SPOUSES SALVADOR and ALMA ABELLA v.
SPOUSES - It follows now that at the time the respondents were
ROMEO and ANNIE ABELLA
FACTS:
The case:
- July 31, 2002, petitioners Spouses Salvador and Alma
Abella filed a complaint for sum of money and damages
with prayer for attachment against respondents Spouses
Romeo and Annie Abella before the RTC
Petitioners:
- Petitioners alleged that respondents obtained a loan from
them in the amount of 500K
- And said loan was evidenced by an acknowledgement
receipt dated March 22, 1999 and was payable within 1
year
- Petitioners added that respondents were able to pay a
total 200K, which was paid in two separate occasions.
(100K each), leaving an unpaid balance of 300K
Respondents:
- In their answer, respondents alleged that the amount they
obtained from petitioners was not a loan but was part of
a capital for a joint venture involving the lending of money.
- Respondents claimed that they were approached by the
petitioners to propose that if respondents were to assume
the management of whatever money petitioner would
give them, petitioner would get 2.5% a month with a 2.5%
service fee to respondents.
- The 2.5% that each party would be receiving represent
their sharing in 5% interest that the joint venture was
supposedly going to charge against its debtors.
- Respondents further alleged that the one year stated by
petitioners was not a deadline for payment BUT the term
within which they were they were to return the money
placed by petitioners should the joint venture fails.
- They also claimed that the entire amount of 500K 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.
- However, they were able to collect only to the extend of
200K.
- Hence, the 300K remaining unpaid balance.
RTC:
- RTC ruled in favor of petitioners.
- It noted that the terms of the acknowledgement receipts
executed by respondents clearly showed that:
o Respondents were indebted to the extend of
500K;
o And this indebtedness was to be paid within 1
year; and
o Was subject to interest
- Hence, the trial court concluded that respondents
obtained a simple loan.
- It ordered defendants to pay plaintiffs 300K with interest
rate of 30% per annum from the time the complaint was
filed until fully paid.
CA:
- It ruled that although the agreement is a simple loan,
respondents were not longer liable to pay the outstanding
amount of 300K.
- The CA reasoned that the loan could not have earned
interest, whether contractually stipulated interest or
interest as actual or compensatory damages.
As to the loan’s not having earned stipulated interest:
- It based its ruling on the Civil Code, which requires
interest to be stipulated in writing for it to be due.
- The acknowledgement receipt did not specify the
particular interest rate although it showed that interest
was to be charged.
making interest payments of 2.5% per month, these were
invalid for not being properly stipulated.
As to the loan’s not having earned interest in the concept
of actual or compensatory damages:
- The CA ruled that interest in the concept of actual or
compensatory damages accrues only from the time of
that demand is made, whether judicial or extrajudicial.
- Since respondents received petitioners’ demand letter
only on July 12, 2002, any interest in a concept of actual
or compensatory damages due should be reckoned only
from then.
- Hence, 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.
- Hence, all payments respondents made by way of
interest should be deemed payments for the principal
amount of 500K
- The CA concluded that there was already an
overpayment of 148,500.
- Hence, petitioners were the ones liable to reimburse the
respondents for the overpaid amount of 148,500 applying
the principle of solutio indebiti.
- It ordered petitioner to pay respondents the amount of
148,500 with an interest of 6% per annum to be computed
upon receipt of this decision, until full satisfaction thereof.
- Upon finality of this judgment, an interest rate of 12% per
annum, instead of 6%, shall be imposed on the amount
due, until full payment thereof.
- CA denied petitioner’s Motion for Reconsideration.
- Hence, this present appeal
ISSUE:
1. Whether or not an interest accrued on respondents’
loan from petitioners.
2. Whether or not petitioners are liable to reimburse
respondents for the latter’s excess payments and for
interest.
RULING:
RE: Contractual Relation
- As to the first issue as to whether or not an interest
accrued on respondents’ loan.
- The SC first discussed the contractual relation
between the parties.
- It ruled that respondents entered into a simple loan
or mutuum as also noted by the CA and RTC.
- The basis for this ruling is actually the Civil Code with
provides guideposts as to determine if a contractual
relation is one of simple loan or mutuum.
- It states the Article 1933 provides that where one of
the contracting parties delivers to another a money
or other consumable thing, upon the condition that
the same amount shall be paid, a contract is called
mutuum.
- In the case, the SC ruled that the Acknowledgement
Receipt is clear and straightforward, it attests that (1)
respondents’ received an amount of 500K from the
petitioners; (2) the respondents’ duty to pay back the
amount with 1 year; and lastly, the respondents’ duty
to pay interest.
- These are consistent with what characterizes a
simple loan; namely the delivery of 500K with the
condition that respondents shall pay the same within
1 year.
RE: Respondents’ duty to pay conventional interest
- After establishing the contractual relation between
the parties, the SC then discussed the duty of the
respondent to pay conventional interest.
- It ruled that the loan obtained by respondents is
subjected to a conventional interest at the rate of
12% per annum, the legal interest at the time the
 parties executed their agreement, which is March 22,
1999.
- In cited the CC which provides that no interest shall
be due unless it has been expressly stipulated in
writing.
- However, the issue lies from the failure of the
acknowledgement receipt to state the exact rate of
interest.
- So, in concluding the interest rate of 12% the the SC
cited jurisprudence in deciding on the issue. It stated
that jurisprudence is clear about the applicable rate
of interest
- It first cited the case of Spouses Toring v. Spouses
Olan, wherein the Court ruled that “in a loan or
forbearance of money, the interest due should be
that stipulated in writing, and in the absence thereof,
the rate shall be 12% per annum.
- Spouses Toring case also cited the case of Security
Bank and Trust Company v. RTC, wherein the Court
also ruled that the in the absence of stipulated
writing, the rate shall be 12% per annum.
- The Security Bank case referred to the case of
Eastern Shipping Lines, Inc. v. CA, which also states
that, “when the obligation is breached, and it consists
in the payment of sum of money, i.e loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing. In the
absence of stipulation, the rate shall be 12% per
annum to be computed from default.”
- However, in the case of Nacar v. Gallery Frames, the
Court recognized that the legal rate of interest has
been reduced to 6% per annum.
- Nevertheless, both Bangko Sentral ng Pilipinas
Circular No. 799, Series of 2013 and Nacar retain the
definite and mandatory framing of the rule articulated
in Eastern Shipping, Security Bank, and Spouses
Toring.
- Thus, it remains that where the interest was
stipulated in writing by the debtor and creditor in a
simple loan or mutuum, but no exact interest rate
was mentioned, the legal rate of interest shall
apply.
- At present, this is 6% per annum, subject to Nacar’s
qualification on prospective application.
- IN THE CASE, the loan obtained by respondents
from petitioners is deemed subjected to conventional
interest at the rate of 12% per annum, the legal
interest at the time the parties executed their
agreement.
- Moreover, should conventional interest still be due as
of July 1, 2013, the rate of 12% per annum shall
persist as the rate of conventional interest.
- This Court reasoned that interest in this respect is
used as a substitute for the parties’ intent, as
expressed at the the time of the execution of their
contract.
- In this sense, the legal rate of interest is an
affirmation of the contracting parties' intent; that is,
by their contract's silence on a specific rate, the then
prevailing legal rate of interest shall be the cost of
borrowing money.
- This rate, which by their contract the parties have
settled on, is deemed to persist regardless of shifts
in the legal rate of interest.
- Hence, the legal rate of interest, when applied as
conventional interest, shall always be the legal rate
at the time the agreement was executed and shall
not be susceptible to shifts in rate.
RE: Petitioners’ insistence on conventional interest rate
of 2.5% per month/ 30% per annum
- The Court ruled that the monthly interest rate of 2.5%
is unconscionable.
- The SC ruled that the imposition of an
unconscionable rate of interest on a money debt,
even if knowingly and voluntarily assumed, is
immoral and unjust.
- It is void ab initio for being contrary to morals, and
the law.
- Petitioners here insist upon the imposition of 2.5%
monthly or 30% annual interest. Compounded at this
rate, respondents' obligation would have more than
doubled by the end of the third year after which the
loan was contracted if the entire principal remained
unpaid.
- This is grossly unfair, especially since up to the fourth
year from when the loan was obtained, respondents
had been religiously delivering payment.
- This reduces their best efforts to satisfy their
obligation
- However, in the case, since the 30% interest rate per
annum is unconscionable, it will not be applied so its
as if the contracting parties have failed to make a
specific stipulation, the legal rate must apply. And as
discussed, it will be 12% per annum.
RE: Legal interest on conventional interest
(Compensatory Interest)
- Apart from respondents' liability for conventional interest
at the rate of 12% per annum, if the outstanding
conventional interest is still due from respondents, it shall
itself earn legal interest from the time judicial demand was
made by petitioners on July 31, 2002, when they filed their
Complaint.
- This is consistent with Article 2212 of the Civil Code,
which provides, that interest due shall earn legal interest
from the time it is judicially demanded
- Also in Nacar, it states that "the interest due shall itself
earn legal interest from the time it is judicially demanded."
- Consistent with Nacar, the interest due on conventional
interest shall be at the rate of 12% per annum from July
31, 2002 to June 30, 2013.
- Thereafter, or starting July 1, 2013, this shall be at the
rate of 6% per annum
V
RE: Overpayment
- The Court ruled that respondents made an overpayment
in the amount of Php 3,379.
- Applicable Interest Rate:
o For conventional interest (CI) ,12% per annum
o For interest on conventional interest,
§ 12% per annum from July 31, 2002 to
June 20, 2003
§ 6% per annum henceforth
- By end of June 21, 2002, respondents had not only fully
paid the principal and all the conventional interest that
had accrued on their loan.
- By this date, they also overpaid 3,379.17.
- Moreover, while hypothetically, interest on conventional
interest would not have run from July 21, 2002, no such
interest accrued since there was no longer any
conventional interest due from respondents by then.
V
RE: Principle of Solutio Indebiti
- As respondents made an overpayment, the principle
of solutio indebiti as provided by Article 2154 of the Civil
Code applies.
- As respondents had already fully paid the principal and
all conventional interest that had accrued, they were no
longer obliged to make further payments.
- Any further payment they made was only because of a
mistaken impression that they were still due.
- Accordingly, petitioners are now bound to return any and
all excess payments delivered by respondents.
- Nevertheless, Nacar also provides that, “when the
judgment of the court awarding a sum of money
becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, 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.”
- Thus, interest at the rate of 6% per annum may be
properly imposed on the total judgment award. This shall
be reckoned from the finality of this Decision until its full
satisfaction.
- Petitioners Spouses Salvador and Alma Abella
are directed to jointly and severally reimburse
respondents Spouses Romeo and Annie Abella the
amount of P3,379.17, which respondents have overpaid
CATALINA, ELIZABETH, and GILBERT ISLA v. GENEVIA
ESTORGA
FACTS:
- On December 6, 2004, petitioners Catalina, Elizabeth,
and Gilbert, all surnamed Isla, obtained a loan in the
amount of 100K from respondent Genevia Estorga.
- The said loan is payable from 6 months to 1 year and
subject to interest at the rate of 10% per month.
- As security, a real estate mortgage was constituted over
a parcel of land in Pasay City registered under the name
of Edilberto Isla, who is married to Catalina.
- Since petitioners failed to pay the said loan, the
respondents asked assistance from the barangay and a
“Kasulatan ng Pautang” was executed.
- However, petitioners failed to comply with its terms.
- Thus, respondents sent a demand letter dated November
16, 2006.
- Once more, petitioners failed to comply with the demand.
- Hence, the respondents filed a Petition for Judicial
Foreclosure against them before the RTC
Petitioners:
- Petitioners maintained that the subject mortgage was not
a real estate mortgage but mere loan
- Moreover, they said that the stipulated interest of 10% per
month was grossly unconscionable.
- They also insisted that the since petitioners were not the
absolute owners of the subject property, they could not
gave validly constituted the subject mortgage.
RTC:
- RTC granted the Petition for Judicial Foreclosure.
- It found that the petitioners themselves admitted that:
a. They obtained a loan in the amount of 100K and that
said loan was secured by a real estate mortgage
over the subject property; and
b. The subject mortgage was annotated on a transfer
certificate title.
- RTC also observed that the underlying principle is that
real estate mortgage is but a security and not a
satisfaction of indebtedness although the present action
pertains to a judicial foreclosure.
- Thus, it is only proper to render petitioners solidarily liable
to pay respondent and foreclose the subject mortgage
should they fail to fulfill their obligation.
- RTC directed petitioners:
a. To pay respondent the amounts of 100K with 12%
interest per annum.
b. 20K as attorney’s fee.
- Alternatively, it held that the subject property will be
foreclosed and sold at public auction to satisfy the
mortgage debt, and surplus, if any, will be delivered to
petitioners with reasonable interest under the law in the
event that petitioners fail to pay or deposit with the
Clerk of Court the said amount within the period of 6
months.
CA:
- The CA affirmed with modification the decision of RTC
- It ordered petitioner to pay respondent the following:
a. 100K representing the principal of the loan
obligation;
b. an amount equivalent to 12% of 100K computed per
year from Nov. 16, 2006 until full payment,
representing interest on the loan;
c. an amount equivalent to 6% of the sums due in a and
b per annum computed from the finality of the CA
Decision until full payment, representing legal
interest; and
d. 20K attorney’s fee.
- Meanwhile, it did not agree with the RTC providing for
alternative remedies, which are by law mutually
exclusive
- Thus, since respondent’s Petition for Judicial
Foreclosure was essentially an action to collect a
sum of money, she is then barred from causing the
foreclosure of the subject mortgage.
- Moreover, the CA ruled that the RTC erred in
imposing the interest rate of twelve percent (12%) per
annum from December 2007 until full payment.
- It likewise held that the stipulated interest of ten
percent (10%) per month on the real estate mortgage
is exorbitant.
- Finally, it declared that respondent is entitled to the award
of attorney's fees based on equity and in the exercise of
its discretion.
- Petitioner sought partial reconsideration however, the
same was denied
- Hence this petition, claiming that CA erred in imposing
interest of 12% per annum interest until full payment
ISSUE:
1. Whether or not the CA erred in awarding 12%
interest on the principal obligation until full payment.
[NO]
2. Whether or not the award of attorney’s fee in favor of
respondent is valid. [NO]
RULING:
- In determining the interest rate, the SC discussed first the
2 types of interest, monetary interest and compensatory
interest.
- Monetary interest is the compensation fixed by the
parties for the use or forbearance of money. The right to
recover this interest arises only virtue of a contract
- On the other hand, compensatory interest is that
imposed by law or by the courts as penalty or indemnity
for damages. The right to recover interest arises only as
damages for delay or failure to pay the principal loan on
which the interest is demanded.
- In monetary interest, the parties are free to stipulate their
preferred rate.
- However, courts are allowed to equitably temper interest
rates that are found to be excessive and unconscionable.
- In such instances, only the unconscionable interest rate
is nullified but the parties' agreement on the payment of
interest on the principal loan obligation still subsists.
- It is as if the parties have not specified the interest rate to
be imposed on the principal amount, in which case the
legal rate of interest prevailing at the time the agreement
was entered into is applied by the Court.
- In this case, petitioners and respondent entered into a
loan obligation and clearly stipulated for the payment of
monetary interest.
- However, the stipulated interest of ten percent 10% per
month was found to be unconscionable, and thus, the
court struck it down and fixed a new monetary interest of
12% per annum, which was the prevailing legal rate of
interest for loans at the time the loan was contracted on
December 6, 2004.
- In saying that the interest is 12%, the SC cited the case
of Spouses Abella, where the Court struck down the
interest and changed it with the prevailing legal interest
rate at the time the loan was perfected at 12% per annum.
In the same case, however, it cited Nacar case and
Bangko Sentral ng Pilipinas Circular that recognized
the legal rate of interest to be reduced to 6% per annum.
“where the interest was stipulated in writing, but no exact rate
was mentioned, the legal rate of interest shall apply, which is
6% at present”
- Applying this, the loan obtained by respondents from
petitioners is deemed subjected to conventional interest
at the rate of 12% per annum, the legal rate of interest at
the time the parties executed their agreement.
Moreover, should conventional interest still be due as of
July 1, 2013, the rate of 12% per annum shall persist as
the rate of conventional interest.
- The Court reasoned that because interest in this respect
is used as a substitute for the parties' intent.
- In this sense, the legal rate of interest is an affirmation of
the contracting parties' intent, which is the silence on a
specific rate, the then prevailing legal rate of interest shall
be the cost of borrowing money.
- This rate is deemed to persist regardless of shifts in the
legal rate of interest.
- Hence, the legal rate of interest, when applied as
conventional interest, shall always be the legal rate at the
time the agreement was executed and shall not be
susceptible to shifts in rate.
- The Court rules that the CA correctly imposed a
straight monetary interest rate of 12% per annum on
the principal loan obligation of petitioners to
respondent, from the date of extrajudicial demand until
finality of this ruling.
- In addition, not only the principal amount but also the
monetary interest due to respondent shall itself earn
compensatory interest at the legal rate, pursuant to
Article 2212 of the Civil Code, which states that interest
due shall earn legal interest from the time it is judicially
demanded.
- It contemplates the presence of stipulated or conventional
interest, i.e., monetary interest, which has accrued when
demand was judicially made.
- In cases where no monetary interest had been stipulated
by the parties, no accrued monetary interest could further
earn compensatory interest upon judicial demand.
- Thus, the principal amount and monetary interest due to
respondent shall earn compensatory interest of 12%
per annum from judicial demand, i.e., the date of the
filing of the complaint on July 24, 2007, to June 30,
2013, and thereafter, at the rate of six percent (6%)
per annum from July 1, 2013 until fully paid.
-
WHEREFORE, Petitioners Catalina F. Isla, Elizabeth Isla, and
Gilbert F. Isla are ORDERED to pay respondent Genevira P.
Estorga:
(a) P100,000.00 representing the principal loan
obligation;
(b) Monetary interest on the principal loan obligation at
the rate of twelve percent (12%) per annum from the
date of default, i.e., extrajudicial demand on
November 16, 2006, until finality of this ruling;
(c) Compensatory interest on the monetary interest at
the rate of twelve percent (12%) per annum from
judicial demand, i.e., July 24, 2007, to June 30, 2013,
and thereafter, at the rate of six percent (6%) per
annum from July 1, 2013 until finality of this ruling;
and
(d) Legal interest at the rate of six percent (6%) per
annum imposed on the sums due in letters (a), (b),
and (c) from finality of this ruling until full payment;

II
RE: Attorney’s Fee
- General Rule is that attorney’s fee cannot be recovered
as part of damages because of the policy that no premium
should be places on the tight to litigate. Awarding it
demands justification and must be clearly stated in the
body of its decision.
- In the case, the CA awarded the attorney’s fee without
clearly stating the reasons for such award.
- Hence, the Court finds it proper to delete the same.

SECURITY BANK CORPORATION v. SPOUSES
RODRIGO and ERLINDA MERCADO
FACTS:
- On September 13, 1996, Security Bank (SB) granted
spouses Mercado a revolving credit line in the
amount of 1,000,000.
- The terms and conditions of the said revolving line
included stipulations as to the:
a. Interest on Availments
Where Spouses Mercado agree to pay Security Bank
interest on outstanding Availments at a per annum rate
determined from time to time by SB. The basis for the
interest rate is the SB’s prevailing lending rate at the date
of Availment.
b. Late Payment charges
Where if the account is delinquent, spouses agree to pay
SB a penalty of 2% per month computed on the amount
due and unpaid or in excess of the latter’s credit limit
- An addendum to the agreement also provided that
spouses agree to pay SB Corporation (SBC) interest on
outstanding availments based on annual rate computed
and billed monthly by SBC on the basis of prevailing
monthly rate; without need of additional confirmation to
the interest stipulated as computed by SBC.
- To secure the credit line, the spouses then executed a
Real Estate Mortgage in favor of SB over their properties
in Lipa City and San Jose.
- Another Real Estate Mortgage was executed by the
spouses but over their properties in Batangas City to
secure an additional amount of 7,000.000 under the same
revolving credit agreement.
- Subsequently, the spouses defaulted in their payment.
- SB then requested them to update their account, and
sent a final demand letter on March 31, 1999.
- Thereafter, it filed a petition for extrajudicial
foreclosure pursuant to Act No. 3135 with respect to the
parcels of land in Lipa City.
- SB likewise filed similar petition with respect to the
parcels of land in San Jose and Batangas City.
- Respective notices of the foreclosure sales were
published in newspapers of general circulation.
- However, the publication of the notices of foreclosure of
the properties in Batangas City contained errors with
respect to the technical descriptions
- SB then cause the publication of an erratum in a
newspaper to correct the errors.
- However, this erratum was only published once, and did
not correct the lack of indication of location in both cases.
- Thereafter, the foreclosure sale of the land in Lipa City
was held wherein SB was the winning bidder.
- A similar foreclosure sale was also conducted over the
properties in Batangas City and San Jose, where SB
was again adjudged as the winning bidder.
- Certificate of Sale over these properties were issued
and registered.
- Spouses Mercado then offered to redeem the
foreclosed properties for 10,000,000.
- However, SB allegedly refused and made a counter-
offer of 15,000.000
- The Spouses Mercado then filed a complaint for the
annulment of foreclosure sale, damages, injunction,
specific performance, and accounting with application for
temporary restraining order and/or preliminary injunction.
- In the complaint, Spouses Mercado averred that:
a. The parcel of land in San Jose should not have been
foreclosed together with the one in Batangas City
because they are covered by separate real estate
mortgages
b. The requirements of posting and publication of notice
under Act 3135 were not complied with
c. Security Bank acted arbitrarily in disallowing the
redemption of the foreclosed properties for 10M.
d. The total price of the parcels of land only amounted
to 4,723,620; and
e. The interest and the penalties imposed by SB on
their obligation were iniquitous and unconscionable.
- Meanwhile after SB consolidated its titles to the
foreclosed parcels of land, it filed an ex-parte petition for
issuance of writ of possession over the parcels of land
located in Batangas City and San Jose.
- Thereafter, two cases were consolidated before RTC of
Batangas City.
RTC:
- RTC declared that the foreclosure sales of the 5 parcels
of land were void.
Basis: It reasoned that they were void because the act of
making only one corrective publication is a fatal omission
committed by the mortgagee bank.
- It also declared that the interest rates contained in the
revolving credit line agreement were void for being
potestative or solely based on the will of SB.
Basis: It stated that where the fixing of the interest rate is
the sole prerogative of the creditor/mortgagee, it belongs
to the class of potestative condition which is null and void
under the Civil Code. Article 1308
Additionally, it violates the Central Bank Circular No. 1191
which requires the interest rate for each re-pricing period to be
subject to a mutual agreement between the borrower and the
bank.
Hence, no interest has been expressly stipulated in writing (as
required under Article 1956 of the Civil Code)
It ruled that since the spouses offered to pay a higher amount
of 10M and the bank unjustifiably refused to accept it, no
interest shall be due and demandable after the offer.
- Further, it declared the sum of 8,000,000 as the true and
correct obligation of the spouses to SB.
- SB moved for reconsideration claiming that RTC does not
have jurisdiction over the parcels in Lipa City and erred in
limiting the obligation to only 8M
- RTC then modified its decision and declared that only
the parcels of land in Batangas City and San Jose are
void; not Lipa City where it has no jurisdiction.
- Furthermore, the obligation of spouses Mercado is 7.5M,
after deducting 500K from the principal loan of 1M
- It also ruled that as cost of money, the obligation shall
bear the interest at the rate of 6% from the time of date
of the Amendatory Order until fully paid.
CA:
- The CA affirmed with modification the RTC Amended
Decision.
- It agreed that the error in the technical description of the
property rendered the notice of foreclosure sale defective.
- CA also concluded that the provisos giving SB the sole
discretion to determine the annual interest rate is violative
of the principle of mutuality of contracts because there is
no reference rate to peg the annual interest rate to be
imposed.
- However, CA disagreed as to the amount of the
outstanding obligation, the imposition of interest,
and the penalty.
a. As to the principal amount of obligation, the liability
of the spouses from SB is 7,516,880 or the principal
obligation of 8M less the amount (483,120) for which
Lipa City property has been sold.
b. As to the legal interest, it modified the legal interest
from 6% to 12% from the date of extrajudicial
demand (March 31, 1999)
c. As to penalty, it imposed the stipulated 2% monthly
penalty under the revolving credit line.
- Hence, these consolidated petitions
Security Bank:
- It argues that CA erred in the declaring the foreclosure sale void
and the provisions on interest rate violative of the principle of
mutually of contracts
- First, it said that the foreclosure sale is valid since it complied
with the publication requirements and that the error was only
minor and does not require the complete technical description of
the property published.
- Second, it insists that the provision on the interest rate did not
violate the principle of mutuality of contracts. Absolute discretion
is wanting since the addendum provides for a ceiling on the
maximum applicable rate; it is the market forces and other factor
that would dictate the rate of interest to be applied It also said
that the spouses are bound by the rate since they were are
aware of and had freely and voluntarily assented to it.
Spouses Mercado:
- They claim that CA erred in imposing interest and penalty from
the date of extrajudicial demand until the finality of the decision.
- It cited cases where the Court ruled that the interest and penalty
were considered paid by the auction sale.
- As such, interest should only run from the finality of the Decision.
- They also assert that they should be excused from paying the
penalty because of economic crises and their lack of bad faith.
ISSUE:
1. WON the foreclosure sales of parcels of land in Batangas
City and San Jose are valid.
2. WON the provisions on interest rate in the revolving credit
line and its addendum are void for being violative of the
principle of mutuality of contracts
3. WON the interest and penalty are due and demandable
from date of auction sale until finality of judgment
declaring the foreclosure void under the doctrine of
operative facts.
RULING:
I.
RE: Foreclosure sales
- SC ruled that the foreclosure sales were void for non-
compliance with the publication requirement of the notice
of sale.
- Act No. 3135 provides that when the value of the property
is more than 400 pesos, the notice of sale must be
published once a week for 3 consecutive weeks in a
newspaper of general circulation.
- Failure to advertise a mortgage foreclosure sale in
compliance with statutory requirements constitutes a
jurisdictional defect which invalidates the sale.
- Validity of a notice of sale is not affected by immaterial
errors but only if it is a substantial error to the extent that
it will mislead bidders, depreciate the value of property or
prevent it from bring a fair price, these then would render
the notice insufficient.
- In the case, the errors committed constitute data
important to a prospective bidder.
- First, the notice misidentified the identify of the properties
since lot numbers are misstated.
- Second, the notice omitted the exact location of the
properties.
- These errors are significant to affect public decision.
II.
- The Court ruled that the interest rate in the parties’
agreement violate the principle of mutuality of contracts.
A. Principle of Mutuality of Contracts
- The principle of mutuality of contracts provided for in the
Civil Code states that contracts must bind both
contracting parties, and its validity or compliance cannot
be left to the will of one of them.
- It is premised on 2 settled principles:
- First, that any obligation arising from contract has the
force of law between parties
- Second, that there must be mutuality between the parties
based on their essential equality.
- From this, if a contract heavily favors of one party so as
to lead to an unconscionable result is void.
- Likewise, any stipulation regarding the validity of
compliance of the contract that is potestative or is left
solely on the will of one of the parties is invalid.
- Stipulations as to the payment of interest are subject to
the principle of mutuality of contracts.
- As a principal condition and an important component in
contracts of loan, interest rates are only allowed if agreed
upon by express stipulation of the parties, and only when
reduced into writing.
- In case of contract of loan, the interest rate is always
a vital component as it would affect a capital venture.
- Hence, any change to it must be mutually agreed
upon, or it produces no binding effect
-
- In Philippine Savings Bank v. Castillo, the Court
declared void a stipulation that allows for both an increase
or decrease of the interest rate, without subjecting the
modification to the mutual agreement of the parties
- In the same case, the Court ruled that the validity of the
escalation clause did not give petitioner the
unbridled right to unilaterally adjust interest
rates. The adjustment should have still been subjected to
the mutual agreement of the contracting parties. In light
of the absence of consent on the part of respondents to
the modifications in the interest rates, the adjusted rates
cannot bind them notwithstanding the inclusion of a de
escalation clause in the loan agreement.
- In the case of Silos v. Philippine National Bank, the
Court found that the method of fixing interest rates is
based solely on the will of the bank. The method is "one-
sided and based on subjective criteria such as
profitability, cost of money, bank costs, etc. x x x." It is
"arbitrary for there is no fixed standard or margin above
or below these considerations." More, it is worded in such
a way that the borrower shall agree to whatever interest
rate the bank fixes. Hence, the element of consent from
or agreement by the borrower is completely lacking.
- In the case, spouses Mercado supposedly:
a. Agreed to pay an annual interest based on a
“floating rate of interest”
b. To be determined solely by Security Bank
c. On the basis of SB’s own prevailing lending rate;
d. Which shall not exceed the total monthly
prevailing rate as computed by SB; and
e. Without the need of additional confirmation to
the interests stipulated by SB.
- The stipulations on floating rate of interest differ from
escalation clauses.
- Escalation clauses are stipulations which allow for the
increase (as well as the mandatory decrease) of the
original fixed interest rate. Meanwhile, floating rates of
interest refer to the adjustable interest rate stated on a
market-based reference rate agreed upon by the parties.
- Both are contractual provisions that entail adjustment of
interest rates subject to the principle of mutuality of
contracts. Thus, while the cited cases involve escalation
clauses, the principles they lay down on mutuality equally
apply to floating interest rate clauses.
- The Banko Sentral ng Pilipinas (BSP) Manual of
Regulations for Banks (MORB) allows banks and
borrowers to agree on a floating rate of interest,
provided that it must be based on market-based
reference rates
- Floating rates of interest. The rate of interest on a floating
rate loan during each interest period shall be stated on
 the basis of Manila Reference Rates (MRRs), T-Bill Rates
(TBR) or other market based reference rates plus a
margin as may be agreed upon by the parties.
- It provided that that the parties to such existing floating
rate loan agreements are not precluded from amending
or modifying their loan agreements by adopting a floating
rate of interest determined on the basis of the TBR or
other market based reference rates.
- Where the loan agreement provides for a floating interest
rate, the interest period, which shall be such period of
time for which the rate of interest is fixed, shall be such
period as may be agreed upon by the parties.
- This BSP requirement is consistent with the principle
that the determination of interest rates cannot be left
solely to the will of one party.
- It further emphasizes that the reference rate must be
stated in writing, and must be agreed upon by the
parties.
- for the whole amount, but for any amount due.
B. The interest provisions in the revolving credit
line agreement and its addendum violate the
principle of mutuality of contract
- Security Bank contends that subject provisions on the
Interest Rate observed the principle of mutuality.
However, the Court said no; it is violative of the
mutuality of contract.
- First, the authority to change the interest rate was
given to Security Bank alone as the lender, without
need of the written assent of the spouses Mercado.
- This unbridled discretion given to Security Bank is
evidenced by the clause wherein the spouses Mercado
said that they give their consent without need of additional
confirmation as to the interest stipulated by SB.
- The irregularity of the imposition of interest rates is further
emphasized by the lack of a breakdown of the interest
rates imposed by Security Bank in its statement of
account accompanying its demand letter.
- Second, the interest rate to be imposed is determined
solely by Security Bank for lack of a stated, valid
reference rate.
- The stipulated interest rate based on "Security Bank's
prevailing lending rate" is not synonymous with
"prevailing market rate."
- For one, Security Bank is still the one who determines its
own prevailing lending rate. More, the argument that
Security Bank is guided by other facts in determining its
prevailing monthly rate fails because these reference
rates are not contained in writing as required by law and
the BSP.
- Thus, we find that the interest stipulations here are akin
to the ones invalidated in Silos and in Philippine Savings
Bank for being potestative.
- In striking out these provisions, both in the original
and the addendum, the Court note that there are no
other stipulations in writing from which can be the
basis of an imposition of interest.
- Nevertheless, while the Court found that no
stipulated interest rate may be imposed on the
obligation, legal interest may still be imposed on the
outstanding loan.
- Eastern Shipping Lines, Inc. v. Court
Appeals and Nacar v. Gallery Frames provide that in the
absence of a stipulated interest, a loan obligation shall
earn legal interest from the time of default, i.e., from
judicial or extrajudicial demand.
III.
As to the issue of WON the interest and penalty are due and
demandable from date of auction sale.
- Spouses Mercado erred in citing the case of Andal v.
PNB.
- In that case, there was a finding by both the trial court and
the CA that no default can be declared because of the
arbitrary and unconscionable interest rates and penalty
charges unilaterally imposed by the bank. There, the
debtors questioned the period of default in relation to the
interest imposed as it was an issue necessary for the
determination of the validity of the foreclosure sales
therein.
- In contrast, here, the spouses Mercado never denied
that they defaulted in the payment of the principal
obligation.
- They did not assert, from their complaint or up to their
petition before this Court, that they would not have been
in default were it not for the bank's imposition of the
interest rates.
- The SC ruled that for purposes of computing when
legal interest shall run, it is enough that the debtor be
in default on the principal obligation.
- To be considered in default under the revolving credit
line agreement, the borrower need not be in default
- The spouses Mercado never challenged Security Bank's
claim that they defaulted as to the payment of the
principal obligation of P8,000,000.00.
- Thus, the Court found that they have defaulted to this
amount at the time Security Bank made an extrajudicial
demand on March 31, 1999.
- The Court also ruled that the penalty charges can be
imposed.
- While the Court see no legal basis to strike down the
penalty stipulation, however, it reduced the penalty of 2%
per month or 24% per annum for being iniquitous and
unconscionable.
- The Court also modified the amount of the
outstanding obligation of the spouses Mercado to
Security Bank.
- The foreclosure sale over the parcel of land in Lipa City
is not affected by the annulment proceedings.
- Thus, the proceeds of the foreclosure of said parcel of
land amounting to 483,120 pesos should be applied to the
principal obligation of 8M plus interest and penalty from
extrajudicial demand (March 31, 1999) until date of
foreclosure sale (October 19, 1999).
- The resulting deficiency shall earn legal interest at the
rate of 12% from the filing of Security Bank's answer with
counterclaim on January 5, 2001 until June 30, 2013,
AND shall earn legal interest at the present rate of 6%
from July 1, 2013 until finality of judgment.
WHEREFORE, petitions are denied.
- Spouses Mercado are hereby ordered to pay Security
Bank Corporation the sum of P8,317,756.71 representing
the amount of deficiency, inclusive of interest and penalty.
- Said amount shall earn legal interest of 12% per
annum from January 5, 2001 until June 30, 2013, and
shall earn the legal interest of 6% per annum from July 1,
2013 until finality of this Decision.
- The total amount shall thereafter earn interest at the rate
of 6% per annum from the finality of judgment until its full
satisfaction.
of
ARTICLE 1953
A person who receives a loan of money of any other General Rule: non fungible things are irreplaceable; they must
fungible thin acquires the ownership thereof, and is be returned to the lender after the purpose of the loan has
bound to pay the creditor an equal amount of the same been accomplished
kind and quality.
Exception: Article 1959. Non fungible things may be replaced
What is mutuum? by agreement of the parties. However, the contract ceased to
Mutuum is a contract whereby one of the parties called the be a loan. It becomes barter.
“lender” deliver to another called the “borrower,” money or
other consumable thing with the condition or agreement that How do you distinguish loan from barter?
the same amount of the same kind and quantity shall be paid. Basis Loan Barter
Subject matter Money or other Non-fungible
What is the cause in a loan? fungible things
1. As to the borrower, the acquisition of the thing Nature If mutuum, may Always onerous
2. As to the lender, the right to demand the return of the be gratuitous or
thing loaned or its equivalent onerous
Effect While there is It is in effect, a
What can the lender demand from the borrower? transfer of mutual sale
In a contract of loan, the borrower becomes the owner of the ownership, there resulting in the
property delivered to him. Thus, what will be paid is not the is no sale transfer of
same identical thing delivered. The borrower is bound to pay, ownership of
not return, to the lender only the equivalent of the thing. both sides
Otherwise, it will become a contract of commodatum. Return of the If commodatum, The parties do
Note: A loan of money may by agreement be payable in kind. thing the borrower not return the
returns the things things subject to
Can a person be imprisoned for non payment of debt? after the the exchange
No. The debtor in mutuum becomes the owner of the thing expiration period
delivered to him. If he consumed or disposed the thing, that agreed upon
act which is an act of ownership is not appropriation. Hence,
there is no basis for a criminal prosecution. ARTICLE 1955
The obligation of the person who borrows money shall be
How do you distinguish mutuum from rent? governed by the provisions of Article 1249 and 1250 of
Basis Mutuum Rent this Code.
Ownership Ownership of Ownership of
property is property is not If what was loaned is a fungible thing other than money,
transferred to the transferred to the debtor owes another thing of the same kind, quantity
borrower lessee. However, and quality, even if it should change in value. In case it is
possession is impossible to deliver the same kind, its value at the time
temporarily of the perfection of the load shall be paid.
relinquished to
lessee for the What are the governing rules on payment of loan?
period of the The subject matter of loan may either be money or
lease contract consumable thing.
Nature Unilateral Bilateral Contract 1. If it is money, the obligation of the debtor or borrower
Contract shall be governed by the following articles:
Subject Consumable Non-consumable a. Article 1249. The payment of debts in money
Juridical Lender and Lessor and shall be made in the currency stipulated, and if
Relations Borrower lessee it is not possible to deliver such currency, then
in the currency which is legal tender in the
What is a fungible thing? Philippines.
It is a fungible thing when the movable thing delivered in loan The delivery of promissory notes payable to
is not to be returned to the bailor, but may be substituted or order, or bills of exchange or other mercantile
replaces with another equivalent thing. It is usually determined documents shall produce the effect of payment
by number, weight, or measure. only when they have been cashed, or when
through the fault of the creditor they have been
What is a non-fungible thing? impaired. In the meantime, the action derived
If the thing delivered is intended to be returned and from the original obligation shall be held in
irreplaceable after the purpose of the loan had been abeyance.
accomplished.
b. Article 1250. In case of extraordinary inflation or
Note: The article speaks of fungible things. deflation of the currency stipulated should
Mutuum – Contract of consumption supervene, the value at the time of the
Commodatum – Contract of use of a thing establishment of the obligation shall be the basis
of payment, unless there is an agreement to the
ARTICLE 1954 contrary
A contract whereby one person transfers the ownership
of non-fungible things to another with the obligation on 2. If is is other consumable or fungible thing,
the part of the latter to give things of the same kind, a. The debtor or borrower shall pay another
quantity, and quality shall be considered a barter. thing of the same kind, quantity and quality,
even if it should change in value.
What is barter? b. If it cannot be done, the value of the thing at
It is a contract where one of the parties binds himself to give the time of its perfection (delivery) shall be
one thing to another in consideration of the latter’s promise to the basis of the payment of loan.
give another thing.
ARTICLE 1956
No interest shall be due unless it is stipulated in writing.
When does this article apply?
The article applies only to interest for use of money. It is not
applicable to interest as indemnity for damages.
What is interest?
Interest is nothing more than the compensation agreed to be
paid by the borrower for the use of the money lent to him by
the lender.
What are the classes of interest?
1. Simple – the interest which is paid for the use of the
principal at a certain rate stipulated in writing by the
parties
2. Compound – the interest which is imposed upon the
accrued interest, that is, interest due and unpaid.
Note: Accrued interest + principal = new principal, upon which
the interest for the next period is based.
The compounding of the penalty or compensation interest is
sanctioned by and allowed pursuant to Article 1959 of the CC.
3. Legal – the interest which the law directs to be paid in the
absence of any agreement as to the rate.
It is fixed at 6% per annum
What is the basis for the right to interest?
The right to interest arises only:
a. By reason of the contract (stipulation in writing); or
b. By reason of delay or failure to pay principal on which
interest is demanded
If the obligation consists of the payment of a sum of money,
and the debtor incurs delay, the indemnity for damages shall
be the payment of legal interest.
What is the reckoning period for payment of interest on
unliquidated claims?
No interest shall be adjudged on unliquidated claims unless
the same can be established with reasonably certainty, and
where the pleadings in the trial court did not spell out said
amounts with certitude, the legal interest thereon shall run
only from the promulgation of judgment of said court, it being
at that stage that the quantification of damages may be
deemed to have been reasonably ascertained.
What is the actual base for computation?
The actual base for the computation of such legal interest shall
be the amount as finally adjudged by the Supreme Court
What is interest on damage?
It is a special kind of interest which is imposed in a judgment
as indemnity for damages. It need not to be in writing.
General rule: Article 1956
Exception: interest imposed as items of damages
When shall the interest on damage be computed?
The interest on damages awarded should be computed from
the time of the finality of the decision, and not from the filing of
the complaint against the accused.
What interest can one recover in case of delay in payment
of money obligations?
Article 2209. If the obligation consists in the payment of a sum
of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in the absence
of stipulation, the legal interest, which is 6% per annum.
Is a floating rate of interest valid?
No. A stipulation for a floating rate of interest in a letter of credit
in which there is no reference rate set either by it or by the
Central Bank, leaving the determination thereof to the sole will
and control of the lender bank is invalid.
When is the legal rate of interest from 6% to 12%
applicable?
The Supreme Court held that 12% interest applies only for
forbearances of money, goods and credits and court
judgments thereon, but not on court judgments for damages
which do not involve a loan in which cases the legal rate of
interest remains at 6% per annum. In the absence of a
stipulation as to interest, the loan due will now earn interest at
the legal rate of 12% per annum.
If the instrument evidencing a debt contains no stipulations as
to payment of interests, no interest will be allowed prior to the
filing of the complaint. Interest will be allowed when payment
is judicially demanded.
Can there be interest in equitable mortgage?
No. Inters could not be collected on equitable mortgage
because the same is not stipulated in writing.
Is compound interest automatic?
No. A lender cannot just be entitled to compound interest.
There must first be a stipulation for payment of interest and
this interest may earn interest only when it is judicially
demanded, although the obligation is silent upon this point.
Is the amount paid under usurious agreement
recoverable?
Yes, it is recoverable by the debtor since the payment is
deemed to have been made under restraint, rather than
voluntarily.
Art. 1957. Contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against
usury shall be void. The borrower may recover in accordance
with the laws on usury.
- “Usury Law” has become legally non-existent
- Courts may simply reduce unreasonable interests.
Q: Is the form of contract conclusive?
A: No. The form of the contract is not conclusive for the law
will not permit a usurious loan to hide itself behind a legal form.
Parole evidence is admissible to show that a
document though legal in form was in fact a device to
cover usury.
Q: What is the status of the Usury Law?
A: The Usury Law, by virtue of CB Circular No. 905 adopted
on December 22, 1982 effective January 1, 1983, has become
legally non-existent. The Circular has expressly removed the
interest ceiling prescribed by the Usury Law.
Q: May the borrower recover interests he paid in
usurious transaction?
A: Yes. The Supreme Court held that only the amount paid in
excess of the legal rate can be recovered.
Q: What is the status of usurious loans?
A: In usurious loans, the entire obligation does not become
void because of an agreement for usurious interest – the
unpaid principal debt still stands and remains valid but the
stipulation as the usurious interest is void, and the debt is to
be considered without stipulations as to the interest.
Q: Must the principal debt still be paid in usurious
transactions?
A: Yes. Under the Usury Law, notwithstanding stipulations of
usurious interest, the debtor must still pay the principal debt.
Q: Can the courts simply reduce unreasonable interests?
A: Yes. Even if the ceilings on interests imposed by the Usury
Law had been suspended by the CB Circular No. 905,
nonetheless, lenders cannot charge unreasonable and
unconscionable interests. The courts may reduce the
unreasonable interests. Hence, the lender may recover both
the principal and reasonable interest.

Art. 1958. In the determination of the interest, if it is payable

in kind, its value shall be appraised at the current price of the
products or goods at the time and place of payment.
Q: How do you determine interest when payable in kind?
A: If the interest by stipulation is payable in kind, the products
or goods to be paid as interest must be appraised to determine
their value of money. The basis is the current price of the
products or goods at the time and place of payment.

Art. 1959. Without prejudice to the provisions of article 2212,

interest due and unpaid shall not earn interest. However, the
contracting parties may by stipulation capitalize the interest
due and unpaid, which as added principal, shall earn new
interest.
Q: What is “accrued interest”?
A: Interest due and remaining unpaid

Q: What is a “compound interest”?

A: interest on the accrued interest

Q: Can accrued interest earn a compound interest?

A: GR: No.
XPNS: (1) There is a written stipulation
(2) When judicial demand has been made upon the borrower.

Art. 1960. If the borrower pays interest when there has been
no stipulation therefor, the provisions of this Code concerning
solutio indebiti, or natural obligations, shall be applied, as the
case may be.
- There must be a written stipulation for payment of interest
- [natural obligation] If interest was agreed orally and not
written, no interest is due. If borrower nevertheless paid
interest, and considers it as a moral obligation, the payment is
valid
- If paid by mistake, the rules on Solutio Indebiti shall apply.

Art. 1961. Usurious contracts shall be governed by the Usury

Law and other special laws, so far as they are not inconsistent
with this Code.

Q: Did CB Circular 905 repeal or amend the Usury Law?

A: No. It did not repeal or amend the Usury Law. It merely
suspended its effectivity. If the Central Bank restores the
ceiling on interest rates, the Usury Law would again be
applicable.

Q: What is “forbearance”
A: Contractual obligation of the creditor to forbearer during a
given period to require the debtor, payment of an existing debt
then due and demandable.
 Title XII: DEPOSIT
Nature G/O G G/O
Art. 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of Object EJ: Movable/ money /
safely keeping it and of returning the same. If the safekeeping movables immovable fungible
of the thing delivered is not the principal purpose of the only thing
contract, there is no deposit but some other contract. J: can be
immovable
Q: What is a deposit?
A: Deposit is a contract whereby the depositor delivers a thing Demandabili At will Not until Wait for
to the depositary for the principal purpose of safekeeping it ty lapse of expiration
and then returning it when demanded. period of period

Q: What is an irregular deposit?
A: A contract where the depositary is allowed to use the object
but only as a secondary purpose [See Art. 1978]
Q: What are the main obligations in a contract of deposit?
[on the part of the depositary]
A: 1. To safely keep the object of the deposit
2. To return the thing deposited
Q: What are the characteristics of a contract of deposit?
A:
1. It is a REAL contract because it is perfected only
upon delivery of the object of contract.
Q: How are deposits perfected?
A: there must be delivery of the object.
2. Q: What is the OBJECT of deposit?
A: GR: Movable or personal property
XPN: Lands (immovable), in case of judicial deposit
3. PURPOSE: It is principally intended for
safekeeping of the thing deposited.
Q: What if the principal purpose is not for
safekeeping?
A: Then there is no deposit, but a pledge of personal
property where the safekeeping is merely the
secondary purpose.
4. CONSIDERATION:
GR: Gratuitous
XPNs:
1) There is contrary agreement
2) Depositary is engaged in the business of storing
goods.
5. Q: Can the depositary USE the thing
deposited?
GR: No. The depositary cannot use the thing
deposited
XPNs:Yes. [The depositary can use the thing
deposited]
1. With the permission of the depositor
2. When the preservation of the thing requires
its use but only for said purpose
Art. 1963: An agreement to constitute a deposit is binding, but
the deposit itself is not perfected until the delivery of the thing.
• An offer to make a contract for future deposit is
merely consensual but is nevertheless binding if the
offer is accepted.
• This article applies only to voluntary deposits
→ Why? Because there must be an agreement, and
not to necessary or involuntary deposits.
→ in involuntary deposits, there is no agreement
between the parties to create a contract.
Art. 1964: A deposit may be constituted judicially or
extrajudicially.
Q: What are the Kinds or Classes of Deposit?
A:
a.) Judicial- one which is brought about by settlement of a
property by order of a court
• By attachment or seizure of a proper order of the
court.
b.) Extra-judicial- by agreement of the parties either
voluntary or necessary.
Voluntary- made by the will of the depositor with the
consent of the depositary.
Necessary- one made in compliance with a legal
obligation, or on the occasion of a calamity.
Art. 1965. A deposit is a gratuitous contract, except when
there is an agreement to the contrary, or unless the depositary
is engaged in the business of storing goods
Q: As to consideration, what is a deposit?
A: GR: A deposit is a gratuitous contract.
XPNs:
1. Parties have agreed that compensation be paid
2. Depositary is engaged in the business of storing goods
Art. 1966. Only movable things may be the object of a
deposit.

Q: Can a depositary allow a 3rd person to use it? Q: Is the rule absolute?
A: Only if there is an express permission or consented by A: No. This only applies to extra-judicial deposits.
depositor. Otherwise, depositary will be liable for breach of
trust. Q: So when can an immovable property be the object of
deposit?
Q: If a depositary is allowed to use the object, can he A: Judicial deposits may cover either immovable or movable
allow others to use it as well? property, the aim of which being to protect the rights and
A: No. The consequential use or secondary purpose of using interests of the concerned party.
the object is PERSON BASED - based on trust and
confidence. Hence, you cannot allow others without an Dumb version:
express permission coming from the depositor. Otherwise, in Extrajudicial - movable
case of loss, the depositary is liable even if loss is due to a Judicial: immovable or movable
fortuitous event.

Basis Deposit Commodatu Mutuum

m

Purpose Safekeepin Use Consumpti

g on
 Judicial Extra-judicial

Movable / immovable Only movable

Extinguished by court Extinguished by the

parties

onerous gratuitous

Consideration through safekeeping

bond

Q: Can you enter into a contract where the object is

immovable, but the primary purpose is safekeeping in an
extrajudicial deposit? What do you call it?
A: Yes.
If the deposit is for compensation, it is a contract of lease or
service.
If it is gratuitous, it is an innominate contract akin to deposit.

Art. 1967. An extrajudicial deposit is either voluntary or

necessary. [See Art. 1964]
 CHAPTER 2: VOLUNTARY DEPOSITS
SECTION 1: GENERAL PROVISIONS
Art. 1968. A voluntary deposit is that wherein the delivery is
made by the will of the depositor. A deposit may also be made
by two or more persons each of whom believes himself
entitled to the thing deposited with a third person, who shall
deliver it in a proper case to the one to whom it belongs.
Q: What is “Voluntary Deposit”?
A: It is a contract where a thing is delivered at the will of a
person (depositor) to another (depositary) for the purpose of
safekeeping coupled with an obligation to return it upon
demand.
• In Voluntary deposit, there is a freedom of action on
the part of the depositor who is free to choose the
depositary.
Q: Should the depositor be the owner of the thing?
A: As a general rule NO but there are exceptions and [Take
note:] ownership is not transferred to the depositary..
• The depositary cannot demand that the depositor
prove his ownership of the thing deposited.
(Pursuant to Art. 1984)
• Examples of depositor who is not the owner of the
thing deposited: carrier, commission agent, lessee
2nd Sentence is in the nature of an interpleader [Remedy]
• Deposit is made by 2 or more persons
• Each one believes that he is the owner of the thing
which is deposited with a third person.
→ when the issue of ownership is finally settled
[through the interpleader suit], the third person shall
deliver the thing to the proclaimed owner.
Art. 1969. A contract of deposit may be entered into orally or
in writing.
Q: What makes a contract of deposit valid and
enforceable?
A: The delivery of the thing.
Q: Can the contract of deposit be partly oral and partly in
writing?
A: Yes. The contract of deposit may be entered into in
whatever form, there being no indispensable formalities.
Art. 1970. If a person having capacity to contract accepts a
deposit made by one who is incapacitated, the former shall be
subject to all the obligations of a depositary, and may be
compelled to return the thing by guardian, or administrator, of
the person who made the deposit, or by the latter himself if he
should acquire capacity.
Q: Who is an incapacitated person?
A: A person is considered incapacitated if he cannot give
consent to the contract such as minors, insane demented
persons, deaf-mutes who do not know how to write (Art.
1327).
Q: Does the contract of deposit become a voidable
contract since the depositor is incapacitated?
A: No. In the present Article, the deposit is still recognized.
Q: What is the status of the contract if the depositor is
incapacitated?
A: Voidable or valid until annulled
Dumb version:
Art. 1970: Incapacitated depositor and capacitated depositary
Art. 1971: Capacitated depositor and incapacitated depositary
Q: So what is the effect when a capacitated person
(depositary) accepts the deposit made by an
incapacitated person (depositor)?
A: The capacitated person shall be subject to all the
obligations of a depositary as provided under Articles 1972 to
1991 as if there is a regular contract of deposit.
Q: What happens if the depositary refuses to return the
thing deposited?
A: The depositary can be compelled to return it
1. by the legal representative of the incapacitated
person or
2. By the incapacitated person if he becomes
capacitated
Q: An incapacitated depositor entered into a contract
then demanded for the return of the object. The
depository returned it. Is the depositary relieved from
obligation?
A: No. It should only be returned to the guardian or
administrator. The law says not to return to an incapacitated
depositor.
Q: A depositor is capacitated to enter into a contract of
deposit and delivered the object to the depositary. Later
on, he becomes incapacitated, then the depository
returned the object to him. Is he relieved from the
obligation? [Art. 1986]
A: He will be relieved in two instances:
1. If the depositor keeps the object
2. To the extent that the depositor is benefited.
Note:
You have to distinguish when the incapacity is present. If
incapacity is present from the moment of perfection, ONLY the
guardian or administrator can validly receive the object of
deposit.
But, if the depositor is capacitated from perfection and
becomes incapacitated, the depositary can be relieved if he
returns the object and (1) the depositor keeps the object or (2)
the depositor benefitted from the object.
Art. 1971. If the deposit has been made by a capacitated
person with another who is not, the depositor shall only have
an action to recover the thing deposited while it is still in the
possession of the depositary, or to compel the latter to pay
him the amount by which he may have enriched or benefited
himself with the thing or its price. However, if a third person
who acquired the thing acted in bad faith, the depositor may
bring an action against him for its recovery.
Q: To whom does the capacitated person (depositor) have
an action?
A:
1. To the depositary, if he is still in possession of the
thing deposited
2. To a third person who acted in good faith whose
rights cannot be disturbed, by collecting the amount
by which the incapacitated depositary had been
enriched or benefitted.
3. To a third person who acted in bad faith (for being
aware of the flaw in the possession of the
incapacitated depositary), by an action to recover the
thing from him with damages.
Q: The depositary is incapacitated to receive the object
but the depositor entered into a contract. The depositary
sold it to a third person - the object of deposit is 1M. But
the depositary sold it for 50k. How much can the
depositor recover?
A: The amount of recovery depends on the benefit received
by the depositary. If the depositary is incapacitated and he
only benefitted 50K for the amount of the sale, then the
depositor can only recover the 50K. EXCEPT when the third
party is in bad faith.
GR: If the 3rd party is in good faith, the depositor cannot
recover the whole amount.
XPN: 3rd party in bad faith, depositor can recover the whole
amount
Q: Can a depository redeposit an object of deposit?
A: No, unless there is an express stipulation to that effect.
Q: If there is an express stipulation that the depositary
can redeposit it, will the depositary be liable in case of
loss of the object?
GR: The depositary is not liable.
XPN: when the third person is found to be unfit, or there is
negligence in the use
Q: Depositary who is an owner of a motor shop received
by way of deposit a vehicle for safekeeping. Because
there is no longer space in the garage, he delivered the
vehicle to his colleague, who then brought the vehicle to
his own garage. Vehicle got lost. Is the depositary liable?
A: If without stipulation, depositary is ALWAYS LIABLE.
Assuming there is a permission to redeposit it, the depositary
will only be liable if
1.) The person to whom the object was redeposited is
manifestly careless or unfit.
2.) The person to whom it was deposited is his employee. In
the given example, he is a colleague, who
is not an employee. Hence, the only way to make the
depositary liable is when there is a showing that the colleague
is manifestly careless or unfit. Without that showing, then the
colleague becomes liable to the depositor. Same situation
applies if the third person was the employee.
Q: The object was redeposited to one of his employees
who owns a garage. But after investigation, there was no
showing that the employee was manifestly careless or
unfit. Loss was due to a fortuitous event. Is depositary
liable?
A: Generally, yes because that is his employee. The
qualification for manifestly carelessness does not apply if the
third person is an employee of the depositary.
BUT HERE, the depository is not liable because the loss was
due to a fortuitous event and not the negligence of the
employee. Depositary is only liable FOR NEGLIGENCE of his
employees.
SECTION 2: OBLIGATIONS OF THE DEPOSITARY
Art. 1972. The depositary is obliged to keep the thing safely
and to return it, when required, to the depositor, or to his heirs
and successors, or to the person who may have been
designated in the contract. His responsibility, with regard to
the safekeeping and the loss of the thing, shall be governed
by the provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account
in determining the degree of care that the depositary must
observe.
Q: What are the obligations of a depositary?
A: a.) to keep the thing safely
b.) to return the thing deposited when required, to the
depositor or his or heirs and successors.
Q: What is the diligence required of a depositary in the
performance of his obligations to protect and preserve
the thing deposited?
A:
GR: Good father of a family
XPN: unless a higher degree of diligence is stipulated by the
parties.
Q: What is the degree of diligence required by common
carriers in taking care of your object of deposit?
A: Extraordinary Diligence
Q: Aside from common carriers, what other
establishments are required to exercise extraordinary
diligence?
A: Banks, in taking care of money deposited.
Q: What if the thing is lost, who is liable?
A: Depositary if it is due to his own fault
XPN: loss due to Fortuitous Event or force majeure.
Exceptions to the rule that the depositary is not liable
when loss of the thing is due to FE
1. It is stipulated
2. If he uses the thing without the depositor’s
permission.
3. If he delays its return.
4. If he allows others to use it, even though he himself
may been authorized to use the same
→ hence, the depositor bears the loss as the depositary is not
at fault.
Q: What is the presumption when the thing in the
possession of the debtor is lost?
A:
GR: the presumption is that he is at fault
XPN: there is proof the contrary
Q: Is a guardian a depositary of the ward’s property?
A: No. The guardian is not holding the funds of the ward
merely for safekeeping exclusively intended for the latter’s
maintenance and support.
Art. 1973. Unless there is a stipulation to the contrary, the
depositary cannot deposit the thing with a third person. If
deposit with a third person is allowed, the depositary is liable
for the loss if he for the loss if he deposited the thing with a
person who is manifestly careless or unfit. The depositary is
responsible for negligence of his employees.
Q: Is a depositary prohibited from depositing the thing
with a third person.
A:
GR: Yes. Because deposit is founded on trust and
confidence.
XPN: if there is a stipulation to the contrary.
• Here, the stipulation will be the law between the
parties.
XPN to XPN: if the thing is deposited with a person manifestly
careless and unfit.
Q: Who is liable in case loss or damage to property is
caused through negligence of depositary’s employees?
A: Depositary. (Pursuant to Vicarious liability under Art. 2180
par. 4)
Art. 1974. The depositary may change the way of the deposit
if under the circumstances he may reasonably presume that
the depositor would consent to the change if he knew of the
facts of the situation. However, before the depositary may
make such change, he shall notify the depositor thereof and
wait for his decision, unless delay would cause danger.
Q: Can the place of delivery and other conditions of deposit
be altered?
A:
GR: No.
XPN: he may reasonably presume that the depositor would
agree to the modification if the depositor would agree to the
modification

Q: Is notice necessary before the modification in the manner
of delivery and conditions?
A:
GR: Yes, notice should be sent to the depositor and to await
for the latter’s decision before any change is made.
XPN: time is of the essence to avoid danger.
. A: It is the depositary.
Art. 1975. The depositary holding certificates, bonds,
securities or instruments which earn interest shall be bound to
collect the latter when it becomes dues, and to take such steps
as may be necessary in order that the securities may preserve
their value and the rights corresponding to them according to
law
The above provision shall not apply to contracts for the rent of
safety deposit boxes.
• Depositary who has the obligation to preserve the
thing, must collect the interest as well as the principal
when they become due.
• Must see to it that the securities and the rights
corresponding to them preserve their value.
On safety deposit boxes; Character
Q: Is a contract for rent of safety boxes an ordinary
contract of lease of things?
A: No, it is a special kind of deposit not strictly governed by
the provisions of deposit.
Art. 1976. Unless there is a stipulation to the contrary, the
depository may commingle grain or other articles of the same
kind and quality, in which case the various depositors shall
own or have a proportionate interest in the mass.
Q: When can a depositary commingle grains or other
items belonging to 2 or more depositors?
A: only when it is of the same kind and quality
XPN: when there is a prohibition
→ depositors shall own a proportionate share in the mass of
the things deposited.
→ if the grains or other things are not of the same kind and
quality, depositary must keep them separately.
Art. 1977. The depositary cannot make use of the thing
deposited without the express permission of the depositor.
Otherwise, he shall be held liable for damages.
However, when the preservation of the thing deposited
requires its use, it must be used but only for that purpose.
Q: Can the depositary USE of thing deposited
A: GR: The depositary cannot use the thing deposited
XPNs: [The depositary can use the thing deposited]
1. With the permission of the deposito
2. When the preservation of the thing requires
its use but only for said purpose
→ if the depositor allows the use of the thing, it becomes a
loan or commodatum and not anymore deposit
Q: May a depositary dispose of the thing for the use of 3rd
persons?
A: no, especially when it would frustrate the very purpose for
which the thing was deposited.
Art. 1978. When the depositary has permission to use the
thing deposited, the contract loses the concept of a deposit
and becomes a loan or commodatum, except where
safekeeping is still the principal purpose of the contract.
The permission shall not be presumed, and its existence must
be proved.
Q: When the depositary is permitted to use the thing
deposited, what happens to the contract of deposit?
A:
GR: The contract loses the concept of deposit and becomes
a loan or commodatum.
XPN: [The contract retains its concept of deposit] where
safekeeping is still the principal purpose of the contract, and
the use of the thing is merely secondary. This is called
irregular deposit.
Q: Who has the burden of proof to establish that
permission to use the thing was granted?
GR: A depositary is NOT liable for non-fulfillment of obligation
by reason of a fortuitous event or force majeure (Art. 1174,
similar to an obligor)
XPN: Art. 1979. The depositary is liable for the loss of the
thing through a fortuitous event:
1. If it is so stipulated;
2. If he uses the thing without the depositor’s
permission;
3. If he delays its return;
4. If he allows others to use it, even though he himself
may have been authorized to use the same.
Q: What is a fortuitous event?
A: It is an unforeseen happening arising from acts of God such
as storms, earthquakes, lightning, etc.
Q: What is loss?
A: Loss, which is generally total, includes partial destruction
or depreciation of the value of the thing deposited.
Art. 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the
provisions concerning simple loan.
Q: Are deposits in banks true deposits?
A: No. They are considered simple loans.
Art. 1981. When the thing deposited is delivered closed and
sealed, the depositary must return it in the same condition,
and he shall be liable for damages should the seal or lock be
broken through this fault.
Fault on the part of the depositary is presumed, unless there
is proof to the contrary.
As regards to the value of the thing deposited, the statement
of the depositor shall be accepted, when the forcible opening
is imputable to the depositary, should there be no proof to the
contrary. However, the courts may pass upon the credibility of
the depositor with respect to the value claimed by him.
When the seal or lock is broken, with or without the
depositary’s fault, he shall keep the secret of the deposit.
Q: What happens when the seal or lock of the thing
delivered is broken?
A: If it was broken though his fault, the depositary is liable for
damages
[CESV] If it was not through his fault, there must be proof to
that effect since fault on his part is presumed. In the absence
of proof to the contrary, the presumption stands and the
depositary is thus liable.
Q: If there is no proof as to who caused the breaking of
the lock or seal, who is liable?
A: Presumption is [always] against the depositary who is then
liable for damages.
Art. 1982. When it becomes necessary to open a locked box
or receptacle, the depositary is presumed authorized to do so,
if the key has been delivered to him; or when the instructions
of the depositor as regards the deposit cannot be executed
without opening the box or receptacle.
Q: When is DY allowed to open the sealed receptacle?
A: If there is a key delivered; or when the instructions of the
depositor as regards the deposit cannot be executed without
opening the box or receptable.

Q: What is the additional obligation of DY?
A: When the seal or lock is broken, with or without the
depositary’s fault, he shall keep the secret of the deposit.
Q: If an object is delivered locked and sealed, can the
depositary open it?
A: GR: No. Part of his obligation is to keep it locked and to
keep the object and return the object in its original condition.
XPNs: 3 instances when depositary is presumed to be
allowed to open the lock or seal:
1. If he is expressly authorized to open it at a certain
time or circumstances especially if he wanted to
maintain the value of the object
2. If the key to the lock is delivered to the depositary
3. If the depositary cannot follow the instruction of the
depositor without opening the object delivered
Art. 1983. The thing deposited shall be returned with all its
products, accessories and accessions.
Should the deposit consist of money, the provisions relative to
agents in Article 1896 shall be applied to the depositary
• Depositary must also return all its products,
accessories, and, accessions. E.g. natural,
industrial, and civil fruits.
When deposit consists of money
• The applicable law is Art. 1896 and “agent” must be
read as “depositary”
• Art. 1896: The agent (depositary) owes interest on
the sums he has applied to his own use from the day
on which he did so, and on those which he still owes
after the extinguishment of the agency (deposit).
→ money deposited must be returned together with interest
for the use thereof.
• The imposition of interest is a form of penalty
OTHERWISE; the contract will be mutuum.
Instances Where Depositary Is Liable for Interest Even
Without Stipulation:
When he appropriates the money given to maintain the value
of the object for his benefit. He is liable for interest from the
moment his obligation to deliver arises, even if it is not
stipulated.
Art 1984. The depositary cannot demand that the depositor
prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing has been
stolen and who its true owner is, he must advise the latter of
the deposit.
If the owner, in spite of such information, does not claim it
within the period of one month, the depositary shall be relieved
of all responsibility by returning the thing deposited to the
depositor.
If the depositary has reasonable grounds to believe that the
thing has not been lawfully acquired by the depositor, the
former may return the same.
Q: Should a depositary accept a thing for purpose of
safekeeping?
A: No, he is not under obligation to do so
Q: Can depositor be required by depositary to prove
ownership?
A: No. Because,
• There is no transfer of ownership in contract of
deposit
• Bailee (depositary) is estopped from asserting title to
thing received against bailor
• Fraud may be easily committed against depositor.
Q: What is the duty of depositary of the thing appears to
be unlawfully acquired?
A: He may return the thing to depositor to avoid possible
liability.
Q: If the thing is a stolen property what should the
Depositary do?
A: if the true owner is identified, DY should inform the former
so that he may take the necessary precautions to retrieve the
property.
Q: Is the depositary authorized to return the thing
unceremoniously to the true owner?
A: No, the depositor must also be aware.
→ the duty of depositary is only to ADVISE the tru owner
Q: What if the depositor insists on his ownership as
against the true owner?
A: The depository may file an interpleader suit against both of
them to avoid responsibility.
Q: What if the true owner cannot be ascertained?
A: depositary may just return the thing to the depositor if he
has reasonable grounds to believe that the thing has not been
lawfully acquired by the depositor.
Q: What happens if after 30 days from advisement to the
true owner, he failed to claim the thing?
A: depositary shall be relieved from responsibility by returning
the thing to the depositor.
Q: What if before the lapse of 30 days, the depositor who
knew of the advice to the true owner demands the return
of the thing, may the depositary retain the thing until the
lapse of 1 month?
A: Depositary shall wait for the lapse of 30 days but inform the
depositor of the legal reason for the retention.
→ the purpose of the par. 2 of the article is to protect the true
owner and immediately releasing to depositor the thing would
defeat the very purpose of said paragraph.
→ the limited period of retention should be another exception
to paragraph 2 of Art. 1988.
Q: If A delivered a watch for safekeeping to B, B received
it gratuitously, but with the condition that A will demand
for its return when he needs the watch. A week after, B
met C, who said that he lost a watch. When B showed the
watch to C, it turned out that it was the watch lost by C. Is
B obliged to deliver the watch to C?
A: B is not obliged to inform C of the deposit made to him by
A. Because the watch was never stolen; IT WAS LOST. The
law says, ONLY IF YOU BELIEVE THAT THE WATCH WAS
STOLEN, will you have the obligation to inform the true owner,
and wait for that owner to act on the information given. If the
true owner does not act, then the depositary has the obligation
to return the object to the depositor.
Q: What is the purpose why the law requires the
depositary to notify the true owner of the deposit? A:
Because if he prematurely returns the object despite the
opposition made by the true owner, then he will be liable for
damages. So he has to wait for one month until such time that
he is already able to return the object to the depositary. The
threshold is the one-month period. - The other instance is that
if he has reasons to believe that the object has not been
lawfully acquired.
Q: Why is there a need to know when a depositary can
deliver the object?
A: Because he cannot return the object anytime. Because
deposit is constituted for the benefit of the depositor. Hence,
only the depositor can demand its return.
Q: What if it's gratuitous? Is it the same case?
A: YES. Because the nature of deposit — constituted for the
benefit of the depositor.
Q: When can you return the object of deposit?
A: Upon demand. When the depositor wants its return.
Q: What if it's an onerous deposit (there is
compensation), can the depositor demand the return
anytime? Even prior to expiration?
A: Yes, as long as there is payment of indemnity. EXAMPLE:
Parties entered a deposit for one year. With a compensation
of 10,000 per month. If the depositor demanded the return
before the expiration of one year, the depositor will still be
liable to pay for the one-year period of deposit. But still, he can
demand it anytime because he owns the object.
Art 1985. When there are two or more depositors, if they are
not solidary, and the thing admits of division, each one cannot
demand more than his share.
When there is solidarity or the thing does not admit of division,
the provisions of articles 1212 and 1214 shall govern.
However, if there is a stipulation that the thing should be
returned to one of the depositors, the depositary shall return it
only to the person designated.
Respective rights of 2 or more depositors
1. Joint depositors - each one may only demand the
return of his proportionate share in the DIVISIBLE
thing/s deposited
2. Solidary depositors - and the thing is INDIVISIBLE,
depositary may return the thing to anyone of the
solidary.
Stipulation to return thing to one of the depositors
• If there is an agreement that the thing deposited shall
be returned to a particular depositor, the thing shall
be returned only to said designated depositor.
XPN: there is a subsequent agreement to the
modification with the consent of all parties
concerned.
Art. 1986. If the depositor should lose his capacity to contract
after having made the deposit, the thing cannot be returned
except to the persons who may have the administration of his
property and rights.
Q: To Whom Should Depositary Return The Thing?
A:
GR: depositary shall not deliver the thing to anyone EXCEPT
to the person who:
• Has administration of the depositor’s property
→ Administrator may be a guardian:
a. Appointed by court
b. Spouse who is given power of administration by court
c. Representative (in case depositor is declared an
absentee)
Q: A depositor is capacitated to enter into a contract of
deposit and delivered the object to the depositary. Later
on, he becomes incapacitated, then the depository
returned the object to him. Is he relieved from the
obligation?
A: He will but in two instances:
1. If the depositor keeps the object
2. To the extent that the depositor is benefited.
→ This Article applies only after the deposit had already been
made and depositor was capacitated at the time of making of
deposit BUT became incapacitated before return of thing.
→ if depositor is already incapacitated before deposit, Art.
1970 shall apply.
Art. 1987. If at the time the deposit was made a place was
designated for the return of the thing, the depositary must take
the thing deposited to such place; but the expenses for
transportation shall be borne by the depositor.
If no place has been designated for the return, it shall be made
where the thing deposited may be, even if it should not be the
same place where the deposit was made, provided that there
was no malice on the part of the depositary.
Q: In what place shall the thing be returned?
A: (1) Place designated in the contract of deposit
(2) If no place designated- Place where things may be even if
this place is different from the place of deposit and no bad faith
on the part of depositary.
Q: Who shall bear the expenses for transportation?
A: Depositor
XPN: unless the depositary acted with malice in changing the
place of returning or retrieval.
Art 1988. The thing deposited must be returned to the
depositor upon demand, even though a specified period or
time for such return may have been fixed.
This provision shall not apply when the thing is judicially
attached while in the depositary’s possession, or should he
have been notified of the opposition of a third person to the
return or the removal of the thing deposited. In these cases,
the depositary must immediately inform the depositor of the
attachment or opposition.
Q: When should the thing deposited be returned?
A: Upon demand regardless if there is a period fixed or none
→ Why? Term or period if agreed upon is for the benefit of
the depositor hence, he can always seek the return any time.
HOWEVER, if deposit is for compensation, depositary must
still be paid for his services.
Q: If there is no fixed period for return, may the depositor
withdraw the thing anytime even without judicial orders?
A: Yes.
“Return Upon Demand Rule” subject to exceptions:
1. Thing is in possession of the depositary is subjected
to writ of attachment in which case it is placed under
the control of the court
2. When there is an opposition to the return of the object
and depositary is notified thereof
3. When there is an opposition to the removal of the
thing deposited
4. When this is stolen and period of 30 days from notice
to the true owner for him to claim it had not lapsed
yet and thing cannot be returned.
→ in paragraphs 1 to 3, depositary must immediately notify
the depositors of the attachment or opposition so he can make
timely steps to protect his rights and interests.
→ if he returned the thing despite the presence of
the circumstances above, he shall be held liable for damages
caused to offended party.
Instances When Depositary Can Refuse the Return Of The
Object:
1. When the object is subject to attachment in a judicial
deposit
2. If there is an opposition for the return of the object —
because either the object has been stolen and the
true owner is demanding for the delivery of the object
to him or in judicial deposit where attachment is
deemed order by the court
Art. 1989. Unless the deposit is for a valuable consideration,
the depositary who may have justifiable reasons for not
keeping the thing deposited may, even before the time
designated, return it to the depositor; and if the latter should
refuse to receive it, the depositary may secure its consignation
from the court.
• Applicability: only if deposit is gratuitous
Q: Can the depositary demand that the thing be retrieved
by depositor any time?
A: Yes if he has justifiable reason. E.g. DY has to leave for
abroad for medical treatment.
Q: What is the remedy of the depositary in case of
depositor’s refusal to retrieve the thing?
A: Resort to Judicial Consignation if depositor unjustifiably
refuses to accept the same.
Q: Can the depositary just return the thing if it is for a
valuable consideration?
A: GR: No.
XPN: reason for not continuing with deposit
constitutes a force majeure otherwise he will be liable for
damages for breach of contract.
• In case depositary cannot anymore perform his
obligation due to a force majeure, he may return the
thing and a proportionate reduction of compensation
is payable to him.
2 Instances Where Even Without The Demand Of
Depositor, The Depositary May Return The Object:
1. In case of a stolen object, after one month, that the
true owner does not demand or oppose the deposit.
2. If there is reasonable ground to believe that the
object deposited has not been lawfully acquired.
Art. 1990. If the depositary by force majeure or government
order loses the thing and receives money or another thing in
its place, he shall deliver the sum or other thing to the
depositor.
GR: if the thing deposited is lost or confiscated by the
government, the depositary is NOT liable for failure to return
the thing upon demand of depositor.
HOWEVER, if depositary had received money or an
equivalent thing for the property, he must deposit the same to
the depositor.
Art. 1991. The depositor’s heir who in good faith may have
sold the thing which he did not know was deposited, shall only
be bound to return the price he may have received or to assign
his right of action against the buyer in case the price has not
been paid him.
Applicability- when depositary died and left the thing to heir/s
in a concept of an owner and heirs decided to sell it to a third
person in good faith.
*the word DEPOSITOR in the provision is a typographical
error, it should be DEPOSITARY, as the original provision
used the word bailee which is the equivalent of depositary.
Q: What should the depositary’s heirs do in case they
have sold the thing to 3rd person in good faith?
A: In case the thing has already been paid, the purchase price
must be returned to the depositor
Q: In case buyer has not yet paid the price?
A: right of action must be assigned to depositor so he can
pursue an action for collection or cancellation of the contract.
Q: What are the remedies of the depositor if depositary is
in bad faith?
A:
1. May sue them for recovery of price with damages; or
2. May seek annulment of the contract of sale on basis of
fraud; or
3. May file a criminal case for Estafa for the
appropriation of the thing deposited.
SECTION 3: OBLIGATIONS OF THE DEPOSITOR
Art. 1992. If the deposit is gratuitous, the depositor is obliged
to reimburse the depositary for the expenses he may have
incurred for the preservation of the thing deposited.
Q: Does the depositor have to reimburse the depositary
for the latter’s expenses to preserve the thing?
A: It depends.
• If deposit is for compensation- NO as the “rule of no
reimbursement” explains that expenses are included
in the compensation paid to depositary. These are
known as NECESSARY expenses.
• If deposit is gratuitous, depositor must reimburse the
expenses incurred for the preservation of the thing.
Q: Are useful and luxurious expenses included in the
coverage of the Article?
A: No, depositor is not under any obligation to said expenses
incurred by depositary.
Art. 1993. The depositor shall reimburse the depositary for
any loss arising from the character of the thing deposited,
unless at the time of the constitution of the deposit the former
was not aware of, or was not expected to know the dangerous
character of the thing, or unless he notified the depositary of
the same, or the latter was aware of it without advice from the
depositor.
Q: Is the depositor liable for losses or damages suffered
by depositary?
A:
GR: Yes.
XPNs: [Depositor is not liable] if at the time of the constitution
of deposit,
1. Depositor was not aware of such character
2. Depositor was not expected to know such dangerous
character
3. Depositor has notified the depositary of such
character
4. Depositary was independently aware of it without
need of advice from depositor.
Art. 1994. The depositary may retain the thing in pledge until
the full payment of what may be due him by reason of the
deposit.
Q: What are the obligations of the Depositor?
A:
1. To reimburse the depositary for necessary expenses
2. Pay compensation agreed upon as consideration for
deposit
3. Indemnify the depositary for any loss or damages
arising from the character of the thing.
Q: May depositary retain the thing?
A: Yes until he is fully reimbursed
• If the deposit is GRATUITOUS - depositary is entitled
to the reimbursement of necessary expenses
• If deposit is FOR COMPENSATION - entitled to the
agreed upon consideration
Q: Is Pledge created by operation of law?
A: Yes. Legal Pledge (Art. 2121)
Q: May the depositary sell the thing retained in pledge?
A: Yes.
→ Art. 2108 provides: If, without the fault of the pledgee, there
is danger of destruction, impairment, or diminution in value of
the thing pledged, he may cause the same to be sold at a
public sale. The proceeds of the auction shall be a security for
the principal obligation in the same manner as the thing
originally pledged.

After payment of expenses, remainder of the sale price shall

be reimbursed to obligor.

Art. 1995. A deposit is extinguished:

(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either the
depositor or the depositary.

Q: How is a deposit extinguished?

A:
1. Upon destruction of thing deposited
2. Upon death of either DR or DY (if gratuitous)
If the deposit is for compensation, the death of either
party shanll not extinguish the contract because the
rights and liabilities arising therefrom are
transmissible to their respective heirs unless there is
a contrary agreement.

Other grounds:
• Expiration of period agreed upon
• Demand at the will of the depositor
• Mutual withdrawal from contract
• Fulfillment of the purpose of deposit
• Fulfillment of resolutory condition agreed upon

Q: If the deposit is for compensation, does the death of

either party extinguish the contract of deposit?
A: No, because the rights and liabilities arising therefore are
transmissible to heirs UNLESS there is a contrary agreement.

If it is a compensated deposit, death of either will continue

the deposit until the expiration of the compensation. It will
only be extinguished after the compensation or if the heir of
the depositary or depositor terminates the deposit.
 CHAPTER 3 NECESSARY DEPOSIT
Art 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such
as fire, storm, flood, pillage, shipwreck, or other similar events.
Q: What is the main distinction between a voluntary
deposit and a necessary deposit?
A: A voluntary deposit is that where the delivery of the thing is
made by the will of the depositor, who has the freedom to
choose the depositary.
On the other hand, a necessary deposit is where the deposit
is not made by the will of the depositor but created by force of
law or on occasion of a calamity.
Q: What is pillage?
A: It is the act of plundering, especially in war.
Instances of necessary deposits:
1. Those made in compliance with a legal obligation;
[Article 1996(1)]
2. Those which take place on the occasion of any
calamity [Article 1996(2)]
3. Those made by travelers in hotels or inns; and [Art.
1998] [Pineda states that this falls under par. 1 of Art.
1996]
4. Those made by travelers in common carriers.
In the third instance, it is necessary that he be a traveler. A
traveler is a transient or certainly not a permanent or,
an ordinary or regular boarder in an apartment, house, inn or
hotel; staycation qualifies under the circumstance.
Art. 1997. The deposit referred to in No. 1 of the preceding
article shall be governed by the provisions of the law
establishing it, and in case of its deficiency, by the rules on
voluntary deposit.
The deposit mentioned in No. 2 of the preceding article shall
be regulated by the provisions concerning voluntary deposit
and by article 2168.
Art. 2168. When during a fire, flood, storm or other calamity,
property is saved from destruction by another person without
the knowledge of the owner, the latter is bound to pay the
former just compensation.
• In this case, the savior or rescuer of the property is
the depositary.
Art. 1998. The deposit of effects made by travelers in hotels
or inns shall also be regarded as necessary. The keepers of
hotels or inns shall be responsible for them as depositaries,
provided that notice was given to them, or to their employees,
of the effects brought by the guests and that, on the part of the
latter, they take the precautions which said hotel-keepers or
their substitutes advised relative to the care and vigilance of
their effects.
Conditions for A Hotel or Inn to Be Liable For The Loss Of
The Objects Deposited By Their Guests:
1. There must be notice of the precaution to be taken
by the guests
2. The guests followed the instructions.
Art. 1999. The hotel-keeper is liable for the vehicles, animals
and articles which have been introduced or placed in the
annexes of the hotel. [self-explanatory]
Art. 2000. The responsibility referred to in the two preceding
articles shall include the loss of, or injury to the personal
property of the guests caused by the servants or employees
of the keepers of hotels or inns as well as by strangers; but
not that which may proceed from any force majeure. The fact
that travellers are constrained to rely on the vigilance of the
keeper of the hotel or inn shall be considered in determining
the degree of care required of him.
Q: When are hotel-keepers liable?
A: Liability of Hotel-Keepers for damages arising from the loss
of, or injury to, the personal effects of hotel guest caused by
1. The negligence of its servants or employees
2. Loss or damage due to strangers
Q: When are hotel-keepers not liable?
A: They are not liable when the loss or injury is due to force
majeure (acts of man and acts of God)
Art. 2001. The act of a thief or robber, who has entered the
hotel is not deemed force majeure, unless it is done with the
use of arms or through an irresistible force.
Force majeure only applies to strangers.
This article will not apply when the theft or robbery was
committed by an employee of the hotel-keeper, for then, it is
Article 2000 which applies making the hotel-keeper liable for
the loss.
Situational:
For example, you checked-in a hotel or inn and followed
all the precautions and requirements of the law in order
for you to be paid just in case you lose anything. Once of
the employees or room service attendant entered your
room without irresistible force because he has pass in the
room, but in this case, he broke into your safety deposit
box with here your personal things are like money,
jewelry, and others, then he took it. What is that, is it a
theft or robbery?
A: It is robbery because there is use of force upon the
safe box. It is in this case, considered as force majeure.
Q: Is the hotel liable? Why?
A: Yes. Because the perpetrator is an employee. If the
perpetrator is a stranger, because it is considered a force
majeure, in which he hotel is not liable.
Regardless of the nature of taking, theft or robbery, for as
long as the perpetrator is an employee, the hotel
is always liable.
Dumb version:
Thief or robber is stranger without use of arms or irresistible
force > not force majeure > liable
Thief or robber is stranger with use of arms or irresistible force
> force majeure > liable
Thief or robber is employee > not force majeure > liable
Art. 2002. The hotel-keeper is not liable for compensation if
the loss is due to the acts of the guest, his family, servants or
visitors, or if the loss arises from the character of the things
brought into the hotel.
GR: Losses suffered by the hotel guests are generally
chargeable to the hotel-keeper
XPNs: Hotel-keepers are not liable when the losses are due
to the following causes:
1. Acts of the guest himself;
2. Acts of the guest’s family;
3. Acts of the guest’s servants or visitors; or
4. Character of the things of the guests subject to the
conditions mentioned in Art. 1993.
Q: Is the hotel liable for the loss of the object of a guest
caused by third persons?
A: Depends on how they are lost; if by force majeure, then
hotel is not liable. But if without force majeure, then the hotel
is liable.

SITUATIONS:
Law students rented a room in the hotel, instructions
were given. They informed the hotel that the most
valuable possession they have are their law books.
Unfortunately, the books got lost. Is the hotel liable?
• No. Because they are not travellers.

Guest 1 informed the hotel that he has valuables in his

room and he followed the instructions. He left the room
and forgot to lock it. Another guest discovered that the
room of guest 1 was not locked, he went to the room and
stole the valuables. Is the hotel liable?
• YES. That is not a force majeure. It is the
obligation of the hotel to safely keep the
object deposited. That is the essence of
necessary deposit.

Guest A informed ABC hotel that he has valuables in his

room. And that he placed it in the vault of the hotel. He
left locking his room and went outside. The bell boy who
has access to the room forcefully opens the vault. Is the
hotel liable?
• Yes. Because that is their employee. Hence
even if there is force majeure, the hotel is
liable.
•
Art. 2003. The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not
liable for the articles brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the
responsibility of the former as set forth in articles 1998 to 2001
is suppressed or diminished shall be void.

Q: Can the hotel post an announcement that they are not

responsible for any object brought into the hotel?
[counter-logic gaming]
A: YES. Post lang naman. But they will not be relieved from
liability. Because it is a necessary deposit.

Q: Can the hotel relieve themselves from liability by

posting exculpatory notices?
A: No. Such posting is void under the law.

Art. 2004. 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 lodging, and supplies usually furnished to hotel
guests. [self-explanatory]
 CA AGRO-INDUSTRIAL DEVELOPMENT CORP.
v.
COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
FACTS
The Case: On July 3, 1979, petitioner, through its President,
Sergio Aguirre, and the spouses Ramon and Paula Pugao
entered into an agreement whereby the former purchased
from the latter 2 parcels of land for a consideration of P350,
625. Of this amount, P75,725.00 was paid as downpayment
while the balance was covered by three (3) postdated checks.
Among the terms and conditions of their agreement were that
the titles to the lots shall be transferred to the petitioner upon
full payment of the purchase price and that the owner's copies
of the certificates of titles thereto, Transfer Certificates of Title
(TCT) Nos. 284655 and 292434, shall be deposited in a safety
deposit box of any bank. The same could be withdrawn only
upon the joint signatures of a representative of the petitioner
and the Pugaos upon full payment of the purchase price.
Petitioner, through Sergio Aguirre, and the Pugaos then
rented Safety Deposit Box No. 1448 of private respondent
Security Bank and Trust Company. For this purpose, both
signed a contract of lease, with the following conditions:
13. The bank is not a depositary of the contents of
the safe and it has neither the possession nor control
of the same.
14. The bank has no interest whatsoever in said
contents, except herein expressly provided, and it
assumes absolutely no liability in connection
therewith.
After the execution of the contract, 2 renter’s keys were given
to them, 1 key for Aguirre and 1 key for the Pugaos. A guard
key remained in the possession of the respondent Bank. The
safety deposit box has two (2) keyholes, one for the guard key
and the other for the renter's key, and can be opened only with
the use of both keys. Petitioner claims that the certificates of
title were placed inside the said box.
Thereafter, a certain Mrs. Margarita Ramos offered to buy
from petitioner the 2 lots at a price P225 per square meter, or
a total profit of P280, 500 for the entire property. Mrs. Ramos
demanded the execution of a deed of sale which necessarily
entailed the production of the certificates of title. In view
thereof, Aguirre, accompanied by the Pugaos, then proceeded
to the respondent Bank on October 4, 1979 to open the safety
deposit box and get the certificates of title. However, when
opened in the presence of the Bank's representative, the box
yielded no such certificates. Because of the delay in the
reconstitution of the title, Mrs. Ramos withdrew her earlier
offer to purchase the lots; as a consequence thereof, the
petitioner allegedly failed to realize the expected profit of
P280, 500.00.
Hence, petitioner filed a complaint for damages against
respondent Bank with the CFI (RTC) of Pasig.
RESPONDENT: Respondent Bank alleged that the petitioner
has no cause of action because of paragraphs 13 and 14 of
the contract of lease. It then interposed a counterclaim for
exemplary damages as well as attorney's fees in the amount
of P20, 000.00.
CFI/RTC
RTC decided in favor of the bank. Ordered petitioner to pay
the Bank P5, 000 as attorney’s fees.
It concluded that under paragraphs 13 and 14 of the contract
of lease, the Bank has no liability for the loss of the certificates
of title. The court declared that the said provisions are binding
on the parties. MR denied.
CA
CA upheld RTC.
The CA affirmed the appealed decision primarily on the theory
that the contract executed by the petitioner and respondent
Bank is in the nature of a contract of lease by virtue of which
the petitioner and its co-renter were given control over the
safety deposit box and its contents while the Bank retained no
right to open the said box because it had neither the
possession nor control over it and its contents. For the CA, the
contract is governed by Article 1643 of the Civil Code, which
provides:
Art. 1643. In the lease of things, one of the parties
binds himself to give to another the enjoyment or use
of a thing for a price certain, and for a period which
may be definite or indefinite. However, no lease for
more than ninety-nine years shall be valid.
The CA also invoked Tolentino v. Gonzales, which held that
the owner of the property loses his control over the
property leased during the period of the contract, and Article
1975 of the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds,
securities or instruments which earn interest shall be
bound to collect the latter when it becomes due, and
to take such steps as may be necessary in order that
the securities may preserve their value and the rights
corresponding to them according to law.
The above provision shall not apply to contracts for
the rent of safety deposit boxes.
The CA concluded that the Bank is not under any duty to
maintain the contents of the box. The stipulation absolving the
Bank from liability is in accordance with the nature of the
contract of lease and cannot be regarded as contrary to law,
public order and public policy. The appellate court was quick
to add, however, that under the contract of lease of the safety
deposit box, respondent Bank is not completely free from
liability as it may still be made answerable in case
unauthorized persons enter into the vault area or when the
rented box is forced open, as provided in stipulation number 8
of the contract in question.
MR denied.
ISSUE
WHETHER the contract entered between the parties is a
contract of deposit or a contract of lease?
Petitioner’s Argument [reiterated its appeal to CA]:
maintains that regardless of nomenclature, the contract for the
rent of the safety deposit box is actually a contract of deposit.
It is claimed that the respondent Bank is liable for the loss of
the certificates of title pursuant to Article 1972 of the said
Code. Petitioner then quotes a passage from American
Jurisprudence, where:
A safe-deposit company leases a safe-deposit box or
safe and the lessee takes possession of the box or
safe and places therein his securities or other
valuables, the relation of bailee and bail or is created
between the parties to the transaction as to such
securities or other valuables; the fact that the safe-
deposit company does not know, and that it is not
expected that it shall know, the character or
description of the property which is deposited in such
safe-deposit box or safe does not change that
relation. That access to the contents of the safe-
deposit box can be had only by the use of a key
retained by the lessee does not operate to alter the
foregoing rule.
Petitioner further argues that conditions 13 and 14 of the
questioned contract are contrary to law and public policy and
should be declared null and void. In support thereof, it cites
Article 1306 of the Civil Code which provides that parties to a
contract may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order or
public policy.
RULING
SC: Partly granted the petition. It still dismissed the case even
though it held that it is a special kind of deposit. However, it
deleted the award of attorney’s fees to respondent Bank for
lack of bad faith on petitioner’s part.
The SC agreed with the petitioner's contention that the
contract for the rent of the safety deposit box is not an ordinary
contract of lease as defined in Article 1643 of the Civil Code.
However, the SC did not fully subscribe to its view that the
same is a contract of deposit that is to be strictly governed by
the provisions in the Civil Code on deposit; the contract in
the case at bar is a special kind of deposit. It cannot be
characterized as an ordinary contract of lease under Article
1643 because the full and absolute possession and control of
the safety deposit box was not given to the joint renters — the
petitioner and the Pugaos. The guard key of the box remained
with the respondent Bank; without this key, neither of the
renters could open the box. On the other hand, the respondent
Bank could not likewise open the box without the renter's key.
In this case, the said key had a duplicate which was made so
that both renters could have access to the box.
Therefore, the authorities cited by the CA on this point do not
apply.
HOWEVER, the deposit theory itself does not altogether find
unanimous support even in American jurisprudence. We
agree with the petitioner that under the latter, the prevailing
rule is that the relation between a bank renting out safe-
deposit boxes and its customer with respect to the contents of
the box is that of a bail or and bailee, the bailment being for
hire and mutual benefit. This is just the prevailing view
because some…
“View the relationship in question as that of landlord
and tenant, or lessor and lessee. It has also been
suggested that it should be characterized as that of
licensor and licensee. The relation between a bank,
safe-deposit company, or storage company, and the
renter of a safe-deposit box therein, is often
described as contractual, express or implied, oral or
written, in whole or in part. But there is apparently no
jurisdiction in which any rule other than that
applicable to bailments governs questions of the
liability and rights of the parties in respect of loss of
the contents of safe-deposit boxes.”
In the context of our laws which authorize banking institutions
to rent out safety deposit boxes, it is clear that in this
jurisdiction, the prevailing rule in the United States has
been adopted. Section 72 of the General Banking Act
provides:
Sec. 72. In addition to the operations specifically
authorized elsewhere in this Act, banking institutions
other than building and loan associations may
perform the following services:
(a) Receive in custody funds, documents,
and valuable objects, and rent safety
deposit boxes for the safeguarding of
such effects.
of fraud, negligence or delay would be void for being contrary
to law and public policy.
The SC agreed with the petitioner’s contention that
conditions 13 and 14 of the questioned contract of lease
of the safety deposit box are void for being inconsistent with
Section 72(a) of the General Banking Act. Furthermore,
condition 13 stands on a wrong premise and is contrary to the
actual practice of the Bank. It is not correct to assert that the
Bank has neither the possession nor control of the contents of
the box since in fact, the safety deposit box itself is located in
its premises and is under its absolute control; moreover, the
respondent Bank keeps the guard key to the said box. As
stated earlier, renters cannot open their respective boxes
unless the Bank cooperates by presenting and using this
guard key. Clearly then, to the extent above stated, the
foregoing conditions in the contract in question are void and
ineffective.
Thus, we reach the same conclusion which the Court of
Appeals arrived at, that is, that the petition should be
dismissed, but on grounds quite different from those relied
upon by the Court of Appeals. In the instant case, the
respondent Bank's exoneration cannot, contrary to the holding
of the Court of Appeals, be based on or proceed from a
characterization of the impugned contract as a contract of
lease, but rather on the fact that:
(1) No competent proof was presented to show that
respondent Bank was aware of the agreement
between the petitioner and the Pugaos to the effect
that the certificates of title were withdrawable from
the safety deposit box only upon both parties' joint
signatures, and that
(2) No evidence was submitted to reveal that the loss of
the certificates of title was due to the fraud or
negligence of the respondent Bank.
This in turn flows from this Court's determination that the
contract involved was one of deposit. Since both the petitioner
and the Pugaos agreed that each should have one (1) renter's
key, it was obvious that either of them could ask the Bank for
access to the safety deposit box and, with the use of such key
and the Bank's own guard key, could open the said box,
without the other renter being present.

The banks shall perform the services

permitted under subsections (a), (b) and (c)
of this section as depositories or as
agents. . . .
Note that the primary function is still found within the
parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for
safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this
principal function.
A contract of deposit may be entered into orally or in writing
and, pursuant to Article 1306 of the Civil Code, the parties
thereto may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order or
public policy. The depositary's responsibility for the
safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the
depositary would be liable if, in performing its obligation,
it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement. In the
absence of any stipulation prescribing the degree of diligence
required, that of a good father of a family is to be observed.
Hence, any stipulation exempting the depositary from any
liability arising from the loss of the thing deposited on account
 YHT REALTY CORPORATION, ERLINDA LAINEZ and
ANICIA PAYAM, Petitioners, v. THE COURT OF
APPEALS and MAURICE McLOUGHLIN, Respondents.
2005-02-17 | G.R. No. 126780
FACTS:
Maurice McLoughlin, an Australian businessman-
philanthropist, used to stay at Sheraton Hotel during his trips
to the Philippines prior to 1984 when he met Brunhilda Mata-
Tan. Tan befriended McLoughlin by showing him around,
introducing him to important people, accompanying him in
visiting impoverished street children and assisting him in
buying gifts for the children and in distributing the same to
charitable institutions for poor children. Tan convinced
McLoughlin to transfer from Sheraton Hotel to Tropicana
Copacabana Apartment Hotel (owned and operated by YHT
Realty Corporation) where Erlinda Lainez, Anicia Payam, and
Danilo Lopez were employed. Lopez served as manager of
the hotel while Lainez and Payam had custody of the keys for
the safety deposit boxes of Tropicana. Tan took care of
McLoughlin’s booking at the Tropicana where he started
staying during his trips to the Philippines from December 1984
to September 1987.
On October 30, 1987, McLoughlin arrived from
Australia and registered with Tropicana. He rented a safety
deposit box as it was his practice to rent a safety deposit box
every time he registered at Tropicana in previous trips.
McLoughlin was aware of the procedure observed by
Tropicana relative to its safety deposit boxes. The safety
deposit box could only be opened through the use of two keys,
one of which is given to the registered guest, and the other
remaining in the possession of the management of the hotel.
When a registered guest wished to open his safety deposit
box, he alone could personally request the management who
then would assign one of its employees to accompany the
guest and assist him in opening the safety deposit box with
the two keys.
McLoughlin allegedly placed the following in his
safety deposit box: US$15,000.00 which he placed in two
envelopes, one envelope containing US$10,000.00 and the
other envelope US$5,000.00; AUS $10,000.00 which he also
placed in another envelope; two (2) other envelopes
containing letters and credit cards; two (2) bankbooks; and a
checkbook, arranged side by side inside the safety deposit
box.
On December 12, 1987, before leaving for a brief trip
to Hongkong, McLoughlin opened his safety deposit box with
his key and with the key of the management and took
therefrom the envelope containing US$5,000.00, the
envelope containing AUS $10,000.00, his passports and his
credit cards. McLoughlin left the other items in the box as he
did not check out of his room at the Tropicana during his short
visit to Hongkong. When he arrived in Hongkong, he opened
the envelope which contained US$5,000.00 and discovered
upon counting that only US$3,000.00 were enclosed therein.
Since he had no idea whether somebody else had tampered
with his safety deposit box, he thought that it was just a result
of bad accounting since he did not spend anything from that
envelope.
After returning to Manila, he checked out of
Tropicana on December 18, 1987 and left for Australia. When
he arrived in Australia, he discovered that the envelope with
US$10,000.00 was short of US$5,000. He also noticed that
the jewelry which he bought in Hongkong and stored in the
safety deposit box upon his return to Tropicana was likewise
missing, except for a diamond bracelet.
When McLoughlin came back to the Philippines on
April 4, 1988, he asked Lainez if some money and/or jewelry
which he had lost were found and returned to her or to the
management. However, Lainez told him that no one in the
hotel found such things and none were turned over to the
management. He again registered at Tropicana and rented a
safety deposit box. He placed therein one (1) envelope
containing US$15,000.00, another envelope containing
AUS$10,000.00 and other envelopes containing his traveling
papers/documents. On April 16, 1988, McLoughlin requested
Lainez and Payam to open his safety deposit box. He noticed
that in the envelope containing US$15,000.00, US$2,000.00
were missing and in the envelope previously containing
AUS$10,000.00, AUS$4,500.00 were missing.
When McLoughlin discovered the loss, he
immediately confronted Lainez and Payam who admitted that
Tan opened the safety deposit box with the key assigned to
him. McLoughlin went up to his room where Tan was staying
and confronted her. Tan admitted that she had stolen
McLoughlin’s key and was able to open the safety deposit box
with the assistance of Lopez, Payam and Lainez. Lopez also
told McLoughlin that Tan stole the key assigned to McLoughlin
while the latter was asleep.
McLoughlin requested the management for an
investigation of the incident. Lopez got in touch with Tan and
arranged for a meeting with the police and McLoughlin. When
the police did not arrive, Lopez and Tan went to the room of
McLoughlin at Tropicana and thereat, Lopez wrote on a piece
of paper a promissory note promising to pay McLoughlin the
amount of AUS$4,000.00 and US$2,000.00 or its equivalent
in Philippine currency on or before May 5, 1988. It was signed
by Tan, and Lopez also signed as witness. In spite of the
execution of the promissory note, McLoughlin insisted that it
must be the hotel who must assume responsibility for the loss
he suffered. However, Lopez refused to accept the
responsibility relying on the conditions for renting the safety
deposit box entitled “Undertaking For the Use Of Safety
Deposit Box,” (paragraphs 2 &4) which allowed “to release
and hold free and blameless TROPICANA APARTMENT
HOTEL from any liability arising from any loss in the contents
and/or use of the said deposit box for any cause whatsoever,
including but not limited to the presentation or use thereof by
any other person should the key be lost; and to return the key
and execute the RELEASE in favor of TROPICANA
APARTMENT HOTEL upon giving up the use of the box.
McLoughlin consulted his lawyers as to the validity of
the abovementioned stipulations. They opined that the
stipulations are void for being violative of universal hotel
practices and customs. His lawyers prepared a letter which
was signed by McLoughlin and sent to President Corazon
Aquino. The Office of the President referred the letter to the
Department of Justice (DOJ) which forwarded the same to the
Western Police District (WPD).
He came to the Philippines and registered again at
the Tropicana. He went to Malacañang but was instructed to
go to DOJ which directed him to proceed to the WPD.
However, he went back to Australia for an urgent business
matter. For several times, McLoughlin left for Australia to
attend to his business and came back to the Philippines to
follow up on his letter to the President but he failed to obtain
any concrete assistance.
It was on his return in August 25, 1989 to pursue his
claims against petitioners that the WPD conducted an
investigation which resulted in the preparation of an affidavit
which was forwarded to the Manila City Fiscal’s Office. Said
affidavit became the basis of preliminary investigation.
However, McLoughlin left again for Australia without receiving
the notice of the hearing on November 24, 1989. Thus, the
case at the Fiscal’s Office was dismissed for failure to
prosecute. Mcloughlin requested the reinstatement of the
criminal charge for theft. In the meantime, McLoughlin and his
lawyers wrote letters of demand to those having responsibility
to pay the damage.
 Then he left again for Australia. Upon his return on
October 22, 1990, he registered at the Echelon Towers at
Malate, Manila. Meetings were held between McLoughlin and
his lawyer which resulted to the filing of a complaint for
damages on December 3, 1990 against YHT Realty
Corporation, Lopez, Lainez, Payam and Tan for the loss of
McLoughlin’s money which was discovered on April 16, 1988.
After filing the complaint, McLoughlin left again for Australia to
attend to an urgent business matter. Tan and Lopez, however,
were not served with summons, and trial proceeded with only
Lainez, Payam and YHT Realty Corporation as defendants,
who admitted in their pre-trial brief that they had previously
allowed and assisted Tan to open the safety deposit box. The
court also admitted an amended/supplemental complaint filed
by McLoughlin which included another incident of loss of
money and jewelry in the safety deposit box rented by
McLoughlin in the same hotel which took place prior to 16 April
1988.
During the trial of the case, McLoughlin had been in
and out of the country to attend to urgent business in Australia,
and while staying in the Philippines to attend the hearing, he
incurred expenses for hotel bills, airfare and other
transportation expenses, long distance calls to Australia,
Meralco power expenses, and expenses for food and
maintenance, among others.
RTC:
The RTC of Manila rendered judgment in favor of
McLoughlin, ordering defendants, jointly and severally, to pay
plaintiff the sum of US$11,400.00 or its equivalent in
Philippine Currency of P342,000.00, more or less, and the
sum of AUS$4,500.00 or its equivalent in Philippine Currency
of P99,000.00, or a total of P441,000.00, more or less, with
12% interest from April 16 1988 until said amount has been
paid to plaintiff. They were also ordered to pay actual and
consequential damages, moral and exemplary damages,
litigation expenses, attorney’s fees plus cost of suit.
The trial court found that McLoughlin’s allegations as
to the fact of loss and as to the amount of money he lost were
sufficiently shown by his direct and straightforward manner of
testifying in court and found him to be credible and worthy of
belief as it was established that McLoughlin’s money, kept in
Tropicana’s safety deposit box, was taken by Tan without
McLoughlin’s consent. The taking was effected through the
use of the master key which was in the possession of the
management. Payam and Lainez allowed Tan to use the
master key without authority from McLoughlin. The trial court
added that if McLoughlin had not lost his dollars, he would not
have gone through the trouble and personal inconvenience of
seeking aid and assistance from the Office of the President,
DOJ, police authorities and the City Fiscal’s Office in his desire
to recover his losses from the hotel management and Tan.
As regards the loss of US$7,000.00 and jewelry
worth approximately US$1,200.00 which allegedly occurred
during his stay at Tropicana previous to April 4, 1988, no claim
was made by McLoughlin for such losses in his complaint
dated November 21, 1990 because he was not sure how they
were lost and who the responsible persons were. But
considering the admission of the defendants in their pre-trial
brief that on three previous occasions they allowed Tan to
open the box, the trial court opined that it was logical and
reasonable to presume that these personal assets were also
taken by Tan from the safety deposit box without McLoughlin’s
consent through the cooperation of Payam and Lainez.
The trial court also found that defendants acted with
gross negligence in the performance and exercise of their
duties and obligations as innkeepers and were therefore liable
to answer for the losses incurred by McLoughlin. Moreover,
the trial court ruled that paragraphs (2) and (4) of the
“Undertaking For The Use Of Safety Deposit Box” are not
valid for being contrary to the express mandate of Article
2003 of the New Civil Code and against public policy. Thus,
there being fraud or wanton conduct on the part of defendants,
they should be responsible for all damages which may be
attributed to the non-performance of their contractual
obligations.
CA:
The Court of Appeals affirmed the disquisitions made by the
lower court except as to the amount of damages awarded.
ISSUE:
Whether a hotel may evade liability for the loss of items left
with it for safekeeping by its guests, by having these guests
execute written waivers holding the establishment or its
employees free from blame for such loss
RULING:
As to the fact of loss of the properties:
The fact of loss was established by the credible
testimony in open court by McLoughlin. Great respect is
accorded to the evaluation of the credibility of witnesses by
the trial court because it is in the best position to assess the
credibility of witnesses and their testimonies because of its
unique opportunity to observe the witnesses firsthand and
note their demeanor, conduct and attitude under grilling
examination.
As to the gross negligence on the part of petitioners in
the performance of their duties as innkeepers:
Tropicana should be held responsible for the
damage suffered by McLoughlin by reason of the
negligence of its employees. Two keys are required to open
the safety deposit boxes of Tropicana. One key is assigned to
the guest while the other remains in the possession of the
management. If the guest desires to open his safety deposit
box, he must request the management for the other key to
open the same. In other words, the guest alone cannot open
the safety deposit box without the assistance of the
management or its employees. With more reason that access
to the safety deposit box should be denied if the one
requesting for the opening of the safety deposit box is a
stranger. Thus, in case of loss of any item deposited in the
safety deposit box, it is inevitable to conclude that the
management had at least a hand in the consummation of the
taking, unless the reason for the loss is force majeure.
Payam and Lainez, who were employees of
Tropicana, had custody of the master key of the management
when the loss took place. In fact, they even admitted that they
assisted Tan on three separate occasions (at around 6:30
A.M. to 7:30 A.M. while the latter was still asleep) in opening
McLoughlin’s safety deposit box. This only proves that
Tropicana had prior knowledge that a person aside from
the registered guest had access to the safety deposit box.
Yet the management failed to notify McLoughlin of the
incident and waited for him to discover the taking before
it disclosed the matter to him.
[Petitioner’s contention 1:] The management
contends, however, that McLoughlin, by his act, made its
employees believe that Tan was his spouse for she was
always with him most of the time. The evidence on record,
however, is bereft of any showing that McLoughlin introduced
Tan to the management as his wife. Such an inference from
the act of McLoughlin will not exculpate the petitioners from
liability in the absence of any showing that he made the
management believe that Tan was his wife or was duly
authorized to have access to the safety deposit box. Mere
close companionship and intimacy are not enough to warrant
such conclusion considering that what is involved in the
instant case is the very safety of McLoughlin’s deposit.
[Court:] Tan’s acts of opening McLoughlin’s safety
deposit box a number of times at the early hours of the
morning should have prompted the management to
investigate her relationship with McLoughlin. Then, petitioners
would have exercised due diligence required of them. Failure
to do so warrants the conclusion that the management had
been remiss in complying with the obligations imposed upon
hotel-keepers under the law.
Under Article 1170 of the New Civil Code, those who,
in the performance of their obligations, are guilty of
negligence, are liable for damages. As to who shall bear the
burden of paying damages, Article 2180, paragraph (4) of the
same Code provides that the owners and managers of an
establishment or enterprise are likewise responsible for
damages caused by their employees in the service of the
branches in which the latter are employed or on the occasion
of their functions. Also, this Court has ruled that if an employee
is found negligent, it is presumed that the employer was
negligent in selecting and/or supervising him for it is hard for
the victim to prove the negligence of such employer. Given the
fact that the loss of McLoughlin’s money was consummated
through the negligence of Tropicana’s employees in allowing
Tan to open the safety deposit box without the guest’s
consent, both the assisting employees and YHT Realty
Corporation itself, as owner and operator of Tropicana, should
be held solidarily liable pursuant to Article 2193.
As to the main issue of this case: whether the
“Undertaking For The Use of Safety Deposit Box”
executed by McLoughlin is tainted with nullity
THE UNDERTAKING/WAIVER IS NULL AND
VOID. Article 2003 is controlling, thus: “Art. 2003. The hotel-
keeper cannot free himself from responsibility by posting
notices to the effect that he is not liable for the articles brought
by the guest. Any stipulation between the hotel-keeper and the
guest whereby the responsibility of the former as set forth in
Articles 1998 to 2001 is suppressed or diminished shall be
void.”
with the use of arms or through an irresistible force to qualify
the same as force majeure.
[Petitioner’s contention 2:] Article 2002 which
exempts the hotel-keeper from liability if the loss is due to the
acts of his guest, his family, or visitors.
[Court] The justification they raise would render
nugatory the public interest sought to be protected by the
provision. The responsibility of securing the safety deposit box
was shared not only by the guest himself but also by the
management since two keys are necessary to open the safety
deposit box. Without the assistance of hotel employees, the
loss would not have occurred. Thus, Tropicana was guilty of
concurrent negligence in allowing Tan, who was not the
registered guest, to open the safety deposit box of
McLoughlin, even assuming that the latter was also guilty of
negligence in allowing another person to use his key. To rule
otherwise would result in undermining the safety of the safety
deposit boxes in hotels for the management will be given
imprimatur to allow any person, under the pretense of
being a family member or a visitor of the guest, to have
access to the safety deposit box without fear of any
liability that will attach thereafter in case such person
turns out to be a complete stranger. This will allow the
hotel to evade responsibility for any liability incurred by
its employees in conspiracy with the guest’s relatives and
visitors.
Lastly, petitioners contend that McLoughlin’s case
was mounted on the theory of contract, but the trial court and
the appellate court upheld the grant of the claims of the latter
on the basis of tort. The Court affirmed and held that tort
liability can exist even if there are already contractual
relations. The act that breaks the contract may also be tort.

Article 2003 was incorporated in the New Civil Code DISPOSITION: The decision of the CA is affirmed.
as an expression of public policy precisely to apply to Petitioners are jointly and severally liable.
situations such as that presented in this case. The hotel
business like the common carrier’s business is imbued with
public interest. Catering to the public, hotelkeepers are bound
to provide not only lodging for hotel guests and security to their
persons and belongings. The twin duty constitutes the
essence of the business. The law in turn does not allow such
duty to the public to be negated or diluted by any contrary
stipulation in so-called “undertakings” that ordinarily appear in
prepared forms imposed by hotel keepers on guests for their
signature.

The court in a previous case ruled that to hold

hotelkeepers or innkeeper liable for the effects of their guests,
it is not necessary that they be actually delivered to the
innkeepers or their employees. It is enough that such effects
are within the hotel or inn. With greater reason should the
liability of the hotelkeeper be enforced when the missing items
are taken without the guest’s knowledge and consent from a
safety deposit box provided by the hotel itself, as in this case.

Paragraphs (2) and (4) of the “undertaking”

manifestly contravene Article 2003 of the New Civil Code
for they allow Tropicana to be released from liability
arising from any loss in the contents and/or use of the
safety deposit box for any cause whatsoever. Evidently,
the undertaking was intended to bar any claim against
Tropicana for any loss of the contents of the safety deposit
box whether or not negligence was incurred by Tropicana or
its employees. The New Civil Code is explicit that the
responsibility of the hotel-keeper shall extend to loss of, or
injury to, the personal property of the guests even if caused by
servants or employees of the keepers of hotels or inns as well
as by strangers, except as it may proceed from any force
majeure. It is the loss through force majeure that may
spare the hotel-keeper from liability. In the case at bar,
there is no showing that the act of the thief or robber was done