INTRO: REVIEW OF CONTRACT LAW ● Who can give consent

○ Anyone
Definition of Contract ● Who cannot give consent
● A meeting of the minds between 2 persons, where one binds himself to ○ Minors
give something or to render service ○ Deaf mutes who do not know how to write (or read)
● Contrast : Obligation ○ Insane or demented persons
○ A juridical necessity to give, to do, or not to do ○ Those suffering from Civil Interdiction
● Contract - agreement ■ A legal restriction on someone incapable of managing property
● Obligation - duty ○ Incomptent or spendthrift
○ Spouses
Elements of a Contract ■ For property owned by the other spouse UNLESS there is a
● Consent marriage settlement)
● Object ○ Those exercising fiduciary relationships to a person and his
● Cause property
■ Lawyer - client’s properties
Consent ■ Judge - object being litigated
● Meeting of the offer & acceptance (upon the thing and cause) ■ Govt officials/employees - property they have authority over
○ Offer = certain ○ Transaction of married person and paramour
■ Definite - agreement can be reached
■ Complete - all details (price, type, quantity) Object
■ Intentional - offerer must have the intent of being bound by the ● Anything can be an object, except:
acceptance if given ○ Those outside the commerce of men
○ Acceptance = absolute ■ Belonging to public domain or to the State
■ Unmistakable, identical in all aspects to the offer ○ Intransmissible rights
■ Offer must be matched by an absolute acceptance ■ Personal rights (against people)
● Qualified acceptance ■ Those agreed upon or declared by law to be intransmissible
○ Constitutes a counter-offer ○ Future inheritance
○ Involves a new proposal ○ Objects/services contrary to law, morals, custom, order, and policy
○ Is a rejection of the original offer ○ Impossible things or services
○ When what is desired is not exactly what is being offered ○ Those incapable of existing in the future
■ Example : A wants to buy a book from B for 500. B wants to
sell it for 600.

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Cause
● The reason which moves the contracting parties to enter into an
agreement
● The prestation/promise of a thing, service, or benefit
● What can be a cause of a contract
○ Anything
● What cannot be a cause of a contract
○ Same as what object cannot be to a contract

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 MODULE 1: LAW ON THE CONTRACT OF SALES ● RULE: if consideration of contract consists partly in money and in thing
○ With clear intention:
Contract of Sale ■ Classification of transaction (barter/sale) - what is followed is
● Where seller promises to deliver a determinate object in exchange for what is agreed upon by the parties
money or its equivalent to be given by the buyer ○ No clear intention:
○ Determinate - specific, not substitutable (ex: house located at a ■ Sale - value of thing ≤ amount of money
specific address, specific book, a painting) ■ Barter - value of thing > amount of money
● 4 Important concepts: ● Essence of differentiating barter and sale
○ Transfer of ownership ○ Barter - there is mutual warranty over the things exchanged (this does
■ Non-transfer of ownership beats the essence of making a sale not work for sales)
■ Can be towards a buyer or third party (as a gift) Elements of a Sale: Consent, Object, Consideration
○ Deliver ● Consent
■ Can be to the buyer or third party ○ Contract of sale is perfected when there is a meeting of minds
○ Thing (upon object and price)
■ Cannot be a service ○ When there is an offer and acceptance
■ Service is not tangible; this transaction is under contract of ○ Who cannot give consent
services ■ Unemancipated persons - under parental authority
○ Certain Price ■ Insane or demented persons
■ Equivalents of money: ■ Deaf mutes who cannot write (and read)
● Cash, checks, credit card, loyalty card (where you earn ○ Other information
money), etc. ■ Minors can buy for their necessities
■ The blind can give consent for they may learn how to read or
Sale VS Barter write
● Theory of Conservation of Value ■ Consent in online purchase
○ Every object has a finite and immutable (fixed) value ● E-Commerce law - provision of private and public
● Seller sells object lower than its finite value = there was a sale and donation code (username and password)
● Consideration - anything of value promised by one party to another ● Burden of proof in proving absence of consent is on the
○ Example : selling a car for 1M. Considerations are the car (seller) and buyer
1M (buyer) ● Object
■ Barter - giving of a thing ○ Anything
■ Sale - giving of money ■ Within the commerce of man
■ What if both money and thing?: ■ Not impossible to obtain legally and physically

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 ■ In existence or is capable of being
■ Determinate (or becomes indeterminate (?))
○ Except those not allowed by law
○ There are some objects that cannot be sold/bought due to conditions
(i.e. prescribed/allowed amount dictated by law)
● Consideration
○ Anything of value promised by one party to another
Auctions
● Consent is manifested:
○ Participant - signals the auctioneer that he is bidding
○ Auctioneer - signals that there is no other bid by banging the hammer
● Consent in an online purchase
○ E-Commerce Law - consent is given upon providing private and
public code
Other special rules for Auctions (1476)
● (1) Sales of separate lots by auction are separate sales
○ There is a separate contract to each lot
○ Fall of hammer - indicates a complete and separate bargain
● (2) Sale perfected by the fall of the hammer
○ Putting up the goods for sale - only an invitation
○ Each bid is an offer
○ Until the fall of the hammer (or until the contract is perfected):
■ Bidder - may retract his bid
■ Auctioneer - may withdraw the goods from the sale UNLESS
the auction has been announced to be without reserve
(meaning, the auctioneer cannot withdraw once bid is made
and sale is made to highest bidder)
● (3) Right of seller (or his agent) to bid in the auction
○ Is given if:
■ Such right was reserved
■ Notice was given that an agent can bid in behalf of the seller
■ The right to bid by seller is not prohibited
○ Notice of right to bid - NOT GIVEN
■ It is unlawful for seller to bid and auctioneer to allow it
■ Purpose of notice - prevent puffing or secret bidding (since
seller may unlawfully inflate the price)
○ Notice of right to bid - GIVEN
■ Right to bid may be expressly reserved by or on behalf of the
seller
■ Secrecy of puffing - fraud on bidding
● (4) Contract not to bid
○ Sale is fraudulent - due to conduct of seller and buyer
■ Buyer cannot make an agreement wherein he would be the
only one to bid (so that price can be lowered)
● (5) Advertisements for bidders
○ Are invitations; not bound to accept biddings unless contrary appears
Objects in a Sale
● Not outside the commerce of men (including future things)
● Transmissible rights
○ Example : right to demand payment from debtors (borrowers)
Consideration in a Sale
● Always money
Form of Sale
● Sale is a consensual contract
○ Consensual - perfected by consent (signing of parties)
■ Ex: contract of sale, lease and agency
○ Real - perfected by consent and the delivery of the object (transfer
of the thing)
■ Ex: contract for pawn, loans of money/goods, deposit, pledge
and commodatum
● Contract of sale - no particular form is required EXCEPT when the contract of
sale is covered by the Statute of Fraud
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 ○ ORAL CONTRACTS ARE PERFECTED CONTRACTS, BUT THERE
ARE SOME TRANSACTIONS THAT NEED TO BE IN WRITING TO
BE ENFORCEABLE
○ Statue of Fraud - type of law requiring certain classes of contracts to
be put down into writing
■ It can be in any piece of writing (letter, text, emails are valid)
● Electronic evidence - any direct transmutations of
paper documents are valid
■ Form - required for evidentiary purposes
■ Non-compliance with SF - won’t affect contract’s validity
● But, contract cannot be enforced & be proved in court
by mere oral testimony
■ Purpose : to prevent fraud and perjury in the enforcement of
obligations
■ (2d) about sale of movable property where price is P500
● If price of sale is less than 500 = contract would be
valid and enforceable even if made orally
Obligations of a Seller
● (1) Transfer ownership
○ Ownership is transferred upon actual or constructive delivery
○ DOES DELIVERY CONCLUSIVELY TRANSFER OWNERSHIP?
■ NO, BECAUSE IT CAN BE THAT YOU ARE ONLY
BORROWING THE THING THAT YOU ARE POSSESSING
(BUT OWNERSHIP IS TRANSFERRED BUT NOT TO YOU)
■ OWNERSHIP IS TRANSFERRED UPON ACTUAL DELIVERY
● (2) Deliver the object and to warrant (affirm) it
○ What can be delivered:
■ Object of sales (principal)
■ Accessions (fruits) - springs forth the principal thing either
naturally or artificially (thing can still be used without it)
● Natural - w/o labor (trees, young of animals)
● Industrial - w/ labor (corn and other crops, rice)
● Civil - from a contract (rents, leases, annuities, etc.)
■ Accessories - principal thing cannot be used without it;
“accessory follows the principal”
● Spare tire of a car, television antennas, cell phone
chargers)
Actual VS Constructive Delivery
Actual Delivery
● Self evident
● The physical turnover of the object of sale
● Thing sold is delivered - it is in the control and possession of buyer
● POSSESSION - HOLDING A THING AND POSSESSING A RIGHT
(SHOPEE DELIVERY OF A NEIGHBOR; YOU WOULD BE A HOLDER AND
NOT A POSSESSOR)
Constructive Delivery
● Object not turned over physically
● Certain symbolic ritual is made which transfers the object
○ (1) Sale through public instrument (1498)
■ Possession transferred by public instrument (notarized deed of
conveyance)
● Execution of public instrument as manner of delivery -
applicable to movable and immovable property
● Buyer may use the document as proof of his ownership
■ Delivery presumptive only
● Execution of deed (equivalent to) delivery of property
● Prior physical delivery/possession is not required
● But, delivery is still presumptive and not conclusive
(since execution of the doc is just an equivalent)
○ Presumption is destroyed thru legal
impediment (rejection to a contract) and failure
of buyer to take material possession of it
○ (2) Traditio Longa Manu (1499)
■ Delivery with the long hand - thing to be delivered to buyer
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 ■ Delivery takes place by mere consent/agreement of parties
when seller points to the thing sold that is to be at the control
and disposal of buyer
● Example : buyer purchases a car which is still in the
seller’s lot. Car should be delivered to the buyer's
home.
○ (3) Constitutum Possessorium (1500) and Traditio Brevi Manu
(1499)
■ Delivery with the short hand - thing in possession of buyer
■ Delivery happens when buyer has possession of the thing sold
by virtue of another title (lease)
● Example : a person who leases a car possesses it but
does not own it. If there is an option to buy, then the
lessee already has the car.
Place and Time of Delivery
● WHERE (presumption: buyer must take goods from seller’s place)
○ With agreement - place agreed upon
○ No agreement - HERE; place of delivery (determined by usage of
trade)
○ No agreement and usage - seller’s place of business (if none, his
residence) CUSTOM
○ For specific goods, where contract was made at some other
place - that place is the place of delivery (if no agreement)
○ WHERE IT IS FOUND
● WHEN
○ No fixed time - deliver within reasonable time (a question of fact)
○ There is a fixed time - co
○ rrect performance should be offered if time is of the essence (if not,
the question is if correct performance was offered within reasonable
time)
○ No specified time for delivery - deliver within reasonable time (time
is not of the essence)
Delivery by Carrier (Definition of Shipping Terms)
● CIF - Cost, Insurance and Freight
○ To be paid by seller up to the point of destination
○ Price covers: Cost of goods, expense of freight and insurance
○ Title passed onto buyer from the moment of delivery
● FAS - Free Alongside Ship
○ Seller is obligated to deliver goods purchased by the buyer next to a
particular vessel that the buyer designates
■ Buyer has direct link to the vessel
○ Applies to goods transported by sea or inland waterway (int’l trade)
○ Seller - export clearance; buyer pays for costs
● FOB - Free On Board
○ Indicates when liability and ownership of goods are transferred from a
seller to a buyer
○ Also indicates who pays for freight
○ Point of FOB (shipment or destination) - determines when the
ownership passes
■ FOB shipping point - buyer owns and pays
■ FOB destination - seller owns and pays
Risk of Loss
● Seller must exercise diligence of a good father of a family - after perfection
of contract and before delivery of object
○ UNLESS law/obligation requires a higher degree of care
○ APPLIES ONLY TO SPECIFIC, DETERMINATE OBJECTS
● Fruits
○ Creditor has right to fruits - obligation to deliver arises
○ Creditor has no real right until it is delivered
■ But, creditor has personal right against seller - the right to
demand for its delivery
■ REAL RIGHT - RIGHT TO USE; ENFORCEABLE AGAINST
THE WHOLE WORLD
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 ■ PERSONAL - RIGHT TO MAKE SOMEONE PERFORM;
INVOKE ONLY AGAINST CERTAIN PERSONS
● Who takes risk of loss (general rule)
○ SELLER UNLESS OWNERSHIP IS TRANSFERRED TO THE
BUYER
■ YOU NEVER LOSE WHAT YOU DO NOT OWN
○ Seller - before ownership is transferred (delivery or no delivery)
○ Buyer - after ownership is transferred
○ EXCEPTION
■ Buyer (physically possesses the thing) - if goods are given to
buyer but ownership is still with seller
■ Party at fault - actual delivery has been delayed thru fault
● Special rules
○ (1) Loss due to fortuitous event (1262)
■ Obligation is extinguished
● Determinate thing is destroyed during the delivery
● Without the fault of the debtor/seller
● Debtor has not incurred legal delay
○ Legal delay
■ Only if creditor/buyer makes a demand
■ Fortuitous event
● No person is held liable
● Events not foreseen
● If foreseen, event is inevitable
○ (2) Sale by non-owner (1174)
■ If goods are sold by a person who: Does not own the good and
Does not sell them under authority or with the consent of the
owner, then the buyer has no title to the goods as well
UNLESS:
● YOU ARE AUTHORIZED BY THE OWNER / The
owner of the goods cannot deny the seller’s authority to
sell due to owner’s conduct (ESTOPPEL)
■ EXCEPT (what are not affected by this article):
● If the object is covered by relevant recording and
registration of law
○ Examples which may have a bearing on the
validity of a sale made by a person (not the
owner/agent):
■ Property registration decree
■ Land transportation and traffic code
■ Revised administrative code (with
regards to the sale of large cattle and of
vessels)
○ Any other provision of law
■ Negotiable instruments law
■ Warehouse receipts law
○ IF YOU BOUGHT SOMETHING STOLEN, YOU
ARE NOT OBLIGED TO RETURN IT
● Purchase in a merchant’s store, in fairs, or markets
○ Imperfect/void title ripening into a valid one
○ Sale is necessary to facilitate and give stability
to business transactions
■ Buyer cannot look at the owner of every
article in a store
○ (3) Effect of loss of thing at the time of sale (of specific thing)
(1493)
■ Loss - before or at the time the contract of sale is perfected
● Thing is ENTIRELY lost - contract is inexistent and void
(there is no object)
● Thing only PARTIALLY lost - vendee may:
○ Withdraw from the contract
○ Demand the remaining part, paying its
proportionate price
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 ■ When thing is considered lost
● When it perishes, goes out of commerce, disappears,
cannot be recovered (perishes = deterioration)
○ (4) Effect of loss in case of specific goods (1494)
■ Applies to a mass of “specific goods” or goods identified and
agreed upon at the time of a contract of sale is made
■ Both art. 1943 and 1944 - have same alternative remedies ([1]
rescind from contract OR [2] give it legal effect, paying the
proportionate price of the remaining object)
● Sale divisible - option 2 is available if sale is divisible
○ Divisible contract - consideration is made up of
several parts
○ Indivisible contract - consideration is single
● Sale indivisible
○ If sale is indivisible, then the object is a specific
thing
Rules in Double Sales (1544)
● Same property, same vendor, different vendees:
○ Movable property - ownership granted to vendee who is first to take
possession of property
○ Immovable property - ownership granted to vendee who is first to
register
■ If no inscription - property will pertain to who possessed it first
(if not to that party with the oldest title); register > possession
● Inscription - an engagement which a person, who
makes a solemn accusation of a crime against another
Conditions and Warranties
● Condition - a future and uncertain event
● Warranty - a promise or affirmation of the seller regarding the qualities of an
object
○ Use of the terms warranty or warrant are not necessary to constitute
warranty
● Condition VS Warranty
○ Condition - goes into the root of the contract; if not fulfilled, there is
no contract
○ Warranty - goes into the performance of the obligation
Kinds of Warranties
- Seller is liable for both
● Express Warranties (1546)
○ Warranty represented by the seller’s words which induces buyer
○ If the affirmation/promise induced buyer to purchase the good
and buyer relies on the said affirmation
○ Warranty is part of a contract of sale
■ It is immaterial whether the seller knows it is true or not
○ Not considered as warranty - expression of opinion UNLESS a seller
is an expert
■ Example : a light bulb manufacturer prints "lasts 15,000 hours"
on its packaging. The words "guaranteed" or "warranty" do not
appear, but this claim nevertheless is an express warranty
● Implied Warranty (1547)
○ Warranties imposed to sellers by law
○ It is which the law derives depending in the nature of the
transaction or the situation of the parties
○ Instances where there is an implied warranty:
■ Seller has right to sell and buyer will have possession thereof
■ That the thing sold is free from defects
■ That the thing sold is fit for its intended purpose
○ Natural, not essential, element of a contract since it is presumed to
exist even though it is not stated in the contract
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Obligations of the Buyer (1582)
● To accept delivery
● To pay the price at the time and place stipulated
○ If time and place not stipulated - payment must be made at the time
and place of delivery

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 MODULE 2: LAW ON AGENCY
Definition of Agency (1868)
● (ppt) when a person binds himself to do something in behalf of another
with the consent or authority of the latter
○ One person is employed to render services for another
○ Excludes:
■ Employer-employee, master-servant, employer-independent
contractor relationships
● Agency - a relationship which implies power in an agent to contract with a
third person on behalf of a principal
○ (ppt) Proceeds from a theory - what a person can do for himself, he
could ask another to do for him
● DIFFERENCE between agent VS employee, servant, independent contractor
○ Agent - has the power to affect the principal’s contractual
relations with third persons
Form of an Agency (1869)
● Usual form of agency - no specific form (oral or in writing) UNLESS the law
requires a specific form (1874)
○ Express - agent is actually, explicitly authorized by principal orally or
in writing
○ Implied - It isn't an agreement that the principal & agent have made,
but instead, agency is formed by something that has been done (by
principal & agent; one which is implied from the ff:
■ (1) Acts of principal
● Example : A sold good of B without B’s consent. B
received proceeds from A’s sale and gave A’s
commission. Acts of B implies that he had ratified what
A has done (or that given the contract the same effect
as if had originally authorized it)
■ (2) Principal’s silence or lack of action, or failure to repudiate
agency
● Note : principal must know that “another person is
acting on his behalf without authority” for agency to be
implied
● Example : A administers B’s property. A passed on the
his duties to C. B was informed and did not oppose; C
acted by virtue of an implied agency equivalent to a
legitimate agency
Special Power of Attorney (1878)
● SPA - a written document authorizing an agent to make certain
transactions in behalf of a principal
● SPA is valid although no notary public intervened in its execution (Baretto
vs. Tuazon, 59 Phil. 845.)
○ EXCEPTION : SPA is executed in a foreign country, it must be
certified and authenticated (1987 decision in Lopez v. Court of
Appeals (December 29, 1987); Rules of Court, Sec. 25, Rule 132)
● Applies to acts of strict dominion or ownership (distinguished from acts of
administration)
● DIFFERENCE
○ General power of attorney - grants broad powers to to handle
principal’s affairs; grants agent the legal right to make all financial and
legal decisions for the principal
○ Special power of attorney - grants specific/limited powers; gives
agent authority for a limited set of actions
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Transactions that require an SPA
(In behalf of the principal, an SPA is needed for the agent...)
1) To make payment
● Payment - the delivery of money or the performance in any other
manner of obligation (1232)
● Difference (payment made is…)
○ An act of ownership - payment involves the conveyance of
ownership of money/property
■ SPA is implied from the authority to buy a designated
piece of land at a certain price
○ An act of administration - if payment is made through the
ordinary course of management (1877)
2) To effect novations
● Novation - the extinction of an obligation through the creation of a
new one thru: (1291)
○ Changing the object or principal conditions
○ Substituting the debtor (who would fulfill demand)
○ Subrogating (substituting) another in the right of the creditor
● Obligation must already exist at the time the agency is constituted
● With an SPA, agent can effect the novation of an obligation at the time
the agency was constituted
3) To (exercise) compromise, arbitration, to waive authority
● Compromise - a contract wherein the parties avoid litigation or put an
end to one already commenced (2028)
● Arbitration - where parties submit their controversies to one or more
arbitrators (someone who settles dispute) for decision (2042, 1880)
● Authority of the agent to waive the ff:
○ The right to appeal from a judgement
○ Objections to the venue of an action
○ Prescription already acquired
● Note
○ These are acts of ownership - involves the possibility of
disposing of a the thing or right subject of the compromise or
arbitration
○ The grant of SP to one of the acts is not enough to authorize
the others
4) To waive an obligation gratuitously (NOT SURE)
● If authorized, agent can waive the right of the principal (to demand
something against a debtor)
○ If authorized, an agent can execute condonation in behalf of
the principal (who is the creditor)
● He cannot bind the principal (the obligee, creditor) to
condonation/remission UNLESS specially authorized to do so
○ Condonation or remission (1270) - extinguishment of
obligation wherein the creditor gratuitously renounced his right
against the debtor with the latter's acceptance
5) To convey or acquire immovable
● Applies to both gratuitous and onerous contracts (1874)
○ Gratuitous - contracts of pure beneficence, donations
■ Consideration - liberality of the benefactors
○ Onerous - cause or consideration is money or property
■ Consideration - (as to each of the parties) delivery or
performance of a thing or service
● Only applies to immovables (under strict dominion)
6) To make gifts
● Gift/Donation - an act of liberality; person gratuitously disposes a thing
or right (725)
● An agent without SP from principal cannot make gift
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 ● Acts of administration (where SP is not required):
○ Making of customary gifts for charity
○ Gifts to employees in the business managed by the agents
7) To loan or borrow money
● Loan - borrower is bound to pay the creditor an equal amount of the
same kind and quality
● SPA is needed if agent will loan or borrow money UNLESS (no SPA is
needed for) borrowing money is urgent and indispensable for the
preservation of things under administration
● Agent may be empowered to borrow money (1890)
● This article only refers to money and not other fungible things
8) To lease realty TO another person for more than a year
● Lessor gives lesse the enjoyment/use of a thing for a price certain and
for a period which may be definite or not (1643)
● General rule : Agreement for leasing real property for more than 1
year - unenforceable UNLESS made in writing, even if the agent is
authorized
● An act of administration - lease of realty to another for 1 year or less,
and lease it not registered
○ Unrecorded lease of real estate - not binding upon third
persons (1648)
● Note
○ The article does not refer to lease of realty FROM another
person and to lease of personal property
■ Realty / Real property - immovable, land and anything
attached to it permanently
■ Personal property - movable property, not fixed
9) To bind the principal to render service gratuitously
● Agent may bind himself to render service without compensation
(1875) ; agent does his services for free
● However, to bind the principal to that effect requires an SPA; SPA is
needed when the principal is bound to render services for free and the
agent would do that act on the principal’s behalf
10) To bind the principal in a contract of partnership
● Contract of partnership - partners bind themselves to contribute to a
common fund and divide profits (1767)
○ Fulfillment of obligations (to contribute and gain) - requires an
act of strict ownership
● Principal must personally have trust and confidence in the proposed
partners
11) To obligate principal as guarantor or surety
● Contract of guaranty - guarantor binds himself to fulfill the obligation
of the principal debtor (if the latter fails to do so)
● Contract of suretyship - principal has undertaken obligation and a
surety is also under direct and primary obligation (2047)
● Contract of surety must be expressed and not inferred; contract of
guaranty is unenforceable UNLESS made in writing
● DIFFERENCE
○ Guarantor - pays when the principal cannot pay
○ Surety - pays when the principal does not pay (surety has the
same level as the principal in terms of the obligation assumed)
12) To create or convey real rights over immovable property belonging to
his principal without special power
● That is an act of strict ownership
● Agent must have SP to create/convey real right over immovable
property of his principal
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 13) To accept or repudiate (reject) an inheritance (of the principal)
● Any person having the free disposal of his property may accept or
repudiate an inheritance (1044)
● This act is of strict dominion - thus, the need for SP
14) To ratify obligations contracted before the agency
● If without SPA, agent cannot effect/practice novation if obligation and
constitution of agency existed at the same time (see no. 2)
● On the same principle, agent cannot ratify obligations before the
agency if without SP from principal
15) Any other act of strict dominion
● Act of strict dominion - sale or purchase of personal property
○ SPA is needed for the act to be binding on the principal
● Act of strict dominion
○ Example : agent appointed to manage a tailoring shop cannot
sell sewing machines (since these are owned)
● Act of administration (in the ordinary course of mgt, included in
agency couched in general terms (1877))
○ Example : sale of suits in tailoring shop, sale of books in
bookstore
Scope of authority to sell and to mortgage (1879)
● The agent cannot sell or mortgage the principal’s property without SP
● Agent with the authority to sell only has authority to sell; it does not include
the authority to mortgage
○ Vice versa - agent with authority to mortgage does not mean that he
also has the authority to sell
● In the absence of authority - sale or mortgage will be unenforceable
against the principal as the agent has acted beyond his powers
Powers of the Agent (how to carry out authority) (1881, 1882)
● Agent must act within the scope of his authority (1881)
○ He may do acts that may be conducive to the accomplishment of the
purpose of the agency
● Limits of agent’s authority is not exceeded - when such use of authority is
more advantageous for the principal than what is stated by him (1882)
Definition
● Authority of an agent - the power of the agent to affect the legal relations of
the principal by acts done as per the principal’s manifestation of consent
Authority distinguished from power
● As to existence
○ Authority - the source or cause
○ Power - effect
● As between an agent and principal
○ Act is within agent’s authority
■ Act is not in violation of his duty to the principal
■ Act is within his power (as long as he has legal ability to do so)
○ Agent with authority to do an act has the power to bind the principal
but the power may exist without authority
● So far as third persons are concerned
○ No distinction exists
○ Act within power of agent = within the scope of his authority (even if
agent exceeded) (1900, 1911)
Kinds/types of authority
● Actual - granted, either express or implied
● Express - conferred by words (1869)
● Implied - incidental to the transaction or reasonably necessary to accomplish
the purpose of agency (1881)
● Apparent or ostensible - conferred by conduct or silence (1869)
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 ○ Ostensible - another term for authority by estoppel (albeit the two has ○ (2) Where the limitations upon the power created by him (principal?)
a distinction) (1911) could not have been known to the third person
○ Also an implies authority - not expressly conferred ○ (3) Where the principal has placed in the hands of the agent
● General - refers to all the business of the principal (1876) instruments signed by him in blank
● Special - limited to only to one or more specific transactions ○ (4) Where principal has ratified the acts of the agent (1901)
● Authority to necessity - when it is demanded by virtue of the existence of an
emergency
CASES
● Module 2 (case digests)
When principal bound by act of agent
● (1) Comply with the Requisites - for principal to be bound to third persons by
the act of an agent:
○ Agent must act within the scope of his actual authority AND
○ Agent must act on behalf of the principal
● (2) Ratification by principal
○ Agents acts without authority but such an act has been ratified
(expressly or impliedly) before it is revoked by the other contracting
party
● (3) Performance of agency more advantageous to principal
○ See 1882
○ Since his acts may be conducive to the accomplishment of the
purpose of the agency
● NOTE: if agents acts within the scope of his authority but in his own name,
Art. 1883 applies

When principal is bound by acts of agent beyond his powers

● General rule: principal is not bound by the acts of an agent beyond his limited
powers
● EXCEPTIONS (when the principal can be bound by acts of agent who acted
beyond his powers)
○ (1) Where principal’s acts have contributed to deceive a third person
in good faith

14
 MODULE 3: CONTRACT OF LEASE (I)
Definition (1642)
Concept and nature of contract of lease
● Contract of lease - an agreement where the lessor binds himself to grant
temporary enjoyment/use of a thing OR to render service to a lessee who
pays rent, compensation, or the price of thing/service
● Lease - a personal right
○ EXCEPTION: lease becomes a real right - real estate is binding
upon third persons (purchaser) when registered in the Registry of
Property
■ If property is not registered - purchaser may terminate lease
(1676)
● UNLESS: (1676)
○ There is a stipulation that the purchaser must
respect the existing lease
○ The purchaser knows of the existence of the
lease
■ Actual knowledge is equivalent to
registration
○ The property is sold fictuitously just to terminate
the lease
● Lease contract is not personal in character - rights and obligations are
transmissible to heirs
○ Death of a party - does not excuse non-performance of contract
(involves property rights and obligations)
Kinds of lease according to subject matter
● Lease of THINGS
○ Can be real or personal
○ Involves an obligation of the lessor to deliver a thing and the right of
the lessee to enjoy the things for a price certain
● Lease of WORK
○ Refers to a contract for a piece of work
○ Involves an obligation on the part of the lessor (contractor) to execute
a piece of work for the lessee (employer) for a certain
price/compensation
■ Contractor to execute a piece of work for the employer
● Lease of SERVICE
○ Involves an obligation of the housekeeper, laborer, employee, or
common carrier to do service for the head of the family, employer, or
passenger/shipper of goods respectively in exchange for
compensation
■ This kind of lease covers household service, contract labor,
contract for a piece of work, and common carriers
Characteristics and elements of the contract
● (1) Contract of lease is
○ Consensual - perfected by consent
○ Bilateral - both contracting parties are bound to fulfill obligations
○ Onerous - thing sold is given for a price and vice versa
○ Commutative - thing sold is the equivalent of the price paid and vice
versa
○ Nominate - it is given a special name or designation in the Civil Code,
namely “Sale”
○ Principal - its existence and validity does not depend on another
contract (unlike guaranty, pledge, mortgage)
15
 ○ In lease as in sale, there is an exchange of equivalent values
■ Use of lessee of thing/work/service is equivalent to the
rent/compensation/price paid
● (2) As in ordinary contracts, a contract of lease has 3 elements:
○ Consent of the contracting parties
○ Object certain
○ Cause of the obligation
Definition (1643)
Lease of things
● Terms
○ Landlord - lessor / owner
○ Tenant - lessee
● (1) Essence/Purpose of lease
○ The transmission of the temporary enjoyment/use of a thing for a
certain period in exchange for the payment of rent
○ Object of lease - within the commerce of man; otherwise, it is void
■ Lease of public property - void ab initio
■ Lease of a building - includes lease of the land
■ Rentals of buildings - include those of the land
● (2) Subject-matter of lease
○ Things - can be movable or immovable
○ Civil code has not special provisions for lease of movable
■ Meaning: provisions on lease of immovable (land) is also
applicable to movable property EXCEPT: for provisions
applicable only to immovable in terms of its nature and intent
○ Lease of chattels
■ Lessor - loses complete control over the chattel
■ Lessee - would be responsible to the lessor if he made bad
use of the chattel
● (3) Ownership of thing
○ Lessor need not be the owner of the thing
■ As long as the lessor can transmit its enjoyment/use to the
lessee since ownership is not being transferred (again, it’s
just the use/enjoyment)
■ Examples :
● Usufructuary may enjoy the thing or lease it to another;
but, lease contracts will terminate upon expiration of
usufruct
● Easement can’t be leased independently of the estate
it belongs to (actively or passively) since it is
inseparable
○ Lessee can lease the property to another thru a sublease
● (4) Consideration of lease
○ Must be a price certain or anything that has value
○ Rent / rental in money or its equivalent (products, fruits, other useful
things, a prestation or labor which the lessee binds himself to do)
■ Price certain - price of lease/rent is determined by the parties
or is at least capable of determination under the contract;
● Exists when it can be ascertained according to the
usages/customs of the place
■ Amount - must not be nominal or insignificant
● Insignificant that it indicates an intention to enter into a
contract of commodatum → gratuitous
■ Lease as a consensual contract
● Lessor:
16
 ○ Has the right to fix the amount of rent - when
there is no law imposing a ceiling on rentals
○ Can demand an increase in rent - upon the
expiration of the lease contract
● Lessee:
○ May agree or not consent to the lease
■ During the period fixed in the contract where there is a
stipulated rent
● Lessor cannot increase rental without the consent of
the lessee
● Court cannot fix a different rental even when there is an
increase in realty taxes
● (5) Period of lease - may be definite or indefinite (in any case, period is
temporary and not perpetual)
○ When period is definite or fixed
■ Longest is 99 years
● Limited to only 99 years since it would be an unsound
economic policy to allow ownership and enjoyment to
be separated for a long time
● Actually too long (old Civil Code, there was no
maximum; only provides that the lease must be for
definite period
○ Period fixed is more than 99 years
■ Lease is considered to be expired at the end of said term
■ When there is an implied new lease, it would be for an
indefinite time (1670)
○ Term is fixed but it is indefinite
■ But from the circumstances it can be inferred that the period
was intended - court may fix the duration of the lease
■ Contract of lease can only be for a determinate period and
must be temporary
■ FROM OBLICON BOOK: (1197)
● The parties decide whether or not to subject their
contract to a period
● If there is no period/condition - it is presumed that they
intend to make a pure obligation
○ Courts can’t interfere and fix a period
● When courts can fix a period:
○ (1) No period is fixed but from the nature and
circumstances it is clear that one is intended
■ Example : A issues a promissory note to
B. A period is intended since promissory
notes, by nature, require a certain date
for payment
○ (2) The period depends solely upon the will of
the debtor
■ Example: A promises to pay B when she
has money. B’s remedy could be to ask
the court to fix a period. (note that 1196
states that the establishment of a period
should be beneficial for both creditor
and debtor)
○ No term is fixed
■ Article 1682 - for leases of rural lands
● Period of lease is based on the amount of time needed
to gather the fruits a land may yield in a year
■ Article 1687 - for leases of urban lands
● It is understood that period of lease is from year to
year/month to month/day to day if rent is paid
yearly/monthly/daily
○ A verbal contract
■ “for as long as the lessees are doing business and as long as
they can pay just rents’’
17
 ● This means that the contract is to be leased from Lease vs Sale
month to month (1687)
Lease Sale
● This is not one of indefinite duration
● Terminable (no need for a special notice upon the Enjoyment/use is transferred Ownership is transferred
expiration of any month)
○ Lease of thing during a lifetime of one of the parties Transfer is temporary Transfer is permanent UNLESS subject
to resolutory condition
■ Lease is for an indefinite period
■ Lease ends upon the death of either party Lessor need not be the owner Seller must be the owner or at least
○ Continuance and fulfillment of a lease of a house authorized to sell by the owner
■ Shall not be based on whether or not the lessee would pay
rentals Price of the thing is usually not Price of the things is usually fixed in the
mentioned, being immaterial contract
■ If lessee elected to pay rentals - lessor cannot terminate the
lease (in case of doubt: intention of parties →
■ If lessor wants to continue lease - lessee could prevent this by a factor in determining the contract
simply not paying for rentals entered into)
● This is contrary to art. 1308 → prohibits the validity with
a contract to be left to the will of one of the parties Conditional sales of goods
● Lease of personalty with an option to buy - an installment sale (not a lease)
Estoppel against lessee ● Sellers who want to make conditional sales but do not want to bargain in that
● A lessee is stopped from the ff: (while he is in possession of the thing) form resort to: making contracts in the form of leases with the choice of:
○ Asserting title to the thing leased (as against the lessor) ○ Giving the buyer the option to purchase the thing for a small
○ Denying the lessor’s title consideration after the term (provided that rent is duly paid) OR
○ Asserting a better title to himself and a third person ○ Having a stipulation that if rent is paid throughout the term, title shall
● This estoppel applies even if lessor had no title at the time the lessor-lessee be given to the lessee
relation was created ● Transactions here are ‘leases’ only in name
○ Relation of lessor and lessee depends on the agreement between the ● The so-called rent - payments of the price in installments
parties (as long as lessee remains in undisturbed possession) ○ Since due payment of the amount results to transfer of title to the
○ EXCEPTION: rule may be relaxed to avoid unjust enrichment in favor lessee
of the lessor and at the expense of the lessee
■ Example : lessee pays rental twice for same property and
same period
● This estoppel may be asserted by the lessor and his successors in title

18
Lease vs Commodatum
● Commodatum - one party delivers to another a non consumable thing so that Lease vs Usufruct
the latter may use and return it after a certain period ● Usufruct - gives a right to enjoy the property of another with the obligation of
○ A loan for temporary possession preserving its form and substance UNLESS the title constituting it or law
otherwise provides
Lease Commodatum
Lease Usufruct
Onerous contract (although rent may be Gratuitous contract
condoned or remitted) A real right Always a real right
(only in the case of real property where
Not personal in character (right may be Personal in character (death of either lease is registered)
transmitted) bailor or bailee extinguishes the
contract) Lessor may or may not be the owner Creator of the right must be the owner
or one authorized by him
Consensual contract Real contract
Lessor has active obligation to maintain Owner has the passive duty to allow
Both consist the transmission of enjoyment/thing to another the lessee in enjoyment/use of property usufructuary to enjoy/use the same

Lessee pays no taxes Usufructuary pays annual charges and

Lease vs Mutuum (loan)
taxes on fruits
● Mutuum (loan) - one party delivers money or other consumable things, given
that the same amount or kind and quality shall be paid in return Lessee cannot constitute a usufruct on Usufructuary may lease the thing in
○ A loan for consumption the property usufruct to another
Lease Mutuum (loan) May be created only by contract May be created by law, constract, last
will and testament, or prescription
Owner of property does not lose his Lender/creditor losses his ownership if
ownership thing loaned to the borrower/debtor Covers uses limited by contract Covers all possible uses of property
Lease Mutuum (loan)

Subject matter - can be real and/or Subject matter is only money or any
personal property other fungible thing

Governed by statue of frauds Not governed by statute of frauds;

where the thing leased is real property Loan may be gratuitous or with
for more than one year stipulation

19
Lease vs Deposit Service as driver under the boundary system
● Deposit - constituted when a person receives a thing belonging to another ● Boundary system
with the obligation of keeping it safely and returning the same ○ Relation between the driver and the jeepney owner = relation of
○ When safekeeping is not the principal purpose of the contract = there employer and employee (not lessor and lessee)
is no deposit; just some other contract
● CASE
Lease Deposit
○ Respondent - owner and operator of TPU jeepneys
Purpose: enjoyment/use of thing lease Purpose: safekeeping of the thing ○ Petitioners - jeepney divers
delivered ■ Had oral contract with respondent for use of jeepneys
○ The features that would make the relationship of drivers and
Lessor cannot demand the thing leased Depositor can demand the return of
owners of lessor and lessee:
before expiration of the contract thing at will
■ (1) Drivers do not pay owners any fixed wage
Object - both movable and immovable Object - if extrajudicial, only movable ● But their compensation is the excess of the total
property (corporeal/material) things amount of fares earned/collected tp be given to the
owner
Onerous May be gratuitous
■ (2) The gasoline burned by jeeps is for the account of the
Consensual Real drivers
○ Why relationship of lessor-lessee cannot be sustained:
■ Drivers (have no interest in the business) did not invest
Lease of chattels vs Employment anything in acquisition of jeeps and did not manage them, and
Lease Employment their only contribution is their service as drivers
■ Earnings for fares must be over and above the amount the
Relationship: lessor and lessee Relationship: employer and employee drivers agreed to pay to the owners
Lessor loses control/mgmt over the Employer retains control/mgmt over his
chattel leased chattel

Lessor has no control/supervision over Employer exercises control and

the lessee supervision over his employee

Lessee pays rent ot lessor for Employer pays wage/salary for services
enjoyment/use of chattel of the employee

20
Lease of Consumable goods (1645)
● Fungible things - things consumed by use cannot be the subject matter of
lease (1545, old CC)
○ Essence of a lease - enjoyment/use of property which is to be
returned upon the expiration of the lease
○ Ownership is not transferred to the lessee
○ So, things that cannot be used without being consumed cannot be the
subject matter of lease
● WHAT THE ARTICLE IS ABOUT:
○ As a general rule, consumable goods cannot be the object of a
contracting lease. The exceptions to this general rule are:
■ (1) When such consumable goods are used merely for exhibits
■ (2) When such consumable goods are used as an accessory
to an industrial establishment. (fuel, electricity, water???)
Obligations of the Lessor (1653)
Warranty of the lessor
● Art. 1653 applies to leases in the warranties in sales
● In a lease contract, lessor warrants that:
○ He has the right to lease the thing
○ The lessee shall enjoy the legal and peaceful possession of thing
○ The thing is fit for use which it is intended for and free from
fault/defect
● In case of eviction of the lessee (return of rents paid is required):
○ Reduction shall be made, taking into account the period which the
lessee enjoyed the thing
○ Lessee - has the right to ask for proportionate reduction of rents
■ Condition: If area/number of object of lease is less than what is
stated in the contract
Lessor’s warranty distinct from his liability for damages
● Warranty (in lease) - the obligation to repair/correct any fault/defect existing
when the lessee took over the property leased
● When law declares that lessor must warrant the thing leased
○ This does not mean that lessor must guarantee the lessee
○ NOTE: liability for warranty ≠ liability in damages (<--obligation)
■ Lessor’s obligation to warrant the thing leased - exists w/n he
knew about the defects
■ Lessor’s liability for damages - exists when he knew about the
defects and failed to disclose them to lessee (he has
committed fraud and bad faith)
Obligations of the Lessor (1654)
● 3 principal obligations of the lessor:
○ Delivery of property
○ Making of necessary repairs
○ Keeping lessee in peaceful and adequate enjoyment
● Lessor cannot alter the form of the thing leased
(1) Delivery of property
● Thing leased must be delivered for the lessee to enjoy/ use it
● Delivery - may be actual OR constructive
More information:
● (1) At time of delivery, thing must be in condition fit for use intended
○ The contract may idly provide that the thing shall be in the same
condition at the time of the perfection of contract
○ Parties may stipulate the fitness of the thing and the use to which it
will be devoted by the lessee
21
 ● (2) When lessee rents a building which is occupied by another person
(and lessee cannot obtain possession)
○ Lessee’s cause of action - breach of contract against the lessor
○ Since lessor violated the obligation of delivering peaceful possession
of leased premises
○ Lessee has no cause of action against the possessor - possessor has
no relation (contractual or ex delicto/consequence of a wrong/tort)
with the lessee
○ When lessee fails to take possession of leased premises due to third
persons who won’t vacate because of some previous act or
transaction of lessor - lessee should institute action against lessor
since he failed to deliver the possession
(2) Making necessary repairs
● Necessary repairs - to keep the thing leased suitable for its intended use
UNLESS there is a stipulation to the contrary
● Custom of a place - should be observed as to the kind of repairs (if no special
stipulation)
● If lessor fails to perform his duty, lessee can:
○ Suspend payment of rent OR
○ Avail other remedies provided in the law
● Lessor - not liable for repairs for damages caused by the lessee
More information:
● Lessee may do the repairs
○ Lessee may agree to do the repairs and relieve the lessor of his duty
■ Given that the lessee is to pay only very moderate rent
● Repairs vs Improvements
○ “Repairs” - implies the putting back of something
○ “Improvement” - adding something new
○ Thus, filling of vacant lot and construction of house - not a repair
● Repairs vs Total Reconstruction
○ “Repairs” - to apply to the restoration of things after injury/partial
destruction (without complete loss of identity of the thing)
○ Making repairs is different from reconstruction in case of total loss
○ Lessor’s obligation to repair - does not extend to reconstruct
something totally destroyed
■ Example: repairs mean the restoration of the burnt house
partially destroyed without total loss of its identity
● Lessor cannot recover damages or rent from lessee for the unexpired term if:
○ Lessor agrees to keep building under lease in proper condition but
failed to AND
○ Lessee vacates building before expiration of lease
● Lessee has cause of action
○ If owner fails to inspect premises and fails to make repairs before
damage is material
○ Lessee is in possession and if repairs are necessary - lessee should
call upon the owner to make the repairs
■ If owner fails to do his duty, action would lie
● Lessor cannot be held liable
○ If lessee’s goods got wet even if roof was in good condition & there is
no proof that lessor knew about defects
○ Not held liable in the absence of express agreement to that effect
○ Even if lessor is not liable due to fortuitous events, he must make
repairs after being advised of the need for it
(3) Keeping lessee in peaceful and adequate enjoyment
● Lessor has obligation to maintain the lessee
○ When legal trespass disturb/dispute/place difficulties in the lessee’s
peaceful and adequate enjoyment of leased premises (that casts
doubt on right of debtor to execute lease)
○ Lessor is liable for legal trespass
22
More information:
● Lessor subject to indemnity (for losses and damages) if he fails to perform his CASES
obligations ● Mod 3 Lesson 1 Notes
○ True measure of damages for the breach - what the plaintiff has lost
● https://drive.google.com/drive/folders/1_E9PpQ9zA_b_CJvD-5f7_nT02Q2B4
by the breach
uVT
● Warranty of lessor - lessee shall not be distrubed in his legal possession (not
physical possession)
○ Lessor is not liable - for physical trespass
○ Lessor is liable - when his non-payment for realty tax results in the
eviction of lessee
○ Lessor is not liable - for lessee’s eviction caused by condemnation
proceedings for the reason that expropriation is involuntary
● Act of the Japanese Armed Forces
○ Act of the JAF in evicting lessee from leased premises - an act of
trespass under a color of title chargeable to the lessor
○ Lessee’s obligation to pay rentals have ceased during that time
● Case where agreement of parties is for the lease of an entire area
○ Failure of lessee to use a portion of the leased premises - equivalent
to dispossession from the entire area
■ Since there was incomplete performance by the lessor of its
principal prestation
■ Thereby calling for the application of the contractual provision
on extension of term
● Obligation of lessor to maintain lessee in peaceful and adequate possession -
lasts only during the duration of the contract

23
 MODULE 3: CONTRACT OF LEASE (II)
Obligations of the Lessee (1657)
● 3 Principal obligations of the lessee:
○ (1) Payment of agreed price of lease
○ (2) Proper use of the thing leased
○ (3) Payment of expenses for deed of lease
● Additional obligations: (1663)
○ (4) Notify the lessor of every usurpation(seizure)/untowards act by any
third person
○ (5) Notify the lessor of the need for urgent repairs
(1) Payment of agreed price of lease
● Obligation to pay arises only when the thing leased is delivered to the
lessee for the purposes stipulated in the contract
○ Example : Agreement to lease a vessel
■ Never consummated (perfected) since the defendant did not
accept the delivery of the vessel = lessee’s not liable for rent
More information:
● Only the lessor has the right to fix rents
○ Court cannot determine the rent and compel lessor to conform to it
(and allow lessee to enjoy the premises on that rent)
○ An error - if court’s fixed monthly rate < what lessee is willing to pay
● Lessor has the right to:
○ Terminate the lease upon expiration of the term
○ Increase the rent in case of renewal
○ Lessee - can accept the new rate OR vacate the premises
■ OTHERWISE, (if he did not accept and vacate) he will be
considered to be in bad faith of the property
● When the lessee must compensate the lessor:
○ Lessee - in continuous possession and use* of the building and lot
during the pendency of the case
■ *use: operating business therein, making profits from it
○ Lessor here is deprived of possession and rental of his property
○ Lessee is obliged to pay rentals during the pendency for the
rescission of lease
● Lessee pays the rentals a bit late = no rescission of the lease
○ Given that the delay was only for a few days
○ These breaches are not substantial and fundamental to warrant the
rescission of the lease
● Lot: (1) sold under Pacto de retro AND (2) leased by vendor-lessee =
vendor-lessee has no excuse not to pay
○ Pacto de retro sale - sale with stipulation for repurchase
○ If a lot is: (1) sold by vendor-lessee and (2) is currently being leased
by the vendor-lessee = the vendor-lessee would not be excused for
not paying rentals
■ Reason: sale and lease - independent of each other
● Disagreement on rent to be paid cannot be decided through
consignation
○ Disagreement between a lessor and lessee about the amount of rent
cannot be decided in an action of consignation (1256)
○ Disagreement can be decided in that of forcible entry and unlawful
detainer that the lessor institutes when lessee refuses to pay
■ The fact that there is forcible entry & unlawful detainer shows
that the lessee does disagree with the rent to be paid
○ What renders consignation necessary:
■ When creditor refuses to accept debtor’s payment without just
cause
● Same rules : place for payment of rental & place for payment of
obligation in general
24
(2) Proper use of the thing leased
● Lessee must exercise the diligence of a good father of a family
○ Must devote the thing to the use stipulated
○ If none was stipulated - use of the thing is:
■ Inferred from the nature of the thing AND
■ According to the custom of the place
○ Use of thing for illegal purpose - entitled lessor to terminate contract
(3) Payment for expenses for deed of lease
● In a sale:
○ Expenses for execution and registration of deed of sale = borne by
vendor UNLESS there is a stipulation to the contrary (1487)
● In a lease:
○ Expenses for the deed of lease = borne by lessee UNLESS there is a
stipulation to the contrary
*Article 1663:
(4) Notify the lessor of every usurpation(seizure)/untowards act by any third
person
(5) Notify the lessor of the need for urgent repairs
(1665)
(6) Return of thing leased upon expiration of lease
● Upon expiration, Lessee must return the property to the lessor in the same
condition as he received it
● Lessee is not liable for loss/depreciation due to:
○ Lapse of time
○ Ordinary wear and tear
○ Inevitable cause/fortuitous event
More information:
● Return of leased premises = not fulfilled if the lessor cannot resume
possession because of:
○ Impediment (for which the lessee is responsible) OR
○ An occupant (placed by lessee) who refuses to leave
■ Here, the landlord-tenant relationship is not dissolved (lessee
is held liable of injuries to lessor)
● General rule - the whole of the property subject to the lease must be
returned to the lessor (and not a part of it only)
● Owner can allow a defaulting tenant to remain in the rented property
(1month/year or more)
○ Tenant's possession is lawful - when given consent by owner in this
case
○ Tenant's possession is unlawful - when consent is withdrawn and
owner demands tenant to leave
■ Tenant’s refusal or failure to leave - violates the owner’s
preferential rights of possession
(1667)
(7) Responsibility of lessee for deterioration or loss of thing leased
● General rule - LESSEE is responsible on the presumption that he is guilty of
fault or negligence
○ Burden of proof to overcome the presumption is on the lessee
● There is no presumption when the destruction is due to a natural
calamity
○ It would be unjust to impose upon the lessee the burden of proving
due diligence
○ More probable that lessee was not negligent
○ The burden of proving the lessee was negligent lies on the lessor (this
is if lessor insists that it’s the lessee’s fault ??)
25

More information:
● Theory that the sinking was caused by a fortuitous event - cannot be
accepted when there is no proof on current of river or wind (that caused the
sinking)
○ Burden is upon the defendants to show there was no negligence on
their part or of the agent
● Responsibility of a lessee for loss of thing leased due to fire
○ Lessee is without fault - if court finds that he had taken reasonable
precautions to prevent fires
○ Ordinarily, fire is NOT a natural calamity (not mentioned in this article)
■ Lessee must prove he was without fault
● When loss of leased property occurs
○ Lessee is responsible if there is not proof that the loss happened
without his fault
○ Whether there has been fault on lessee’s part:
■ To be determined in relation to provisions of the Civil Code and
general principles of jurisprudence
● Article 1665 - lessee of lands is not responsible for
loss resulting from inevitable cause
● Article 1174 - no one is liable for events that are
unforeseen or inevitable (UNLESS there is a stipulation
to the contrary)
● When it is stipulated in the lease contract that the lessee is responsible for
repairs on the building leased:
○ Failure of lessee to make repairs (which then caused the destruction
of the building) would make him liable to the lessor
Rule as to improvements (1678)
Right of lessee with regard to useful improvements and ornamental expenses
● (1) Reimbursement or removal as to useful improvements
○ Old Civil Code - lessee can’t reimburse his improvements; but he can
remove them provided that the principal won’t suffer injury + liability
for improvements are paid
○ New Civil Code - lessee can:
■ Reimburse half of the value of improvements OR
■ Remove the improvements (if the lessor refuses to reimburse)
● (2) Requirements for improvements to be reimbursed:
○ (1) lessee should make the improvements in good faith
○ (2) improvements be suitable to the use for which the lease is
intended
○ (3) the form or substance of property leased is not altered
○ NOTE:
■ Improvements are made in good faith if they are not in
violation of the lease contract
■ Right to indemnity - arises only if lessor opts to appropriate
(seize) the improvements
● Lessor is given the option for therein
● Lessee cannot compel the lessor to appropriate the
improvements and pay him half of their value
■ Lessee has no right to reimbursement of improvements
made AFTER the termination of lease
● (3) With regard to ornamental expenses
○ Rule is similar to the expenses for pure luxury of a possessor in good
faith
○ (NOT SURE) Lessee - shall not be entitled to any reimbursement but
he may remove the ornamental objects (provided no damage is
caused to the principal thing and lessor chose not to retain them*)
■ *chose not to retain them - means that lessor pays the value of
the ornament to the lessee at the time lease is extinguished
26
Right of lessee over necessary repairs
● Necessary repairs - those made for the preservation of the thing upon which
they have been expended
○ Example: repairs made on plumbing system and electrical wiring
■ Lessee is entitled to full reimbursement of the total amount
spent for it
■ Repairs of window screens, cabinets, fixtures, construction of
a garage, filling and fencing of a lot - useful improvements
only
● Lessee is entitled to claim half of the value of it at
the termination of the lease
● DIFFERENCE
○ Necessary repairs - lessee is entitled to full reimbursement
○ Useful improvements - lessee is entitled to half of the value only
Termination of the lease (1669)
Lease made for a determinate time
● Lease terminates on the day fixed without the need for demand or
notice for lessee to vacate and return possession
More information:
● When lessee refuses to pay rent but is in possession of the premises - lessee
becomes a deforciant withholding the property unlawfully
● If lessee agrees to pay the increased rent, he cannot be ejected until he fails
to comply with the said obligation
● Continuous possession of leased properties after termination with the
acquiescence of lessor = an implied renewal of lease for the time
established in Arts. 1682 & 1687
● There should be a demand (to vacate?) on a lessee if he is an unlawful
detainer - when he fails to pay rent based on the conditions of his lease (not
where action is to terminate the lease)
● Contract of lease of urban property for an indefinite period
○ Notice to increase rent = notice of the termination of a contract
● If stipulated in the contract, the lessor may terminate lease if:
○ His children would need the property OR
○ Lessor would need it for business
■ When condition happens, lease is deemed as terminated
Extension or Renewal of lease
● Authority of court
○ Court has no authority to extend a lease when the stipulated period
in the contract has expired
○ Extension is devoid of legal basis
● Lease not be deemed extended or renewed by implication
○ This is the case when it is expressly stated in the contract (that
implication does not mean extension/renewal?)
○ Lease is not extended even if lessee is willing to pay (to extend it)
■ What lessee pays < what is demanded by lessor
○ It would be absurd to hold that there is implied renewal if lessee
continues to occupy premises after expiration period
■ It is possible that the lessee wants to delay ejectment action
● Lease extendible for a similar period
○ This is understood as giving the lessee the right:
■ To the additional period OR
■ To quit upon the expiration of the first term
○ Extendible
■ Term of the lease may be extended
■ Equivalent to a promise by the lessor to extend
■ A unilateral stipulation that obliges the lessor to fulfill his
promise
○ General rule - when there is doubt, the lessee is favored
■ Not the lessor since he has the power of stipulating in his favor
and that a grant should be taken strongly against the grantor
● Lease renewable at option of both parties
27
 ○ There must be a mutual agreement
○ This pertains to a stipulation that the lease of a parcel of land will be
“renewable for another 10 years at the option of both parties…”
● Option to renew is given to lessor
○ If option is given to the lessor, the lessee cannot renew the lease
against the former’s refusal
○ If lessor refuses to renew, then the lease is terminated
● Extension exclusively for the benefit of the lessor
○ Lessor is benefited:
■ When extension stipulated in the contract is done to save the
lessor of the trouble of reimbursing the lessee in cash for the
expenses incurred on the premises
● Lessor has the right to terminate lease upon expiration
by tendering to lease or consigning to the court
● Lessor - can reimburse expenditures OR demand the
lessee should account for such + credit lessor for fruits
● Option to renew is given to lessee
○ When lessee is given the option to continue or renew the contract
and is silent upon the rentals - old terms are to be followed in the
renewed lease
■ A covenant to renew a lease (with no provisions about the
term of extension or renew) - implies an extension or renewal
upon the same terms of the original lease
● No new terms before = original terms are followed in
the renewed contract of lease
■ Continued possession of lessee - an evidence of his exercise
of the option to extend the lease
● There is no need to notify the lessor of the
extension (if there is no stipulation which requires the
lessee to notify)
(1670)
Implied new lease
● When it takes place
○ An implied lease arises when the lessee holds the expiration of
contract of lease under the same terms and conditions
■ The new period for this would be based on the character of the
property and mode of payment of the rent (1682, 1687)
● Example : (1687) Where rent for 10 year period lease
has expire monthly - the implied new lease must be
from month to month and may be terminated after each
month
● Terms which are revived
○ Original terms of contract that are revived:
■ Those that are relevant/germane to the lessee’s right of
continued enjoyment of property leased:
● Amount of rental, date when it must be paid, care of
the property responsibility of repairs
■ There should be no presumptions in special agreements
● Example: preferential right given to lessee to purchase
lease property
● Requisites for implied renewal of lease:
○ The terms of the original contract of lease are:
■ The lessee continues enjoying the thing for at least 15 days
■ The continuation of the occupation by the lessee is with the
acquiescence of the lessor
■ The lessor or lessee has not previously given notice* to vacate
○ *The notice required in this article (1670) is the one given after the
expiration of the lease period
■ Purpose of notice - to abort an implied renewal of lease
■ Notice to vacate - constitutes an express act that the lessor no
longer consents to the continued occupation by the lessee
28
 ● A lessor who give notice after the 15-day period - has
no cause of action for unlawful detainer (since there is
already an implied new lease)
Instances when implied renewal is NOT APPLICABLE
● (1) Stipulation against implied renewal
● (2) Invalidity of original lease
○ When original lease is declared as void for being repugnant/conflicting
with the Constitution
○ Also when the lessor and lessee cannot agree on a rental price
■ The acceptance of the lessor of payments with reservation or
condition does not imply a new lease
● (3) Acceptance of rentals beyond original term
○ Acceptance of such by lessor does not signify that he had agreed to
the implied renewal of lease
■ Given that the lessor had previously informed the lessee that
he was not renewing the lease but later demanded the lessee
to vacate the property
■ Given that the lessee is in possession and had to pay rentals
for the use of property
○ Instead of implied renewal, this is an express termination of the
contract of lease
● (4) Acceptance of rentals less than amounts stipulated
○ If lessor accepts partial payments from lessee - not considered as a
renewal of lease contract
○ Lessor could allow the continued default of the lessee
■ Lessor should not refuse to accept payment from the lessee
just because they did not cover the unpaid rent in full
(1687)
Duration of lease depending on period at which rent is payable
● Application of this provision
○ Applies only to a lease without a fixed period (1669)
○ Is based on the presumed intention of the parties
○ Applies to a lesse who has a contract of lease with the owner
■ A sublessee is not entitled to benefits
○ Contemplates that both parties aren’t at fault and lessor decides to
terminate the contract
○ Does not apply where there is a fixed period: (either definite or
indefinite)
■ A contract with a month-to-month basis
■ A lease stipulating that the lessee will vacate as soon as the
lessor needed the premises (proper notice to be given or
demand for lessee to vacate)
■ When lease period is subject to a resolutory condition
● i.e.: lease period shall continue for an indefinite period
provided the lessee is up to date in the payment of his
monthly rentals
● Lessor has right to increase rental each period; lessee
has right to refuse (contract is terminated when
refused→ lessee must vacate)
● 2 distinct provisions of Art. 1687:
○ (1) Contract has no fixed duration = law fixes the term according as
the parties have agreed to pay rentals monthly/weekly/daily
○ (2) Even if parties agreed to periodical payments of rental, courts
can exercise their discretion in fixing the term
■ Provided that the lessee has stayed in the premises for some
time
■ Court is given discretion BUT does not compel it to fix the
duration of the contract
29
● Implied new lease
○ A lease whose duration is reliant on the mode of payment may
arise
■ At the expiration, lessee should continue to enjoy the thing at
least 15 days with acquiescence of the lessor (for time
established in 1678)
● Discretion of court to fix a longer period
○ Old Civil Code - lease ceases upon the expiration of the term
○ New Civil Code - court is authorized to fix longer term if lessee
(not at fault) has been in the premises for a period and lessor
wanted to terminate the lease*
■ Court may legally refuse to do so (if the circumstance warrants
such refusal)
■ Extension of lease should be commensurate/in proportion with
the period during which the lessee had been in the premises
■ Court may not grant extension beyond the period sought by
lessee
■ This provision does not apply to leases whose termination is
expressly left to the lessee
■ The provision does not grant lessee an absolute right to an
extension of lease (*just gives courts the discretion to
allow additional time for lessee to prepare for evental
ejection) ?
■ Art. 1997 is not applicable - where the duration of lease is left
to the will of the lessor
■ Stipulation that lease can be renewed at the option of both
parties - implies that lease cannot be renewed without the
lessor’s consent
■ Lessee cannot be granted extension of lease - when parties
stipulated that lease shall not be renewed/extended by
implication
■ Art. 1687 does not authorize the court to fix the term of lease
when rental is payable yearly BUT this does not prevent the
court from fixing a period under Art. 1197
■ The power to extend the period of lease may be exercised by
the court as an incident of the ejectment suit
■ A subsequent agreement between the parties to a lease
contract over a parcel of land, authorizing an agent to sell the
land owned by the lessor and the improvements thereon,
owned by the lessee, and fixing the rental a month until the
property shall have been actually sold = authorizes the lessee
to remain in possession until the sale is effected, or it becomes
clear that the property could not be sold.
● When agent resigns due to his inability to sell =
agreement becomes functus officio (agency had
expired) and binding force is terminated
■ There is no law conferring on a lessee the preferential right to
occupy the premises over other prospective lessees after the
termination of the lease
CASES
● Mod 3 Lesson 1 Notes
● Module 3 (case digests II)- incomplete
● https://drive.google.com/drive/folders/1ElzZ1pf2yCgtnC7QIZgqQZsOJl4MO7I
J
30
 MODULE 4 (LESSON 1): COMMODATUM AND MUTUUM Kinds of Loans
● (1) Commodatum
○ Bailor (lender) delivers to the bailee (borrower) a non-consumable
LOANS IN GENERAL
thing (ex: car) for the latter to use for a certain time and return the
1933
identical thing.
Definition and Characteristics of Contract of Loan (CoL)
● (2) Simple Loan or Mutuum
A Contract of Loan is:
○ Same as commodatum but difference is the thing delivered is money
● A real contract
or other consumable thing upon the condition that the borrower will
○ Delivery of the thing is necessary for the perfection of the contract
pay the same amount of the same kind and quality.
● Unilateral Contract
■ Example of consumable: rice, gasoline, money, fruit, firewood,
○ Once the subject matter is delivered, it creates obligations on the part
etc.
of only one of the parties - the borrower.
Commodatum vs Mutuum
Commodatum Mutuum

Involves something not consumable Subject matter is consumable or money

Ownership of the thing loaned is Ownership is transferred to the

retained borrower.

Essentially gratuitous May be gratuitous or onerous (with

stipulation to pay interest.)

Return the same thing loaned. Borrower need only pay the same
amount of the same kind and quality.

May involve real or personal property Only PERSONAL property

Loan for use Loan for Consumption

Cause or Consideration in a CoL

Bailor (lender) can demand the return of Lender cannot demand the return
● (1) Borrower the thing loaned before expiration in before the expiration of the term.
○ acquisition of the thing case of urgent need
● (2) Lender
○ right to demand its return or its equivalent. Loss is suffered by the bailor Loss is suffered by the borrower

31
*May also be said that Commodatum is purely personal in character Mutuum is
not. (see Art 1939)
Kinds of Commodatum
● (1) Ordinary Commodatum (Art 1933)
● (2) Precarium (Art 1947)
○ The bailor may demand the thing loaned at will.
1934
Binding Effect of Accepted promise to lend.
● Rule:
○ Accepted promise to deliver = binding upon the parties
○ Delivery of thing = perfection of contract
● ^ this rule is a necessary consequence of the fact that commodatum and
mutuum are real contracts.
○ This requires the delivery of the subject for its perfection.
■ Delivery is necessary because the purpose of the contract is
to transfer the use or ownership of the thing.
○ Does not mean that a promise to lend would be without efficacy.
■ Accepted promise to make a future loan* = a consensual
contract. (Art 1315)
● Binding upon the parties, but after delivery, the real
contract of loan will arise.
● See example in page 328 of Book.
COMMODATUM
1935
Commodatum is essentially gratuitous
● Contract ceases to be a commodatum if there is compensation to be paid
by the borrower who acquires the use.
○ In such a case, a lease contract arises.
● If consideration is rendering of some service = an innominate contract will
result.
● Being gratuitous, it lacks the element of consideration, and is NOT
enforceable as a contract.
● Any agreement to lend property by commodatum at a future time would be
terminable at any time by the owner without violating any right giving rise to
action for damages (however, see Art. 1934*)
○ Once contract is perfected, right of bailor to demand the return of
thing is governed by articles 1946 and 1947.
Extent of Bailee’s Right of Use
● Right to use is limited to the thing loaned but not to its fruits - UNLESS there
is stipulation
● As owner of the thing loaned (Art 1933), bailor is naturally entitled to the
fruits. (remember that in a commodatum, ownership of bailor is retained)
Contract Similar to Donation
● Commodatum is similar to a donation
○ Both confer a benefit to the recipient.
■ Presumption - bailor has loaned the thing for having no need
of it (Art 1946)
Purpose of the Contract
● Use of the thing loaned for “a certain time” (Art 1933)
○ If Bailee is not entitled to use the thing = contract may be a deposit,
not a commodatum.
32
1936 - 1937
Subject Matter of the Contract
● Subject matter is generally a non-consumable whether real or personal.
● Movable or immovable property can be the object. (Art 1937)
● It can be a consumable provided it is for exhibition.
○ Examples:
■ (1) Consumable for exhibition - a bottle of wine used as a
sample or for advertisement
■ (2) Involving Real Property - a person allowed another to
build a warehouse on the former’s land, so the latter may use
the property for a certain period without any payment of
rentals.
● No time for use of the land is specified = contract
would be called a “Precarium” (Article 1947)
1938
Bailor need not be the owner of thing loaned
● Ownership is not passed to the borrower in a commodatum.
○ Who may lend:
■ A mere lessee of the thing or
■ A usufructuary (one entitled to the use and fruits of property
belonging to another (Art 562)
● But, the bailee himself cannot lend or lease the thing loaned to him to a third
person. (Art 1939)
1939
Purely Personal in Character (intransmissible)
● Lender having in view the character, credit and conduct of the borrower.
○ Meaning, the death of either party terminates the contract UNLESS
there’s a stipulation that it can be transmitted to the heirs of either or
both parties
● Generally, bailee cannot lend nor lease the object to a third person.
○ However, use of the thing loaned (ex: tv set) can be extended to the
members of bailee’s household, (not considered 3rd persons);
EXCEPT in 2 cases:
■ (1) stipulation to the contrary
■ (2) Nature of the thing forbids such use (ex: dress)
● Art 1939 = an exception to the general rule, that all rights acquired in virtue of
an obligation are transmissible.
1940
Contrary Stipulation as to Fruits
● Bailee is entitled only to use the thing loaned and not the fruits.
○ Rights to use a thing and rights to enjoy the fruits are distinct.
■ Fruits belong/pertain to the owner of the thing producing the
fruits.
● Example: if an animal is loaned, the offspring is not
included.
● But the parties can stipulate that the bailee can also make use of the
fruits
○ But enjoyment of the fruits should only be incidental to the use of the
thing itself.
■ Because if it is the main cause, the contract may be one of
usufruct. (again, in a usufruct, the cause is the use and fruits
of property belonging to another)
MUTUUM
1953
Definition
● Mutuum - a contract where one party delivers to another money or other
fungible thing (with understanding that the same amount of the same kind
and quality shall be paid)

33
Obligation of borrower is to “pay” ○ Whether it is fungible or not
● Mutuum involves the return of the equivalent only and not the identical thing ■ Depends on the intention of the parties
○ This is because borrower acquires ownership of the thing ● Example:
● NOTE: ○ Wine is consumable by nature; it would be non-fungible if the intention
○ The term “pay” is used and not “return” is merely for display or exhibition (1936) since the same wine must be
■ Consumption of the thing loaned - a distinguishing character of returned
mutuum and commodatum
● Promise of borrower to pay = consideration for the obligation of the lender the 1954
furnish the loan Mutuum and Commodatum vs Barter
○ A loan is thus a bilateral contract ● Contract of barter/exchange - one of the parties binds himself to give one
thing in consideration of the other’s promise to give another thing (1638)
No criminal liability for failure to pay
● In a mutuum, borrower acquires ownership of the thing borrowed Distinction: Subject Matter
○ As owner, borrower can dispose the thing and his act will not be
Mutuum Barter
considered as an misappropriation of it
○ No estafa is committed by a person who refuses to pay his debt or Money or any other fungible things Non-fungible things
denies its existence
Distinction: What is returned
Fungible things
● Fungible things - usually dealt with by number, weight, or measure so that Commodatum Barter
any given unit or portion is treated as the equivalent of any other unit or
The identical thing borrowed The equivalent thing is given in return
portion (when time has expired or the purpose for what has been received
○ Example: has been served)
■ Grain, oil, sugar, etc.
■ One cavan of wagwag rice of a particular quality is the same
Distinction: gratuitous or onerous
as any other portion of the same kind, quality, and quantity
Mutuum & Commodatum Barter
Fungible vs Consumable things
Mutuum - may be gratuitous An onerous contract
● Movable property - classified into consumable or non-consumable Commodatum - always gratuitous (it is a mutual sale)
○ Whether a thing is consumable or not
■ Depends on its nature
● However, Article 1953 still speaks of fungible things

34
1955
Form of payment
● Object of a simple loan - money or consumable or fungible things
● Loan of money
○ Payment must be made in the currency which is legal tender in the
PH
■ All notes and coins issued by the BSP are legal tender in the
PH for all debts (public and private)
○ In case of extraordinary inflation or deflation - the basis of payment
is the value of the currency at the time of the creation of the obligation
(unless there is an agreement to the contrary, acc to the example in
the book)
● Loan of fungible thing
○ If what was loaned was a fungible thing and not money:
■ The borrower is obligated to pay the lender another thing of
the same kind, quality, and quantity
● ^ if this is impossible - the borrower shall pay its
value at the time of the perfection of the loan
1956
Requisites for recovery of monetary interest
● In the order that interest may be chargeable, the following are the requisites:
○ Payment - expressly stipulated
○ Agreement - in writing
○ Interest - is lawful
● If the exact rate of interest is not mentioned, the legal rate (6%) shall be
imposed
Exceptions to the rule (when interest is due even if not stipulated in writing):
● Indemnity for damages
○ Debtor in delay - liable to pay legal interest (6%) as indemnity for
damages in case of delay even in the absence of stipulation for the
payment of interest
● Interest accruing from unpaid interest
○ Interest due shall earn legal interest from the time it is judicially
demanded
■ Although the obligation may be silent from this point
■ NOTE: Central Bank Circular No. 416 - legal rate is increased
from 6% to 12% per annum but now 6% again (see article
1957)
Interest payable in case of breach of obligation
● Loan or forbearance of money
○ Borrower shall pay the rate of interest expressly stipulated
■ OTHERWISE, 6% per annum computed from judicial or extra
judicial demand
○ Compound interest shall earn 6% legal interest from the time it is
judicially demanded
● Other than loan or forbearance of money
○ Interest shall be 6% as indemnity at the discretion of the court
○ When amount of obligation is established = interest shall run from
judicial or extrajudicial demand
■ OTHERWISE, from the time the amount is finally decided by
the court
● Judgement (under #1 and 2) of court has become final and executory
○ Rate of interest shall be 6% from finality based on the adjudged
principal and unpaid interest, until full satisfaction
35
1957
Usury defined
● Usury - contracting for or receiving something in excess of the amount
allowed by law for the loan or forbearance of money, goods, or chattels
● NOTE: usury law mentions 2 transactions: loan and forbearance
○ Loan (in usury law) - called a mutuum
■ Commodatum is not included since it it gratuitous
○ Forbearance (in usury law) - signifies the contractual obligation of the
creditor to forbear/restrain during a given period to require the debtor
to pay a debt then due and payable
■ Where there is no loan or forbearance, there is no usury
Interest defined
● Interest - the compensation allowed by law or fixed by the parties for the loan
or forbearance of money, goods, or credits
Kinds of Interest
● Simple interest
○ Paid for the principal at a certain fixed rate or stipulated by the parties
● Compound interest
○ Imposed upon interest due and unpaid
○ Accrued interest is added to the principal sum, and the whole
(principal + accrued interest) is treated as the new principal
■ New principal - upon which the interest for the next period is
calculated
● Lawful interest
○ The laws allow this — the rate of interest is within the maximum
prescribed by law
● Unlawful / Usurious interest
○ Paid or stipulated to be paid beyond the maximum prescribed by law
Usurious contracts declared void
● This article is necessary to defeat the cunning devices of usurers
● The form of contract is not conclusive
● The law will not permit a usurious loan to hide itself behind a legal form
● Oral evidence is admissible to show that a written document, through legal
form, was a device to cover usury
○ See book for example, p. 349
● Interest rates - no longer subject to a ceiling
○ Rate will depend on the agreement of the parties
○ Lenders have no absolute right ot raise interest rates to any level
○ When the agreed rate is found to be “excessive”, the courts may
declare that rate illegal and reduce the same to a reasonable amount
○ It is immaterial that the debtor knowingly and willingly agreed to such
interest
1958
Determination of interest payable in kind
● This article has the same purpose - to make usury harder to perpetrate
● In the determination of interest payable in kind - value is appraised/evaluated
at the current price of the products/goods at the time and place of payment
1959
When unpaid interest earns interest
● General rule - accrued interest (interest due and unpaid) shall not earn
interest EXCEPT only in 2 instances:
○ When judicially demanded as provided from in article 2212
○ When there is an express stipulation made by the parties:
■ That the interest due and unpaid shall be added to the
principal obligation and the resulting amount shall earn interest
● This practice is called compounding interest and it is
allowed if there is an express stipulation
36
1960
Payment of interest without stipulation
● When unstipulated interest is paid by mistake (not due)
○ The debtor may recover (since this is solutio indebiti/undue payment)
● When the unstipulated interest is paid voluntarily because the debtor feels
morally obliged to do so
○ There is no recovery (as in the case of natural obligations)
Fform
1961
Usurious transactions governed by special law
● Usury law and other special laws - apply as long as they are consistent with
the Civil Code
● Usurious transactions shall be governed by special laws (1175)
● Articles 1175 & 1961 - have given rise to the question: in case of conflict,
which would prevail, usury law or civil code?
● NOTE: usury is now legally inexistent

CASES
● Module 4 (case digests)

37
 MODULE 4 (LESSON 2): PLEDGES & MORTGAGE Essential requirements of pledge and mortgage
● The following intends to secure the performance of a principal and
pre-existing obligation by subjecting to security/property/fruits:
PROVISIONS COMMON TO PLEDGE AND MORTGAGE (2085, 2086, 2087)
○ Pledges, mortgage, chattel mortgage, antichresis
Definition and characteristics of a pledge
○ Each share common characteristics and has special features
● Pledge - a contract by virtue of which the debtor delivers to the creditor/third
person a movable OR instrument evidencing incorporeal rights for the
REQUIREMENTS & SIMILARITIES: Pledge and Mortgage (2085, 2087)
purpose of securing the fulfillment of a principal obligation
● Constituted to secure fulfillment of principal obligation
○ When the obligation is fulfilled - the thing delivered shall be returned
○ Are accessory contracts like guarantee
with all its fruits and accessions
○ Cannot exist without a valid obligation
● A pledge is a/an:
○ May guarantee a voidable, unenforceable, or natural obligation
○ Real contract - perfected by delivery of the thing pledged
● Pledgor or Mortgagor is an absolute owner
■ Debtor - pledgor
○ Contract should be constituted by absolute owner
■ Creditor - pledgee
■ OTHERWISE, pledge or mortgage would be void
○ Accessory contract - no independent existence of its own
○ Future property cannot be pledged or mortgaged
○ Unilateral contract - it creates an obligation on the part of the creditor
○ Is it not necessary that the principal debtor is the pledgor or mortgagor
to return the thing subject upon the fulfillment of the principal
● Pledgor or mortgagor has free disposal of property or has legal
obligation
authority
○ Subsidiary contract - obligation does not arise until the fulfillment of
○ Act of pledging or mortgaging - an act of strict ownership
the principal obligation which is secured
■ Involves alienation/transmission of real rights in property
○ Pledgor or mortgagor must have the capacity or consent to pledge or
Cause or consideration in pledge
mortgage property
● Pledge is an accessory contract
● Thing pledged or mortgaged may be alienated
● Cause of pledgor - principal obligation
○ The essence of a pledge or mortgage - constituted to secure the
● Cause if pledgor is not the debtor - compensation stipulated for the pledge
fulfillment of a principal obligation
or the liberality of the pledgor
○ Creditor does not become the owner if obligation is still
unfulfilled
Kinds of pledge
○ Thing pledged - must be delivered by common agreement to creditor
● Voluntary / Conventional - created by agreement of the parties
or third person
● Legal - created by operation of law
■ No delivery = no pledge

38
DIFFERENCES: Pledge and Mortgage Prohibition against pactum commissorium
● Stipulation authorizing automatic, direct appropriation by creditor
Pledge Mortgage
○ What is PROHIBITED - the automatic appropriation by the creditor of
Object Movables Immovables the thing pledged/mortgaged upon failure of debtor to pay his debt
within period agreed upon by authority or by the creditor
Delivery Property is delivered (to pledgee) or Not necessary ○ Null and void - to consider mortgaged property as full payment
by common consent (to third
“without further action in court” in case of non-payment
person)
■ Null and void in the form of pacto comisorio
Invalidity Against third persons Against third person (if ● Stipulation null and void
UNLESS a description of thing and mortgage is not ○ Pacto comisorio - a stipulation where thing pledged/mortgaged
date of pledge appears in a public registered) would automatically become property of the creditor
instrument ○ Stipulation does not affect the principal contract of pledge/mortgage
Selling the Pledgor can sell if given consent by Mortgagor can sell ■ Only the stipulation of pacto comisorio is void
thing/property pledgee without consent of ● Subsequent voluntary cession or sale of property
mortgagee ○ NOT PROHIBITED
■ (1) The debtor making cession of property mortgaged in
(2088) payment for debt
Right of creditor to appropriate thing pledged or mortgaged ● This turns out to be a novation or modification of the
● Sale of subject property original contract
○ If debtor fails to comply with the obligation when it’s due, the creditor ■ (2) A promise to assign or sell the property in payment of the
is entitled to move for the sale of the thing pledged obligation (if it is not paid upon its maturity, title remains with
■ Done with formalities required by law the debtor)
■ This is for creditor to collect the amount of his claim from the ● Promise is a personal obligation, and does not bind the
proceeds of sale property in any way
● Prohibition against appropriation of property
○ Creditor cannot appropriate thing to himself nor dispose of the same (2089, 2090)
as owner Pledge or mortgage is indivisible
○ Reason for prohibition - amount of loan is ordinarily much less that ● It is indivisible as to contracting parties; rule applies even if the obligation is
the real value of thing pledged/mortgaged (loan < thing) joint and not solidary
○ Single thing - any portion of the property is answerable for the whole
obligation as soon at it falls due

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 ■ Debtor cannot ask for the release of any portion of the
property until and unless the debt secured has been fully paid
○ Several things - several things pledged/mortgaged are all liable
for the entire debt
■ Even if only a part of the debt remains unpaid
● UNLESS each one of the things pledged/mortgaged
guarantees only a determinate portion of the
credit**
● There would be as many pledges/mortgages are there
are things given in a pledge/mortgage (so, it’s not really
an exception)
○ Debtor’s heir or Creditor’s heir
■ Debtor’s heir who paid a part of the debt - cannot ask for the
proportionate extinction of pledge/mortgage
■ Creditor’s heir who received his share of the debt - cannot
return the pledge or cancel the mortgage (if debt is not
completely satisfied)
EXCEPTIONS to rule of indivisibility
● (1) Where each one of several things guarantees determinate portion of
credit**
○ Example 1
■ GENERAL RULE
● D borrowed from C = 20K
● D pledged - ring = 15K + earrings = 15K
● DEBTOR - if D pays 15K - he cannot ask for the return
of the ring since both the ring and earrings are given to
secure the entire 20K
○ Same is true if D dies, with heirs W and X and
one of them pays 15K
● CREDITOR - heirs of C cannot return the thing since it
would prejudice the other who has not received his
share
■ EXCEPTION - if it was agreed that the ring is to secure the
payment of 15K and the earrings for the 5K
● DEBTOR - if D (or his heir) pays 15K, he can demand
the return of the ring
○ Example 2 - indivisibility is not the same as solidarity
■ A and B are jointly liable to C = 20K
● 15K = secured by A’s ring
● 5K = secured by B’s watch
■ A pays 15K - he cannot demand the return of the ring even if
liability is only joint and proportionate
● Reason: indivisibility ≠ solidarity
○ Indivisibility - refers to the object or prestation
of the obligation
○ Solidarity - legal tie of the obligation
● (2) Where only a portion of the loan was released
○ Loan is 80K but only 17K (21.25%) of the loan was given to the debtor
○ If mortgage covers 100 hectares of land, the foreclosure should only
extend up to 21.25% or 21.25 hectares only
(2091)
All kinds of obligation can be secured by pledge or mortgage
● Whether is is pure or conditional
● Same applies in a guarantee which also secures a conditional obligation
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PLEDGE (2093)
Transfer of possession is essential in pledge
● Pledge - real contract
● An agreement to constitute a pledge only gives rise to a personal action
between contracting parties
○ Validity of pledge
■ Transfer of possession is essential to the validity of a pledge
■ Creditor acquires no right to the property
● UNLESS the movable given as security by way of
pledge is delivered to and placed in possession of
the creditor/third person designated by common
agreement
■ Pledge is only a lien (possession is indispensable to the right
of a lien)
○ Transfer of actual possession
■ Mere symbolic delivery is not sufficient to constitute delivery of
possession
○ Symbolic or constructive delivery
■ May be sufficient to validate a pledge - depending on the
peculiar nature of the thing
■ Example:
● Delivery of keys to warehouse where goods were
stored
○ Depository (third person) appointed by common
consent was legally placed in possession
■ Owner (pledgor) can no longer dispose
of the same
(2094, 2095)
Subject matter of pledge
● Pledge (chattel mortgage) - confined and limited to personal property
○ Must be within the commerce of men and capable of possession
● Incorporeal rights evidenced by documents (negotiable or not)
○ If negotiable - document must be indorsed in favor of the creditor
○ Title to goods may be conveyed by either transfer or negotiation of the
document title
(2098)
Right of pledgee to retain the thing pledged
● The possession of the pledge constitutes his security
○ Debtor cannot demand its return unless debt is paid
● Right of retention is only limited to the fulfillment of the principal obligation for
which the pledge was created
● Example:
○ D owes C = 10K
○ D pledged his ring
○ D borrowed an additional = 4K
○ C has right to retain the ring only until the 10K is paid (does not
include the 4K)
FORECLOSURE OF A PLEDGE (2112)
Right of pledgee to cause sale of thing pledged
● Requisites of a pledge - object pledged may be alienated for payment to
creditor when principal obligation becomes due
● Formalities required for such sale:
○ Debt is due and unpaid
○ Sale must be at a public auction
○ There must be notice to the pledgor and owner, stating the amount
due
○ The sale must be made with the intervention of a notary public
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Right of pledgee to appropriate thing pledged (to himself?)
● Pledgee may appropriate thing pledged - if thing is not sold after the first
and second auctions
● If creditor appropriates the thing = full payment for his entire claim
Right of debtor to excess
● Debtor is not entitled to the excess in case the value of the thing pledged is
● General rule - debtor is not entitled to the excess* UNLESS there is an
more than the principal obligation
agreement to the contrary
○ *This is unfair since the obligation is fully satisfied
(2113, 2114)
○ In effect, the rule would amount to pacto comisorio which is prohibited
Right of pledgor and pledgee to bid at public sale
● Chattel mortgage law - mortgagor is entitled to recover the excess of the
● Preference given to pledgor
proceeds of the sale in foreclosure proceedings
○ If debt is not paid - pledgor/owner and pledgee may bid
○ Pledgor is preferred
Right of creditor to recover deficiency
■ If he offers the same terms as the highest bidder
● Creditor is not entitled to recover the deficiency in all cases
■ After all, the thing belongs to him
● Electing to sell thing pledged instead of suing on principal obligation - creditor
○ Pledgee is not allowed to acquire thing pledged - if he is the only
waives another remedy and must abide by the results of the sale
bidder
● Creditor may sue on principal obligation instead of electing to sell the
■ To avoid fraud
thing pledged
● Bids must be for cash
○ In this case, he may recover the deficiency from the debtor
○ All bids must be for cash
(2116)
○ If pledgee accepts a bid other than cash - pledgor/owner has the right
Obligation of pledgee to advise pledgor or owner of result of sale
to consider that the pledgee has received the purchase price in cash
● To enable the pledgor/owner to take steps for the protection of his rights
(2115)
where he has reasonable grounds to believe that the sale was not an
Effect of sale of thing pledged
honest one
● Sale of the thing pledged - extinguishes the principal obligation (whether price
of sale is more or less than the amount due)
○ Price of sale > amount due - debtor is not entitled to the excess
UNLESS the contrary is provided
○ Price of sale < amount due - creditor is not entitled to deficiency (a
contrary stipulation is void)
■ Reason - to compel creditor to hold an honest public sale
■ Creditor should loan only as much as he is likely to realize at a
public sale

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MORTGAGE (2124)
Definition and characteristics of mortgage
● Mortgage (real estate mortgage or real mortgage) - contract where the
debtor secures to creditor the fulfillment of a principal obligation an
immovable property OR real rights over immovable property if principal
obligation is not complied with at the time stipulated
● It is a real, accessory, and subsidiary contract
● Also a unilateral contract - it creates an obligation on the creditor
○ Creditor - must free the property from the encumbrance once the
obligation is fulfilled
Cause or consideration in mortgage
● Consideration is the principal contract from which it receives its life
○ Since a mortgage is an accessory contract
● Obligation is incurred by a third person (other than the mortgagor)
○ Validity of mortgage depends on:
■ Validity of the principal obligation / loan secured by it (cannot
be avoided due to lack of consideration)
Kinds of mortgage
● Voluntary
○ Agreed to between parties OR
○ Constituted by the will of the owner of the property
● Legal
○ Required by law to be executed in favor of certain persons
● Equitable
○ It lacks the formality of a mortgage - it should show the intention of
the parties to make the property as a security of debt
○ Instances where contracts (regardless of its nomenclature) may be
presumed to be an equitable mortgage - found in Art. 1602
Subject matter of mortgage
● Immovables
● Alienable (transferrable) real rights imposed upon immovables
● Real right over real property = real property
○ Mortgage on real property = a real property
● Note: object of pledge and chattel mortgage - movables
(2124)
Essential requisites of mortgage
● See Art. 2085, 2087 (SIMILARITIES of pledge and mortgage)
● For mortgage to be validly constituted - a public document (in which it
appears) should be recorded in the Registry of Property
○ If it is not recorded, mortgage is nevertheless binding between the
parties
○ Order for foreclosure - allowed if mortgage is not registered
Right in case of legal mortgage
● Legal mortgages - in conformity with the rule on Form of Contracts
○ Gives contracting parties the right to compel each other to observe
the form required by law:
■ Execution of document or other special forms (provided that
the contract is valid and enforceable)
Doctrine of mortgagee (creditor) in good faith
● Reliance in good faith on certificate of title of mortgage
○ Mortgagee has right to rely on this as security
○ No sign of suspicion (in the title?) - mortgagee has no obligation to
make further investigation
■ Doctrine of mortgagee in good faith - mortgagee is in good
faith (and is entitled to protection) even if mortgagor is not the
rightful owner or does not have a valid title
○ Title is in the name of mortgagor, and not of the rightful owner
■ The doctrine presupposes that:
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 ● The mortgagor (not the rightful owner of property) has
already acquired a Torrens title in his name, making the
mortgaging successful
■ Mortgagee (purchaser) - protected by law; purchases land by
virtue of a deed executed by the registered owner; relies on
the Torrens title
○ Duty of mortgagee to look beyond certificate of title
■ General rule - no cloud/vice in the ownership of property, no
encumbrance = purchaser is not required to explore further
than what is in the Torrens title
■ EXCEPTIONS
● Purchaser has knowledge of a defect or lack of title in
the vendor
● Purchaser does not directly deal with the registered
owner of the property
● Purchaser is aware of sufficient facts to induce a
prudent man to inquire into the status of the property in
question
○ Greater care and diligence required for mortgagee-bank
■ Purchaser/mortgagee is a bank or financing institution
● General rule that mortgagee is not required to
investigate on the Torrens Certificate of Title does not
apply
○ Bank/financing institution - requires a higher
standard of diligence, its business is
impressed with public interest
■ Before granting a loan, bank/fin inst must:
● Examine the title to: verify its genuineness and
determine the real owner
● Do a physical, on the spot investigation of the land
○ Purpose of ocular inspection - to protect the
“true owner” of the property and the third
persons with a right/interest/claim (from an
usurper who acquired a fraudulent certificate of
title)
(2126)
Effect of mortgage
● Creates a real right
○ Enforceable against the whole world
○ If mortgagor sells the mortgaged property - property remains
subject to the fulfillment of the obligation secured by it
■ Mortgage must be registered
■ If not registered, buyer must know of its existence
● Creates merely an encumbrance
○ Mortgage is an encumbrance and does not extinguish the title of the
debtor
■ Debtor does not lose his ownership over it (right to dispose
it)
○ Law voids stipulation forbidding the owner from alienating the
mortgaged immovable
(2128)
Alienation or assignment of mortgage credit
● Mortgage credit (right of mortgagee) - a real right
○ Subjects the property to the fulfillment of the principal obligation
● Real right may be alienated to a third person (in whole or part) by
mortgagee
● Sale or assignment is valid even if not registered
○ Registration is only necessary to affect third persons
(2130)
Stipulation forbidding alienation of mortgaged property
● Void - stipulation forbidding the owner from alienating the mortgaged
property
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 ○ Prohibition would be contrary to the public good; transmission of
property should not be unduly impeded
● If mortgagor alienates the property
○ Transferee shall respect the encumbrance
■ Property remains subject to the fulfillment of the obligation for
whose guaranty it was constituted
CASES
● Cases - Module 4 (Lesson 2)

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