.1984 [2 and 3]). If the depositary
has reasonable grounds to believe that the thing
has not been lawfully acquired by the depositor, he
may return the same. (Art.1984[4])
Right of 2 or More Depositors (Art. 1985)
1. Where the thing is divisible and depositors not
solidary – each one of the depositors can demand
only his share proportionate thereto.
2. Where the thing is not divisible or the obligation is
solidary – rules on active solidarity must apply
a. Each one of the depositors may do whatever may
be useful to the others but not anything which
may be prejudicial to the latter. (Art.1212)
b. The depositary may return the thing to any one of
the solidary depositors UNLESS a demand for its
return has been made by one of them in which
case delivery should be made to him. (Art. 1214)
3. Where there is a stipulation of return to one of the
depositors, the depositary is bound to return it only
to the person designated although he has not made
any demand for its return
Persons to whom return must be made
1. The depositary is obliged to return the thing
deposited, when required, to:
a. The depositor
b. To his heirs or successors
c. To the person who may have been designated in
contract (Art. 1972)
2. If the depositor was incapacitated at the time of
making the deposit, the property must be returned
to:
a. His guardian or administrator
b. To the person who made the deposit
c. To the depositor himself should he acquire capacity
(Art. 1970)
3. Even if the depositor had capacity at the time of
making the deposit but he subsequently loses his
capacity during the deposit, the thing must be
returned to his legal representative. (Art.1986)
Place of Return (Art. 1987)
1. At the place agreed upon by the parties
2. In the absence of stipulation, at the place where the
thing deposited might be even if it shouldn’t be the
same place where the original deposit was made,
provided that there was no malice on the part of the
depositary
Time of Return (Art. 1988)
1. General rule: the thing deposited must be returned
to the depositor upon demand, even though a
specified period of time for such return may have
been fixed
2. Exceptions:
a. When the thing is judicially attached while in the
depositary’s possession
b. When notified of the opposition of a 3 rd person to
the return or the removal of the thing deposited
Right of the depositary to return the thing (Art.
1989)
1. General rule: The depositary may return the thing
deposited notwithstanding that a period has been
fixed for the deposit if:
a. The deposit is gratuitous
b. The reason is justifiable
Note: if the depositor refuses to receive the thing,
the depositary may deposit the thing at the disposal
of the judicial authority.
2. Exception: When the deposit is for a valuable
consideration, the depositary has no right to return
the thing before the expiration of the time
designated even if he should suffer inconvenience
as a consequence
Alienation in by depositary’s heir
When alienation is done in good faith, the heir is
obliged to:
1. Return the value of the thing deposited
2. Assign the right to collect from the buyer
Note: The heir doesn’t need to pay the actual price
of the thing deposited.
When alienation is done in bad faith, the heir must:
1. Be liable for damages
2. Pay the actual price of the thing deposited
Depositary’s right of retention
- The depositary may retain the thing in pledge until
the full payment of what may be due him by reason
of the deposit. (Art. 1994)
- Note: this is an example of a pledge created by
operation of law (Art. 2121)
Obligations of the Depositor
1. Depositor is obliged to reimburse the
depositary for expenses incurred for
preservation – if deposit is gratuitous. (Art.1992)
2. Depositor is obliged to pay losses incurred due
to character of thing deposited. (Art. 1993)
General rule: The depositary must be reimbursed
for loss suffered by him because of the character of
the thing deposited.
Exceptions:
1. Depositor wasn’t aware of the danger
2. Depositor wasn’t expected to know the
dangerous character of the thing.
3. Depositor notified the depositary of such
dangerous character
4. Depositary was aware of the danger w/o
advice from the depositor.
Extinguishment of Deposit (Art. 1995)
A deposit is extinguished:
1. Upon the loss or deterioration of the thing
deposited
2. Upon the death of the depositary, ONLY in
gratuitous deposits
3. By other modes provided in the Civil Code
Effect of Death of Depositor or Depositary (Art.
1995)
1. Where deposit gratuitous – death of either of the
depositor or depositary extinguishes the deposit
(personal in nature). By the word “extinguished,”
the law really means that the depositary is not
obliged to continue with the contract of deposit
2. Where deposit for compensation – not extinguished
by the death of either party
Necessary Deposit
Kinds of Necessary Deposits
1. It is made in compliance with a legal obligation, in
which case it is governed by the law establishing it,
and in case of deficiency, the rules on voluntary
deposit
2. It takes place on the occasion of any calamity, such
as fire, storm, flood, pillage, shipwreck, or other
similar events. There must be a causal relation
between the calamity and the constitution of the
deposit. In this case the deposit is governed by the
rules on voluntary deposit and Art. 2168.
3. Made by passengers with common carriers.
(Art.1754)
4. Made by travelers in hotels or inns. (Art. 1998)
Deposits by travelers in hotels & inns
 Before keepers of hotels or inns may be held
responsible as depositaries with regard to the
effects of their guests, the following must concur:
1. They have been previously informed about the
effects brought by the guests
2. The latter have taken the precautions prescribed
regarding their safekeeping.
right of the parties to the property in case of a
favorable judgment
Applicable law
- The law on judicial deposit is remedial or
procedural in nature, hence the Rules of Court are
applicable (Art. 2009)

Extent of liability under Art. 1998 Extrajudicial Vs Judicial Deposits

1. Liability in hotel rooms w/c come under the term Extrajudicial deposit Judicial deposit
“baggage” or articles such as clothing as are (Voluntary) deposit Constituted by virtue of
ordinarily used by travelers made by free will of the a court order
depositor
2. Include those lost or damages in hotel annexes
Object must be Object may be either
such as vehicles in hotel’s garage
movable property movable or immovable
3. In the ff. cases, hotelkeeper is liable. property
When Hotelkeeper liable Purpose is safekeeping Purpose is to secure or
of the thing deposited protect the owner’s
Regardless of the amount of care exercised – right; to maintain status
quo during pendency of
1. The loss or injury to personal property is caused by case
his servants or employees as well as by strangers Generally gratuitous Always onerous
(Art. 2000). Depositary is obliged to Thing shall be
2. The loss is caused by the act of a thief or robber return the thing delivered only upon
done without the use of arms and irresistible force. deposited upon order of the court
(Art. 2001). demand made by the
depositor
When Hotelkeeper Not Liable
1. The loss or injury is cause by force majeure, like Depositary of Sequestered Property
flood, fire, (Art.2000) theft or robbery by a stranger
– not the hotel-keeper’s servant or employee with A person appointed by the court (Art. 2007) with the
the use of firearms or irresistible force (Art.2001). obligations:

Exceptions: Hotelkeeper is guilty of fault or
negligence in failing to provide against the loss or
injury from his cause. (Arts.1170 & 1174).
2. The loss is due to the acts of the guests, his family,
servants, visitors (Art.2002).
3. The loss arises from the character of the things
brought into the hotel (Ibid.).
Note: The hotelkeeper can’t free himself from
responsibility by posting notices to the effect that he
isn’t liable for the articles brought by the guest.
Such kind of stipulation shall be void (Art. 2003)
1. To take care of the property with the diligence of a
good father of a family (Art. 2008)
2. To continue in his responsibility until the litigation is
ended or the court so orders (Art. 2007)
WAREHOUSE RECEIPTS LAW
Warehouse – building or place where goods are
deposited & stored for profit
Warehouseman/bailee – a person (natural/juridical)
lawfully engaged in the business of storing goods for
profit

Hotelkeeper’s right to retention Warehouse receipt

- The hotel-keeper has a right to retain the things
brought into the hotel by the guest, as a security for
credits on account of (a) lodging, and (b) supplies
usually furnished to hotel guests.
- Note: The right to retention recognized in this article
is in the nature of a pledge created by operation of
law.
Judicial Deposit
- takes place when an attachment or seizure of
property in litigation is ordered by a court (Art.
2005)
- Nature & Purpose: It is auxiliary to a case pending
in court. The purpose is to maintain the status quo
during pendency of the litigation or to insure the
- A written acknowledgement by a warehouseman
that he has received & holds certain goods therein
described in store for the person to whom it is
issued (Talengtan Bros & Sons vs. CA)
- A simple written contract between the owner of the
goods & the warehouseman to pay the
compensation for that service
- It is a bilateral contract. It imports that goods are in
the hands of a warehouseman and is a symbolical
representation of the property itself.
Purpose of the Law
- To prescribe the rights and duties of a
warehouseman
- To regulate the relationship between a
warehouseman and the depositor of goods, or the
 holder of a warehouse receipts for the goods, or
other persons
- To render title to, and right of possession of,
property stored in warehouse more easily
convertible
- To protect those who, in good faith and for value,
acquire negotiable warehouse receipts by
negotiation
Notes:
- Only a warehouseman or a duly authorized agent
may issue warehouse receipts to put said
warehouse receipts w/in the purview of the WRL
- Not a negotiable instrument under NIL
- It is a symbolical representation of the property
itself
- When more than one is issued for the same goods,
the word "duplicate" shall be plainly placed upon
the face of every such receipt, except the first one
issued
o A warehouseman shall be held liable for damages
for failure to do so to anyone who purchased the
subsequent receipt for value supposing it to be
original, even though the purchaser be after the
delivery of the goods by the warehouseman to the
holder of the original receipt
- Effect of negotiation of warehouse receipt –
Negotiation of the document has the effect of
manual delivery so as to constitute the transferee
the owner of the goods.
- Liability for stolen & deposited goods – If stolen
goods are deposited by the thief with a
warehouseman, the latter shall not be liable to the
holder of the receipt even if he delivers the goods
to the real owners without the receipt being
surrendered to him. (Sec.11 and 141, WRL)
Form and Content of Warehouse Receipt
1. The location of the warehouse where the goods are
stored
a. For the benefit of the holders of warehouse receipts
to enable them to determine where the goods are
deposited esp. if warehouseman has more than 1
warehouse
2. The date of issue of the receipt
a. Indicated prima facie when the contract of deposit
was perfected
3. Consecutive number of the receipt
a. Identify each receipt w/ the goods for w/c it was
issued
b. No express requirement as to when the
consecutive numbering shall begin
4. A statement whether the goods received will be
delivered to the bearer, to a specified person, or to
a specified person or his order
a. Persons who shall prima facie be entitled lawfully to
the possession of the goods deposited
b. If the receipt’s terms provide that it is to be
delivered to order or to bearer, then it is a
negotiable warehouse receipt
5. The rate of storage charges
a. States the consideration
b. If consideration not placed, it is the
customary/reasonable compensation for the
services
6. A description of the goods or of the package
containing them
a. Purpose – identification of property w/c should be
delivered to the rightful owner
b. Notwithstanding the fact that the goods deposited
are incorrectly described doesn’t make ineffective
the receipt when the goods’ identity is fully
established by evidence
7. The signature of the warehouseman which may be
made by his authorized agent
a. Furnishes the best evidence of the fact that the
warehouseman received the goods & bound
himself to assume obligations
8. Warehouseman’s ownership of or interest in goods
a. Purpose – prevent abuses w/c in the past had
arisen from warehouseman issuing receipts on
their goods
9. A statement of the amount of advances made and
of liabilities incurred for which the warehouseman
claims as lien. If the precise amount for such
advances made or of such liabilities incurred is, at
the same time of the issue of the receipt, unknown
to the warehouseman or his agent who issues it, a
statement of the fact that advances have been
made or liabilities incurred and the purpose thereof
is sufficient
a. Purpose – preserve the lien of the warehouseman
over the goods stored
Effect of omission of the essential contents
1. A warehouseman shall be liable to any person
injured thereby all damages caused by the
omission from a negotiable receipt of any of the
terms herein required
2. Validity of receipt not affected
3. Negotiability of receipt not affected
Terms that can’t be included in warehouse
receipt
1. Those contrary to any provision of the law
2. In any wise impair the warehouseman's obligation
to exercise that degree of care in the safekeeping
of the goods entrusted to him which a reasonably
careful man would exercise with regard to similar
goods of his own
Document of Title to Goods – any document used
in the ordinary course of business, in the
sale/transfer of goods, as proof of possession or
control of the goods, or authorizing or purporting to
authorize the possessor of the document to transfer
or receive either by indorsement or by delivery,
goods represented by such document. (Art. 1636)
Common Types of Document of Title
1. Bill of Lading – written acknowledgement of the
receipt of goods and an agreement to transport and
to deliver them at a specified place to a person
named therein or on his order
 a. On Board Bill of Lading – issued when the goods
have been actually placed aboard the ship with
very reasonable expectation that the shipment is
as good as on its way
b. Port Bill of Lading – issued by the carrier to whom
the goods have been delivered and the vessel
indicated in the bill of lading by which the goods
are to be shipped is already in the port where the
goods are held for shipment
2. Quedan – warehouse receipt that covers sugar
3. Dock warrant – warrant given by dock owners to
the owner of merchandise imported and
warehoused on the dock, upon the faith of the bills
of lading, as a recognition of his title to the goods
Functions of Documents of Title
1. Evidence of receipt of goods
2. Represents the goods and therefore operates as
transferrable document that carries with it the
control over the goods. It is used to pass title to the
goods
3. It is a contract
Meaning of Negotiable Under the Act
- It indicates that in the passage of warehouse
receipts through the channels of commerce, the law
regards the property which they describe as
following them and gives to their regular transfer by
indorsement the effect of manual delivery of the
things specified in them
Negotiable warehouse receipts – one in w/c it is
stated that the goods received will be delivered
either:
1. To the bearer or
2. To the order of any person named in such
receipt (Sec. 5, WRL)
Non-negotiable warehouse receipts – one in which
it is stated that the goods received will be delivered
to the depositor or to any specified person
Negotiation of Warehouse Receipts
A. By delivery
1. Where by the terms of the receipt, the
warehouseman undertakes to deliver the goods to
the bearer
2. Where by the terms of the receipt, the
warehouseman undertakes to deliver the goods to
the order of a specified person, and such person
or a subsequent indorsee of the receipt has
indorsed it in blank or bearer
The bearer document is not always a bearer
document. A special indorsement has the effect of
converting the bearer instrument into an order
instrument.
B. By indorsement coupled w/ delivery
1. If the receipt states that the goods are to be
delivered to the order of a person named therein
2. Effects when indorsement is necessary but the
negotiable receipt was only delivered
i. The transferee acquires title against the
transferor
ii. There is no direct obligation of the
warehouseman to deliver the goods to such
holder of the receipt
iii. The transferee can compel the transferor to
complete the negotiation by indorsing the
instrument
The negotiation takes effect on the date of the
indorsement only.
Rights of a person to whom a receipt has been
negotiated
1. In case of receipt negotiable by delivery, such title
to the goods as the person negotiating the receipt
to him had or had ability to convey to a purchaser in
good faith for value
2. In case of receipt negotiable by indorsement
coupled by delivery, such title to the goods as the
depositor or person to whose order the goods were
to be delivered by the terms of the receipt has or
had ability to convey to a purchaser in good faith for
value
3. The direct obligation of the warehouseman to hold
possession of the goods for him according to the
terms of the receipt as fully as if the warehouseman
had contracted directly with him. (Sec.41, WRL)
Rights of a person to whom a receipt has been
transferred
1. The title to the goods as against the transferor with
respect to a negotiable warehouse receipt not duly
negotiated (merely steps into the shoes)
2. The right, thereafter, to acquire the obligation of the
warehouseman to hold the goods for him
3. If the receipt is non-negotiable, such person
acquires the right to notify the warehouseman of
the transfer thereof. (Sec. 42, WRL)
Prior to the notification of the warehouseman by the
transferor or transferee of a non-negotiable receipt,
the title of the transferee to the goods and the right
to acquire the obligation of the warehouseman may
be defeated by:
1. The levy of an attachment or execution upon the
goods by a creditor of the transferor
2. A notification to the warehouseman by the
transferor or a subsequent purchaser from the
transferor of the subsequent sale of the goods by
the transferor
a. But unpaid seller’s lien or right of stoppage in
transitu cannot defeat the right of the holder in
good faith of NWR
b. Goods covered by NWR cannot be attached or
levied upon unless receipt is surrendered
Warehouseman’s Defenses for Non-Delivery or
Misdelivery
1. Loss or destruction of the goods without the fault of
the bailee
2. Failure to satisfy the bailee’s lien
3. Failure to surrender a negotiable document of title
4. Lack of willingness to sign acknowledgement
5. Delivery to a claimant with better right
6. Where the document of title is attached by a
creditor
7. Receipt by the bailee of a request by or on behalf of
the person lawfully entitled to a right of property or
possession in the goods, not to make such delivery
8. The bailee has information that the delivery about
to be made was to one not lawfully entitled to the
possession of the goods
9. Attachment/levy of the goods by a creditor where
the document is surrendered or its negotiation is
enjoined or the document is impounded
In case of adverse claim, the Bailee may:
1. Refuse to deliver the goods to anyone of them until
he has had reasonable time to check the validity of
the claims
2. File as action for interpleader and allow the
claimants to prove their claims or in case an action
is filed against the bailee, he can set up the
defense of adverse claims
Warehouseman’s Obligations:
A. Under the WRL
1. Deliver the goods upon a demand made either by
the holder of a receipt for the goods or depositor
2. Obligation to deliver arises only if the demand is
accompanied by:
i. An offer to satisfy the warehouseman’s lien
ii. An offer to surrender the receipt, if negotiable,
with such indorsement as may be necessary for
the negotiation of the receipt
iii. A readiness and willingness to sign, when the
goods are delivered, an acknowledgement that
they have been delivered, if such signature is
requested by the warehouseman
Warehouseman’s Lien
A warehouseman shall have a lien on the goods
deposited or on the proceeds thereof in his hands for:
1. All lawful charges for storage and preservation of
the goods
2. All lawful claims for money advanced, interest,
insurance, transportation, labor, weighing,
coopering, and other charges and expenses in
relation to such goods; and
3. All reasonable charges and expenses for notice
and advertisements of sale, and for the sale of the
goods where default had been made in satisfying
the warehouseman’s lien
Remedies of Warehouseman to Enforce His
Lien
1. Refuse to deliver the goods until his lien is satisfied
(Sec. 31, WRL)
2. Sell the goods and apply the proceeds thereof to
the value of the lien (Secs. 33 & 34, WRL)
3. By other means allowed by law to a creditor against
his debtor (Sec. 32, WRL)
4. Such other remedies allowed by law for the
enforcement of a lien against personal property
(Sec. 35, WRL)
Loss of Lien
Warehouseman’s lien is lost either by:
1. Surrendering possession thereof
2. Refusing to deliver the goods when a demand is
made with which he is bound to comply (Sec. 29,
WRL)
Note: When warehouseman withholds the delivery
of the goods without any valid reason, he is liable
for the loss of the goods and the liability cannot be
eliminated by proof of exercise of due diligence.
Attachment or Levy
- Negotiable receipt – the goods cannot be
attached/levied in execution unless:
a. The receipt is first surrendered
b. Its negotiation is enjoined
c. The receipt is impounded by the court (Sec. 25,
WRL)
o Creditor’s Remedies to Reach Negotiable Receipt:
 A creditor whose debtor is owner of a negotiable
warehouse receipt may seek for the attachment
of the receipt or seek aid from the courts to
compel the debtor to satisfy claims by means
allowed by law in regard to property which
cannot readily be attached or levied upon by
ordinary legal process. (Sec. 26, WRL)
o It doesn’t apply when:
a. The depositor is not the owner of the goods
(thief) or one who has no right to convey title to
the goods binding upon the owner
b. The action for recovery or manual delivery of
goods by the real owner
c. Where attachment is made prior to the issuance
of receipt
- Non-negotiable receipt – the goods can be
attached, provided it is done prior to the notification
of the bailee of the transfer. (Sec. 42, WRL)
Warranties of Transferor
A person who, for value, negotiates or transfers a
receipt by indorsement or delivery, including one
who assigns for value a claim secured by a receipt,
unless a contrary intention appears, warrants that:
1. The receipt is genuine
2. He has a legal right to negotiate or transfer it
3. He has knowledge of no fact which would impair
the validity or worth of that receipt
4. He has a right to transfer the title to the goods
5. The goods are merchantable or fit for a particular
purpose whenever such warranties would have
been implied, if the contract of the parties had been
to transfer without a receipt of the goods
represented thereby. (Sec. 44, WRL)
GUARANTY/SURETY
 Guaranty – a contract whereby a person, called the
guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter
should fail to do so. (Art. 2047)
- While a surety undertakes to pay if the principal
doesn’t pay, the guarantor only binds himself to
pay if the principal can’t pay
Characteristics:
1. Accessory – dependent for its existence upon the
principal obligation guaranteed by it
2. Subsidiary & conditional – takes effect only when
the principal debtor fails in his obligation
3. Unilateral –
a. It gives rise only to a duty on the part of the
guarantor in relation to the creditor and not vice
versa
b. It may be entered into even without the intervention
of the principal debtor.
4. Guarantor must be a person distinct from the
debtor – a person can’t be the personal guarantor
of himself
Rules Governing Guaranty
1. A guaranty is generally gratuitous (Art. 2048)
a. Exception – contrary stipulation
2. On the cause of a guaranty contract
a. Presence of cause w/c supports principal
obligation: Cause of contract is same cause w/c
supports the obligation as to the principal debtor
is a sufficient consideration to support the
obligation of guaranty/surety
b. Absence of direct consideration or benefit to
guarantor: Guaranty or surety agreement is
regarded valid despite the absence of any direct
consideration received by the guarantor or surety,
such consideration need not pass directly to the
guarantor or surety; a consideration moving to the
principal will suffice
3. A married woman who is a guarantor binds only
her separate property, generally (Art. 2049)
Exceptions:
- w/ her husband’s consent, bind the
ACP/CPG
- w/o husband’s consent, in cases provided
by law, such as when the guaranty has
redounded to the family’s benefit
4. A guaranty need not be undertaken w/ the
knowledge of the debtor (Art. 2050)
a. Guaranty is unilateral – exists for the creditor’s
benefit
b. Creditor has every right to take all possible
measures to secure payment of his credit –
guaranty can be constituted even against the
principal debtor’s will
However, as regards payment made by a 3 rd
person:
a. Payment w/o knowledge or against debtor’s will:
i. Guarantor can recover only insofar as the
payment has been beneficial to the debtor
ii. Guarantor cannot compel the creditor to
subrogate him in his rights
b. Payment with knowledge or consent of the debtor:
Subrogated to all the rights which the creditor had
against the debtor
5. The guaranty must be founded on a valid
principal obligation (Art. 2050[1])
a. Guaranty is an accessory contract: It is an
indispensable condition for its existence that there
must be a principal obligation. Hence, if the
principal obligation is void, it is also void.
6. A guaranty may secure the performance of a
voidable, unenforceable & natural obligation
(Art. 2050[2])
A guaranty may secure the performance of a:
a. Voidable contract – such contract is binding,
unless annulled by proper court action
b. Unenforceable contract – such contract isn’t
void
c. Natural obligation – creditor may proceed
against the guarantor although he has no
right of action against the principal debtor
for the reason that the latter’s obligation is
not civilly enforceable. When the debtor
himself offers a guaranty for his natural
obligation, he impliedly recognizes his
liability, thereby transforming the obligation
from a natural into a civil one.
7. A guaranty may secure a future debt (Art. 2053)
Continuing guaranty/suretyship: Future debts, even
if the amount is not yet known, may be guaranteed
but there can be no claim against the guarantor
until the amount of the debt is ascertained or fixed
and demandable
Rationale: a contract of guaranty is subsidiary.
a. To secure the payment of a loan at maturity
– surety binds himself to guarantee the
punctual payment of a loan at maturity and
all other obligations of indebtedness which
may become due or owing to the principal
by the borrower
b. To secure payment of any debt to be
subsequently incurred – a guaranty shall be
construed as continuing when by the terms
thereof it is evident that the object is to give
a standing credit to the principal debtor to
be used from time to time either indefinitely
or until a certain period, especially if the
right to recall the guaranty is expressly
reserved
c. To secure existing unliquidated debts –
refers to debts existing at the time of the
constitution of the guaranty but the amount
thereof is unknown and not to debts not yet
incurred and existing at that time
d. The surety agreement itself is valid and
binding even before the principal obligation
intended to be secured thereby is born, any
 more than there would be in saying that a. Guaranty must not only be expressed but must so
obligations which are subject to a condition be reduced into writing. Hence, it shall be
precedent are valid and binding before the unenforceable by action, unless the same or
occurrence of the condition precedent some note or memorandum thereof be in writing,
8. A guaranty may secure the performance of a and subscribed by the party charged, or by his
conditional obligation (Art. 2053) agent; evidence, therefore, of the agreement
a. Principal obligation subject to a suspensive cannot be received without the writing, or a
condition – guarantor is liable only after the secondary evidence of its contents. However, it
fulfillment of the condition need not appear in a public document
b. Principal obligation subject to a resolutory condition
– happening of the condition extinguishes both Guaranty Distinguished from Others
the principal obligation and the guaranty
Guaranty vs. Warranty
9. A guarantor’s liability can’t exceed the principal
obligation (Art. 2054) Guaranty Warranty
Guaranty is a contract Warranty is an
General rule: Guaranty is a subsidiary & accessory
by which a person is undertaking that the
contract – guarantor can’t bind himself for more bound to another for title, quality, or quantity
than the principal debtor and even if he does, his the fulfillment of a of the subject matter of
liability shall be reduced to the limits of that of the promise or a contract is what is
debtor. But the guarantor may bind himself for less engagement of a third has been represented
than that of the principal. party. to be, and relates to
some agreement made
Exceptions: ordinarily by the party
a. Interest, judicial costs, and attorney’s fees as part who makes the
of damages may be recovered – creditors suing warranty.
on a suretyship bond may recover from the surety
as part of their damages, interest at the legal rate,
judicial costs, and attorney’s fees when
appropriate, even without stipulation and even if
the surety would thereby become liable to pay
more than the total amount stipulated in the bond Guaranty vs. Suretyship

Interest runs from: Guaranty Suretyship

Guarantor’s liability Surety assumes liability
- Filing of the complaint (upon judicial depends upon an as a regular party to
demand) independent the undertaking
- The time demand was made upon the agreement to pay the
surety until the principal obligation is fully obligation.
paid (upon extrajudicial demand) Guarantor’s Surety is an original
engagement is a promissor
Rationale: Surety is made to pay by reason of his collateral undertaking
failure to pay when demanded & for having Guarantor is Surety is primarily
compelled the creditor to resort to the courts to subsidiarily liable i.e. liable i.e. bound to pay
obtain payment only obliged to if the principal does
pay if the principal not pay
b. Penalty may be provided – a surety may be held cannot pay
liable for the penalty provided for in a bond for Guarantor not bound to Surety ordinarily held
violation of the condition therein take notice of default of to know every default
10. The existence of a guaranty isn’t presumed (Art. his principal of his principal
2055) Guarantor often Surety not discharged
discharged by the mere either by the mere
Guaranty requires the expression of consent on the indulgence of the indulgence of the
part of the guarantor to be bound. It cannot be creditor and is usually creditor or by want of
presumed because of the existence of a contract or not liable unless notice of default of the
principal obligation. notified of the principal
principal’s default
Rationale:
a. There be assurance that the guarantor had the true The Guarantor
intention to bind himself
b. To make certain that on making it, the guarantor Qualifications
proceeded w/ consciousness of what he was
doing 1. He possesses integrity
11. Contract of guaranty is covered by Statute of 2. He has capacity to bind himself
Frauds 3. He has sufficient property to answer for the
obligation w/c he guarantees
 Exception: The creditor waives the requirements.
- The qualifications above need only be present at
the time of perfection of the contract.
- The subsequent loss of integrity or property or
supervening incapacity of the guarantor would not
operate to exonerate the guarantor of the eventual
liability he has contracted, and the contract of
guaranty continues. The creditor can merely
demand another guarantor with the proper
qualifications except that the creditor may waive
such remedy if he chooses and hold the guarantor
to his bargain
Selection of Guarantor
1. Specified person stipulated as guarantor:
Substitution of guarantor may not be demanded.
Reason: The selection of the guarantor is:
a. Term of the agreement
b. As a party, the creditor is, therefore, bound thereby.
2. Guarantor selected by the principal debtor: Debtor
answers for the integrity, capacity, and solvency of
the guarantor.
3. Guarantor personally designated by the creditor:
Responsibility of the selection should fall upon the
creditor because he considered the guarantor to
have the qualifications for the purpose.
Effects of Guaranty
Between the Guarantor and the Creditor
1. The guarantor has the right to benefit from
excussion/exhaustion (Art. 2058)
Exceptions to benefit of excussion:
a. As provided in Art. 2059:
i. If the guarantor has expressly renounced it;
waiver is valid but it must be made in express
terms
ii. If he has bound himself solidarily with the
debtor, the liability assumed is that of a surety.
The guarantor becomes primarily liable as a
solidary co-debtor. In effect, he renounces in
the contract itself the benefit of exhaustion
iii. In case of insolvency of the debtor – guarantor
guarantees the solvency of the debtor. If the
debtor becomes insolvent, the liability of the
guarantor as the debtor cannot fulfill his
obligation.
iv. When he (debtor) has absconded, or cannot be
sued within the Philippines – the creditor is not
required to go after a debtor who is hiding or
cannot be sued in our courts, and to incur the
delays and expenses incident thereto. The
exception is when the debtor has left a
manager or representative.
v. If it may be presumed that an execution on the
property of the principal debtor would not result
in the satisfaction of the obligation – if such
judicial action including execution b would not
satisfy the obligation, the guarantor can no
longer require the creditor to resort to all such
remedies against the debtor as the same
would be but a useless formality. It is not
necessary that the debtor be judicially declared
insolvent
b. If he doesn’t comply w/ Art. 2060: In order that the
guarantor may make use of the benefit of
excussion, he must:
i. Set it up against the creditor upon the latter’s
demand for payment from him
ii. Point out to the creditor:
1.1 Available property of the debtor – the
guarantor should facilitate the realization of the
excussion since he is the most interested in its
benefit
2.1 Within the Philippine territory – excussion of
property located abroad would be a lengthy
and extremely difficult proceeding and would
not conform with the purpose of the guaranty to
provide the creditor with the means of
obtaining the fulfillment of the obligation
3.1 Sufficient to cover the amount of the debt
c. If he is a judicial bondsman & subsurety (Art. 2084)
d. Where a pledge/mortgage has been given by him
as a special security
e. If he fails to interpose it as a defense before
judgment is rendered against him.
2. The creditor has the right to secure a judgment
against the guarantor prior to the excussion.
General rule: An ordinary personal guarantor (NOT
a pledgor or mortgagor), may demand exhaustion
of all the property of the debtor before he can be
compelled to pay.
Exception: The creditor may, prior thereto, secure a
judgment against the guarantor, who shall be
entitled, however, to a deferment of the execution
of said judgment against him, until after the
properties of the principal debtor shall have been
exhausted, to satisfy the latter’s obligation
3. The creditor has the duty to make prior demand
for payment from the guarantor (Art. 2060)
a. The demand is to be made only after judgment on
the debt
b. Joining the guarantor in the suit against the
principal debtor isn’t the demand intended by law.
4. The guarantor has the duty to set up the benefit
of excussion (Art. 2060)
a. As soon as he is required to pay, guarantor must
also point out to the creditor available property
(not in litigation/encumbered) of the debtor w/in
the PH.
5. The creditor has the duty to resort to all legal
remedies (Art. 2061)
a. After the guarantor has fulfilled the conditions
required for make use of the benefit of
exhaustion, it becomes the creditor’s duty to:
i. Exhaust all property of the debtor pointed out by
guarantor
 ii. If he fails to do so, he shall suffer the loss but
only to the extent of the value of the said
property, for the insolvency of the debtor
6. Creditor has the duty to notify the guarantor in
the action against the debtor (Art. 2062)
a. Notice to the guarantor is mandatory in the action
against the principal debtor. The guarantor,
however, isn’t duty bound to appear in the case, &
his non-appearance shan’t constitute default w/ its
consequential effect
b. Rationale: The purpose of notification is to give the
guarantor the opportunity to allege whatever
defenses he may have against the principal
obligation & chances to set up such defenses as
are afforded him by law if he so desires
7. A compromise shall not prejudice the person
not party to it (Art. 2063)
a. A compromise between creditor & principal debtor
benefits the guarantor but doesn’t prejudice him.
b. A compromise between the guarantor & the creditor
benefits but doesn’t prejudice the principal debtor.
8. Co-guarantors are entitled to the benefit of
division (Art. 2065)
a. The benefit of division applies only when there are
several guarantors and one debtor for a single
debt. Except when solidarity has been stipulated
among the co-guarantors, a co- guarantor is liable
only to the extent of his share in the obligation as
divided among all the co-guarantors
Between the Guarantor and the Debtor
1. The guarantor has the right to be subrogated to
the rights of the creditor (Art. 2067).
A guarantor who pays the debt is entitled to every
remedy which the creditor has against the principal
debtor, to enforce every security and all means of
payments to stand in the place of the creditor not
only through the medium of the contract, but even
by means of the securities entered into w/out the
knowledge of the surety having the right to have
those securities transferred to him though there
was no stipulation for it, and to avail himself of all
securities against the debtor
The need to enforce indemnity provisions on Art.
2066 forms the basis for the subrogation clause of
Art. 2067.
2. The guarantor has the duty to notify the debtor
before paying the creditor (Art. 2068)
Should payment be made w/o notifying the debtor,
and supposing the debtor has already made a prior
payment, the debtor would be justified in putting up
the defense that the obligation has already been
extinguished by the time the guarantor made the
payment
In this case, the guarantor will lose the right of
reimbursement and consequently the right of
subrogation as well.
3. The guarantor can’t make payment before the
obligation has become due (Art. 2069)
General rule: Since a contract of guaranty is only
subsidiary, the guarantor cannot be liable for the
obligation before the period on which the debtor’s
liability will accrue. Any payment made by the
guarantor before the obligation is due cannot be
indemnified by the debtor.
Exception: Prior consent or subsequent ratification
by the debtor
4. The guarantor may proceed against the debtor
even before payment has been made (Art. 2071)
General rule: Guarantor has no cause of action
against the debtor until after the former has paid
the obligation.
Exceptions:
a. When he is sued for the payment
b. In case of insolvency of the principal debtor
c. When the debtor has bound himself to relieve
him from the guaranty w/in a specified period,
& this period has expired
d. When the debt has become demandable, by
reason of the expiration of the period of
payment
e. After the lapse of 10yrs., when the principal
obligation has no fixed period for its maturity,
unless it be of such nature that it can’t be
extinguished except w/in a period longer than
10yrs.
f. If there are reasonable grounds to fear that the
principal debtor intends to abscond
g. If the principal debtor is in imminent danger of
becoming insolvent
Rationale: Enable the guarantor to take measures
for the protection of his interest in view of the
probability that he would be called upon to pay the
debt.
Between Co-Guarantors
Requisites for the applicability of Art. 2073:
1. Payment has already been made by one guarantor
2. The payment was made because:
3. The paying guarantor seeks to be indemnified only
to the extent of his proportionate share in the total
obligation. For purposes of proportionate
reimbursement, the other guarantors may interpose
such defenses against the paying guarantor as are
available to the debtor against the creditor, except
those that are personal to the debtor
Extinguishment of Guaranty
1. Once the obligation of the debtor is extinguished in
any manner provided in the Civil Code, the
obligation of the guarantor is also extinguished (Art.
 2076). However, there may be instances when,
after the extinguishment of the guarantor’s
obligation (as in the case of a release from the
guaranty), the obligation of the debtor still subsists.
2. Although the guarantor generally has to make
payment in money, any other thing of value, if
accepted by the creditor, is valid payment and
therefore releases the guarantor (Art. 2077).
3. If one guarantor is released, the release would
benefit the co-guarantors to the extent of the
proportionate share of the guarantor released (Art.
2078).
4. A guarantor is also released if the creditor, without
the guarantor’s consent, extends the time within
which the debtor may perform his obligation (Art.
2079). This is to protect the interest of the
guarantor should the debtor be insolvent during the
period of extension and deprive the guarantor of his
right to reimbursement.
5. If through the fault of the creditor the guarantors are
precluded from being subrogated to the former’s
rights, the latter are released from the obligation.
(Art. 2080)