Article 2088 of the Civil Code of the Philippines prohibits pactum commissorium and provides that “[t]he

creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.” The following are the elements of a pactum commissorium:
“(1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of
security for the payment of the principal obligation; (2) that there should be a stipulation for an
automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment
of the principal obligation within the stipulated period” (Spouses Uy Tong vs. Court of Appeals; G. R. No.
77465, May 21, 1988; ponente, former Associate Justice Irene Cortes). “The essence of pactum
commissorium is that ownership of the security will pass to the creditor by mere default of the debtor”
(Sps. Solitarios vs. Sps. Jaque; G. R. No. 199852, November 12, 2014; ponente, Associate Justice
Presbitero Velasco Jr.).

From the facts that you gave, it seems that all the elements of a pactum commissorium are
present: (1) there is a creditor-debtor relationship between you and your friend; (2) a property
was mortgaged as a security for the obligation; and (3) there is an automatic appropriation by
your friend in case you defaulted in any of the monthly payments. Also, the Supreme Court has
repeatedly held that “the only right of a mortgagee in case of non-payment of debt secured by
mortgage would be to foreclose the mortgage and have the encumbered property sold to satisfy
the outstanding indebtedness. The mortgagor’s default does not operate to automatically vest on
the mortgagee the ownership of the encumbered property, for any such effect is against public
policy, as earlier indicated.” (Id.)

Simply put, your friend cannot automatically appropriate to himself the mortgaged property upon
your failure to pay your obligation but he has the option to foreclose the mortgage and even
purchase the same in a foreclosure sale. Nevertheless, since you are ready, willing and able to
pay your outstanding debt, we find it unnecessary to foreclose the subject property.

Difference: commodatum & mutuum

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

Commodatum is essentially gratuitous.

Simple loan may be gratuitous or with a stipulation to pay interest.

In commodatum the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.
[1] Commodatum ordinarily involves something not consumable (see Art. 1936.), while in
mutuum, the subject matter is money or other consumable thing. It must be noted that only
personal (movable) property can be classified into consumable or not;
[2] In commodatum, ownership of the thing loaned is retained by the lender (Art. 1933.), while
in mutuum, the ownership is transferred to the borrower. The purpose of mutuum is for the
borrower to own the thing loaned and use and consume it;

[3] Commodatum is essentially gratuitous, while mutuum may be gratuitous or it may be

onerous, that is, with stipulation to pay interest. If any compensation is paid by the bailee, the
contract is no longer within the concept of commodatum;

[4] In commodatum, the borrower must return the same thing loaned, while in mutuum, the
borrower need only pay the same amount of the same kind and quality. Money, for example,
when it used, parts the owner and, therefore, it is almost impossible for a bailee in mutuum to
return the same cash with the same series numbers;

[5] Commodatum may involve real or personal property (Art. 1937.), while mutuum refers only
to personal property. If personal property (whether or not consumable) is borrowed not for the
purpose of consumption but for exhibition or display, the contract is commodatum, not mutuum;

[6] Commodatum is a loan for use or temporary possession (Art. 1935.), while mutuum is a loan
for consumption. Use or temporary possession of the thing may or may not include its fruits. In
commodatum, the parties may stipulate that the bailee has the right to make use of the fruits of
the thing bailed BUT the fruits are not the main purpose of the contract. Otherwise (i.e. the main
purpose of the contract being the enjoyment by the bailee of the fruits of the thing), the contract
may be classified as one of usufruct.

[7] In commodatum, the bailor may demand the return of the thing loaned before the expiration
of the term in case of urgent need (Art. 1946), while in mutuum, the lender may not demand its
return before the lapse of the term agreed upon. Note that this does not mean that the bailor may
demand the return of the thing anytime; there must be an urgent need.

On the other hand, even if there is urgent need or emergency (e.g. hospitalization of a child, etc.),
the bailor in mutuum cannot demand the return of the thing before the lapse of the period agreed
upon. In fact, he cannot go to court for this purpose.

[8] In commodatum, the loss of the subject matter is suffered by the bailor since he is the owner
(Art. 1942 and Art. 1174.), while in mutuum, the borrower suffers the loss even if caused
exclusively by a fortuitous event and he is not, therefore, discharged from his duty to pay. It may
also be said that while commodatum is purely personal in character (see Art. 1939.), mutuum is
not so.
It can be readily noted from [Article 1933] that in simple loan (mutuum), as contrasted to
commodatum, the borrower acquires ownership of the money, goods or personal property
borrowed. Being the owner, the borrower can dispose of the thing borrowed (Article 248, Civil
Code) and his act will not be considered misappropriation thereof. (G.R. No. L-50550-52.
October 31, 1979)

In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan,
ownership passes to the borrower.

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

Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.

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

The rule is that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract. In case of doubt, the contemporaneous and
subsequent acts of the parties shall be considered in such determination. (G.R. No. 115324.
February 19, 2003)