Art. 2088.

The creditor cannot appropriate the things given by way of

pledge or mortgage, or dispose of them. Any stipulation to
the contrary is null and void.

Prohibition Against pactum commissorium

(1) Stipulation null and void. –
= a stipulation whereby the thing pledged or mortgaged or
under antichresis (Art. 2137) shall automatically become the
property of the creditor in the event of non-payment of the
debt within the term fixed is known as pactum commissorium
or pacto commisorio which is forbidden by law and declared
null and void. (Art. 2088).
= by such a stipulation, the creditor would be able to acquire
ownership of the property given as security without need of
public sale or foreclosure required by law.
= this forfeiture clause has traditionally been outlawed because
it is contrary to good morals and public policy.
= the reason for the prohibition is that the amount of the loan
is oridinarily much less than the real value of the thing pledged
or mortgaged.
(2) Requisites. –
= there are two requisites or elements for pactum
commissorium to exist, namely:
a. There should be a pledge, mortgage, or antichresis of
property by way of security for the payment of the
principal obligation; and
b. There should be a stipulation for an automatic
appropriation by the creditor of the property on the event
of nonpayment of the obligation within the stipulated
period.

= it is immaterial that the questioned stipulation was

voluntarily and freely entered into, pactum commissorium
being void for being prohibited by law.

(3) Stipulation presupposes existence of security contract. –

= pactum commissorium referred to in Arts. 2088 and 2137,
therefore, presupposes the existence of mortgage or pledge or
antichresis.
Art. 2088.
The creditor cannot appropriate the things given by way
of pledge or mortgage, or dispose them. Any stipulation
to the contrary is null and void.
Art. 2137.
The creditor does not acquire the ownership of the real
estate for non-payment of the debt within the period
agreed upon.
Every stipulation to the contrary shall be void. But the
creditor may petition the court for the payment of the
debt or the sale of the real property. In this case, the
Rules of Court on the foreclosure of mortgages shall apply.

= thus it has been held that there was no pactum

commissorium where pursuant to the contract of sale, the
sums already paid by the vendee were forfeited for his failure
to pay the stipulated installments in due time considering that
the person to whom the property was forfeited (vendor) was
the real and equitable owner of the same because title would
not pass until payment of the last installment.
= there is also no pactum commissorium where the alienation
of the subject property was by way of secutiry and not by way
of satisfying or extinguishing the debt of the debtor.
(4) Effect on security contract. –
= the vice of nullity which vitiates such a stipulation does not
affect substantially the principal contract of pledge, mortgage,
or antichresis with regard to its validity and efficacy for the
reason that the contract, having been perfected, can subsist
although the contracting parties have not agreed as to manner
the creditor can recover his credit inasmuch as the law has
expressly established the procedure in order that he may
recover the same, in case the debtor does not comply with his
obligation.
= in short, the security contract remains valid; only the
prohibited stipulation is void.

Illustrative Cases:
(1) If the sum loaned is not paid, property of the debtor would be
considered as absolutely sold to the creditor for said sum.
Facts:
D borrowed money from C under the agreement that if, at the
expiration of the period stipulated, the sum loaned should not be paid,
it would be understood that the house and lot owned by D, be
considered as absolutely sold to C for the said sum. No payment was
made by D within the time fixed.

In view of the refusal of D to deliver the property, C brought action to

recover the property and a rents from D.
 Issue:
Is the contract in question in the nature of pactum commissorium?
Held:
No. We have in this case a contract of loan and a promise of sale of
property, the price of which should be the amount loaned, if within a
fixed period of time such amount should not be paid by the debtor-
vendor (D) of the property to the creditor-vendee (C) of the same.
= The fact that the parties have agreed at the same time, in such a
manner that the fulfillment of the promise of sale would depend upon
the nonpayment or return of the amount loaned, has not produced
any change in the nature and legal conditions of either contract or
any essential defect which would tend to nullify them.
= Pactum commissorium indicates the existence of the contract of
mortgage, or of pledge, or of antichresis, none of which has coincided
in the loan in question.
= the property does not appear mortgaged. Said property could not
be pledged, not being personal property, and notwithstanding the said
double contract the debtor (D) continued in possession thereof and the
said property had never been occupied by the creditor (C). Neither
was there any contract of antichresis by reason of said contract of loan
inasmuch as C has never been in possession thereof, nor has he enjoyed
the said property nor for one moment ever received its rents.

(2) Buyer executed a deed of assignment in favor of seller of property sold,

pursuant to a judgment rendered in an action for specific performance
filed by the seller.
 Facts:
B and S agreed on the sale of trucks by the latter (S) to the former
(B). When B defaulted in the payment of the second and third
installments, S filed an action in court for specific performance. The
trial court rendered judgment for S and ordered B to pay the balance
of his obligation and in case of failure to do so, to execute a deed of
assignment pursuant to the judgment.
Issue:
Is the deed of assignment in the nature of pactum commissorium?
Held:
No. There was no contract of pledge or mortgage entered into by the
parties; nor a case of automatic appropriation of the property by S
because it took the intervention of the trial court to exact fulfillment
of the obligation, by which its very nature is “....anathema to the
concept of pacto commissorio.” And even granting that the original
agreement between the parties had the badges of pactum
commissorium, the deed of assignment does not suffer the same fate
as it was executed pursuant to a valid judgment as can be gleaned
from its very terms and conditions.

Prohibition refers to stipulation authorizing automatic appropriation

What is prohibited by Art. 2088 in connection with pacto

commissorio is the automatic appropriation by the creditor of the
thing pledged or mortgaged upon failure of the debtor to pay his
debt within the period agreed upon by virtue of authority or right
previously given the creditor, thus:
(1) A stipulation providing that the mortgaged property “shall
be considered in full payment without further action in
court” in case of nonpayment is null and void being in the
form of pacto commissorio.
(2) A stipulation in a purported pacto de retro sale that the
owner that the ownership over the property sold would
automatically pass to the vendee in case of no redemption
was effected within the period stipulated, is contrary to the
nature of a true pacto de retro sale, under which the vendee
acquires ownership of the thing sold immediately upon the
execution of the sale, subject only to the vendor’s right of
redemption.
= the said stipulation is a pactum commissorium which
enables the mortgagee to acquire ownership of the mortgaged
property without need of foreclosure.
= it is void. Its insertion in the contract is an avowal of the
intention of the mortgage, rather than to sell, the property.

Permissible stipulations
(1) Subsequent modification of original contract. –
= the stipulations that are prohibited by Arts. 2088 and 2137
(antichresis) are those executed or made simultaneously with
the original contract, not those subsequently entered into.
 = the principle does not prohibit modification of the contract by
subsequent agreement such as the parties may see fit to adopt.

(2) Subsequent voluntary cession of property. –

= the prohibition does not include s subsequent voluntary act of
the debtor making cession of the property mortgaged in
payment of the debt which amounts in its legal effect to a
novation of the original contract and to a voluntary sale of the
said property for the amount of the debt.

(3) Promise to assign or sell. –

= neither is the prohibition applicable to a promise to assign or
sell said property in payment of the obligation if, upon its
maturity, it is not paid because the title thereto remains with
the debtor.
= the promise is merely a personal obligation of the mortgagor
and does not in any way bind the property.
(a) The mortgagor can validly sell the property to a third
person and if there should be any action accruing to the
mortgagee, it would be a personal action for damages
against the mortgagor.
(b) If the vendee contributed to the breach of the contract by
the mortgagor, the former, together with the latter, may
also be held liable for damages; or
 = if the vendee was guilty of fraud which would be a ground
for rescission of the sale in his favor, the mortgagor and not
the mortgagee would be the party entitled to bring the
action of annulment.
Footnote:
(1) Page 355 (Dulay vs. Aquiatin and Maximo, 47 Phil. 951; 1925)
=Dissenting opinion, Justice Street said:
It is not to be denied that a mortgagor of property may transfer the
mortgaged property to the creditor in satisfaction of the mortgage
debt after the mortgage has fallen due. But such transfer implies the
independent exercise of the power vested in the mortgagor, as
owner....
= by virtue of this stipulation (to the effect that in case the specified
date should arrive and the debtor should be unable to pay the
amount due, it should be paid with the property security), the debtor
was bound to transfer the property to the creditor in satisfaction of
the mortgaged debt, the mortgagor being unable at the time to pay
the same.
= said stipulation should be declared invalid, as contrary to the spirit,
if not the letter of Art. Of 1859 (now Art. 2088), as well as directly
contrary to the general principles of jurisprudence applicable to the
relation of mortgagor and mortgagee.
= if a stipulation of this kind is valid, every mortgage in which such
stipulation is inserted will become self-executing and the debtor, upon
making default in the payment of the debt, will be bound to transfer
the property in satisfaction of the mortgage, with the result that the
 right of redemption is lost from the mere fact that the debtor is
unable to pay at the date stipulated.

(4) Authority to take possession of property upon foreclosure.-

= a stipulation authorizing the mortgagee, for the purpose
therein specified, to take possession of the mortgaged premises
upon foreclosure of a mortgage is not repugnant to either Art.
2088 or Art. 2137.
= On the contrary, such a stipulation is in consonance with or
analogous to the provisions of Arts. 2132, et seq. regarding
antichresis and the provisions of the Rules of Court (Rule 59)
regarding the appointment of a receiver as a convenient and
feasible means of preserving and administering the property in
litigation.

Illustrative cases:
(1) Mortgagor appoints mortgagee in deed of assignment as attorney-in-
fact with authority to dispose of mortgage properties in case of default
of mortgagor and to apply the proceeds in the payment of loan.
Facts:
C, a grantee of a Fishpond Lease Agreement from the Gov’t, obtained
from DBP three separate loans, each of which was covered by a
promissory note. Simultaneous with the execution of the notes was the
execution of “Assignment of Leasehold Rights” by C, as borrower of the
mortgaged properties by way of security in the payment of the loans.
 Condition No. 12 provides for the appointment of DBP as attorney-in-
fact with authority, among other things, to sell or otherwise dispose of
the said real rights in case of default of C and to apply the proceeds to
the payment of the loan.
Issue:
(1) Whether the condition in question constitute pactum commissorium.
(2) Whether the act of DBP in appropriating to itself C’s leasehold rights
without foreclosure proceedings was contrary to Art. 2088 and,
therefore, invalid.
Held:
(1) Elements of pactum commissorium are not present.-
= Condition No, 12 did not provide that the ownership over the
leasehold rights would automatically pass to DBP upon Cuba’s failure
to pay the loan on time.
= This provision is standard condition in mortgage contracts and is in
conformity with Art. 2087 of the CC, which authorizes the mortgagee
to foreclose the mortgage and alienate the mortgage property for the
payment of the principal obligation.

(2) DBP exceeded the authority vested by condition.-

= However, DBP exceeded the authority vested by condition No. 12 for
the Deed of Assignment. As admitted by it during the pre-trial, it
had, without foreclosure proceedings, whether judicial or
extrajudicial.... appropriated the leasehold rights of Cuba over the
fishpond in question.
 = its contention that it limited itself to mere administration by posing
caretakers is further belied by the deed of conditional sale it executed
favor of Cuba. The deed stated:
“Whereas, the Vendor (DBP) by virtue of a deed of assignment
executed in its favor by the herein vendees (Sps. Cuba) the former
acquired all the rights and interest of the latter over the above-
described property;
“The title to the real estate property and all its improvements thereon
shall remain in the name of the vendor until after the purchase price,
advances and interest shall have been fully paid.”
= it is obvious from the above-quoted paragraphs that DBP had
appropriated and taken ownership of Cuba’s leasehold rights merely on
the strength of the deed of assignment.
=DBP cannot take refuge in Condition No. 12 of the deed of
assignment to justify its act of appropriating the leasehold rights. As
stated earlier condition No. 12 did not provide that Cuba’s default
would operate to vest in DBP ownership of the rights.
=Besides, an assignment to guarantee an obligation as in the present
case, is virtually a mortgage and not an absolute conveyance of title
which confers ownership on the assignee.”

(1) The lender is given the option to buy at a certain price the property
given as collateral in the event the borrower fails to pay.
Facts:
C (respondent) entered into a loan agreement with B (petitioner) and
her late husband, with the following terms and conditions:
 a. The spouses would borrow P100K from C, for a period of two
years counted from Mar. 1, 1987;
b. Interest rate is 18% per annum;
c. To guaranty payment: put up as collateral 70sqm portion of a
parcel of land, inclusive of the apartment therein;
d. In the event the borrowers fail to pay, C has the option to buy
or purchase the mortgaged property for a total consideration of
P200K inclusive of the principal and interest.

When the loan was about to mature on Mar. 1, 1989, C proposed to

buy at the pre-set price of P200K the collateral given to guarantee
the payment of the loan, but B refused to sell. On Mar. 1, 1989, B
tendered payment of the loan to C which the latter refused to accept,
insisting B’s signing a prepared deed of absolute sale. C consigned the
amount of P47.5K with the trial court with which C filed a complaint
for the specific performance. In arriving at the amount deposited, C
considered the principal loan of P100K and 18% interest per annum
thereon, which amounted to P52.5K, leaving a balance of P47.5K
from the amount of P200K. On the other hand B filed a petition for
consignation and deposited the amount of P153K with the trial court.
Issue:
Whether the stipulation in the loan contract was valid and enforceable.
Held:
1. The stipulation embraced in concept of pactum commissorium.
= B did not fail to pay the loan. When C refused to accept
payment, B consigned the amount with the trial court.
 = a scrutiny of the stipulation of the parties reveals a subtle
intention of the creditor to acquire the property given as security
for the loan. This is embraced in the concept of pactum
commisssorium, which is proscribed by law.
= the elements of pactum commissorium are as follows: (1) there
should be a property mortgaged by way of security for the
payment of the principal obligation; and (2) there should be a
stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of nonpayment of the principal obligation within
the stipulated period.
2. Intent to appropriate property given as collateral appears to be
evident
= a significant task in contract interpretation is the ascertainment
of the intention of the parties and looking into the words used by
the parties to project that intention.
= In this case, the intent to appropriate the property given as
collateral in favor of the creditor appears to be evident, for the
debtor is obliged to dispose of the collateral at the pre-agreed
consideration amounting to practically the same amount as the
loan.
= In effect, the creditor acquires the collateral in the event of non-
payment of the loan. This is within the concept of pactum
commissorium. Such stipulation is void.
3. Duty of court to protect necessitious borrowers. –
= all persons in need of money are liable to enter into contractual
relationships whatever the condition if only to alleviate their
financial burden albeit temporarily.
 = hence, courts are duty bound to exercise caution in the
interpretation and resolution of contracts lest the lenders devour
the borrowers like vultures do with their prey.
Note:
Here, the agreement between the parties was not a sale with right
to repurchase (pacto de retro sale), but a loan with interest of 18%
per annum for a period of 2 years and if B fails to pay, C was
given the option to purchase the property given as collateral for
P200K. There was no stipulation for automatic appropriation by
C of the property in case of non-payment of the loan within the
stipulated period.

Risk of loss of property pledged or mortgaged

As the pledgee or mortgagee does not become the owner of the

property and the ownership thereof remains with the debtor,
therefore, under the maxim, res perit domino suo, the debtor-
owner bears the loss of the property.
= The principal obligation is not extinguished by the loss of the
pledged or mortgaged property.