Ust Golden Notes 2011 Credit Transactions

CREDIT TRANSACTIONS
CREDIT TRANSACTIONS depend on the existence of another

contract. (e.g. commodatum and
Q: What is credit? mutuum)
b. Accessory contracts – They have to
A: It is a person’s ability to borrow money by depend on another contract. These
virtue of confidence or trust reposed in him by accessory contracts depend on the
the lender that he will pay what he may promise. existence of a principal contract of
loan. (e.g. guaranty proper,
suretyship, pledge, mortgage and
Q: What is credit transaction?
antichresis)
A: It refers to agreement based on trust or belief
3. As to their consideration
of someone on the ability of another person to
a. Onerous – This is a contract where
comply with his obligations.
there is consideration or burden
imposed like interest.
Q: What do credit transactions include?
b. Gratuitous – This is a contract where
there is no consideration or burden
A: They include all transactions involving loans of: imposed. (e.g. commodatum)
1. goods
2. servicew Q: What is bailment?
3. money extended to another either
gratuitously or onerously with a A: It is the delivery of a personal property for
promise to pay or deliver in the future. some particular use, or on mere deposit, upon a
contract, express or implied, that after the
Q: What is security? purpose has been fulfilled, it shall be redelivered
to the person who delivered it, or otherwise dealt
A: It is something given, deposited, or serving as a with according to his directions, or kept until he
means to ensure the fulfillment or enforcement reclaims it, as the case may be.
of an obligation or of protecting some interest in
the property. Note: Generally, no fiduciary relationship is created
by bailment. No trustee‐beneficiary relationship is
Q: What are the types of security? created.
A: Q: What are the contractual bailments with

Personal: when an individual become a surety reference to compensation?
or a guarantor.
Real or property: when an encumbrance is A:
made on property. 1. For the sole benefit of the bailor
(gratuitous)
Q: What are the kinds of credit transactions? e.g. gratuitous deposit, commodatum
A: 2. For the sole benefit of the bailee

1. As contracts of security (gratuitous)
a. Contracts of real security – These e.g. commodatum, mutuum
are contracts supported by
collateral/s or burdened by an 3. For the benefit of both parties (mutual ‐
encumbrance on property such as
benefit bailments)
mortgage and pledge.
a. e.g. deposit for compensaton,
b. Contracts of personal security –
involuntary deposit, pledge
These are contracts where
and bailments for hire:
performance by the principal debtor
is not supported by collateral/s but
only by a promise to pay or by the b. hire of things – temporary use
personal undertaking or c. hire of service – for work or
commitment of another person such labor
as in surety or guaranty. d. hire of carriage of goods – for
carriage
2. As to their existence e. hire of custody – for storage
a. Principal contracts – They can exist
alone. Their existence does not
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VICE CHAIRS FOR ACADEMICS: KAREN JOY G. SABUGO & JOHN HENRY C. MENDOZA
VICE CHAIR FOR ADMINISTRATION AND FINANCE: JEANELLE C. LEE Facultad de Derecho i v i l 375
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UST GOLDEN NOTES 2011
I. LOAN As to whether it is fungible or not, it depends upon
the intention of the parties.
Q: What is loan?
Fungibles are usually determined by number, weight
A: It is a contract where one of the parties or measure.
delivers to another, either something not
consumable so that the latter may use the same Q: Are non‐fungible things irreplaceable?
for a certain time and return it, in which case is
called a commodatum; or money or other A:
consumable things, upon the condition that the GR: Non‐fungible things are irreplaceable.
same amount of the same kind and quality shall They must be returned to the lender after the
be paid, in which case the contract is simply purpose of the loan had been accomplished.
called a loan or mutuum (Art. 1933, NCC)
XPN: Non‐fungible things may be replaced by
Q: What are the kinds of loan? agreement of the parties. In such case, the
contract is barter and not loan.
A:
1. Commodatum – where the bailor Q: Distinguish loan from:
(lender) delivers to the bailee Credit;
(borrower) a non‐consumable thing so Discount;
that the latter may use it for a given Rent or lease; and
time and return the same thing Barter.
2. Mutuum – where the bailor (lender)
delivers to the bailee (borrower) money A:
or other consumable thing upon the CREDIT LOAN
condition that the latter shall pay same Ability to borrow money Delivery by one party and the
by virtue of the receipt by the other party of a
amount of the same kind and quality
confidence reposed by given sum of money, upon an
the lender unto him that agreement, expressed or implied,
Q: What may be the object of a contract of loan?
he will pay what he has to repay the sum loaned, with or
promised without interest
A: It depends upon the kind of loan.
DISCOUNT LOAN
1. Commodatum – the object is generally
Interest is deducted in Interest is taken at the expiration
not consumable; advance of a credit
2. Mutuum – the object is consumable. Always on double‐name
Generally on a single ‐name paper
paper
Q: Distinguish consumable from non‐ RENT LOAN
consumable things. The owner of property
does not lose the
A: A thing is consumable when it cannot be used ownership; he loses his The thing loaned becomes the
in a manner appropriate to its nature without control over the property property of the obligor
being consumed. (Art. 418) (e.g. food, firewood, rented during the period
gasoline) of contract
Landlord‐tenant
Obligor ‐obligee relationship
On the other hand, a non‐consumable thing is a relationship
movable thing which can be used in a manner BARTER LOAN
appropriate to its nature without it being Subject matter are non‐ Subject matter is money or other
consumed. (Art. 418) (e.g. car, television, radio) fungible things fungible things
Always onerous May be gratuitous or onerous
Q: Distinguish fungible from non‐fungible things. There is a mutual sale
resulting in the transfer in mutuum, there is transfer of
A: Fungible thing is one where the parties have of ownership on both ownership, there is no sale
agreed to allow the substitution of the thing given sides
in commodatum, the bailee
or delivered with an equivalent thing (3 Manresa The parties do not return
returns the thing after the
58). Non‐ fungible thing is one where the parties the things subject of the
expiration of the period agreed
have the intention of having the same identical exchange
upon
thing returned after the intended use (Ibid).
Note: As to whether a thing is consumable or not, it
depends upon the nature of the thing.
CIVIL LAW TEAM:
376 ADVISER: ATTY. ELMER T. RABUYA; SUBJECT HEAD: ALFREDO B. DIMAFELIX II;
ASST. SUBJECT HEADS: KAREN FELIZ G. SUPNAD, LAMBERTO L. SANTOS III; MEMBERS: PAUL ELBERT E. AMON, ALSTON ANARNA , OZAN J.
FULLEROS, CECILIO M. JIMENO, JR., ISMAEL SARANGAYA , JR.; CONTRIBUTORS: LOISE RAE G. NAVAL, MONICA JUCOM

CREDIT TRANSACTIONS
Q: What is barter? 2. the bailee acquires the use of the thing

3. it must be gratuitous
A: It is a contract whereby one of the parties
binds himself to give one thing in consideration of Q: What could be the subject of commodatum?
the other’s promise to give another thing. (Art.
1638, NCC) A:
GR: Under Art. 1933, the subject matter of
Q: What is the legal effect of an accepted commodatum must be non‐consumable
promise to deliver something by way of mutuum because the thing must be returned.
or simple loan?
XPN: Consumable goods may be the object of
A: It is binding upon the parties, but the mutuum commodatum if the purpose is not to
or simple loan itself shall not be perfected until consume them such as when they were
the delivery of the object of the contract (Art. loaned merely for ad ostentationem or
1934, NCC). exhibition purposes. After the affair, the same
and identical goods shall be returned to the
Q: What is the effect if the loan is for an lender or bailor (Art. 1936, NCC).
unlawful purpose?
Q: What may be the object of commodatum?
A: If the loan is executed for illegal or immoral or
unlawful purpose or use, the contract is void. The A: Both movable and immovable property may be
bailor may immediately recover the thing before the object of commodatum. (Art. 1937, NCC)
any illegal act is committed and provided he is
innocent or in good faith (Arts. 1411 and 1412, Q: What are the kinds of commodatum?
NCC).
A:
A. COMMODATUM AND MUTUUM 1. Ordinary commodatum – bailor cannot
just demand the return of the thing at
COMMODATUM will, because there is a period agreed
upon by the parties.
Q: What is commodatum?
2. Precarium – one whereby the bailor
A: It is a contract where one of the parties (bailor) may demand the thing loaned at will in
delivers to another (bailee) something not the following cases:
consumable so that the latter may use the same a. if the duration of the contract
for a certain time and thereafter returns it. had not been stipulated;
b. if the use to which the thing
Q: What are the characteristics of a contract of loaned should be devoted had
commodatum? not been stipulated; or
c. if the use of the thing is
A: merely by tolerance of the
1. Real contract – delivery of the thing owner
loaned is necessary for the perfection of
the contract Note: The word “owner” in Art. 1947 (2) is not proper
2. Unilateral contract – once subject because the bailor need not be the owner of the thing.
matter is delivered, creates obligations (Pineda, Credit Transactions and Quasi contracts, p. 26,
2006 ed)
on the part of only one of the parties
(the borrower)
Q: What are the consequences of the purely
3. Essentially gratuitous
personal character of commodatum?
4. Purpose is to transfer the temporary
use of the thing loaned
A:
5. Principal contract
GR: Commodatum is purely personal in
6. Purely personal contract
character hence death of either bailor
or bailee extinguishes the contract (Art.
Q: What are the elements of commodatum?
1939, NCC)
A: There must be:
1. a bailee and bailor


XPN: By stipulation, the commodatum If fungible thing was loaned, the borrower is
is transmitted to the heirs of either or obliged to pay the lender another thing
both party. of the same kind, quality and quantity.
In case of lease of the thing subject of Note: Mere issuance of checks does not perfect the
commodatum: contract of loan. It is only after the checks have been
encashed that the contact may be deemed
GR: The bailee can neither lend nor perfected. Further, when the movable thing
lease the object of the contract to a delivered in loan is not to be returned to the bailor,
third person. but may be substituted or replaced with another
equivalent thing, it is a fungible thing.
XPN: Members of the bailee’s
Q: Distinguish commodatum from mutuum.
household may make use of the thing
loaned.
A:
COMMODATUM MUTUUM
Note: Members of the bailee’s household
are not considered as third persons. Object
Non‐consumable (Non‐
Consumable
fungible)
XPN to the XPN:
Cause
Contrary stipulation; or
Gratuitous, otherwise it is a May or may not be
Nature of the thing forbids such use.
lease gratuitous
Purpose
Note: Household members are those who permanently
living or residing within the same residence including Use or temporary possession
the household helpers. of the thing loaned but
Q: Distinguish commodatum from lease. GR: not its fruit because the

bailor remains the owner
A:
XPNs: Consumption
COMMODATUM LEASE
use of the fruits is
Real contract Consensual
stipulated;
Object is a non‐
Object may even be enjoyment of the fruits
consumable (non
work or service is stipulated; or
fungible) thing
enjoyment of the fruits
Essentially gratuitous Onerous
is incidental to its use
Subject Matter
Real or personal property
MUTUUM
Generally non‐consumable
Q: What is mutuum? Only personal
things but may cover
property
consumables if the purpose
A: It is a contract whereby one of the parties of the contract is for
called the “lender” delivers to another called the exhibition.
“borrower”, money or other consumable thing Ownership of the thing
subject to the condition that the same amount of Retained by the bailor Passes to the debtor
the same kind and quantity shall be paid. Thing to be returned
Equal amount of the
Exact thing loaned
Q: What are the characteristics of a contract of same kind and quality
mutuum? Who bears risk of loss
Bailor Debtor
A: When to return
Borrower acquires ownership of the thing. In case of urgent need even
If the thing loaned is money, payment must before the expiration of Only after the
be made in the currency which is legal term (the contract is in the expiration of the term
tender in the Philippines and in case of meantime suspended)
Contract
extraordinary deflation or inflation, the
basis of payment shall be the value of Contract of
Contract of use
consumption
the currency at the time of the creation
of the obligation.
CIVIL LAW TEAM:

CREDIT TRANSACTIONS
Q: Distinguish mutuum from: contract which cannot be perfected until the

Lease; and delivery of the object.
Barter. (see Article 1954)
Q: What are the governing rules on payment of
A: loan?
MUTUUM LEASE
Object may be any thing, A: It depends on the object of the contract of
Object is money or any
whether movable or loan.
consumable (fungible)
immovable, fungible or Money – governed by Arts. 1249 and 1250,
thing
non‐ fungible NCC
There is transfer of
No transfer of ownership
ownership GR: Payment shall be made in the
Creditor‐debtor currency stipulated.
Lessor‐lessee relationship
relationship
Unilateral Bilateral XPN: If not, that currency which is legal
tender in the Philippines.
MUTUUM BARTER
Subject matter is money Subject matter are non‐ Note: In case of extraordinary inflation –
or other fungible things fungible things value of the currency at the time of the
May be gratuitous or creation of the obligation.
Always onerous
onerous
There is a mutual sale Consumable or fungible thing – debtor or
While in mutuum, there
resulting in the transfer borrower shall pay another thing of the
is transfer of ownership,
of ownership on both same kind, quality and quantity even if
there is no sale
sides it should change in value. If cannot be
The money or done, the value of the thing at the time
consumable thing of its perfection (delivery) shall be the
The parties do not return
loaned is not returned basis of the payment of the loan.
the things subject of the
but the same amount
exchange
of the same kind and Q: May a person be imprisoned for non‐payment
quantity shall be paid. of debt?
Q: What is the cause in a simple loan? A: No. This is because of the constitutional

provision under Article III, Section 3 of the 1987
A: Constitution which expressly provides that no
1. As to the borrower – the acquisition of person shall be imprisoned for non‐payment of a
the thing debt or poll tax.
2. As to the lender – the right to demand
the return of the thing loaned or its Q: Can estafa be committed by a person who
equivalent (Monte de Piedad v. Javier, refuses to pay his debt or denies its existence?
CA, 36 Off. Gaz. 2176).
A: No, because the debtor in mutuum becomes
Q: What may be the object of mutuum? the owner of the thing delivered to him. If he
consumed or disposed of the thing, the act which
A: Money or fungible and consumable things. is an act of ownership is not misappropriation.
Hence, there is no basis for a criminal
Q: Can loan of money be payable in kind? prosecution.
A: Yes, if there is an agreement between the Q: Does destruction of the thing loaned
parties (Art. 1958, NCC). extinguish one’s obligation in a simple loan?
Q: When is a contract of simple loan perfected? A: The destruction of the thing loaned does not

extinguish one’s obligation to pay because his
A: Real contracts, such as deposit, pledge and obligation is not to return the thing loaned but to
commodatum, are not perfected until the pay a generic thing.
delivery of the object of the obligation. (Art. 1316,
NCC) While mutuum or simple loan is not
mentioned, it has the same character as
commodatum. Hence, mutuum is also a real


CREDIT TRANSACTIONS
of the use for which the commodatum has been Who shall bear the costs for the van's fuel, oil
constituted. and other materials while it was with Tito?
Explain.
Q: What if the bailee is entitled to payment or
reimbursement of expenses incurred or damages A: The costs for the fuel and other materials are
suffered and the bailor offers the thing loaned as considered ordinary expenses, and consequently
payment for said expenses or damages, would Tito, the bailee, shall shoulder them (Art. 1941,
such offer be valid or not, in view of the NCC)
prohibition under Art. 1952 which states that the
bailor cannot exempt himself from the payment Does Pedro have the right to retrieve the van
of expenses or damages by abandoning the thing even before the lapse of one year? Explain.
to the bailee?
A: No, Pedro cannot demand the return of the
A: The offer is not valid. It may be considered as van until after the expiration of the one‐year
dation in payment . In this case, the abandonment period stipulated. However, if in the meantime he
done by the bailor was made in favor of the should have urgent need of the van, he may
bailee for the payment of the expenses incurred demand its return or temporary use.
by the latter, hence, a violation of what the law
has expressly prohibited under Article 1952. Who shall bear the expenses for the accidental
damage caused by the cargo truck, granting that
Q: When is the bailee not entitled to the truck driver and truck owner are insolvent?
reimbursement for the expenses he incurred? Explain.
A: If, for the purpose of making use and A: Both Tito and Pedro shall bear equally the
preservation of the thing, the bailee incurs costs of the extraordinary expenses, having been
expenses other than those ordinary and incurred on the occasion of actual use of the van
extraordinary expenses. by Tito, the bailee, even though he acted without
fault. [Art. 1949(2), NCC] (2005 Bar Question)
Q: Before he left for Riyadh to work as a
mechanic, Pedro left his van with Tito, with the C. INTEREST AND THE SUSPENSION OF THE
understanding that the latter could use it for one USURY LAW
year for his personal or family use while Pedro
works in Riyadh. He did not tell Tito that the Q: What is interest?
brakes of the van were faulty. Tito had the van
tuned up and the brakes repaired. He spent a A: It is nothing more than the compensation to be
total amount of P15,000.00. After using the paid by the borrower for the use of the money
vehicle for two weeks, Tito discovered that it lent to him by the lender.
consumed too much fuel. To make up for the
expenses, he leased it to Annabelle. Two months Q: What is the rule on interests?
later, Pedro returned to the Philippines and
asked Tito to return the van. A:
GR: No interest shall be due unless it is
Unfortunately, while being driven by Tito, the stipulated in writing. (Art. 1956, NCC)
van was accidentally damaged by a cargo truck
without his fault. XPN: In case of interest on damages or
indemnity for damages, it need not be in
Who shall bear the P15,000.00 spent for the writing.
repair of the van? Explain.
Q: What is the basis of the right to interest?
A: The contract between Pedro and Tito is one of
commodatum. Of the P15, 000.00 spent, Pedro, A: It only arises by reason of the contract
the bailor, shall bear the expenses for the repair (stipulation in writing) or by reason of delay or
of the faulty brakes, they being extraordinary failure to pay principal on which interest is
expenses incurred due to the non‐disclosure by demanded (Baretto v. Santa Marina, No. 11908,
the bailor of the defect or fault; Tito, on the other feb. 4, 1918).
hand, shall shoulder "that part of the P15,000.00
spent for the tune‐up”, said expense being If the obligation consists of the payment of a sum
ordinary for the use and preservation of the van. of money, and the debtor incurs delay, the


indemnity for damages shall be the payment of Q: In case the interest may be adjudged on
legal interest (Philrock, Inc. v. Construction unliquidated claim but the pleadings in court did
Industry Arbitration Commission, G.R. Nos. not spell out said amount with certitude, when
132848‐49, June 25, 2001) shall legal interest thereon run?
Q: Can there be interest in equitable mortgage? A: The legal interest thereon shall run only from
the promulgation of judgment of said court, it
A: No. Interest could not be collected on being at that stage that the quantification of
equitable mortgage because the same is not damages may be deemed to have been
stipulated in writing (Tan v. Valdehueza, G.R. No. reasonably ascertained. (Ibid)
L‐38745, Aug. 6, 1975).
Q: What is the actual base for computing such
Note: One which, although it lacks the proper legal interest?
formalities or other requisites of a mortgage
required by law, nevertheless reveals the intention A: It shall be the amount as finally adjudged by
of the parties to burden real property as a security the Supreme Court. (Ibid)
for a debt, and contains nothing impossible or
contrary to law. Q: What is the basis for computation for
indemnity for damages?
Q: Can paid unstipulated interest be recovered?
A: It shall be the interest agreed upon by the
A: If paid by mistake the debtor may recover as in parties and in the absence of stipulation, the legal
the case of solutio indebiti or undue payment. interest which is 6% per annum (Art. 2208, NCC).
However if payment is made voluntarily, no
recovery can be made as in the case of natural Note: 6% because it is based on damages and it has
obligation. been said that judgments other than loans,
forbearance, etc. is based on 6%.
Q: Sabugo granted a loan to Samilin. The loan
agreement was not reduced in writing. Q: What are the classes of interest?
Thereafter, Sabugo demanded additional
interest which was paid by Samilin in cash and A:
checks. Upon advice of her lawyer, Samilin 1. Simple – interest which is paid for the
demanded for the return of the amount of use of the money, at a certain rate
interest paid. Is the payment of interest valid? stipulated in writing by the parties.
2. Compound – interest which is imposed
A: No. Payment of monetary interest is allowed upon accrued interest, that is, the
only if: interest due and unpaid.
1. there was an express stipulation for the 3. Legal – that interest which the law
payment of interest; and directs to be paid in the absence of any
2. the agreement for the payment of agreement as to the rate.
interest was reduced in writing.
Q: When can there be:
The concurrence of the two conditions is required 1. Monetary interest;
for the payment of monetary interest. Thus, 2. Compensatory interest?
collection of interest without any stipulation
therefor in writing is prohibited by law. (Siga‐an v. A:
Villanueva, G.R. No. 173227, Jan. 20, 2009.) 1. Monetary interest must be expressly
stipulated in writing and it must be
Q: May interest be adjudged on unliquidated lawful. (Art. 1956, NCC) It is payable on
claims? the delay of the use of the money.
2. Indemnity for damages (compensatory
A: interest) – the debtor in delay is liable
GR: No. to pay legal interest (6% or 12%) as
indemnity for damages even in the
XPN: Unless the same can be established with absence of stipulation for the payment
reasonable certainty. (Atlantic Gulf and Pacific interest. Such interest as indemnity for
Company of Manila, Inc. v. CA, G.R. Nos. damages is payable only in case of
114841‐42, Aug. 23, 1995) default or non‐performance of contract.
CIVIL LAW TEAM:

CREDIT TRANSACTIONS
Note: If the obligation consists in the payment of a A: Back rentals being equivalent to a loan or
sum of money and the debtor incurs in delay, the forbearance of money, the interest rate due
debtor is liable for damages. (Art. 2209, NCC) thereon is 12% per annum from the time of extra‐
judicial demand (Catungal v. Hao, G.R. No.
Q: What is the basis for the interest rate for 134972, Mar. 22, 2001).
compensatory interest?
Note: Back rental is the full extended value of land
A: let by lease, payable by tenant for life or years.
1. Central Bank Circular 416 – 12% per annum
in cases of: Q: What is the rule on compounding of interest?
a. Loans
b. Forbearance of money, goods and A:
credits GR: Accrued interest (interest due and
c. Judgement involving such loan or unpaid) shall not earn interest.
forbearance, in the absence of
express agreement as to such rate XPN: When:
of interest 1. judicially demanded; or
2. there is express stipulation made by the
Note: During the interim period from parties – that the interest due and
the date of judgment until actual unpaid shall be added to the principal
payment. obligation and the resulting total
amount shall earn interest.
d. Pursuant to P.D. No. 116 amending
Act No. 2655 (Usury Law), the Note: Compounding of interest may be availed only
Central Bank of the Philippines when there is a written stipulation in the contract
issued Circular No. 416 raising the for the payment of interest.
legal rate of interest from 6% to 12%
per annum.
Q: What is floating interest?
e. In the absence of a stipulation as to

A: It is the interest stipulated by banks which is
interest, the loan due will now earn
not fixed and made to depend upon the
interest at the legal rate of 12% per
annum. (Sulit v. CA, G.R. No. 119247, prevailing market conditions, considering the
Feb. 17, 1997). fluctuating economic conditions.
2. Art. 2209, NCC – 6% per annum in cases of: Q: Is a stipulation for floating interest valid?

a. Other sources (i.e. sale)
b. Damages arising from injury from A: No. While it may be acceptable for practical
person. reasons given the fluctuating economic conditions
c. Loss of property which does not for banks to stipulate that interest rates on a loan
involve a loan. not be fixed and instead be made dependent on
prevailing market conditions, there should be a
3. Interest accruing from unpaid interest – reference rate upon which to peg such variable
interest due shall earn interest from the interest rates [Consolidated Bank and Trust Corp.
time it is judicially demanded although the (Solid Bank) v. CA, G.R. No. 114672, Apr. 19,
obligation may be silent upon this point. 2001].
Q: What is forbearance? Q: What is interest on damages?
A: It signifies the contractual obligation of the A: Interest that which is imposed in a judgment
creditor to forbear during a given period of time as indemnity for damages.
to require the debtor payment of an existing debt
then due and payable. Such forbearance of giving Note: It need not be in writing and computed from
time for the payment of a debt is, in substance, a the time of the finality of decision.
loan (91 C.J.S. 598).
Q: A judgment was rendered ordering the
Q: What is the interest rate imposable for back defendant Maybel to pay Vanessa with legal
rentals? interest of 12% from the filing of the complaint
until paid. The decision became final and
executory. Maybel argues that the rate of 12%


under Central Bank Circular 416 was misapplied. hemorraghing of their assets (Almeda v. CA, G.R.
How much by way of legal interest should a No. 113412, Apr. 17, 1996)
judgment debtor pay the judgment creditor?
In the case of Medel v. CA (G.R. No. 131622, Nov.
A: The judgments spoken of and referred to 27, 1998), the court ruled that while stipulated
under Central Bank Circular 416 are judgments in interest of 5.5% per month on a loan is usurious
litigations involving loans or forbearances of pursuant to CBC No. 905, the same must be
money, goods or credits. Any other kind of equitably reduced for being iniquitous,
monetary judgments which has nothing to do unconscionable and exorbitant. It is contrary to
with, nor involving loans or forbearance of any morals. It was reduced to 12% per annum in
money goods or credits does not fall within the consonant with justice and fairplay.
coverage of said law. Coming to the case at bar,
the decision herein sought to be executed is one Q: Samuel borrowed P300,000.00 housing loan
rendered in an Action for Damages for injury to from the bank at 18% per annum interest.
persons and loss of property and does not involve However, the promissory note contained a
any loan, much less forbearances of any money, proviso that the bank "reserves the right to
goods or credits. increase interest within the limits allowed by
law." By virtue of such proviso, over the
Q: Carlos sues Dino for (a) collection on a objections of Samuel, the bank increased the
promissory note for a loan, with no agreement interest rate periodically until it reached 48% per
on interest, on which Dino defaulted, and (b) annum. Finally, Samuel filed an action
damages caused by Dino on his (Carlos') questioning the right of the bank to increase the
priceless Michaelangelo painting on which Dino interest rate up to 48%. The bank raised the
accidentally spilled acid while transporting.it. defense that the Central Bank of the Philippines
The court finds Dino liable on the promissory had already suspended the Usury Law. Will the
note and awards damages to Carlos for the action prosper or not? Why?
damaged painting, with interests for both
awards. What rates of interest may the court A: The action will prosper. While it is true that the
impose with respect to both awards? Explain. interest ceilings set by the Usury Law are no
longer in force, it has been held that PD No. 1684
A: With respect to the collection of money or and CB Circular No. 905 merely allow contracting
promissory note, it being a forbearance of money, parties to stipulate freely on any adjustment in
the legal rate of interest for having defaulted on the interest rate on a loan or forbearance of
the payment of 12% will apply. With respect to money but do not authorize a unilateral increase
the damages to the painting, it is 6% from the of the interest rate by one party without the
time of the final demand up to the time of finality other's consent (PNB v. CA, G.R. No. 107569, Nov.
of the decision and 12% of the total amount from 8, 1994). To say otherwise will violate the
finality of judgment until judgment credit is fully principle of mutuality of contracts under Article
paid. The court considers the latter as a 1308 of the Civil Code. To be valid, therefore, any
forbearance of money. (Eastern Shipping Lines, change of interest must be mutually agreed upon
Inc. v. CA, G.R. No. 97412, July 12, 1994; Arts. by the parties (Dizon v. Magsaysay, G.R. No. L‐
2210 and 2211, NCC) (2002 Bar Question) 23399, May 31, 1974). In the present problem,
the debtor not having given his consent to the
Q: Must the principal debt still be paid in increase in interest, the increase is void. (2001
usurious transactions? Bar Question)
A: Yes. Under the Usury Law, notwithstanding

stipulations of usurious interest, the debtor must II. DEPOSIT
still pay the principal debt (Lopez v. El Hogar
Filipino, No. 22678, Jan. 12, 1925). Q: What is deposit?
Q: What is the rationale behind the validity of A: It is a contract whereby a person (depositor)
unconscionable Interest rate in a loan? delivers a thing to another (depositary), for the
principal purpose of safekeeping it, with the
A: The Supreme Court said nothing in said circular obligation of returning it when demanded.
(Circular 905) suspending Usury Law grants lender
authority to raise interest rates to levels which Q: When is a contract of deposit constituted?
will either enslave their borrowers or lead to a
CIVIL LAW TEAM:

CREDIT TRANSACTIONS
A: From the moment a person receives a thing borrower

belonging to another, with the obligation of safely Subject Matter
keeping it and returning the same upon demand. Movable (extrajudicial) or
Money or other fungible
may be immovable
thing
Q: What are the characteristics of contract of (judicial)
deposit? Relationship
Depositor‐depositary Lender‐borrower
A: Compensation
1. Real contract – because it can only be No compensation of
perfected by the delivery of the object of the things deposited with There can be
contract. each other (except by compensation of credits
However , an agreement to mutual agreement)
constitute a future deposit is a
2.
consensual contract and is
therefore binding. DEPOSIT COMMODATUM
Principal Purpose
Note: There is no consensual Safekeeping Transfer of use
contract of deposit; there is only a Nature
consensual promise to deliver which May be gratuitous or
Always gratuitous
is binding if such is accepted. onerous
2. Object of the contract must be a movable 3.

property . However , in cases of judicial DEPOSIT AGENCY
deposit, the subject matter may be a real Purpose
property. Representation of the
Safekeeping
principal by the agent
3. Purpose is for the safekeeping of the thing Reason for custody of the thing
deposited. This must be the principal The custody of the thing
purpose and not only secondary. is the principal and It is merely an incidental
essential reason for the obligation of the agent
deposit
4. It is gratuitous, unless there is a:
Nature
a. Contrary agreement; or
It is generally onerous or
b. The depositary is engaged in the Essentially gratuitous
for compensation
business of storing goods, like a
warehouseman. 4.
DEPOSIT LEASE
5. The depositary cannot use the thing
Principal Purpose
deposited, unless:
Safekeeping Use of the thing
a. Permitted by the depositor; or
When to return
b. Preservation of the thing requires
its use, but only for said purpose. Upon demand of the Upon termination of the
depositor lease contract.
May be made orally or in writing.
5.
DEPOSIT SALE
Q: Distinguish deposit from:
1. Mutuum; Ownership
2. Commodatum; Retained by depositor. Transferred to buyer.
3. Agency;
4. Lease; and Q: What are the kinds of deposit?
5. Sale.
A: A:
1. 1. Judicial (sequestration)
DEPOSIT MUTUUM 2. Extra‐ judicial
Purpose a. Voluntary – the delivery is made by
Safekeeping/custody Consumption the will of the depositor.
When to return b. Necessary – made in compliance
Upon demand of the Upon expiration of the with a legal obligation, or on the
depositor term granted to the occasion of any calamity, or by


travelers in hotels and inns, or by A: The depositor need not be the owner of the
travelers with common carriers. thing deposited because the purpose of the
contract is safekeeping and not transfer of
Q: Distinguish judicial from extra‐ judicial ownership.
deposit?
Note: A deposit may also be made by two or more
A: persons each of whom believes himself entitled to
JUDICIAL EXTRA‐JUDICIAL the thing deposited with a third person, who shall
Creation deliver it in a proper case to the one to whom it
Will of the contracting belongs.
Will of the court
parties
Purpose Q: What is the nature of advance payment in a
Security or to ensure the contract of sale?
right of a party to
property or to recover in Custody and safekeeping A: A so called deposit of an advance payment in
case of favorable the case of a sale is not the deposit contemplated
judgment under Art. 1962. It is that advance payment upon
Subject Matter which ownership is transferred to the seller once
Movables or it is given subject to the completion of payment
immovables but Movables only by the buyer under an agreement. (Cruz v.
generally immovables Auditor General, No. L‐12233, May 30, 1959).
Cause
Generally gratuitous but
Always onerous
may be compensated A. VOLUNTARY DEPOSIT
When must the thing be returned
Upon order of the court Q: What are the obligations of depositary in
Upon demand of
or when litigation is voluntary deposit?
depositor
ended
In whose behalf it is held
A:
Depositor or third
Person who has a right 1. To keep the thing safely and return it
person designated
2. Exercise same diligence as he would exercise
over his own property
Q: What is the nature of the rent of safety 3. Not to deposit the thing with a 3 person
rd
deposit boxes? unless expressly authorized by stipulation
A: The rent of safety deposit boxes is an ordinary Note: Depositary is liable for the loss
contract of lease of things and not a special kind if:
of deposit because the General Banking Act as a. He deposits the thing to a 3 person
rd
revised has deleted the part where banks are without authority, even though the
expressly authorized to accept documents or loss is due to fortuitous events
b. Deposits the thing to a 3 person
rd
papers for safe‐keeping.
who is manifestly careless or unfit
The case of Sia v. CA, G.R. No. 102970, May 13, although there is authority.
1993 enunciating that a rent of a safety deposit
box is a special kind of deposit, was decided 4. If the thing should earn interest:
under the former General Banking Act. However, a. collect interest as it falls due
SC has not yet decided a case abandoning the b. take steps to preserve the value
ruling in Sia v. CA, making it conform with the and rights corresponding to it
new General Banking Act.
5. Not to commingle things if so stipulated
Fixed, savings and current deposits in banks and
other similar institutions are not true deposits but 6. GR: Not to make use of the thing deposited
are considered simple loans because they earn
interest. (Art. 1980, NCC) XPNs:
a. When preservation of thing
Q: Is ownership necessary in a contract of deposited requires its use
deposit? b. When authorized by depositor
CIVIL LAW TEAM:

5. Conditional obligations – only in case of Q: State the general character of guaranty.

suspensive condition because it gives rise
to the principal and hence, gives rise also A:
to the accessory obligation. GR: Generally gratuitous (Art. 2048, NCC)
Note: Voidable contract is one which has all the XPN: Stipulation to the contrary.
essential elements of a valid contract, except that
the element of consent is vitiated. It is valid and Q: Who are the parties to a contract of
obligatory between the parties before its annulment.
guaranty?
Unenforceable contact, on the other hand, is one
which cannot be enforced by action or complaint in
A:
court, unless they have been ratified by the party
1. Guarantor
who did not give his consent thereto. Since both are
considered valid obligations between the parties 2. Creditor
until their annulment, and subject to ratification,
they can be secured in a contract of guaranty. GUARANTOR
Q: Is a valid principal obligation necessary in Q: Who is a guarantor?

contract of guaranty?
A: The guarantor is the person who is bound to
A: Since guaranty is an accessory contract, it is an another for the fulfillment of a promise or
indispensable condition for its existence that undertaking of a third person.
there must be a principal obligation. Hence, if the
principal obligation is void, it is also void. Q: What are the qualifications of a guarantor?
Q: In what form should a contract of guaranty be A:
made? 1. Possesses integrity;
2. Capacity to bind himself; and
A: It must be expressed and in writing (par. 2, Art. 3. Has sufficient property to answer for
1403, NCC); otherwise, it is unenforceable unless the obligation which he guarantees.
ratified. It need not be in a public instrument.
Note: The qualifications need only be present at the
Note: Guaranty, as a contract, requires the time of the perfection of the contract.
expression of the consent of the guarantor in order
to be bound. It cannot be presumed because of the Q: What is the effect of subsequent loss of
existence of a contract or principal obligation. required qualifications?
Q: Is acceptance necessary in a contract of A: The subsequent loss of integrity, property or
guaranty? supervening incapacity of the guarantor would
not operate to exonerate the guarantor or the
A: eventual liability he has contracted, and the
GR: The acceptance of the creditor is not contract of guaranty continues.
essential in such contracts.
However, the creditor may demand another
XPN: When there is a mere offer of a guarantor with the proper qualifications. But he
guaranty or a conditional guaranty wherein may waive it if he chooses and hold the guarantor
the obligation does not become binding until to his bargain.
it is accepted by the creditor and notice of
such acceptance is given to the guarantor. Q: When is the qualification of the guarantor
lost?
Q: In case of doubt, in whose favor should a
contract of guaranty or surety be resolved? A:
Conviction of a crime involving dishonesty
A: Insolvency
GR: Strict construction against the creditor
and liberal in favor of the guarantor or surety; Q: What is the effect of absence of direct
terms cannot be extended beyond its terms. consideration or benefit to guarantor?
XPN: In cases of compensated sureties. A: Guaranty or surety agreement is regarded valid
despite the absence of any direct consideration
CIVIL LAW TEAM:

CREDIT TRANSACTIONS
received by the guarantor or surety, such Q: What are the situations when a guarantor
consideration need not pass directly to the may lawfully be required to pay more than the
guarantor or surety; a consideration moving to original obligation of the principal debtor?
the principal will suffice.
A:
Q: What is the rule when a married woman is a 1. If upon demand, a guarantor fails to pay
guarantor? the obligation, he can be held liable for
interest, even if in thus paying, the
A: liability becomes more than that in the
GR: Binds only her separate property. principal obligation. The increased
liability is not because of the contract
XPNs: but because of the default and the
1. If with her husband’s consent, it binds necessity for judicial collection. It
the community or conjugal partnership should be noted, however, that the
property. interest runs from the time the
2. Without husband’s consent, in cases complaint is filed, not from the time the
provided for by law, such as when the debt becomes due and demandable
guaranty has redounded to the benefit (Tagawa v. Aldanese, No.18636, sept.
of the family. 28, 1922 ).
Q: What are the rights of a third person who 2. Creditors suing on a surety bond may
pays for the debt guaranteed or secured? recover from the surety, as part of their
damages, interest at the legal rate,
A: judicial cost and attorney’s fees when
1. If payment is made without the appropriate even if the surety would
knowledge or against the will of the thereby become liable to pay more than
debtor: the total amount stipulated in the bond
a. Guarantor can recover only insofar (Dino v. CA, G.R. No. 89775, Nov. 26,
as the payment has been beneficial 1995).
to the debtor
b. Guarantor cannot compel the 3. A penalty clause may also increase the
creditor to subrogate him in his liability of the surety (General Insurance
rights. Surety Co. v. Republic, G.R. No. L‐13873,
Jan. 31, 1963)
2. If payment is made with the knowledge
or consent of the debtor – Subrogated Q: What is the effect of guarantor’s death?
to all the rights which creditor had
against the debtor. A: His heirs are still liable to the extent of the
value of the inheritance because the obligation is
Q: What is the extent of guarantor’s liability? not purely personal and is therefore
transmissible.
A:
1. Where the guaranty is definite – It is Q: What is the effect of the debtor’s death?
limited in whole or in part to the
principal debt to the exclusion of A: His obligation will survive. His estate will be
accessories. answerable. If the estate has no sufficient assets,
the guarantor shall be liable.
2. Where the guaranty is indefinite or
simple – It shall comprise not only the Q: What is the rule with respect to jurisdiction in
principal obligation but also all its an action based on a contract of guaranty?
accessories, including the judicial costs
provided that the guarantor shall only A: The guarantor shall be subject to the
be liable for those cost incurred after he jurisdiction of the court of the place where the
has been judicially required to pay. obligation is to be complied with.


BENEFIT OF EXCUSSION 1. Guarantor has expressly r enounced it.

2. Guarantor has bound himself solidarily
Q: What is the benefit of excussion? with the Debtor.
3. Debtor is i nsolvent .
A: It is a right by which the guarantor cannot be 4. Guarantor has absconded , or cannot be
compelled to pay the creditor unless the latter has sued within the Philippines unless he
exhausted all the properties of the principal left a manager or representative.
debtor and has resorted to all legal remedies 5. If it may be presumed that an e xecution
against such debtor. on the property of the Debtor cannot
satisfy the obligation.
Q: What are the requisites of benefit of 6. Guarantor does not invoke the benefit
exhaustion or excussion? against Creditor upon d emand to him
for payment and he does not point out
A: available property of the Debtor within
The guarantor must set up the right of the Philippines sufficient to cover the
excussion against the creditor upon the obligation (Art. 2060, NCC).
latter’s demand for payment from him; 7. Guarantor is a j udicial bondsman or
and sub‐surety.
8. A pledge or mortgage of his own
He must point out to the creditor the property has been given by Guarantor
available property of the debtor (not as s pecial security.
exempted from execution) found 9. Guarantor f ails to interpose it as a
within the Philippine territory (Art. defense before judgment is rendered.
2060, NCC).
BENEFIT OF DIVISION
Q: May a complaint be filed against the debtor
and guarantor simultaneously in one case before Q: What is the principle of benefit of division?
the exhaustion of all the properties of the
debtor? A: Should there be several guarantors of only one
debtor for the same debt, the obligation to
A: Yes. There is nothing procedurally answer for the same is divided among all. (Joint
objectionable in impleading the guarantor as a liability)
co‐defendant. As a matter of fact, the Rules of
Court on permissive joinder of parties explicitly Note:
allow it. If the creditor obtained a favorable GR: Creditor can claim from the guarantors
only up to the extent they are respectively
judgment against the debtor and guarantor, the
bound to pay.
latter is entitled to a deferment of the execution
of the said judgment against him until all
XPN: When solidarity has been stipulated.
properties of the debtor shall have been
exhausted to satisfy the latter’s obligation Should any of the guarantors become insolvent, his
involved in the case. share shall be borne by the other guarantors
including the paying guarantor in the same joint
Q: What is the effect of declaration of insolvency proportion in accordance with the rule in solidary
with respect to the right of excussion? obligations.
A: Just because the debtor has been declared The right to be reimbursed from his co‐ guarantors is
insolvent in insolvency proceeding does not acquired ipso jure by virtue of said payment.
necessarily mean that he cannot pay, for part of
the debtor’s assets may still be available to the Q: Distinguish benefit of division from benefit of
creditor. One good proof of the debtor’s inability contribution.
to pay is an unsatisfied writ of execution which
has been returned by the implementing sheriff A:
(Machetti v. Hospicio de San Jose, 43 Phil. 297, BENEFIT OF
BENEFIT OF DIVISION
Feb. 7, 1920) CONTRIBUTION
Controversy is between Controversy between
Q: When is there no benefit of excussion? the co‐guarantors and and among the several
the creditor co‐guarantors
A: RJS‐AIR‐FEDS There is no payment There is already
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Ust Golden Notes 2011 Credit Transactions

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CREDIT TRANSACTIONS depend on the existence of another

A: Q: What are the contractual bailments with

A: 2. For the sole benefit of the bailee

ACADEMICS CHAIR: LESTER JAY ALAN E. FLORES II U N I V E R S I T Y O F S A N T O T O M A S