Bailment Contracts

A. Mutuum or simple loan (Arts. 1933, 1934; Arts. 1953-1961)

1. Definition (Art 1933)

LOAN - a contract by which 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 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.

A mutuum or simple loan is a contract by which a person (creditor) delivers to another

(debtor) money or other consumable thing with the understanding that the same
amount of the same kind and quality shall be paid. (Art.1953)

2. Characteristics of a loan
a. Real contract –
i. delivery is essential for perfection of the contract of loan.
ii. An accepted promise to loan, is nevertheless binding on the
parties, it being a consensual contract.
b. Unilateral –
i. creates obligations on only one party, i.e., the borrower
ii. In a contract of loan, the cause is, as to the borrower, the acquisition
of the thing, and as to the lender, the right to demand its return or
its equivalent. (Monte de Piedad v. Javier)

3. Distinguished from commodatum

 Commodatum Mutuum
Subject Ordinarily not Money or other
Matter consumable consumable thing
Ownershi Retained by the lender Transferred to the
p borrower
Nature Purely personal -
Essentially gratuitous May be gratuitous or
onerous
Return or Return the same thing Pay the same amount
Payment loaned of the same kind
and
quality

Nature of Real or personal Personal property

Property property

Purpose Use or temporary Consumption

of
Loan possession

Demand Before the expiration of Lender may not

the term in case of demand before the
urgent need expiration of
the term
Loss of the Borne by the bailor Borne by the bailee
Thing
Liability Criminal (Estafa) Civil liability only

4. Kinds
Whether a thing is consumable or not depends on its nature and whether it is fungible or
not depends on the intention of the parties. Example: Wine is consumable by nature,
but it may be non-fungible if the intention is merely for display or exhibition.

[NOTE: Fixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan. (Art.1980)]
a. Fungible thing– usually dealt with by number, weight, or measure so that
any given unit or portion is treated an equivalent to any other unit or
portion.
b. Sum of money

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5. Form of payment (Arts. 1249 & 1250)

 Loan of money – in the currency stipulated, legal tender in the Philippines
(Art. 1249) and in case of extraordinary inflation or deflation, value based
at the time of the creation of the obligation (Art. 1250).
a. Notes and coins issued by CB
b. Check is not legal tender; cannot constitute valid tender of payment
 Loan of a fungible thing – another thing of the same kind, quality, and
quantity. If impossible, the value of the thing at the time of the perfection
of the contract.

6. Interest (distinguish, rates)

- the compensation allowed by law or fixed by the parties for the loan or for
bearance of money, goods or credits.
-
Interest may be paid either as compensation for the use of money (monetary interest)
referred to in Art. 1956 or imposed by law or by courts as penalty or indemnity for
damages (compensatory interest) under Arts. 2209, 2212 for breach of contractual
obligations (Garcia v. Thio). Existence of stipulation to pay interest
a. Monetary Interest
b. Compensatory Interest

Cases for Mutuum:

a. Pantaleon v. American Express, May 2009

Pantaleon v. American Express International, Inc., G.R. No. 174269, August 25, 2010. The relationship
between a credit card provider and its card holders is that of creditor-debtor, with the card company as
the creditor extending loans and credit to the card holder, who as debtor is obliged to repay the debtor.
This relationship takes exception to the general rule that as between a bank and its depositors, the bank is
deemed the debtor while the depositor is considered the creditor. The requisites of mora solvendi are (1)
obligation is demandable and liquidated; (2) debtor delays performance and (3) the creditor judicially
or extrajudicially requires the debtor’s performance. The requisites of mora accipiendi on the other
hand are (1) offer of performance by the debtor, (2) the offer must be to comply with the prestation as
it should be performed and (3) the creditor refuses the performance without just cause.

b. Eusebio-Calderon v. People October 2004 (INTEREST CHECKS)

c. Eastern Shipping Lines v. CA July 1994 (INTEREST)

Eastern Shipping Lines v. Court of Appeals, G.R. No. 97412, July 12, 1994. The judgments spoken of and
referred to are judgments in litigations involving loans or forbearance of any money, goods or credits.
Any other kind of monetary judgment which has nothing to do with, nor involving loans or forbearance
of any money, goods or credits does not fall within the coverage of the said law for it is not within the
ambit of the authority granted to the Central Bank Circular No. 416.
d. Medel v. CA, November 1998
e. Nakar v Gallery Frames, August 2013

Commodatum (Arts. 1933, 1934; Arts. 1935-1952)

1. Definition (Art. 1933)

LOAN - a contract by which 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 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.

2. Parties
 Bailor – the giver; the one who delivers the possession of the thing bailed
 Bailee – the recipient; the one who receives the possession or custody of
the thing delivered
3. Characteristics
(a) real (because perfected by delivery)
(b) principal (because it can stand alone by itself)
(c) gratuitous (otherwise, the contract is one of lease)
(d) personal in nature (because of the trust). (See Art. 1939).
4. As distinguished from a mutuum
Commodatum Mutuu Barter
m
Subje Nonconsumable Money or Non-fungible
ct thing other (nonconsumabl
Matter fungible e)
thing thing

Retu Identical thing Same Equivalent thing to

rn borrowed amount of what has been
the same received
kind and
quality

Natu Gratuitous May be Onerous

re gratuito
us

5. Subject of a commodatum
- Generally non-consumable things, whether real or personal. If the intention of
the parties is to have the consumable goods loaned returned at the end of the
period, the loan is a commodatum and not a mutuum.

6. Nature of a commodatum (Arts. 1935-1940)

 GENERAL RULE: Commodatum is purely personal in character (Art.1939) such
that:
1. Death of either party extinguishes the contract
2. Bailee can neither lend nor lease the thing lent to him to a third
person
EXCEPTION: Members of the bailee’s household may make use of the thing
loaned
EXCEPTION TO EXCEPTION: Bailee’s household may NOT use it when:
1. There is stipulation to the contrary, or
2. The nature of the thing forbids such use

7. Obligations of the Bailee (Arts. 1941-1945)

1.Obligation to pay for the ordinary expenses for the use and preservation
of the thing loaned (Art.1941)
2.Obligation to take good care of the thing with the diligence of a good
father of a family (Art.1163)
3.Liability for loss, even if loss through fortuitous event, in certain
circumstances (Art.1942)
4.Liability for deterioration of thing loaned, except under certain
circumstances (Art.1943)
5.Obligation to return the thing upon expiration of term or up
6.Solidary obligation where there are 2 or more bailees to whom a thing
was loaned in the same contract (Art.1945)

8. Obligations of the Bailor (Arts. 1946-1952)

1. To allow the bailee the use of the thing loaned for the duration of period stipulated
or until the accomplishment of the purpose for which commodatum was constituted.
2. To refund extraordinary expenses for the preservation of the thing loaned

provided bailor is notified before the expenses were incurred. (Art.1949) 

EXCEPTION: Urgent need hence no notice is necessary.
 3. To refund 50% of the extraordinary expenses arising from actual use of bailee

of the thing loaned (Art.1949)  EXCEPTION: Contrary stipulation

4. To pay damages to bailee for known hidden flaws in the thing loaned.

[NOTE: Bailor has no right of abandonment; he cannot exempt himself from payment
of expenses to bailee by abandoning the thing to the latter. (art. 1952)]

Deposits (Arts. 1962-2009)

 Deposits in General (Arts. 1962-1967)

Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another,
with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract, there is no deposit but some other contract.
(1758a)

When Contract of Deposit is Perfected

A deposit, being a real contract, is perfected by delivery (Art. 1316, Civil Code), but an agreement to
constitute a deposit is merely consensual, and is therefore binding upon mere consent. (Art. 1963, Civil
Code).

o Characteristics (5)
 a) It is a real contract perfected by delivery. (Art. 1316, Civil Code). [Nonetheless, there can be
consensual contract to make or to constitute a deposit. (Art. 1963, Civil Code).
b) The principal purpose is the safekeeping of the thing delivered. (Art. 1962). [Thus, if the
safekeeping is merely secondary, the contract is not a deposit but some other contract like one
of lease or commodatum.
c) The depositary cannot use the thing deposited except:
1. with the express permission of the depositor; or
2. when the preservation of the thing deposited requires its use [but then
it must be used only for that purpose. (Art. 1977, Civil Code).]
d) Only movable things can be the object of a deposit. (Art. 1966, Civil Code).
e) It 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. (Art. 1965, Civil Code).
f) The contract is either unilateral or bilateral, according to whether it is gratuitous or
compensated (onerous)

o Kinds
1. Judicial – attachment or seizure of property in litigation is ordered (Art. 2005-2008)
2. Extrajudicial (Art. 1967) - An extrajudicial deposit is either voluntary or necessary.
a. Voluntary – delivery is made by the will of the depositor or by two or more persons each of whom
believes himself entitled to the thing deposited (Arts. 1965-1995)
b. Necessary -
i. Made in compliance with a legal obligation or
ii. On occasion of any calamity or
iii. By travelers in hotels and inns (Arts. 1996-2004) or
iv. By travelers with common carriers (Arts. 1734- 1735)

The main difference is that in voluntary deposit, the depositor is free to choose the depositary. In
necessary deposit, the depositor lacks the freedom to choose the depositary

o Capacity of both parties

o Nature of Bank deposits
Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan
Bank deposits are in the nature of irregular deposits, they are really loans because
they earn interest. All kinds of bank deposits, whether fixed, savings, or current
are to be treated as loans and are to be covered by the law on loan.  Current and
saving deposits, are loans to a bank because it can use the same. While the Bank
has the obligation to return the amount deposited, it has, however, no obligation
to return or deliver the same money that was deposited. And, the failure of the
Bank to return the amount deposited will not constitute estafa through
misappropriation but it will only give rise to civil liability over which the public
respondents have no- jurisdiction.

o Nature of safety deposit box service

Contract of the use of a safety deposit box of a bank is not a deposit but a lease under Sec 72, A
of General Banking Act. Accordingly, it should have lost no time in notifying the petitioner in
order that the box could have been opened to retrieve the stamps, thus saving the same from
further deterioration and loss. The bank’s negligence aggravated the injury or damage to the
stamp collection.

 Voluntary Deposit (Arts. 1968-1995)

o General Provisions
o Obligations of the Depositary
o Obligations of the Depositor

 Necessary Deposit (Arts. 1996-2009)

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.
o Kinds (when necessary)
o Liabilities and Responsibilities of depositaries
o Liabilities and Responsibilities of depositors
  Judicial Deposit (Arts. 2005-2009)
Art. 2005. A judicial deposit or sequestration takes place when an attachment or seizure of property in
litigation is ordered.

Cases for Deposit:

a. BPI v IAC and Zshornack, August 1998

b. Guingona v. City Fiscal of Manila, April 1984
c. Luzan Sia v CA, May 1993

Accessory Contracts

A. Guaranty and Surety (2047-2081)

 Definition
- Contract between guarantor and creditor
- In the broad sense includes pledge and mortgage because the purpose of
guaranty maybe accomplished by securing the fulfillment of an obligation
through personal guaranty of a third person but also by furnishing to the
creditor for his security, property with authority to collect the debt (Manresa)
 Distinguished
 Parties in a Guaranty
o Responsibilities
o Liabilities
 Parties in a Surety
 o Responsibilities
o Liabilities
 Characteristics of a Guaranty
o Consensual
o Nominate
o Gratuitous
o Unilateral
o Accessory
 Classification of Guaranty
o As to nature
 Personal – personal commitement
 Real -
o As to manner of creation
 Conventional – created by the party
 Legal – constituted by law
 Judicial – constituited by curt
 Gratuitous – no valuable consideration
o As to scope
 Definite – only guarantees the principal obligation
 Indefinite – secures not only the principal obligation but also
the accessories (damages, interest, judicial costetc) of
principal
 Continueing - A guaranty that is not limited to a single
transaction but which contemplates a future course of
dealings, covering a series of transactions generally for an
indefinite time or until revoked.

 Exercise of the Benefit of Excussion (Arts. 2058-2060; Art 2071)

 B. Pledge, Mortgage and Antichresis

1. Common Provisions of Pledge and Mortgage

2. Pledge (2093 to 2123)

 Definition

In a pledge constituted in movable, in mortgage it is constituted on immovable

property.

Who may pledge?

- Must be the owner pf the property

- Must have free

Can a thid person mortgage his own property to secure the debt of another person?

There is nothing in the law that says that debtor himself must be the owner of the
property. What is requid is the mortgagor is the owner of the property. And has all the
authorization.

 As distinguished from Real Estate Mortgage

A real estate mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a
principal obligation, specially subjecting to such security immovable property or real rights over
immovable property in case the principal obligation is not complied with at the time stipulated
  Requisites of a valid pledge
 Sale and recovery of deficiencies

3. Real Estate Mortgage

 Defined
 Kinds
 Characteristics
 Requisites of a valid mortgage
 Foreclosure
o Kinds
 Judicial
 Extrajudicial
o Equity of Redemption
o Right of Redemption

4. Antichresis

 Defined
 Characteristics
 Requisites
 Rights and Obligations of the Antichretic creditor

5. Chattel Mortgage

 Characteristics
 As compared to a pledge
 As compared to a real estate mortgage
 How constituted

PART II – BANKRUPTCY
 A. Concurrence and Preference of Credits (Arts. 2236-2251)
 General Provisions
 Classification of Credits
 Order of Preference of Credits

B. Insolvency

PART III – NEGOTIABLE INSTRUMENTS

A. Negotiability (Sec. 1)
a. Form of Negotiable Instruments
b. Negotiability and Non-Negotiability
c. Cases:
1. Violago v. BA Finance Corp., 559 SCRA 69
2. Banco De Oro v. Equitable Bank, 157 SCRA 188

B. Kinds of Negotiable Instruments

a. Promissory Note (s. 184)
b. Bill of Exchange (s. 126)
c. Check (s. 185)

C. Parties (Sections 191 in relation to Sections 126 and 184)

a. Holder
b. Maker/Drawer
c. Payee
d. Drawee/Acceptor
e. Bearer
f. Indorser
g. Indorsee
 h. Cases:
1. Villanueva v. Nite, 496 SCRA 459
2. Hi-Cement Corp. v. Insular Bank of Asia, 534 SCRA 269

D. Liabilities of Parties
a. Primarily Liable (maker and acceptor)
b. Secondarily Liable (drawer and indorser)

E. Forms and Interpretation of Instrument

a. Written and Duly Signed (S. 18 &19)
b. Unconditional Order or Promise to Pay (S. 3)
c. Certain Sum Payable (Sec. 2)
d. Payable to Order or to Bearer (s. 8&9)
e. Certain Designation of Parties (s. 8, 128&130)
f. Certain times of payment; demand (s. 4, 11&17)
g. Provisions Not affecting Negotiability (S.5)
h. Omissions (s.6)
i. Dates of Instrument (s.11-13)
j. Blanks; When Filled (s.14)
k. Incomplete Instruments (s.15)
l. Construction (s.17)
m. Cases:
1. Villanueva v. Nite, 496 SCRA 459
2. Consolidated Plywood Industries vs. IFC Leasing, 149 SCRA 448
3. PNB v. Rodriguez, 566 SCRA 513
4. BPI v. CA,512 SCRA 620
5. Pacheco v. CA, 319 SCRA 595
6. People vs. Tiongco, 290 SCRA 595
7. Borromeo v. Sun, 317 SCRA 176
8. Development Bank of Rizal v. Wei, 219 SCRA 736
 9. Rodriguez v. CA, 207 SCRA
10. Caltex (Phils.) v. CA, 212 SCRA 448
11. Jose v. CA, 177 SCRA 594
12. Ang v. Associated Bank, 532 SCRA 244

F. Consideration and Effects

a. Presumption (s.24)
b. Value (s.25)
c. Holder for Value (s.26)
d. Lien Holder (s.27)
e. Effect of Want of Consideration (s.28)
f. Accommodation Party (s.29)

G. Transfer and Negotiation

a. Issuance and Delivery (S. 16&191)
b. Negotiation; Holder (S.30, 191)
c. Methods of Negotiation
d. Indorsement (s. 31, 32, 34, 35, 40)
 Kinds: special and blank; payable to bearer; qualified and
restrictive
 Qualified Indorsement
 Conditional Indorsement s.39
 Indorsement to or by collecting blank
 Unindorsed instruments s.49
 Indorsement by agent s20, s44

H. Holder in Due Course (s.52)

a. Holder
b. Holder for Value
 c. Holder in Good Faith
d. Rights of a Holder in Due Course (s.57&58)
e. Cases:
1. Prudencio v. CA, 143 SCRA 11
2. BPI v. Roxas, 536 SCRA 168
3. Caltex (Phils.) v. CA, 212 SCRA 448
4. Gonzales v. RCBC, 508 SCRA 459
5. Great Asian Sales Center Corp. v. CA,381 SCRA 557
6. State Investment House v. CA, 217 SCRA 32
7. Vicente de Ocampo & Co. v. Gatchalian, 3 SCRA 596
8. State Investment House v. CA, 217 SCRA 32
9. Yang v. CA, 409 SCRA 159

I. Defenses and Equities (s.55,57,58)

a. Incapacity (s22)
b. Illegality
c. Forgery (s.18, 23)
d. Acceptance and Payment under Mistake
e. Material Alteration
f. Fraud
g. Duress
h. Complete Instrument which is undelivered (s16)
i. Incomplete instrument which was delivered (s15)
j. Incomplete Instrument which was delivered (s14)
k. Consideration (s28)

J. Liability of Parties
a. Primary Parties
b. Formal Requisites of Acceptance
c. Kinds of Acceptance
d. Liability of Secondary parties
 e. Liability of Accommodation Party

K. Presentment (s.79-100; 143-151)

a. Presentment for Acceptance
b. Presentment for Payment
c. Notice of Dishonor

L. Protest (s.152-180)

M. Discharge (s.119)

REFERENCES

1. Civil Code of the Philippines

2. Law on Negotiable Instruments
3. Law on Negotiable Instruments by Hector De Leon

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