NICHOLE JOHN C.

ERNIETA

CREDIT TRANSACTIONS  Kinds:

1. Commodatum – when the bailor (lender) delivers
CREDIT TRANSACTIONS
 All transactions involving the purchase or loan of
goods, services, or money in the present with a
promise to pay or deliver in the future
Contracts of security
Types:
1. Secured transactions or contracts of real security
- supported by a collateral or an encumbrance of
property
2. Unsecured transactions or contracts of personal
security - supported only by a promise or
personal commitment of another such as a
guarantor or surety
to the bailee (borrower) a non-consumable thing
so that the latter may use it for a certain time
and return the identical thing.
 Kinds of commodatum:
a. Ordinary Commodatum – use by the borrower
of the thing is for a certain period of time
b. Precarium - one whereby the bailor may
demand the thing loaned at will and it exists
in the following cases:
i. neither the duration nor purpose of the
contract is stipulated
ii. the use of the thing is merely tolerated
by the owner

Security 2. Simple loan or mutuum – where the lender

 Something given, deposited, or serving as a delivers to the borrower money or other
means to ensure fulfillment or enforcement of an consumable thing upon the condition that the
obligation or of protecting some interest in latter shall pay the same amount of the same
property kind and quality.
 Types of Security
a. personal – when an individual becomes Commodatum Mutuum
surety or guarantor Key: COPS-LOTR
b. real or property – when a mortgage, pledge, 1. Object
antichresis, charge or lien or other device Non-consumable Consumable
used to have property held, out of which the 2. Cause
person to be made secure can be Gratuitous May or may not be
compensated for loss gratuitous
3. Purpose
Bailment Use or temporary Consumption
 The delivery of property of one person to another possession
in trust for a specific purpose, with a contract, 4. Subject Matter
express or imgratutitou splied, that the trust Real or personal Only personal
property property
shall be faithfully executed and the property
5. Ownership of the thing
returned or duly accounted for when the special
6. Thing to be returned
purpose is accomplished or kept until the bailor
Exact thing loaned Equal amount of the
claims it. same kind and
quality
 Parties: 7. Who bears risk of loss
1. bailor - the giver; one who delivers property Bailor Debtor
2. bailee- the recipient; one who receives the 8. When to return
custody or possession of the thing thus delivered In case of urgent Only after the
need, even before expiration of the
the expiration of the term
term
LOAN (Articles 1933 – 1961)

 A contract wherein one of the parties delivers to Loan Credit

another, either something not consumable so that Delivery by one party Ability of a person to
the latter may use the same for a certain time and the receipt of borrow money or
and return it or money or other consumable thing, other party of a things by virtue of
given sum of money the trust or
upon the condition that the same amount of the
or other consumable confidence reposed
same kind and quality shall be paid. (Art 1933) thing upon an by the lender that he
agreement, express will pay what he
Characteristics: or implied, to repay promised.
1. Real Contract – delivery of the thing loaned is the same.
necessary for the perfection of the contract
NOTE: An accepted promise to make a future
loan is a consensual contract, and therefore Loan Credit
binding upon the parties but it is only after 1. Interest taken at Interest is taken in
delivery, will the real contract of loan arise. (Art the expiration of the advance
1934) credit
2. Always on a Always on a single
2. Unilateral Contract - once the subject matter has double name paper name paper (i.e.
been delivered, it creates obligations on the part (two signatures promissory note with
appear with both no indorse-ment
of only one of the parties (i.e. borrower).
parties held liable other than the
for payment) maker)

COMMODATUM (Articles 1935 – 1952)

 Nature:
1. PURPOSE: Bailee in commodatum acquires the
temporary use of the thing but not its fruits
(unless stipulated as an incidental part of the
contract).(Art 1935)
 Use must be temporary, otherwise the
contract may be a deposit.
2. CAUSE: Essentially gratuitous; it ceases to be a
commodatum if any compensation is to be paid
by the borrower who acquires the use, in such
case there arises a lease contract.
 Similar to a donation in that it confers a
benefit to the recipient. The presumption is
that the bailor has loaned the thing for
having no need therefor.
3. SUBJECT MATTER: Generally non-consumable
whether real or personal but if the consumable
goods are not for consumption as when they are
merely for exhibition, consumable goods may be
the subject of the commodatum. (Art 1936)
4. Bailor need not be the owner of the thing owned
(Art. 1938) since by the loan, ownership does not
pass to the borrower.
 A mere lessee or usufructuary may lend but
the borrower or bailee himself may not lend
nor lease the thing loaned to him to a third
person (Art 1932[2])
5. Purely Personal (Art 1939):
 Death of either party terminates the contract
unless by stipulation, the commodatum is
transmitted to the heirs of either or both
parties.
 Bailee can neither lend nor lease the object
of the contract to a third person.
NOTE:Use of the thing loaned may extend to
members of the bailee’s household except:
a. contrary stipulation;
b. nature of the thing forbids such use
Obligations of the Bailee: (Arts 1941 – 1945)
1. To pay for the ordinary expenses for the use and
preservation of the thing loaned. (Art 1941)
2. To be liable for the loss of the thing even if it
should be through a fortuitous event in the
following cases: (KLAS D)
a. when he keeps it longer than the period
stipulated, or after the accomplishment of its
use
b. when he lends or leases it to third persons
who are not members of his household
c. when the thing loaned has been delivered
with appraisal of its value
d. when, being able to save either of the thing
borrowed or his own things, he chose to save
the latter; or
e. when the bailee devoted the thing for any
purpose different from that for which it has
been loaned (Art 1942)
3. To be liable for the deterioration of thing loaned
(a) if expressly stipulated; (b) if guilty of fault or
negligence; or (c) if he devotes the thing to any
purpose different from that for which it has been
loaned
4. To pay for extraordinary expenses arising from
the actual use of the thing by the bailee, which
shall be borne equally by both the bailor and the
bailee, even though the bailee acted without
fault, unless there is a stipulation to the contrary
(Art 1949 par 2)
5. To return the thing loaned
 The bailee has no right to retain the thing
loaned as security for claims he has against
the bailor even for extraordinary expenses
except for a claim for damages suffered
because of the flaws of the thing loaned.
NOTES:
 However, the bailee’s right extends no
further than retention of the thing loaned
until he is reimbursed for the damages
suffered by him.
 He cannot lawfully sell the thing to
satisfy such damages without court’s
approval.
 In case there are two or more bailees,
their obligation shall be solidary.
Obligations of the bailor (Art 1946 – Art 1952):
1. To respect the duration of the loan
 GENERAL RULE: Allow the bailee the use of the
thing loaned for the duration of the period
stipulated or until the accomplishment of the
purpose for which the commodatum was
instituted.
EXCEPTIONS:
a. In case of urgent need in which case
bailee may demand its return or temporary
use;
b. The bailor may demand immediate
return of the thing if the bailee commits any
act of ingratitude specified in Art. 765.
2. To refund to the bailee extraordinary expenses
for the preservation of the thing loaned, provided
the bailee brings the same to the knowledge of
the bailor before incurring them, except when
they are so urgent that the reply to the
notification cannot be awaited without danger.
3. To be liable to the bailee for damages for known
hidden flaws.
 Requisites:
a. There is flaw or defect in the thing loaned;
b. The flaw or defect is hidden;
c. The bailor is aware thereof;
d. He does not advise the bailee of the same;
and
e. The bailee suffers damages by reason of said
flaw or defect
NOTES:
 If the above requisites concur, the bailee has
the right of retention for damages.
 The bailor cannot exempt himself from the
payment of expenses or damages by
abandoning the thing to the bailee.
SIMPLE LOAN OR MUTUUM (Art 1953 – 1961)
 A contract whereby one party delivers to another,
money or other consumable thing with the
understanding that the same amount of the same
kind and quality shall be paid. (Art. 1953)
 borrowed when the received
NOTES: time has expired or
 The mere issuance of the checks does not result purpose served
in the perfection of the contract of loan. The
3. Mutuum may be Onerous, actually a
Civil Code provides that the delivery of bills of gratuitous and mutual sale
exchange and mercantile documents, such as commodatum is
checks, shall produce the effect of payment only always gratuitous
when they have been encashed (Gerales vs. CA
218 SCRA 638). It is only after the checks have
produced the effect of payment that the contract
of loan may be deemed perfected.
 The obligation is “to pay” and not to return
because the consumption of the thing loaned is  Form of Payment (Art 1955):
the distinguishing character of the contract of 1. If the thing loaned is money - payment must be
mutuum from that of commodatum. made in the currency stipulated, if it is possible;
 No estafa is committed by a person who refuses otherwise it is payable in the currency which is
to pay his debt or denies its existence. legal tender in the Philippines and in case of
extraordinary inflation or deflation, the basisi of
Simple Loan/Mutuum Rent payment shall be the value of the currency at the
time of the creation of the obligation
1. Delivery of money Delivery of some 2. If what was loaned is a fungible thing other than
or some consumable non-consumable money - the borrower is under obligation to pay
thing with a promise thing in order that the lender another thing of the same kind,
to pay an equivalent the other may use it quality and quantity. In case it is impossible to do
of the same kind and during a certain
so, the borrower shall pay its value at the time of
quality period and return it
to the former. the perfection of the loan.

2. There is a transfer There is no transfer Interest

of ownership of the of ownership of the  The compensation allowed by law or fixed by the
thing delivered thing delivered parties for the loan or forbearance of money,
goods or credits
 Requisites for Demandability: (ELI)
3. Relationship Relationship is that 1. must be expressly stipulated
between the parties of a landlord and Exceptions:
is that of obligor- tenant
obligee
a. indemnity for damages
b. interest accruing from unpaid interest
4. Creditor receives Owner of the 2. must be lawful
payment for his loan property rented 3. must be in writing
receives
compensation or Compound Interest
price either in  GENERAL RULE: Unpaid interest shall not earn
money, provisions, interest.
chattels, or labor EXCEPTIONS:
1. when judicially demanded
from the occupant
thereof in return for 2. when there is an express stipulation (must be
its use (Tolentino vs in writing in view of Art. 1956)
Gonzales, 50 Phil 558
1927) Guidelines for the application of proper interest
rates
Loan Sale 1. If there is stipulation: that rate shall be applied
2. The following are the rules of thumb for the
1. Real contract Consensual contract application/imposition of interest rates:
a) When an obligation, regardless of its source,
2. Generally Bilateral and i.e., law, contracts, quasi-contracts, delicts
unilateral because reciprocal or quasi-delicts is breached, the contravenor
only borrower has can be held liable for damages.
obligations
b) With regard particularly to an award of
interest in the concept of actual and
NOTE: If the property is “sold”, but the real intent is
compensatory damages, the rate of interest,
only to give the object as security for a debt – as
as well as the accrual thereof, is imposed, as
when the “price” is comparatively small – there really
follows:
is a contract of loan with an “equitable mortgage.”
i. When the obligation breached consists of
payment of a sum of money (loan or
Commodatum/ forbearance of money), the interest shall
Barter
Mutuum be that which is stipulated or agreed
upon by the parties. In absence of an
1. Subject matter is Subject matter is
money or fungible non-fungible, (non agreement, the rate shall be the legal
things consumable) things rate (i.e. 12% per annum) computed from
default.
2. In commodatum, The thing with NOTE: The interest due shall itself earn
the bailee is bound equivalent value is legal interest from the time it is judicially
to return the given in return for demanded
identical thing what has been
 ii. In other cases, the rate of interest shall
be six percent (6%) per annum. Deposit Mutuum
NOTE: No interest, however, shall be 1. Purpose
adjudged on unliquidated claims or Principal purpose is Principal purpose is
damages except when or until the safekeeping or consumption
demand can be established with custody
reasonable certainty. When the demand 2. When to Return
cannot be established, the interest shall Depositor can The lender must wait
demand the return of until the expiration
begin to run only from the date of the
the subject matter at of the period granted
judgment of the court is made. will to the debtor
iii. When the judgment of the court awarding 3. Subject Matter
a sum of money becomes final and Subject matter may Subject matter is
executory, the rate of legal interest, be movable or only money or other
whether the case falls under paragraph i immovable property fungible thing
or ii above, shall be 12% per annum from 4. Relationship
such finality until its satisfaction, this Relationship is that Relationship is that
interim period being deemed to be by of lender (creditor) of depositor and
then an equivalent to a forbearance of and borrower depositary.
(debtor).
credit. (Eastern Shipping Lines vs. CA,
July 12, 1994)
5. Compensation
There can be NO compensation of
NOTES: compensation of things deposited with
 Central Bank Circular No. 416 fixing the rate of credits. each other (except
interest at 12% per annum deals with loans, by mutual
forbearance of any money, goods or credits and agreement).
judgments involving such loans, or forbearance in
the absence of express agreement to such rate Deposit Commodatum
 Interest as indemnity for damages is payable only
in case of default or non-performance of the 1. Purpose is 1. Purpose is the
Safekeeping transfer of the use
contract. As they are distinct claims, they may be
demanded separately. (Sentinel Insurance Co., 2. May be gratuitous 2. Essentially and
Inc. vs CA, 182 SCRA 517) always gratuitous
 Central Bank Circular No. 905 (Dec. 10, 1982)
removed the Usury Law ceiling on interest rates 3. Movable/corporeal 3. Both movable and
for secured and unsecured loans, regardless of things only in case of immovable may be
maturity. extrajudicial deposit the object

Validity of unconscionable interest rate in a loan  Kinds of Deposit:

Supreme Court in Sps. Solangon vs. Jose 1. Judicial (Sequestration) –takes place when an
Salazar, G.R. No. 125944, June 29, 2001, said that attachment or seizure of property in litigation is
since the usury law had been repealed by CB Cir. No. ordered.
905 there is no more maximum rate of interest and
the rate will just depend on the mutual agreement of 2. Extra-judicial
the parties (citing Lim Law vs. Olympic Sawmill Co., a. Voluntary – one wherein the delivery is made
129 SCRA 439). But the Supreme Court said that by the will of the depositor or by two or more
nothing in said circular grants lenders carta blanche persons each of whom believes himself
authority to raise interest rates to level which will entitled to the thing deposited. (Arts 1968 –
either enslave their borrowers or lead to a 1995)
hemorrhaging of their assets (citing Almeda vs. CA, b. Necessary – one made in compliance with a
256 SCRS 292). In Medel vs. CA, 299 SCRA 481, it was legal obligation, or on the occasion of any
ruled that while stipulated interest of 5.5% per month calamity, or by travellers in hotels and inns
on a loan is usurious pursuant to CB Circular No. 905, (Arts 1996 - 2004), or by travellers with
the same must be equitably reduced for being common carriers (Art 1734 – 1735).
iniquitous, unconscionable and exorbitant. It is NOTE: The chief difference between a voluntary
contrary to morals, (contra bonos mores). It was deposit and a necessary deposit is that in the
reduced to 12% per annum in consonant with justice former, the depositor has a complete freedom in
and fair play. choosing the depositary, whereas in the latter,
there is lack of free choice in the depositor.
DEPOSIT (Articles 1962 – 2009)
Judicial Extra-judicial
 A contract constituted from the moment a person 1. Creation
receives a thing belonging to another, with the Will of the court Will of the parties
obligation of safely keeping it and of returning or contract
the same. 2. Purpose
Security or to insure Custody and
Characteristics: the right of a party safekeeping
1. Real Contract - contract is perfected by the to property or to
delivery of the subject matter. recover in case of
2. Unilateral (gratutitous deposit) - only the favorable judgment
depositary has an obligation. 3. Subject Matter
3. Bilateral (onerous deposit) - gives rise to
obligations on the part of both the depositary
and depositor.
 Movables or Movables only
immovables,
but generally
immovables
4. Cause
Always onerous May be compen-
sated or not, but
generally gratuitous
5. When must the thing be returned
Upon order of the Upon demand of
court or when depositor
litigation is ended
6. In whose behalf it is held
Person who has a Depositor or third
right person designated
 GENERAL RULE: Contract of deposit is gratuitous
(Art 1965)
EXCEPTIONS:
1. when there is contrary stipulation
2. depositary is engaged in business of storing
goods
3. property saved from destruction without
knowledge of the owner
NOTES:
 Article 1966 does not embrace incorporeal
property, such as rights and actions, for it follows
the person of the owner, wherever he goes.
 A contract for the rent of safety deposit boxes
is not an ordinary contract of lease of things but
a special kind of deposit; hence, it is not to be
strictly governed by the provisions on deposit.
The relation between a bank and its customer is
that of a bailor and bailee. (CA Agro vs CA, 219
SCRA 426)
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.
c. 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 one of the solidary depositors may do whatever
broken through his fault, which is presumed may be useful to the others but not anything
unless proved otherwise which may be prejudicial to the latter, (Art. 1212)
c. to keep the secret of the deposit when the and the depositary may return the thing to
seal or lock is broken with or without his fault anyone of the solidary depositors unless a
(Art 1981) demand, judicial or extrajudicial, for its return
NOTE: The depositary is authorized to open has been made by one of them in which case,
the thing deposited which is closed and delivery should be made to him (Art. 1214).
sealed when (Art 1982): 3. Return to one of depositors stipulated. The
i. there is presumed authority (i.e. when depositary is bound to return it only to the person
the key has been delivered to him or the designated although he has not made any demand
instructions of the depositor cannot be for its return.
done without opening it)
ii. necessity NOTES:
8. To change the way of the deposit if under the  The depositary may retain the thing in pledge
circumstances, the depositary may reasonably until full payment of what may be due him by
presume that the depositor would consent to the reason of the deposit (Art 1994).
change if he knew of the facts of the situation,  The depositor’s heir who in good faith may have
provided, that the former notifies the depositor sold the thing which he did not know was
thereof and wait for his decision, unless delay deposited, shall only be bound to return the price
would cause danger he may have received or to assign his right of
9. To pay interest on sums converted to personal action against the buyer in case the price has not
use if the deposit consists of money (Art 1983) been paid him (Art 1991).
10. To be liable for loss through fortuitous event
(SUDA): (Art 1979): Obligations of the Depositor (Art 1992 – 1995):
a. if stipulated 1. To pay expenses for preservation
b. if he uses the thing without the depositor's a. If the deposit is gratuitous, the depositor is
permission obliged to reimburse the depositary for
c. if he delays its return expenses incurred for the preservation of the
d. if he allows others to use it, even though he thing deposited (Art 1992)
himself may have been authorized to use the b. If the deposit is for valuable consideration,
same expenses for preservation are borne by the
depositary unless there is a contrary
NOTES: stipulation
 Fixed, savings, and current deposits of money in 2. To pay loses incurred by the depositary due to
banks and similar institutions shall be governed the character of the thing deposited
by the provisions concerning simple loan. (Art
1980)  GENERAL RULE: The depositor shall reimburse the
 The general rule is that a bank can compensate depositary for any loss arising from the character of
or set off the deposit in its hands for the payment the thing deposited.
of any indebtedness to it on the part of the EXCEPTIONS:
depositor. In true deposit, compensation is not 1. at the time of the deposit, the depositor was
allowed. not aware of the dangerous character of the
thing
Irregular deposit Mutuum 2. when depositor was not expected to know the
dangerous character of the thing
1. The consumable 1. Lender is bound 3. when the depositor notified the depository of
thing deposited may by the provisions of the same
be demanded at will the contract and 4. the depositary was aware of it without advice
by the depositor cannot demand
from the depositor
restitution until the
time for payment, as
provided in the Extinguishment of Voluntary Deposit (Art 1995)
contract, has arisen 1. Loss or destruction of the thing deposited
2. In case of gratuitous deposit, upon the death of
2. The only benefit is 2. Essential cause for either the depositor or the depositary
that which accrues the transaction is 3. Other causes, such as return of the thing,
to the depositor the necessity of the novation, merger, expiration of the term
borrower fulfilment of the resolutory condition, etc (Art
1231)
3. The irregular 3. Common creditors
depositor has a enjoy no preference
preference over in the distribution of
Necessary Deposits
other creditors with the debtor’s 1. Made in compliance with a legal obligation
respect to the thing property 2. Made on the occasion of any calamity such as fire,
deposited storm, flood, pillage, shipwreck or other similar
events (deposito miserable)
3. Made by travellers in hotels and inns or by
Rule when there are two or more depositors (Art travellers with common carrier
1985):
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: Deposit by Travellers in hotels and inns:
Rules on active solidarity shall apply, i.e. each
 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 become binding until it is accepted and
default until notice of such acceptance by the
NOTE: The creditor owes no duty of active creditor is given to, or acquired by, the
diligence to take care of the interest of the guarantor, or until he has notice or
surety and the surety is bound to take notice of knowledge that the creditor has
the principal’s default and to perform the performed the condition and intends to
obligation. He cannot complain that the creditor act upon the guaranty.
has not notified him in the absence of a special  But in any case, the creditor is not
agreement to that effect. (Palmares vs CA, 288 precluded from waiving the requirement
SCRA 422) of notice.
7. Prior demand by the creditor upon principal is  The consideration of the guaranty is the same
not required as the consideration of the principal
NOTE: As soon as the principal is in default, the obligation.
surety likewise is in default.  The creditor may proceed against the
8. Surety is not exonerated by neglect of creditor to guarantor although he has no right of action
sue principal against the principal debtor.
7. Not presumed. It must be expressed and reduced
Characteristics of Guaranty and Suretyship: in writing.
1. Accessory - It is indispensable condition for its NOTE: A power of attorney to loan money does
existence that there must be a principal not authorize the agent to make the principal
obligation. liable as a surety for the payment of the debt of
NOTES: a third person. (BPI vs. Coster, 47 Phil. 594)
 Guaranty may be constituted to guarantee 8. Falls under the Statute of Frauds since it is a
the performance of a voidable or “special promise to answer for the debt, default
unenforceable contract. It may also or miscarriage of another”.
guarantee a natural obligation. (Art 2052) 9. Strictly interpreted against the creditor and in
 The guarantor cannot bind himself for more favor of the guarantor/surety and is not to be
than the principal debtor and even if he does, extended beyond its terms or specified limits.
his liability shall be reduced to the limits of (Magdalena Estates, Inc. vs Rodriguez, 18 SCRA
that of the debtor. 967) The rule of strictissimi juris commonly
2. Subsidiary and Conditional - takes effect only in pertains to an accommodation surety because the
case the principal debtor fails in his obligation. latter acts without motive of pecuniary gain and
hence, should be protected against unjust
NOTES: pecuniary impoverishment by imposing on the
 The guarantor cannot bind himself for more principal, duties akin to those of a fiduciary.
than the principal debtor and even if he does,
his liability shall be reduced to the limits of NOTES:
that of the debtor. But a guarantor may bind  The rule will apply only after it has been
himself for less than that of the principal (Art definitely ascertained that the contract is
2054) one of suretyship or guaranty. It cannot be
 A guaranty may be given as security for used as an aid in determining whether a
future debts, the amount of which is not yet party’s undertaking is that of a surety or
known; there can be no claim against the guarantor. (Palmares vs CA, 288 SCRA 292)
guarantor until the debt is liquidated. A  It does not apply in case of compensated
conditional obligation may also be secured. sureties.
(Art 2053) 10. It is a contract which requires that the guarantor
3. Unilateral - may be entered even w/o the must be a person distinct form the debtor
intervention of the principal debtor, in which because a person cannot be the personal
case Art. 1236 and 1237 shall apply and it gives guarantor of himself.
rise only to a duty on the part of the guarantor in NOTE: However, in a real guaranty, like pledge
relation to the creditor and not vice versa. and mortgage, a person may guarantee his own
4. Nominate obligation with his personal or real properties.
5. Consensual
6. It is a contract between the guarantor/surety and Guaranty Suretyship
creditor.
1. Liability depends 1. Surety assumes
NOTES: upon an independent liability as regular
 Acceptance of guaranty by creditor and agreement to pay the party to the
notice thereof to guarantor: obligation if primary undertaking
debtor fails to do so
 In declaring that guaranty must be
express, the law refers solely and 2. Collateral under- 2. Surety is an
exclusively to the obligation of the taking original promisor
guarantor because it is he alone who
binds himself by his acceptance. With 3. Guarantor is 3. Surety is
respect to the creditor, no such secondarily liable primarily liable
requirement is needed because he binds
himself to nothing. 4. Guarantor binds 4. Surety undertakes
himself to pay if to pay if the principal
 However, when there is merely an offer the principal DOES NOT PAY
of a guaranty, or merely a conditional CANNOT PAY
guaranty, in the sense that it requires
action by the creditor before the 5. Insurer of 5. Insurer of the
obligation becomes fixed, it does not solvency of debtor debt
 6. Guarantor can 6. Surety cannot
avail of the benefit avail of the benefit
of excussion and of excussion and
division in case division
Double or sub-guaranty (Art 2051 2nd par)
creditor proceeds
against him  One constituted to guarantee the obligation of a
guarantor
Indorsement Guaranty
Continuing guaranty (Art 2053)
1. Primarily of 1. Contract of  One which is not limited to a single transaction
transfer security but which contemplates a future course of
dealings, covering a series of transactions
2. Unless the note is 2. Failure in either or generally for an indefinite time or until revoked.
promptly presented both of these
for payment at particulars does not
maturity and due generally work as an NOTES:
notice of dishonor absolute discharge of  Prospective in operation (Diño vs CA, 216 SCRA 9)
given to the indorser a guarantor’s  Construed as continuing when by the terms
within a reasonable liability, but his is thereof it is evident that the object is to give a
time he will be discharged only to standing credit to the principal debtor to be used
discharged abso- the extent of the loss from time to time either indefinitely or until a
lutely from all which he may have
certain period, especially if the right to recall the
liability thereon, suffered in
whether he has consequence thereof guaranty is expressly reserved (Diño vs CA, 216
suffered any actual SCRA 9)
damage or not  “Future debts” may also refer to debts existing at
the time of the constitution of the guaranty but
3. Indorser does not 3. Guarantor the amount thereof is unknown and not to debts
warrant the solvency. warrants the solvency not yet incurred and existing at that time.
He is answerable on a of the promisor
strict compliance
 Exception to the concept of continuing guaranty
with the law by the is chattel mortgage. A chattel mortgage can
holder, whether the only cover obligations existing at the time the
promisor is solvent or mortgage is constituted and not those contracted
not subsequent to the execution thereof (The Belgian
Catholic Missionaries, Inc. vs. Magallanes Press,
4. Indorser can be 4. Guarantor cannot Inc., 49 Phil 647). An exception to this is in case
sued as promisor be sued as promisor 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
Guaranty Warranty exclusion of accessories.
A contract by which a An undertaking that the 2. Where guaranty indefinite or simple: It shall
person is bound to title, quality, or comprise not only the principal obligation, but
another for the quantity of the subject
fulfilment of a promise matter of the contract is
also all its accessories, including the judicial
or engagement of a third what it has been costs, provided with respect to the latter, that
party represented to be, and the guarantor shall only be liable for those costs
relates to some incurred after he has been judicially required to
agreement made pay.
ordinarily by the party
who makes the warranty Qualifications of a guarantor: (Arts 2056-2057)
1. possesses integrity
NOTES: 2. capacity to bind himself
 A guaranty is gratuitous, unless there is a 3. has sufficient property to answer for the
stipulation to the contrary. The cause of the obligation which he guarantees
contract is the same cause which supports the
obligation as to the principal debtor. NOTES:
 The peculiar nature of a guaranty or surety  The qualifications need only be present at the
agreement is that is is regarded as valid despite time of the perfection of the contract.
the absence of any direct consideration received  The subsequent loss of the integrity or property
by the guarantor or surety either from the or supervening incapacity of the guarantor would
principal debtor or from the creditor; a not operate to exonerate the guarantor or the
consideration moving to the principal alone will eventual liability he has contracted, and the
suffice. contract of guaranty continues.
 It is never necessary that the guarantor or surety  However, the creditor may demand another
should receive any part or benefit, if such there guarantor with the proper qualifications. But he
be, accruing to the principal. (Willex Plastic
Industries Corp. vs. CA, 256 SCRA 478)
 may waive it if he chooses and hold the guarantor
to his bargain.
Benefit of Excussion (Art 2058)
 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 Provides for his
enforcement of the protection before he
rights of the has paid but after he
guarantor/surety has become liable
against the debtor
after he has paid the
debt
Gives a right of Protective remedy
action after payment before 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)