CREDIT TRANSACTIONS

 All transactions involving the purchase or loan of goods, Commodatum Mutuum

services, or money in the present with a promise to pay or Nonconsumable object Consumable object
deliver in the future Gratuitous May or may not be gratuitous
Use of temporary possession For consumption
Contracts of security Real or personal property Only personal property
Types: Ownership: bailor Ownership: debtor
1. Secured transactions or contracts of real security - Return exact thing loaned Return equal amount of the
supported by a collateral or an encumbrance of property same kind and quality
2. Unsecured transactions or contracts of personal security - Bailor bears risk of loss Debtor bears risk of loss
supported only by a promise or personal commitment of
Return even before end of Return only after expiration of
another such as a guarantor or surety
term in case of urgent need term
Security
Loan Credit
 Something given, deposited, or serving as a means to
ensure fulfilment or enforcement of an obligation or of Delivery by one party and the Ability of a person to borrow
protecting some interest in property receipt of other party of a money or things by virtue of
 Types of Security given sum of money or other the trust or confidence
a. personal – when an individual becomes surety or consumable thing upon an reposed by the lender that he
guarantor agreement, express or will pay what he promised.
b. real or property – when a mortgage, pledge, implied, to repay the same.
antichresis, charge or lien or other device used to Interest taken at the Interest is taken in advance
have property held, out of which the person to be expiration of the credit
made secure can be compensated for loss Always on a double name Always on a single name paper
paper (two signatures appear (i.e. promissory note with no
Bailment with both parties held liable indorse-ment other than the
 The delivery of property of one person to another in trust for payment) maker)
for a specific purpose, with a contract, express or implied,
that the trust shall be faithfully executed and the property COMMODATUM (Articles 1935 – 1952)
returned or duly accounted for when the special purpose is  Nature:
accomplished or kept until the bailor claims it. 1. PURPOSE: Bailee in commodatum acquires the temporary
use of the thing but not its fruits (unless stipulated as an
 Parties: incidental part of the contract).(Art 1935)
1. bailor - the giver; one who delivers property  Use must be temporary, otherwise the contract may be
2. bailee- the recipient; one who receives the custody or a deposit.
possession of the thing thus delivered 2. CAUSE: Essentially gratuitous; it ceases to be a
commodatum if any compensation is to be paid by the
LOAN (Articles 1933 – 1961) borrower who acquires the use, in such case there arises a
 A contract wherein one of the parties delivers to another, lease contract.
either something not consumable so that the latter may use  Similar to a donation in that it confers a benefit to the
the same for a certain time and return it or money or other recipient. The presumption is that the bailor has
consumable thing, upon the condition that the same loaned the thing for having no need therefor.
amount of the same kind and quality shall be paid. (Art 3. SUBJECT MATTER: Generally non-consumable whether
1933) real or personal but if the consumable goods are not for
consumption as when they are merely for exhibition,
Characteristics: consumable goods may be the subject of the commodatum.
1. Real Contract – delivery of the thing loaned is necessary for (Art 1936)
the perfection of the contract 4. Bailor need not be the owner of the thing owned (Art.
NOTE: An accepted promise to make a future loan is a 1938) since by the loan, ownership does not pass to the
consensual contract, and therefore binding upon the parties borrower.
but it is only after delivery, will the real contract of loan  A mere lessee or usufructuary may lend but the
arise. (Art 1934) borrower or bailee himself may not lend nor lease the
2. Unilateral Contract - once the subject matter has been thing loaned to him to a third person (Art 1932[2])
delivered, it creates obligations on the part of only one of 5. Purely Personal (Art 1939):
the parties (i.e. borrower).  Death of either party terminates the contract unless by
stipulation, the commodatum is transmitted to the
 Kinds: heirs of either or both parties.
1. Commodatum – when the bailor (lender) delivers to the  Bailee can neither lend nor lease the object of the
bailee (borrower) a non-consumable thing so that the latter contract to a third person.
may use it for a certain time and return the identical thing. NOTE: Use of the thing loaned may extend to
 Kinds of commodatum: members of the bailee’s household except:
a. Ordinary Commodatum – use by the borrower of the a. contrary stipulation;
thing is for a certain period of time b. nature of the thing forbids such use
b. Precarium - one whereby the bailor may demand the
thing loaned at will and it exists in the following cases: Republic v. Bagtas
i. neither the duration nor purpose of the contract is
stipulated Republic v. CA, 146 SCRA 15
ii. the use of the thing is merely tolerated by the
owner Who pays for expenses [MUTUUM]
2. Simple loan or mutuum – where the lender delivers to the Ordinary expenses for the use and preservation of the thing Bailee
borrower money or other consumable thing upon the Extraordinary expenses, stipulated in contract As stipulated
condition that the latter shall pay the same amount of the Extraordinary expenses, on the occasion of the actual use by Half-half
same kind and quality. bailee, no stipulation
Extraordinary expenses, not on the occasion of the actual Bailee
use by bailee, no stipulation, bailor not informed
beforehand, not urgent EXCEPTIONS:
Extraordinary expenses, not on the occasion of the actual Bailor a. In case of urgent need in which case bailee
use by bailee, no stipulation, bailor not informed may demand its return or temporary use;
beforehand, urgent b. The bailor may demand immediate return of
the thing if the bailee commits any act of ingratitude
The only time bailee has right of retention – payment for damages due to hidden specified in Art. 765.
defects (Art. 1951) 2. To refund to the bailee extraordinary expenses for the
preservation of the thing loaned, provided the bailee brings
Note: the bailor cannot exempt himself from the payment of damages/expenses the same to the knowledge of the bailor before incurring
by abandoning the thing with the bailee them, except when they are so urgent that the reply to the
notification cannot be awaited without danger.
If a debtor receives the goods before the trust receipt itself, the contract may
3. To be liable to the bailee for damages for known hidden
have been a loan and not a trust receipt transaction (Colinares rule) [effect? no
criminal prosecution under Trust Receipts Law] flaws.
 Requisites:
Consumable or not – nature of the thing a. There is flaw or defect in the thing loaned;
Fungible or not – intention of the parties b. The flaw or defect is hidden;
c. The bailor is aware thereof;
Barter – a contract whereby one person transfers the ownership of non- d. He does not advise the bailee of the same; and
fungible things to another with the obligation on the part of the latter to give e. The bailee suffers damages by reason of said flaw or
things of the same kind, quality and quantity [BON] defect

Art. 1955, re what if the bailee cannot produce a thing of the same kind, quality NOTES:
and quantity at the time of “payment”? Article I. If the above requisites concur, the bailee has
- deliver the same kind OR the right of retention for damages.
- pay the value of the thing AT THE TIME IT WAS GIVEN
 The bailor cannot exempt himself from the payment of
expenses or damages by abandoning the thing to the
Obligations of the Bailee: (Arts 1941 – 1945) bailee.
1. To pay for the ordinary expenses for the use and
preservation of the thing loaned. (Art 1941) Extinguishment of Commodatum
2. To be liable for the loss of the thing even if it should be Quintos v. Beck
through a fortuitous event in the following cases: (KLAS
D)
a. when he keeps it longer than the period stipulated, or SIMPLE LOAN OR MUTUUM (Art 1953 – 1961)
after the accomplishment of its use  A contract whereby one party delivers to another, money or
b. when he lends or leases it to third persons who are not other consumable thing with the understanding that the
members of his household same amount of the same kind and quality shall be paid.
c. when the thing loaned has been delivered with (Art. 1953)
appraisal of its value
d. when, being able to save either of the thing borrowed NOTES:
or his own things, he chose to save the latter; or  The mere issuance of the checks does not result in the
e. when the bailee devoted the thing for any purpose perfection of the contract of loan. The Civil Code provides
different from that for which it has been loaned (Art that the delivery of bills of exchange and mercantile
1942) documents, such as checks, shall produce the effect of
3. To be liable for the deterioration of thing loaned (a) if payment only when they have been encashed (Gerales vs.
expressly stipulated; (b) if guilty of fault or negligence; or CA 218 SCRA 638). It is only after the checks have
(c) if he devotes the thing to any purpose different from produced the effect of payment that the contract of loan
that for which it has been loaned may be deemed perfected.
4. To pay for extraordinary expenses arising from the actual  The obligation is “to pay” and not to return because the
use of the thing by the bailee, which shall be borne equally consumption of the thing loaned is the distinguishing
by both the bailor and the bailee, even though the bailee character of the contract of mutuum from that of
acted without fault, unless there is a stipulation to the commodatum.
contrary (Art 1949 par 2)
5. To return the thing loaned  No estafa is committed by a person who refuses to pay his
 The bailee has no right to retain the thing loaned as debt or denies its existence.
security for claims he has against the bailor even for
extraordinary expenses except for a claim for damages Consolidated Bank and Trust Corp. v. CA
suffered because of the flaws of the thing loaned. Oscar Ramos v. CA
Gopoco Grocery v. Pacific Coast
NOTES:
 However, the bailee’s right extends no further than
Simple Loan/Mutuum Rent
retention of the thing loaned until he is reimbursed
Delivery of money or some Delivery of some non-
for the damages suffered by him.
consumable thing with a consumable thing in order that
 He cannot lawfully sell the thing to satisfy such promise to pay an equivalent the other may use it during a
damages without court’s approval. of the same kind and quality certain period and return it to
 In case there are two or more bailees, their the former.
obligation shall be solidary. There is a transfer of There is no transfer of
ownership of the thing ownership of the thing
Obligations of the bailor (Art 1946 – Art 1952): delivered delivered
1. To respect the duration of the loan Relationship between the Relationship is that of a
GENERAL RULE: Allow the bailee the use of the thing parties is that of obligor- landlord and tenant
loaned for the duration of the period stipulated or until the obligee
accomplishment of the purpose for which the commodatum Creditor receives payment for Owner of the property rented
was instituted. his loan receives compensation or price
 either in money, provisions,
chattels, or labor from the
occupant thereof in return for
its use (Tolentino vs Gonzales,
50 Phil 558 1927)
If no penalty interest has been agreed upon – additional interest at a rate equal to
the regular interest
If no regular interest has been agreed upon – legal interest:
- 12% p.a. if loan or forbearance of money (CB Circ 416)
- 6% p.a. other

CB 416 – loans; forbearance of any money, good, credits; judgments involving

Loan Sale
such goods or credits
Real contract Consensual contract
Generally unilateral because Bilateral and reciprocal If the court’s judgment does not provide for the payment of interest that has
only borrower has obligations already become final, no interest may be awarded.

Loan Discount GR: Accrued interest (interest due and unpaid) do not earn interest
Interest is taken at the Interest is deducted in Exceptions:
expiration of the credit advance 1. judicially demanded
Generally on single-name Always on double-name paper 2. express stipulation: interest due shall be added to the principal
paper obligation and resulting total amount shall earn interest

If the borrower pays interest when there was no stipulation for it, the provisions
NOTE: If the property is “sold”, but the real intent is only to
of the civil code concerning solutio indebiti or natural obligations shall apply.
give the object as security for a debt – as when the “price” is
comparatively small – there really is a contract of loan with an
Compound Interest
“equitable mortgage.” GENERAL RULE: Unpaid interest shall not earn interest.
EXCEPTIONS:
Commodatum/Mutuum Barter 1. when judicially demanded
Subject matter is money or Subject matter is non- 2. when there is an express stipulation (must be in
fungible things fungible, (non consumable) writing in view of Art. 1956)
things
In commodatum, the bailee is The thing with equivalent Guidelines for the application of proper interest rates
bound to return the identical value is given in return for 1. If there is stipulation: that rate shall be applied
thing borrowed when the time what has been received 2. The following are the rules of thumb for the
has expired or purpose served application/imposition of interest rates:
Mutuum may be gratuitous Onerous, actually a mutual a) When an obligation, regardless of its source, i.e., law,
and commodatum is always sale contracts, quasi-contracts, delicts or quasi-delicts is
gratuitous breached, the contravenor can be held liable for
damages.
 Form of Payment (Art 1955): b) With regard particularly to an award of interest in the
 If the thing loaned is money - payment must be made concept of actual and compensatory damages, the rate
in the currency stipulated, if it is possible; otherwise it of interest, as well as the accrual thereof, is imposed,
is payable in the currency which is legal tender in the as follows:
Philippines and in case of extraordinary inflation or i. When the obligation breached consists of payment
deflation, the basisi of payment shall be the value of of a sum of money (loan or forbearance of
the currency at the time of the creation of the money), the interest shall be that which is
obligation stipulated or agreed upon by the parties. In
absence of an agreement, the rate shall be the
 If what was loaned is a fungible thing other than
legal rate (i.e. 12% per annum) computed from
money - the borrower is under obligation to pay the
default.
lender another thing of the same kind, quality and
NOTE: The interest due shall itself earn legal
quantity. In case it is impossible to do so, the borrower
interest from the time it is judicially demanded
shall pay its value at the time of the perfection of the
ii. In other cases, the rate of interest shall be six
loan.
percent (6%) per annum.
NOTE: No interest, however, shall be adjudged on
Interest
unliquidated claims or damages except when or
 The compensation allowed by law or fixed by the parties for
until the demand can be established with
the loan or forbearance of money, goods or credits
reasonable certainty. When the demand cannot be
 Requisites for Demandability: (ELI)
established, the interest shall begin to run only
 must be expressly stipulated
from the date of the judgment of the court is
Exceptions:
made.
a. indemnity for damages
iii. When the judgment of the court awarding a sum of
b. interest accruing from unpaid interest
money becomes final and executory, the rate of
 must be lawful
legal interest, whether the case falls under
 must be in writing
paragraph i or ii above, shall be 12% per annum
from such finality until its satisfaction, this interim
Requisites for recovery of interest [EWL]
period being deemed to be by then an equivalent
1. express stipulation
to a forbearance of credit. (Eastern Shipping Lines
2. in writing
3. interest must be lawful vs. CA, July 12, 1994)

In the absence of stipulated interest, there can be legal interest [6%] pursuant to
Art. 2209
- monetary interest – for the use of the money
- compensatory interest – for breach of contractual obligations
Interest even without stipulation
1. indemnity for damages
2. interest accruing from unpaid interest
NOTES:
 Central Bank Circular No. 416 fixing the rate of interest at
12% per annum deals with loans, forbearance of any
money, goods or credits and judgments involving such
loans, or forbearance in the absence of express agreement
to such rate
 Interest as indemnity for damages is payable only in case
of default or non-performance of the contract. As they are
 distinct claims, they may be demanded separately. Note: deposit, mutuum and commodatum are real contracts.
(Sentinel Insurance Co., Inc. vs CA, 182 SCRA 517)
 Central Bank Circular No. 905 (Dec. 10, 1982) removed  Kinds of Deposit:
the Usury Law ceiling on interest rates for secured and 1. Judicial (Sequestration) –takes place when an attachment
unsecured loans, regardless of maturity. or seizure of property in litigation is ordered.
2. Extra-judicial
Validity of unconscionable interest rate in a loan a. Voluntary – one wherein the delivery is made by the
The Supreme Court in Sps. Solangon vs. Jose Salazar, G.R. No. will of the depositor or by two or more persons each of
125944, June 29, 2001, said that since the usury law had been whom believes himself entitled to the thing deposited.
repealed by CB Cir. No. 905 there is no more maximum rate of (Arts 1968 – 1995)
interest and the rate will just depend on the mutual agreement b. Necessary – one made in compliance with a legal
of the parties (citing Lim Law vs. Olympic Sawmill Co., 129 obligation, or on the occasion of any calamity, or by
SCRA 439). But the Supreme Court said that nothing in said travellers in hotels and inns (Arts 1996 - 2004), or by
circular grants lenders carta blanche authority to raise interest travellers with common carriers (Art 1734 – 1735).
rates to level which will either enslave their borrowers or lead to NOTE: The chief difference between a voluntary deposit
a hemorrhaging of their assets (citing Almeda vs. CA, 256 SCRS and a necessary deposit is that in the former, the
292). In Medel vs. CA, 299 SCRA 481, it was ruled that while depositor has a complete freedom in choosing the
stipulated interest of 5.5% per month on a loan is usurious depositary, whereas in the latter, there is lack of free
pursuant to CB Circular No. 905, the same must be equitably choice in the depositor.
reduced for being iniquitous, unconscionable and exorbitant. It
is contrary to morals, (contra bonos mores). It was reduced to Judicial Deposit Extrajudicial Deposit
12% per annum in consonant with justice and fair play. By will of the court By will of the parties or
contract
Central Bank Circular No. 416 - By virtue of the authority For security or to insure the For custody and safekeeping
granted to it under Section 1 of Act No. 2655, as amended, right of a party to property or
otherwise known as the"Usury Law", the Monetary Board, in its to recover in case of favorable
Resolution No. 1622 dated July 29, 1974, has prescribed that judgment
therate of interest for the loan or forbearance of any money, Movables or immovables, Movables only
goods or credits and the rate allowed in judgments,in the but generally immovables
absence of express contract as to such rate of interest, shall be [reason: purpose it to protect
twelve per cent (12%) per annum. the rights of the parties to a
suit]
Always onerous May be compensated or not,
DEPOSIT (Articles 1962 – 2009) but generally gratuitous
 A contract constituted from the moment a person receives Thing to be returned upon Upon demand of depositor
a thing belonging to another, with the obligation of safely order of the court or when
keeping it and of returning the same. litigation is ended
Person who has a right Depositor or third person
Characteristics: designated
1. Real Contract - contract is perfected by the delivery of
the subject matter. When can the depositary make use of the thing deposited?
2. Unilateral (gratutitous deposit) - only the depositary 1. with express permission of the depositor
has an obligation. 2. preservation of the thing requires its use
3. Bilateral (onerous deposit) - gives rise to obligations on
the part of both the depositary and depositor.
GENERAL RULE: Contract of deposit is gratuitous (Art 1965)
Deposit Mutuum EXCEPTIONS:
Principal purpose is Principal purpose is 1. when there is contrary stipulation
safekeeping or custody consumption 2. depositary is engaged in business of storing goods
Depositor can demand the The lender must wait until the 3. property saved from destruction without knowledge of
return of the subject matter at expiration of the period the owner
will granted to the debtor
Subject matter may be Subject matter is only money NOTES:
movable or immovable or other fungible thing  Article 1966 does not embrace incorporeal property, such
property as rights and actions, for it follows the person of the owner,
Relationship is that of lender Relationship is that of wherever he goes.
(creditor) and borrower depositor and depositary.  A contract for the rent of safety deposit boxes is not an
(debtor). ordinary contract of lease of things but a special kind of
There can be compensation of NO compensation of things deposit; hence, it is not to be strictly governed by the
credits. deposited with each other provisions on deposit. The relation between a bank and its
(except by mutual customer is that of a bailor and bailee. (CA Agro vs CA, 219
agreement). SCRA 426) [Note this since this appeared in the midterms]

Deposit
Purpose is safekeeping
May be gratuitous
Movable/corporeal things only
in case of extrajudicial deposit
Bailor (depositor) can demand
the thing at will unless there is
stipulation
Commodatum
Purpose is the transfer of the
use
Essentially and always
gratuitous
Both movable and immovable
may be the object
We do not fully subscribe to its view that the same is a contract
of deposit that is to be strictly governed by the provisions in the
Civil Code on deposit; 19the contract in the case at bar is a
special kind of deposit. It cannot be characterized as an
ordinary contract of lease under Article 1643 because the full
and absolute possession and control of the safety deposit box
was not given to the joint renters — the petitioner and the
Pugaos. The guard key of the box remained with the respondent
Bank; without this key, neither of the renters could open the
box. On the other hand, the respondent Bank could not likewise
open the box without the renter's key. In this case, the said key
had a duplicate which was made so that both renters could have
access to the box. xxx We agree with the petitioner that under
the latter, the prevailing rule is that the relation between a bank
renting out safe-deposit boxes and its customer with respect to
the contents of the box is that of a bailor and bailee, the
bailment being for hire and mutual benefit.
Note: Under the General Banking Act (RA 337 – check
equivalent provision in the General Banking Law), Section 72,
renting of safety deposit boxes are considered deposits.
Depositor is Depositor is
Capacitated Incapacitated
Depositary is Depositary subject
Capacitated to all obligations;
Valid contract may be compelled
to return the thing
(Art. 1970)
Depositary is Depositary must (1)
Incapacitated return the thing if is
still with him & (2)
pay depositor Unenforceable
amount by which (general rule)
he may have
benefited himself
(Art. 1971)
Depositor is capacitated but depositary is not - if a 3 rd person
acquired the thing in good faith, depositor cannot recover the
thing. But if in bad faith, can recover.
Loss of the thing – who’s responsible?
Commodatum Bailor – subject to exceptions
Mutuum Bailee – must pay
Deposit Bailee (Art. 1972)
Bishop of Jaro v. de la Pena case – Trust fund which trustee
mixed with his own and deposited in a bank to his personal
account was lost thru force majeure (military authorities
confiscated entire amount). Held: de la Pena not liable; did not
assume obligations of a depositary – liability same if the money
was in his house and confiscated. Trent dissenting: by
depositing, he stripped the money of all protection.
What depositary cannot do unless there is a contrary stipulation
1. deposit the thing with a 3rd person (Art. 1973)
When can a depositary responsible for the loss if the thing is
deposited with a 3rd person?
1. when there is no stipulation that this is allowed
2. when there is a stipulation that this is allowed,but the
3rd person is manifestly careless or unfit (Art. 1973)
Obligations of the Depositary (Art 1972 –1991):
1. To keep the thing safely (Art 1972)
 Exercise over the thing deposited the same diligence as
he would exercise over his property
2. To return the thing (Art 1972)
 Person to whom the thing must be returned:
a. Depositor, to his heirs and successors, or the person
who may have been designated in the contract
b. If the depositary is capacitated - he is subject to all the
obligations of a depositary whether or not the
depositor is capacitated. If the depositor is
incapacitated, the depositary must return the property
to the legal representative of the incapacitated or to
the depositor himself if he should acquire capacity (Art
1970).
c. If the depositor is capacitated and the depositary is
incapacitated - the latter does not incur the obligation
of a depositary but he is liable:
i..to return the thing deposited while still in his
possession;
ii.to pay the depositor the amount which he may
have benefited himself with the thing or its price
subject to the right of any third person who
acquired the thing in good faith (Art 1971)
 Time of return:
a. Upon demand even though a specified period or time
for such return may have been fixed except when the
thing is judicially attached while in the depositary’s
possession or should he have been notified of the
opposition of a third person to the return or the
removal of the thing deposited. (Art 1998)
b. If deposit gratuitous, the depositary may return the
thing deposited notwithstanding that a period has been
fixed for the deposit if justifiable reasons exists for its
return.
3. If the deposit is for a valuable consideration,
the depositary has no right to return the thing
deposited before the expiration of the time designated
even if he should suffer inconvenience as a
consequence.(Art 1989)
 What to return: product, accessories, and accessions
of the thing deposited (Art 1983)
3. Not to deposit the thing with a third person unless
authorized by express stipulation (Art 1973)
 The depositor is liable for the loss of the thing
deposited under Article 1973 if:
a. he transfers the deposit with
a third person without authority although there is no
negligence on his part and the third person;
b. he deposits the thing with a
third person who is manifestly careless or unfit
although authorized even in the absence of negligence;
or
c. the thing is lost through the
negligence of his employees whether the latter are
manifestly careless or not.
4. If the thing deposited should earn interest (Art 1975):
a. to collect interest and the capital itself as it fall due
b. to take steps to preserve its value and rights
corresponding to it
5. Not to commingle things deposited if so stipulated (Art
1976)
6. Not to make use of the thing deposited unless authorized
(Art 1977)
GENERAL RULE: Deposit is for safekeeping of the subject
matter and not for use. The unauthorized use by the
depositary would make him liable for damages.
EXCEPTIONS:
1. When the preservation of the thing deposited requires
its use
2. When authorized by the depositor
NOTE: The permission to use is NOT presumed except
when such use is necessary for the preservation of the
thing deposited.
Effect if permission to use is given (Art 1978):
1. If thing deposited is non-consumable, the
contract loses the character of a deposit and acquires
that of a commodatum despite the fact that the parties
may have denominated it as a deposit, unless
safekeeping is still the principal purpose.
2. If thing deposited consists of money/consumable
things, the contract is converted into a simple loan or
mutuum unless safekeeping is still the principal
purpose in which case it is called an irregular deposit.
Example: bank deposits are irregular deposits in nature
but governed by law on loans.
7. When the thing deposited is delivered sealed and closed :
a. to return the thing deposited in the same condition
 b. to pay for damages should the seal or lock be broken 2. he notified the depositary of
through his fault, which is presumed unless proved the same
otherwise 3. the latter was aware of it
c. to keep the secret of the deposit when the seal or lock (w/o advice from the
is broken with or without his fault (Art 1981) depositor) (Art. 1993)
NOTE: The depositary is authorized to open the thing The bailee has a right of The depositary may retain the
deposited which is closed and sealed when (Art 1982): retention for damages from thing in pledge until the full
i. there is presumed authority (i.e. when the key has hidden flaws (Art. 1944) payment of what may be due
been delivered to him or the instructions of the him by reason of the deposit
depositor cannot be done without opening it) (Art. 1994)
ii. necessity
8. To change the way of the deposit if under the Can the depositary return the thing before the expiration of the
circumstances, the depositary may reasonably presume period?
that the depositor would consent to the change if he knew  If deposit is for consideration – NO: breach of contract
of the facts of the situation, provided, that the former  If deposit is gratuitous – Yes, if there are justifiable
notifies the depositor thereof and wait for his decision, reasons (e.g. leaving for the U.S.)
unless delay would cause danger
9. To pay interest on sums converted to personal use if the NOTES:
deposit consists of money (Art 1983)
10. To be liable for loss through fortuitous event (SUDA): (Art
 Fixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions
1979):
concerning simple loan. (Art 1980)
a. if stipulated
b. if he uses the thing without the depositor's permission  The general rule is that a bank can compensate or set off
c. if he delays its return the deposit in its hands for the payment of any
d. if he allows others to use it, even though he himself indebtedness to it on the part of the depositor. In true
may have been authorized to use the same deposit, compensation is not allowed.

Commodatum Deposit Irregular Deposit Mutuum

Art. 1942. The bailee is liable
for the loss of the thing, even
if it should be through a
fortuitous event:
(1) If he devotes the thing to
any purpose different from
that for which it has been
loaned;
(2) If he keeps it longer than
the period stipulated, or after
the accomplishment of the use
for which the commodatum
has been constituted;
(3) If the thing loaned has
been delivered with appraisal
of its value, unless there is a
stipulation exempting the
bailee from responsibility in
case of a fortuitous event;
(4) If he lends or leases the
thing to a third person, who is
not a member of his
household;
(5) If, being able to save
either the thing borrowed or
his own thing, he chose to
save the latter. (1744a and
1745)
Bailor cannot demand the
thing until the expiration of
the period (Art. 1946)
The bailor who knows the
flaws of the thing loaned and
who does not advise the bailee
of the flaws, is liable for the
damages the bailee may suffer
therefrom (Art. 1951)
Art. 1979. The depositary is The consumable thing Lender is bound by the
liable for the loss of the thing deposited may be demanded provisions of the contract and
through a fortuitous event: at will by the depositor cannot demand restitution
until the time for payment, as
(1) If it is so stipulated; provided in the contract, has
arisen
(2) If he uses the thing The only benefit is that which Essential cause for the
without the depositor's accrues to the depositor transaction is the necessity of
permission; the borrower
The irregular depositor has a Common creditors enjoy no
(3) If he delays its return; preference over other preference in the distribution
creditors with respect to the of the debtor’s property
(4) If he allows others to use thing deposited
it, even though he himself
may have been authorized to Rule when there are two or more depositors (Art 1985):
use the same. (n) 1. If thing deposited is divisible and depositors are not
solidary: Each depositor can demand only his
proportionate share thereto.
2. If obligation is solidary or if thing is not divisible: Rules on
active solidarity shall apply, i.e. each one of the solidary
depositors may do whatever may be useful to the others
but not anything which may be prejudicial to the latter,
(Art. 1212) and the depositary may return the thing to
anyone of the solidary depositors unless a demand, judicial
or extrajudicial, for its return has been made by one of
them in which case, delivery should be made to him (Art.
1214).
3. Return to one of depositors stipulated. The depositary is
bound to return it only to the person designated although
he has not made any demand for its return.
NOTES:
 The depositary may retain the thing in pledge until full
payment of what may be due him by reason of the deposit
Depositor can demand the (Art 1994).
thing, even if a period has
been agreed upon (Art. 1988)  The depositor’s heir who in good faith may have sold the
GR: The depositor shall thing which he did not know was deposited, shall only be
reimburse the depositary for bound to return the price he may have received or to
any loss arising from the assign his right of action against the buyer in case the price
character of the thing has not been paid him (Art 1991).
deposited.
Exceptions: Obligations of the Depositor (Art 1992 – 1995):
1. at the constitution of the 1. To pay expenses for preservation
deposit, he was not aware of a. If the deposit is gratuitous, the depositor is obliged to
or not expected to know the reimburse the depositary for expenses incurred for the
dangerous character of the preservation of the thing deposited (Art 1992)
thing
 b. If the deposit is for valuable consideration, expenses
for preservation are borne by the depositary unless
there is a contrary stipulation
2. To pay loses incurred by the depositary due to the
character of the thing deposited
GENERAL RULE: The depositor shall reimburse the depositary
for any loss arising from the character of the thing deposited.
EXCEPTIONS:
1. at the time of the deposit, the depositor was not aware of
the dangerous character of the thing
2. when depositor was not expected to know the dangerous
character of the thing
3. when the depositor notified the depository of the same
4. the depositary was aware of it without advice from the
depositor
Bank deposits
Bank deposits are irregular deposits but are considered loans
(hence rules on irregular deposits do not apply).
 Deposit is not entitled to interest during the period the
bank is not allowed to operate (Overseas Bank v. CA,
105 SCRA 49)
 During the period of the bank’s forcible closure, it is
not liable to the CB for interest on loans and advances
made by the latter. (Ramos v. CB, 137 SCRA 685)
Closed and sealed deposits (Arts. 1981, 1982)
 Depositary liable if seal/lock is broken
 fault on the part of the depositary is presumed
 value of the thing deposited = statement of the
depositor if the forcible opening is imputable to the
depositary, unless there is proof to the contrary
 court may pass upon the credibility of the depositor
 depositary still bound to keep the secret
 if key is delivered or instructions cannot be carried out
without opening the box/receptacle = depositary is
presumed authorized to do so
Extinguishment of Voluntary Deposit (Art 1995)
1. Loss or destruction of the thing deposited
2. In case of gratuitous deposit, upon the death of either the
depositor or the depositary
3. Other causes, such as return of the thing, novation,
merger, expiration of the term fulfilment of the resolutory
condition, etc (Art 1231)
Necessary Deposits
1. Made in compliance with a legal obligation
2. Made on the occasion of any calamity such as fire, storm,
flood, pillage, shipwreck or other similar events (deposito
miserable)
3. Made by travellers in hotels and inns
4. Made by passengers with common carrier (Art. 1754)
Voluntary Deposit Necessary Deposit
Made by the free will of the Freedom of choice is absent
depositor (hence “necessary”)
Deposit by Travellers in hotels and inns:
 The keepers of hotels or inns shall be responsible as
depositaries for the deposit of effects made by travellers
provided:
a. Notice was given to them or to their employees of the
effects brought by the guest; and
b. The guests take the precautions which said hotel-
keepers or their substitutes advised relative to the care
and vigilance of their effects.
NOTES:
 Liability extends to vehicles, animals and articles which
have been introduced or placed in the annexes of the hotel.
 Liability shall EXCLUDE losses which proceed from force
majeure. The act of a thief or robber is not deemed force
majeure unless done with the use of arms or irresistible
force.
 The hotel-keeper cannot free himself from the responsibility
by posting notices to the effect that he is not liable for the
articles brought by the guest. Any stipulation to such effect
shall be void.
 Notice is necessary only for suing civil liability but not in
criminal liability.
GUARANTY (Articles 2047 – 2084)
 A contract whereby a person (guarantor) binds himself to
the creditor to fulfil the obligation of the principal debtor in
case the latter fail to do so.
 Classification of Guaranty:
1. In the Broad sense:
a. Personal - the guaranty is the credit given by the
person who guarantees the fulfilment of the principal
obligation.
b. Real - the guaranty is the property, movable or
immovable.
2. As to its Origin
a. Conventional - agreed upon by the parties.
b. Legal - one imposed by virtue of a provision of a law.
c. Judicial - one which is required by a court to guarantee
the eventual right of one of the parties in a case.
3. As to Consideration
a. Gratuitous - the guarantor does not receive any price
or remuneration for acting as such.
b. Onerous - the guarantor receives valuable
consideration.
4. As to the Person guaranteed
a. Single - one constituted solely to guarantee or secure
performance by the debtor of the principal obligation.
b. Double or sub-guaranty - one constituted to secure
the fulfilment by the guarantor of a prior guaranty.
5. As to Scope and Extent
a. Definite - the guaranty is limited to the principal
obligation only, or to a specific portion thereof.
b. Indefinite or simple - one which not only includes the
principal obligation but also all its accessories including
judicial costs
SURETYSHIP
 A contract whereby a person (surety) binds himself
solidarily with the principal debtor
 A relation which exists where one person (principal) has
undertaken an obligation and another person (surety) is
also under a direct and primary obligation or other duty to
the obligee, who is entitled to but one performance, and as
between the two who are bound, the second rather than
the first should perform (Agro Conglomerates, Inc. vs. CA,
348 SCRA 450)
NOTES:
 The reference in Article 2047 to solidary obligations does
not mean that suretyship is withdrawn from the applicable
provisions governing guaranty. A surety is almost the
same as a solidary debtor, except that he himself is a
principal debtor.
 In suretyship, there is but one contract, and the surety is
bound by the same agreement which binds the principal. A
surety is usually bound with the principal by the same
instrument, executed at the same time and upon the same
consideration (Palmares vs CA, 288 SCRA 422)
 It is not for the obligee to see to it that the principal debtor
pays the debt or fulfill the contract, but for the surety to
see to it that the principal debtor pays or performs
(Paramount Insurance Corp vs CA, 310 SCRA 377)
Nature of Surety’s undertaking:
1. Liability is contractual and accessory but direct
NOTE: He directly, primarily and equally binds himself with
the principal as original promisor, although he possesses no
direct or personal interest over the latter’s obligation, nor
does he receive any benefits therefrom. (PNB vs CA, 198
SCRA 767)
2. Liability limited by the terms of the contract.
NOTE: It cannot be extended by implication beyond the
terms of the contract (PNB vs CA, 198 SCRA 767)
3. Liability arises only if principal debtor is held liable.
NOTES:
 The creditor may sue separately or together the
principal debtor and the surety. Where there are
several sureties, the obligee may proceed against any
one of them.
 In the absence of collusion, the surety is bound by a
judgment against the principal even though he was not
a party to the proceedings. The nature of its
undertaking makes it privy to all proceedings against
its principal (Finman General Assurance Corp. vs.
Salik, 188 SCRA 740)
4. Surety is not entitled to the benefit of exhaustion
NOTE: He assumes a solidary liability for the fulfilment of
the principal obligation (Towers Assurance Corp vs.
Ororama Supermart, 80 SCRA 262) as an original
promissory and debtor from the beginning.
5. Undertaking is to creditor and not to debtor.
NOTE: The surety makes no covenant or agreement with
the principal that it will fulfil the obligation guaranteed for
the benefit of the principal. Such a promise is not implied
by law either; and this is true even where under the
contract the creditor is given the right to sue the principal,
or the latter and the surety at the same time. (Arranz vs.
Manila Fidelity & Surety Co., Inc., 101 Phil. 272)
6. Surety is not entitled to notice of principal’s default
NOTE: The creditor owes no duty of active diligence to take
care of the interest of the surety and the surety is bound to
take notice of the principal’s default and to perform the
obligation. He cannot complain that the creditor has not
notified him in the absence of a special agreement to that
effect. (Palmares vs CA, 288 SCRA 422)
7. Prior demand by the creditor upon principal is not required
NOTE: As soon as the principal is in default, the surety
likewise is in default.
8. Surety is not exonerated by neglect of creditor to sue
principal
Characteristics of Guaranty and Suretyship:
1. Accessory - It is indispensable condition for its existence
that there must be a principal obligation.
NOTES:
 Guaranty may be constituted to guarantee the
performance of a voidable or unenforceable contract.
It may also guarantee a natural obligation. (Art 2052)
 The guarantor cannot bind himself for more than the
principal debtor and even if he does, his liability shall
be reduced to the limits of that of the debtor.
2. Subsidiary and Conditional - takes effect only in case the
principal debtor fails in his obligation.
NOTES:
 The guarantor cannot bind himself for more than the
principal debtor and even if he does, his liability shall
be reduced to the limits of that of the debtor. But a
guarantor may bind himself for less than that of the
principal (Art 2054)
 A guaranty may be given as security for future debts,
the amount of which is not yet known; there can be no
claim against the guarantor until the debt is liquidated.
A conditional obligation may also be secured. (Art
2053)
3. Unilateral - may be entered even w/o the intervention of
the principal debtor, in which case Art. 1236 and 1237 shall
apply and it gives rise only to a duty on the part of the
guarantor in relation to the creditor and not vice versa.
4. Nominate
5. Consensual
6. It is a contract between the guarantor/surety and creditor.
NOTES:
 Acceptance of guaranty by creditor and notice
thereof to guarantor:
 In declaring that guaranty must be express, the
law refers solely and exclusively to the obligation
of the guarantor because it is he alone who binds
himself by his acceptance. With respect to the
creditor, no such requirement is needed because
he binds himself to nothing.
 However, when there is merely an offer of a
guaranty, or merely a conditional guaranty, in the
sense that it requires action by the creditor before
the obligation becomes fixed, it does not become
binding until it is accepted and until notice of such
acceptance by the creditor is given to, or acquired
by, the guarantor, or until he has notice or
knowledge that the creditor has performed the
condition and intends to act upon the guaranty.
 But in any case, the creditor is not precluded from
waiving the requirement of notice. [?]
 The consideration of the guaranty is the same as the
consideration of the principal obligation.
 The creditor may proceed against the guarantor
although he has no right of action against the principal
debtor.
7. Not presumed. It must be expressed and reduced in
writing.
NOTE: A power of attorney to loan money does not
authorize the agent to make the principal liable as a surety
for the payment of the debt of a third person. (BPI vs.
Coster, 47 Phil. 594)
8. Falls under the Statute of Frauds since it is a “special
promise to answer for the debt, default or miscarriage of
another”.
9. Strictly interpreted against the creditor and in favor of the
guarantor/surety and is not to be extended beyond its
terms or specified limits. (Magdalena Estates, Inc. vs
Rodriguez, 18 SCRA 967) The rule of strictissimi juris
commonly pertains to an accommodation surety because
the latter acts without motive of pecuniary gain and hence,
should be protected against unjust pecuniary
impoverishment by imposing on the principal, duties akin to
those of a fiduciary.
NOTES:
 The rule will apply only after it has been definitely
ascertained that the contract is one of suretyship or
guaranty. It cannot be used as an aid in determining
whether a party’s undertaking is that of a surety or
guarantor. (Palmares vs CA, 288 SCRA 292)
 It does not apply in case of compensated sureties.
10. It is a contract which requires that the guarantor must be a
person distinct form the debtor because a person cannot be
the personal guarantor of himself.
NOTE: However, in a real guaranty, like pledge and
mortgage, a person may guarantee his own obligation with
his personal or real properties.
Guaranty Suretyship
Liability depends upon an Surety assumes liability as
independent agreement to pay regular party to the
the obligation if primary undertaking
debtor fails to do so
Collateral under-taking Surety is an original promisor
Guarantor is secondarily liable
Guarantor binds himself to pay
if the principal CANNOT PAY
Insurer of solvency of debtor
Guarantor can avail of the
benefit of excussion and
division in case creditor
proceeds against him
Guaranty
Contract of security
Failure in either or both of
these particulars does not
generally work as an absolute
discharge of a guarantor’s
liability, but his is discharged
only to the extent of the loss
which he may have suffered in
consequence thereof
Guarantor warrants the
solvency of the promisor
Guarantor cannot be sued as
promisor
Guaranty
A contract by which a person
is bound to another for the
fulfilment of a promise or
engagement of a third party
Surety is primarily liable
Surety undertakes to pay if
the principal DOES NOT PAY
Insurer of the debt
Surety cannot avail of the
benefit of excussion and
division
Indorsement
Primarily of transfer
Unless the note is promptly
presented for payment at
maturity and due notice of
dishonor given to the indorser
within a reasonable time he
will be discharged abso-lutely
from all liability thereon,
whether he has suffered any
actual damage or not
Indorser does not warrant the
solvency. He is answerable on
a strict compliance with the
law by the holder, whether the
promisor is solvent or not
Indorser can be sued as
promisor
Warranty
An undertaking that the title,
quality, or quantity of the
subject matter of the contract
is what it has been
represented to be, and relates
to some agreement made
ordinarily by the party who
makes the warranty
is unknown and not to debts not yet incurred and existing
at that time.
 Exception to the concept of continuing guaranty is chattel
mortgage. A chattel mortgage can only cover obligations
existing at the time the mortgage is constituted and not
those contracted subsequent to the execution thereof (The
Belgian Catholic Missionaries, Inc. vs. Magallanes Press,
Inc., 49 Phil 647). An exception to this is in case of stocks
in department stores, drug stores, etc. (Torres vs. Limjap,
56 Phil 141).
Extent of Guarantor’s liability: (Art 2055)
1. Where the guaranty definite: It is limited in whole or in part
to the principal debt, to the exclusion of accessories.
2. Where guaranty indefinite or simple: It shall comprise not
only the principal obligation, but also all its accessories,
including the judicial costs, provided with respect to the
latter, that the guarantor shall only be liable for those costs
incurred after he has been judicially required to pay.
Qualifications of a guarantor: (Arts 2056-2057)
1. possesses integrity
2. capacity to bind himself
3. has sufficient property to answer for the obligation
which he guarantees
NOTES:
 The qualifications need only be present at the time of the
perfection of the contract.
 The subsequent loss of the integrity or property or
supervening incapacity of the guarantor would not operate
to exonerate the guarantor or the eventual liability he has
contracted, and the contract of guaranty continues.
 However, the creditor may demand another guarantor with
the proper qualifications. But he may waive it if he chooses
and hold the guarantor to his bargain.

NOTES: Benefit of Excussion (Art 2058)

 A guaranty is gratuitous, unless there is a stipulation to the
contrary. The cause of the contract is the same cause
which supports the obligation as to the principal debtor.
 The peculiar nature of a guaranty or surety agreement is
that is regarded as valid despite the absence of any direct
consideration received by the guarantor or surety either
from the principal debtor or from the creditor; a
consideration moving to the principal alone will suffice.
 It is never necessary that the guarantor or surety should
receive any part or benefit, if such there be, accruing to the
principal. (Willex Plastic Industries Corp. vs. CA, 256 SCRA
478)
Double or sub-guaranty (Art 2051 2nd par)
 One constituted to guarantee the obligation of a guarantor
Continuing guaranty (Art 2053)
 One which is not limited to a single transaction but which
contemplates a future course of dealings, covering a series
of transactions generally for an indefinite time or until
revoked.
NOTES:
 Prospective in operation (Diño vs CA, 216 SCRA 9)
 Construed as continuing when by the terms thereof it is
evident that the object is to give a standing credit to the
principal debtor to be used from time to time either
indefinitely or until a certain period, especially if the right to
recall the guaranty is expressly reserved (Diño vs CA, 216
SCRA 9)
 “Future debts” may also refer to debts existing at the time
of the constitution of the guaranty but the amount thereof
 The right by which the guarantor cannot be compelled to
pay the creditor unless the latter has exhausted all the
properties of the principal debtor, and has resorted to all of
the legal remedies against such debtor.
NOTE:
 Not applicable to a contract of suretyship (Arts 2047, par.
2; 2059[2])
 Cannot even begin to take place before judgment has been
obtained against the debtor (Baylon vs CA, 312 SCRA 502)
When Guarantor is not entitled to the benefit of
excussion: (PAIRS)
1. If it may be presumed that an execution on the property of
the principal debtor would not result in the satisfaction of
the obligation
 Not necessary that the debtor be judicially declared
insolvent or bankrupt
2. When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative
3. In case of insolvency of the debtor
 Must be actual
4. If the guarantor has expressly renounced it
5. If he has bound himself solidarily with the debtor
Other grounds: (BIPS)
6. If he is a judicial bondsman or sub-surety
7. If he fails to interpose it as a defense before judgment is
rendered against him
8. If the guarantor does not set up the benefit against the
creditor upon the latter’s demand for payment from him,
and point out to the creditor available property to the
debtor within Philippine territory, sufficient to cover the
amount of the debt (Art 2060)
  Demand can be made only after judgment on the debt
 Demand must be actual; joining the guarantor in the
suit against the principal debtor is not the demand
intended by law
9. Where the pledge or mortgage has been given by him as
special security
Benefit of Division (Art 2065)
 Should there be several guarantors of only one debtor and
for the same debt, the obligation to answer for the same is
divided among all.
 Liability: Joint
NOTES:
 The creditor can claim from the guarantors only the shares
they are respectively bound to pay except when solidarity
is stipulated or if any of the circumstances enumerated in
Article 2059 should take place.
 The right of contribution of guarantors who pays requires
that the payment must have been made (a) in virtue of a
judicial demand, or (b) because the principal debtor is
insolvent (Art 2073).
 If any of the guarantors should be insolvent, his share shall
be borne by the others including the paying guarantor in
the same joint proportion following the rule in solidary
obligations.
 The above rule shall not be applicable unless the payment
has been made in virtue of a judicial demand or unless the
principal debtor is insolvent.
 The right to contribution or reimbursement from his co-
guarantors is acquired ipso jure by virtue of said payment
without the need of obtaining from the creditor any prior
cession of rights to such guarantor.
 The co-guarantors may set up against the one who paid,
the same defenses which have pertained to the principal
debtor against the creditor and which are not purely
personal to the debtor. (Art 2074)
Procedure when creditor sues: (Art. 2062)
 The creditor must sue the principal alone; the guarantor
cannot be sued with his principal, much less alone except in
Art. 2059.
1. Notice to guarantor of the action
 The guarantor must be NOTIFIED so that he may
appear, if he so desires, and set up defenses he may
want to offer.
 If the guarantor appears, he is still given the benefit of
exhaustion even if judgment should be rendered
against him and principal debtor. His voluntary
appearance does not constitute a renunciation of his
right to excussion (see Art. 2059(1)).
 Guarantor cannot set up the defenses if he does not
appear and it may no longer be possible for him to
question the validity of the judgment rendered against
the debtor.
2. A guarantor is entitled to be heard before and execution
can be issued against him where he is not a party in the
case involving his principal (procedural due process).
Guarantor’s Right of Indemnity or Reimbursement (Art
2066)
GENERAL RULE: Guaranty is a contract of indemnity. The
guarantor who makes payment is entitled to be reimbursed by
the principal debtor.
NOTE: The indemnity consists of: (DIED)
1. Total amount of the debt – no right to demand
reimbursement until he has actually paid the debt,
unless by the terms of the contract, he is given the
right before making payment. He cannot collect more
than what he has paid.
2. Legal interest thereon from the time the payment was
made known (notice of payment in effect a demand so
that if the debtor does not pay immediately, he incurs
in delay) to the debtor, even though it did not earn
interest for the creditor. Guarantor’s right to legal
interest is granted by law by virtue of the payment he
has made.
3. Expenses incurred by the guarantor after having
notified the debtor that payment has been demanded
of him by the creditor; only those expenses that the
guarantor has to satisfy in accordance with law as a
consequence of the guaranty (Art. 2055) not those
which depend upon his will or own acts or his fault for
these are his exclusive personal responsibility and it is
not just that they be shouldered by the debtor.
4. Damages if they are due in accordance
with law. General rules on damages apply.
EXCEPTIONS:
1. Where the guaranty is constituted without the
knowledge or against the will of the principal debtor,
the guarantor can recover only insofar as the payment
had been beneficial to the debtor (Art. 2050).
2. Payment by a third person who does not intend to be
reimbursed by the debtor is deemed to be a donation,
which, however, requires the debtor’s consent. But the
payment is in any case valid as to the creditor who has
accepted it (Art. 1238).
3. Waiver of the right to demand reimbursement.
Guarantor’s right to Subrogation (ART.2067)
 Subrogation transfers to the person subrogated, the credit
with all the rights thereto appertaining either against the
debtor or against third persons, be they guarantors or
possessors of mortgages, subject to stipulation in
conventional subrogation.
NOTE: This right of subrogation is necessary to enable the
guarantor to enforce the indemnity given in Art. 2066.
 It arises by operation of law upon payment by the
guarantor. It is not necessary that the creditor cede to the
guarantor the former’s rights against the debtor.
 It is not a contractual right. The right of guarantor who has
paid a debt to subrogation does not stand upon contract
but upon the principles of natural justice.
 The guarantor is subrogated by virtue of the payment to
the rights of the creditor, not those of the debtor.
 Guarantor cannot exercise the right of redemption of
his principal (Urrutia & Co vs Morena and Reyes, 28
Phil 261)
Effect of Payment by Guarantor
1. Without notice to debtor: (Art 2068)
 The debtor may interpose against the guarantor those
defenses which he could have set up against the
creditor at the time the payment was made, e.g. the
debtor can set up against the guarantor the defense of
previous extinguishment of the obligation by payment.
2. Before Maturity (Art 2069)
 Not entitled to reimbursement unless the payment was
made with the consent or has been ratified by the
debtor
Effect of Repeat Payment by debtor: (Art 2070)
GENERAL RULE: Before guarantor pays the creditor, he must
first notify the debtor (Art. 2068). If he fails to give such notice
and the debtor repeats payment, the guarantor can only collect
from the creditor and guarantor has no cause of action against
the debtor for the return of the amount paid by guarantor even
if the creditor should become insolvent.
EXCEPTION: The guarantor can still claim reimbursement from
the debtor in spite of lack of notice if the following conditions
are present: (PIG)
a. guarantor was prevented by fortuitous event to advise
the debtor of the payment; and
b. the creditor becomes insolvent;
c. the guaranty is gratuitous.
Right of Guarantor to proceed against debtor before
payment
GENERAL RULE: Guarantor has no cause of action against
debtor until after the former has paid the obligation
EXCEPTION: Article 2071
NOTES:
 Article 2071 is applicable and available to the surety.
(Manila Surety & Fidelity Co., Inc. vs Batu Construction &
Co., 101 Phil 494)
 Remedy of guarantor:
(a) obtain release from the guaranty; or
(b) demand a security that shall protect him from any
proceedings by the creditor, and against the danger of
insolvency of the debtor
Art. 2066 Art. 2071
Provides for the enforcement Provides for his protection
of the rights of the before he has paid but after he
guarantor/surety against the has become liable
debtor after he has paid the
debt
Gives a right of action after Protective remedy before
payment payment.
Substantive right Preliminary remedy
Extinguishment of guaranty: (RA2CE2)
1. Release in favor of one of the guarantors, without the
consent of the others, benefits all to the extent of the share
of the guarantor to whom it has been granted (Art 2078);
2. If the creditor voluntarily accepts immovable or other
properties in payment of the debt, even if he should
afterwards lose the same through eviction or conveyance of
property (Art 2077);
3. Whenever by some act of the creditor, the guarantors even
though they are solidarily liable cannot be subrogated to
the rights, mortgages and preferences of the former (Art
2080);
4. For the same causes as all other obligations (Art 1231);
5. When the principal obligation is extinguished;
6. Extension granted to the debtor by the creditor without the
consent of the guarantor (Art 2079)
BOND
 An undertaking that is sufficiently secured, and not cash or
currency
Bondsman (Art 2082)
 A surety offered in virtue of a provision of law or a judicial
order. He must have the qualifications required of a
guarantor and in special laws like the Rules of Court.
NOTES:
 Judicial bonds constitute merely a special class of contracts
of guaranty by the fact that they are given “in virtue… of a
judicial order.”
 If the person required to give a legal or judicial bond should
not be able to do so, a pledge or mortgage sufficient to
cover the obligation shall admitted in lieu thereof (Art
2083)
 A judicial bondsman and the sub-surety are NOT entitled to
the benefit of excussion because they are not mere
guarantors, but sureties whose liability is primary and
solidary. (Art 2084)
CASES
01 republic v. bagtas 6 scra 262 – Commodatum is essentially
gratuitous. If any compensation is paid by the bailee, the
contract ceases to be a commodatum.
02 republic v. ca 146 scra 15 – The transient possession of the
U.S. navy of the owner’s land partakes of the character of a
commodatum. It does not militate against the title of the owner.
03 quintos v. beck 69 phil 108 – Where plaintiff gratuitously
granted the use of the furniture to the defendant, reserving for
herself the ownership thereof, the contract is one of
commodatum.
01 consolidated bank and trust v. ca 356 scra 671 – The
charging of compounded interest is proper as long as the
payment thereof has been agreed upon by the parties.
02 oscar ramos v. ca 180 scra 635 –
03 gopoco grocery v. pacific coast 65 phil 443 – Fixed, savings
and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loans.
04 ucpb v. spouses beluso 530 scra 567 - The interest rate
provisions are illegal not only because of the CC provision on
mutuality of contracts but also because it’s violative of the Truth
in Lending Act. Not disclosing the true finance charges in
connection with the extensions of credit is a form of deception
which We cannot countenance.
05 pilipinas bank v. ca 225 scra 268
06 reformina v. tomol 139 scra 260- The rate of interest for
judgments providing for legal interest from the filing of the
complaint until paid, not involving any loan or forebearance of
money, goods or credits, remains at 6% p.a.
07 overseas bank of manila v. ca and tapia 105 scra 49
08 overseas bank of manila v. cordero 113 scra 303 – A
depositor is not entitled to interest on his time deposit during
the period the bank was closed.
09 ramos v. central bank 137 scra 685 - During the bank’s
forcible closure, it is not liable for interest on loans and
advances made by the Central Bank.
10 bpi v. spouses yu 610 scra 412
11 asia construction vc. cathay pacific
12 toledo v. hyden – High interest not necessarily
unconscionable if used in business.
13 Banco Filipino Savings and Mortgage Bank v. Navarro 152
scra 346 – Escalation clauses to be valid should specifically
provide that there can be an increase in interest if increased by
law or the Monetary Board and it must include a provision for
reduction in the event that the interest is reduced by law or by
the Monetary Board.
14 pnb v. ca 196 scra 535 – Even assuming that the 1.8 million
agreement between PNB and private respondent gave the PNB a
license to increase the interest rate at will during the term of
the loan, that license would have been null and void for being
violative of the principle of mutuality which is essential in
contracts.
15 development bank of the phil. v. ca, gr 138703, june 30
2006
16 geniza v. henry sy 5 scra 754 – trial court reduced penalty to
5% (not valid?)
17 nicolas v. matias 97 phil 795
18 ang lam v. peregrina 92 phil 506 – use Ballantyne scale
19 first metro investment corp. v. este del sol 369 scra 99 – no
interest could be demanded if usurious
20 verdejo v. ca 157 scra 743 – with the promulgation of CB
905, usury has become legally inexistent.
21 imperial v. juacian 427 scra 517 – usurious interest reduced
to 28%
22 macalinao v. bpi gr 175490 sept 17, 2009 - Credit card
interests and penalty charges are unconscionable and iniquitous
at 36%! SC said that the interest rate and penalty charge of
3%/mo or 36%pa should be reduced to 2%/mo or 24%pa. this
is not the first time that SC considered the 36%pa to be
excessive and unconscionable.
01 aquino v. deala 63 phil 582 – sale with right of repurchase v.
simple loan secured by property (the house case)
02 javellana v. lim 11 phil 141 – Where money consisting of
legal tender is deposited with a person who is authorized to use
and dispose of the same, the agreement is not deposit but a
loan.
03 bpi v. iac 164 scra 630 – The principal purpose of deposit is
the safekeeping of the thing delivered.
04 baron v. david 51 phil 1 – Where palay was placed by
plaintiffs in defendant’s mill with permission to the latter to
convert it into rice and dispose of it, the contract loses the
character of a mere deposit and becomes a loan or a
commodatum.
05 delgado v. bonnevie 23 phil 308 – paddy case: deposit –
contract – deposit - hire
06 lizares v. hernaez 40 phil 981
07 la sociedad dalisay v. de los reyes 55 phil 452
08 palacio v. sudario 7 phil 275
09 roman catholic bishop v. de la pena 26 phil 144 - By placing
the money in the bank and mixing it with his personal funds,
Father did not assume obligation different fromt hat under
which he would have lain if such deposit had not been made,
nor did he thereby make himself liable to repay the money at all
hazards. - If the money had been forcibly taken from his pocket
or from his house by military forces, he would have been
exempt from responsibility. The fact he placed the trust fund in
the bank in his personal account did not make him a debtor who
must respond for all hazards. - There was no law prohibiting
him from depositing it as he did and there was no law which
changed his responsibility by reason of the deposit. [bishop
lost]
10 ca agro-industrial dev corp v. ca 219 scra 426
As a condition for sale, the two partied agreed to deposit the
TCT in an SDB. However, when the vendee was to resell the
property, the title was no longer there. As a result of delay of
TCT reconstruction, the customer withdrew its offer. Vendee
charges bank for unrealized profits.
Is the contractual relation between a commercial bank and
another party in a contract of rent of safety deposit box with
respect to its contents placed by the later one of bailor/bailee or
one of lessor/lessee?
Contract is not an ordinary contract of lease but a special
kind of deposit.
- Not lease because full and absolute possession and control of
SDB was not given to the joint renters. Guard key remained
with Bank without which renters could not open the box.
- 1975 not applicable.
Relation created is that of bailor and bailee.
- The prevailing rule is that the relation between a bank rention
out SDB and its customers with respect to the contents of the
box is that of a bailor and bailee, the bailment being for hire
and mutual benefit.
- CA Agro’s petition is dismissed though because there’s no
evidence that the bank is aware of the agreement between the
two renters that they cannot withdraw the contents without the
consent of the other.
11 elcox v. hill 98 u.s. 218
12 ippolito v. hospitality management
13 NPC v. de veyra 3 scra 646
01 machetti v. hospicio de san jose 43 phil 297 –
Notwithstanding the use of the words “guarantee” or
“guaranty”, circumstances may be shown which may convert
the contract into suretyship but such circumstances do not exist
in this case.
02 severino v. severino 56 phil.185 – A guarantor is bound by
the same consideration that makes the contract effective
between the principal parties thereto. It is never necessary that
a guarantor or surety should receive any part of the benefit
accruing to the principal.
03 piczon v. piczon 61 scra 67 – When defendant in his capacity
as president of the borrowing company signed the loan
agreement as guarantor, he is liable only as guarantor.
04 macondray and pinon 2 scra 1110 – A contract of guaranty is
not a formal contract and shall be valid in whatever form it may
be, provided that it complies with the statute of frauds.
05 pacific tobacco v. lorenzana 102 phil 234 – the rule of
strictissimi juris, i.e. guaranty has to be strictly interpreted
against the creditor and in favor of the guarantor, is not
applicable to a compensated guarantor or corporate sureties
engaged in the business of furnishing bond for compensation.
06 southern motors v. barbosa 99 phil 263 – The guarantor has
no right of excussion if he has given a pledge or mortgage as
special security.
07 imperial insurance v. de los angeles 111 scra 24 – A
guarantor who has bound himself solidarily with the debtor
becomes a surety who is not entitled to excussion.
08 arroyo v. jungsay 34 phil 589 – When properties pointed out
are insufficient to pay the indebtedness, not salable or so
encumbered with 3rd persons, the guarantor cannot make use of
excussion.
09 general indemnity v. alvarez 100 phil 1059 – An action by
the guarantor against the principal debtor for payment, before
the former has paid the creditor, is premature.
10 dino v. ca 216 scra 9 – A continuing guaranty is one which
covers all transactions, including those arising in the future,
which are within the description or contemplation of the
contract of guaranty, until the expiration or termination thereof.
11 mcconn v. haragan 4 scra 251
12 radio corp. of the phil. v. roa 62 phil 211 – An extension of
time given by the creditor to the debtor to make payment
without the consent of the guarantor extinguishes the guaranty.

13 cochingyan v. r and b surety 151 scra 339 – The creditors’

undertaking to “hold in abeyance any action to enforce its
claims” against the principal obligor did not constitute extension
of time that will discharge the guaranty.

01 luzon surety v. city of bacolod – A surety is an insurance co.:

free from city tax.

02 atok finance corp. v. ca 222 scra 232

03 rcbc v. arro 115 scra 777 – The comprehensive surety

agreement which guaranteed future debts binds the surety even
if it did not sign the promisory note which was signed by the
principal obligor.

04 pacific banking corp. v. iac 203 scra496 – As distinguished

from a contract of guaranty where the guarantor binds himself
to the creditor to fulfill the obligation of the principal debtor only
in case the latter should fail to do so, in a contract of
suretyship, the surety binds himself solidarily with the principal
debtor.

05 vizconde v. iac 149 scra 226 – A surety of the obligation of a

principal obligor to sell a diamond ring and turn over the
proceeds to the offended party but fails to do so is NOT liable
for estafa.

06 general insurance and surety v. republic 7 scra 4 – When the

bond is penal in nature, the surety is liable for the entire
amount of the surety bond even if the liability of the principal
obligor is much lesser.

07 towers assurance corp. v. ororama 80 scra 262 – A surety

may be proceeded against separately or together with the
principal obligor because of its direct and solidary liability.
However, the surety is nevertheless entitled to be heard before
an execution can be issued against him if he was not made a
party in the case involving the principal.

08 umali v. ca 189 scra 529 – The creditor’s failure to send

notice of default by the principal obligor to the surety as
required in the surety bond extinguishes the surety’s liability.

09 pnb v. ca 147 scra 273 – Where the contract was changed

extending the agency to other places without the consent of the
surety, there is material alteration and the surety is absolved
from liability.

10 pnb v. macapanga producers 99 phil 180 – An assignment of

credit without the consent of the surety is not a material
alteration sufficient to discharge the surety.

To write or not...
Contract Written or not Basis
Commodatum Not required Not required under
Arts. 1935-1952
Mutuum Not required for the Art. 1956
contract, but required
for the interest
Deposit Can be written or oral Art. 1969
Guaranty
Surety
Real mortgage
Antichresis
Chattel
mortgage
Pledge