I.

LAW ON LOAN AND OTHER CREDIT

TRANSACTION CONTRACTS

A. - THE CREDIT TRANSACTION CONTRACTS

ENUMERATED (D. L.P.G. C.A.R.)

1. D-EPOSIT;
2. L-OAN : (a) Mutuum and (b) Commodatum;
3. P-LEDGE;
4. G-UARANTY;
5. C-HATTEL MORTGAGE;
6. A-NTICHRESIS; and
7. R-EAL MORTGAGE
 B. LOAN AS A CREDIT TRANSACTION
CONTRACT

1. MEANING OF LOAN - “By the contract of loan, one

of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time
and return it, in which case the contract is called a commodatum;
or money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid, in which
case the contract is simply called a loan or mutuum” (Art. 1933)
 2. KINDS OF LOAN
a. Mutuum or Simple Loan
b. Commodatum
COMPARISON MUTUUM COMMODATUM
THE THING BORROWED MONEY OR CONSUMABLE NON-CONSUMABLES
OWNERSHIP OVER THE ACQUIRED BY THE BORROWER DOES NOT
THING BORROWED BORROWER BECOME THE OWNER
REASON FOR FOR CONSUMPTION FOR USE ONLY
BORROWING
THING TO BE AN EQUIVALENT THING THE VERY SAME THING
RETURNED OF THE SAME KIND AND TO BE RETURNED AND
AFTERWARDS QUALITY NO OTHER
CONSIDERATION THAT ONEROUS IF THERE IS GRATUITOUS; WITHOUT
THE LENDER GETS PAYMENT OF INTEREST ANY CONSIDERATION
FROM THE BORROWER BUT SHOULD THERE BE (NOTE: Should there be any,
ONE, GRATUITOUS the contract ceases to be loan.)

TRANSMISSBILITY TRANSMISSIBLE NOT TRANSMISSIBLE

because it is PURELY
PERSONAL in character.
3. FURTHER CLASSIFICATION OF LOANS
a. Secured and
b. Unsecured

4. SECURITY CONTRACTS OF LOAN

a. Pledge
b. Guaranty
c. Chattel Mortgage
d. Antichresis
e. Real Mortgage
II. THE LAW ON MUTUUM (OR SIMPLE
LOAN)

A. Meaning of Mutuum
-A contract of loan, whereby one of the parties
delivers to another, money or other consumable thing,
upon the upon the condition that the same amount of
the same kind and quality shall be paid. (Art. 1933)
B. Characteristics of Mutuum as Contract

1. Either GRATUITOUS OR ONEROUS depending on whether or not there

is a STIPULATED agreement to pay to pay INTEREST.
Third paragraph of Art.1933. Simple loan may be gratuitous or with the
stipulation to pay interest."

2. A REAL Contract ( Perfected by the Delivery of the Thing loaned)

“ART. 1934. An accepted promise to deliver something by way of commodatum
or simple loan is binding upon the parties, but the commodatum or simple loan itself
shall not be perfected until the delivery of the object of the contract.”

3. A UNILATERAL CONTRACT - once its object is delivered, only the

borrower would have obligations.

4. It is a PRINCIPAL CONTRACT (It can stand in its own and can exist
independently from other contracts )

5. It is a NOMINATE CONTRACT (It has a special name that distinguishes it

from other contracts)

6. It is NOT A PURELY PERSONAL CONTRACT (Death does not

extinguishes the obligation to pay).
C. Essential Elements

1. Consent PLUS Delivery of the Thing Loaned

-Acceptance of the Offer to Lend or the Offer to Borrow money or
consumable
-This must be coupled with the DELIVERY of the thing loaned.

2. Object - Thing Loaned which must be either of Money or Consumable

-the borrower becomes the owner of the money or consumable he loan upon
delivery to him
“ART. 1953. A person who receives a loan or money or any other fungible
thing ACQUIRES OWNERSHIP THEREOF, and is bound to pay to the creditor an
EQUAL AMOUNT OF THE SAME KIND AND QUALITY.”

Second Paragraph of Art. 1955 xxx If what was loaned is a fungible thing
other than money, the debtor owes another thing of the same kind, quantity and
quality, even if it should change in value. In case it is impossible to deliver the same
kind, its value at the time of the perfection of the loan shall be paid.”

3. Consideration
-with STIPULATION to pay interest on the loan - ONEROUS
-NO STIPULATION to pay interest on the loan - GRATUITOUS
 D. OBLIGATION TO PAY INTEREST

IF THERE IS STIPULATION TO PAY IF THERE IS NO STIPULATION TO

INTEREST PAY INTEREST
A valid obligation to pay interest is There is no valid obligation to pay interest
created (Art. 1956) exist even if there is a VERBAL agreement
to do so
If PAID, the payment is VALID If the obligation is VERBAL and the
payment is made, the payment is VOID and
the results in SOLUTION INDEBITI (Art.
1960)
Art. 1956 “No interest shall be due Article 1960 “If the borrower pays interest
unless it has been expressly stipulated in when there has been no stipulation thereof,
writing.” the provisions of this Code concerning
SOLUTIO INDEBITI, or natural
obligations, shall be applied, as the case may
be.”
III. LAW ON COMMODATUM

A. MEANING OF COMMODATUM AS
A CONTRACT OF LOAN

-In this kind of LOAN, one of the parties

delivers to another, either something not
consumable so that the latter may use the same
for a certain time and return it, (Art. 1933, the
opening sentence)
B. CHARACTERISTICS OF COMMODATUM
1. It is GRATUITOUS (FREE; NO CONSIDERATION FOR THE USE FO THE
THING BORROWED)
-“Commodatum is essentially gratuitous.” (Art. 1933, Second Sentence)
-“xxx if any compensation is to be paid by him who acquires the use, the contract ceases
to be a commodatum.” (Art. 1935) (NOTE: It ceases to be a loan and becomes a contract of
lease.)
2. It is a REAL CONTRACT (NO DELIVERY, NO CONTRACT)
-“Art. 1316. Real contracts, such as deposit, pledge and commodatum, are not perfected
until the delivery of the object of the obligation.”
3. It is PURELY PERSONAL (DEATH ENDS THE CONTRACT)
“Art. 1939 Commodatum is purely personal in character. Consequently:
(1) The death of either the bailor or the bailee extinguishes the contract;
(2) The bailee can neither lend nor lease the object of the contract to a
third person. However, the members of the bailee's household may make use of the thing
loaned, unless there is a stipulation to the contrary, or unless the nature of the thing forbids such
use.”
4. It is NOMINATE ( It has a SPECIAL NAME that differentiates it from other
contracts)
5. It is a PRINCIPAL CONTRACT (Can INDEDPENDENTLY exist unlike pledge
and mortgage)
6. It is a UNILATERAL CONTRACT
C. ESSENTIAL ELEMENTS
1. Consent PLUS Delivery of the Thing Loaned
-Acceptance of the Offer to Lend or Offer to Borrow
coupled with the DELIVERY of the thing lent or borrowed
-The bailor need not be the owner of the thing loaned. (Art.
1938)
2. Object -the use of the thing borrowed which must be
NON-CONSUMABLE
-the object may either be movable or immovable (Art. 1937)
-If consumable, it must be merely for exhibition (Art. 1936)
-Extends only to the use of the principal object and not its
fruits unless there is a STIPULATION extending the use to its
fruits.
3. Consideration
-Mere benevolence or liberality (no material consideration);
free.
D. KINDS OF COMMODATUM

1. Ordinary Commodatum
a. For a fixed term or
b. One which ends upon accomplishment of the
purpose for its use.

2. Precarium (Art. 1947) (“AT WILL”)

a. NEITHER the duration of the contract nor the
use to which the thing loaned should be devoted, has
been stipulated; or
b. The USE of the thing is MERELY
TOLERATED by the owner.
 OBLIGATIONS OF THE BAILEE
(P.S. R.E.T.U.R.N.)
P-ay for the ORDINARY expenses form the use and preservation of the thing loaned.
“ART. 1941. The bailee is obliged to pay for the ordinary expenses for the use and
preservation of the thing loaned.”
S-olidarily be LIABLE with his co-bailees should there be 2 or more bailees to whom a thing
is loaned in the SAME contract.
“ART. 1945. When there are two or more bailees to whom a thing is loaned in the same
contract, they are liable solidarily.
R-eturn the thing loaned the bailor after the expiration of the period stiupated or afrter the
accomplishement of the use for which the commodatum has been constituted.
E-xcuse himself from liability for loss of the thing loan THROUGH FORTUITOUS
EVENT EXCEPT if it falls under any of FIVE (5) situations (A.L.D.U.B.)
1. ABLE to save either the thing borrowed or its own thing, he chose to save the latter.
2. LENDS OR LEASES the thing to a third person, who is not a member of his 2.
household;
3. DELIVERY of the thing loaned with APPRAISAL OF ITS VALUE, unless there is a 1.
stipulation exempting the bailee from responsibility in case of a fortuitous event;
4. USES OR DEVOTES the thing to any purpose DIFFERENT from that fro which it
has been loaned.
5. BEING KEPT or RETAINED longer thatn the period stipulated or after the R-EFUND the EXTRAORDINARY expenses during the contract for the preservation of the thing
accomplishment of the use fro which the commodatum has been constituted. (Art. loaned provided the bailee brings the same tot eh knowledge of the bailor before incurring them;
1942)
OBLIGATIONS OF THE BAILOR
(D. R.I.N.G.)
D-emand the return of the thing loaned ONLY till after the expiration of the period stipulated or
after the accomplishment of the use for which the commodatum has been constituted.
EXCEPTIONS:
1. In case of URGENT NEED of the bailor
“ART. 1946. The bailor cannot demand the return of the thing loaned till after the
expiration of the period stipulated, or after the accomplishment of the use for which the
commodatum has been constituted. However, if in the meantime, he should have urgent
need of the thing, he may demand its return or temporary use.
In case of temporary use by the bailor, the contract of commodatum is suspended while the
thing is in the possession of the bailor.”
1. In case of PRECARIUM or Bailment at will
“ART 1947. The bailor may demand the thing at will, and the contractual relation is called a
precarium, in the following cases:
1. If neither the duration of the contract nor the use to which the thing loaned should be
devoted, has been stipulated; or
If the use of the thing is merely tolerated by the owner.
In case of ACT OF INGRATITUDE
“ART. 1948. The bailor may demand the immediate return of the thing if the bailee
commits any act of ingratitude specified in Article 765. “
except when they are so urgent that the reply to the notification cannot be waited without danger.

T-erminate the contract of commodatum upon the death of the bailor If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even
though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless
“ART. 1939. Commodatum is purely personal in character. Consequently: there is a stipulation to the contrary. (ART. 1949)
1. The DEATH of EITHER the bailor or the bailee EXTINGUISHES the contract;…”
1. Should there be ACTS OF INGRATITUDE on the part of the bailee
“ART. 1942. The bailee is liable for the loss of the thing, even if it should be through a
fortuitous event:” “Article 1948. The bailor may demand the immediate return of the thing if the bailee
xxxx commits any act of ingratitude specified in article 765.”
xxxx
1. If he lends or leases the thing to a third person, who is not a member of his The following are acts of ingratitude as provided for in Art. 765 if the New Civil Code:
household. (1) If the bailee commits some offense against the person, the honor or the property of the
x x x x” bailor, or of his wife or children under his parental authority;
IV. THE LAW ON DEPOSIT
A. MEANING OF DEPOSIT AS A CONTRACT
-“A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of
safely keeping it and of returning the same. If the safekeeping
of the thing delivered is not the principal purpose of the contract,
there is no deposit but some other contract.” (ART. 1962)
B. SUBJECT MATTER OF DEPOSIT
-Only movables
“ART. 1966. Only movable things may be the object of a
deposit.”
-Not to be used but only for safekeeping
“ART. 1962 (Second Sentence) x x x If the safekeeping of
the thing delivered is NOT the principal purpose of the contract,
there is NO deposit but SOME OTHER contract.”
C. CHARACTERISTICS AS A CONTRACT

1. A REAL Contract - perfected only upon DELIVERY of the

thing for safekeeping.

2. Generally, a GRATUITOUS Contract (ART. 1965)

EXCEPT when there is an agreement to the contrary, or
unless the depositary is engaged in the business of storing
goods.

3. A UNILATERAL Contract because generally, it is gratuitous

services, then it becomes BILATERAL.

4. It is NOMINATE obviously because it is given a special name

that differentiates it from other contracts.
D. DISTINGUISHING FEATURES AS A
CONTRACT
1. A thing is delivered to another person;
2. The thing is movable;
3. It is delivered to him only for
safekeeping; and
4. He has an obligation to return it later
on.
E. KINDS OF DEPOSIT

1. JUDICIAL DEPOSIT (OR SEQUESTRATION) - Thru

the COURT
a. Meaning of Judicial Deposit (ART. 2005)
-takes place when an attachment or seizure of property in
litigation is ordered by a court.
b. Object of Judicial Deposit or Sequestration (ART. 2007)
-movable or immovable
c. Purpose of Judicial Deposit
-ensure the effective performance of a right sued for in case of a
favorable court judgment
d. Obligation of the depositary in Case of Judicial Deposit
(ART. 2008)
-compliance with the observance of the diligence of a good
father of a family taking care of the thing deposited.
2. EXTRAJUDICIAL DEPOSIT (“Extra” (Outside) plus “judicial”
(Referring to Court)
a. Meaning of Extrajudicial Deposit
-this form of deposit takes place either by agreement of the
parties (voluntary deposit) or by operation of law (necessary deposit)
b. Kinds of Extrajudicial Deposit
1. Voluntary Deposit- by agreement of the parties, depositor and
depositary meaning by contract

2. Necessary Deposit - by operation of law in any of the

following four (4) situation: (P.L.O.T.)
a. P -assengers of COMMON CARRIERS (Public
Transportation (Art. 1734)
b. L -egal obligation is being complied with (ART. 1966)
c. O -n Occasion of a Calamity (ART. 1966); and
d. T -travelers in Hotel and Inns (ART. 1998)
3. BASIC CONCEPTS IN RELATION TO VOLUNTARY DEPOSIT
a. Rules in Case of INCAPACITY of the Parties

IF BOTH ARE INCAPACITATED

-CONTRACT is unenforceable

IF ONLY THE DEPOSITOR IS INCAPACITATED

-Depositary shall be subject to all the obligations of a
depositary, and may be compelled to return the thing by the guardian, or
administrator, of the person who made the deposit, or by the latter himself if
he should acquire capacity. (ART. 1970)

IF ONLY THE DEPOSITARY IS INCAPACITATED

-Incapacitated depositary DOES NOT incur the
obligations of a depositary and he is liable to return the thing depositary
while still in his possession and to pay the depositor the amount by which eh
may have benefited himself with the thing or its price subject to the right of
nay third person who acquired the thing in good faith. (ART. 1971)
 b. Form of Voluntary Deposit
-may be entered into ORALLY or in WRITING (ART. 1969)

c. Two obligations of the Depositary NOT TO DO

1. OBLIGATION NOT TO MAKE USE OF THE THING BUT ONLY TO

KEEP IT SAFE OR PRESERVE THE THING (ART. 1977)
-The depositary CANNOT make use of the thing deposited
EXCEPTIONS: 1. If he has the EXPRESS PERMISSION of the depositor to do so; or
2. In case the preservation of the thing necessitates its
use by the depository.
QUALIFICATION: Only for that purpose (ART. 1977).
Effects if he violates this negative obligation (Not to use):
1. The depositary shall be liable for damages (Second par. ART. 1977);
2. If expressly permitted by the depositor to do so, the contract becomes a loan or
commodatum and no longer a deposit.
EXCEPTION: If safekeeping, not withstanding its use, remains the PRINCIPAL purpose
of the contract.
3. The depositary remains liable if later on the thing deposited is lost due to fortuitous
event.
“ART. 1979. The depositary is liable for the loss of the thing through a fortuitous event:
1. If it is so stipulated;
2. If he uses the thing without the depositor’s permission;
3. If he delays its return;
4. If he allows others to use it, even though he himself, may have been
authorized to use the same”
2. OBLIGATION NOT TO DEPOSIT THE THING
WITH A THIRD PERSON
- The depositary CANNOT deposit the thing with third
person. (Art 1973).

EXCEPTION: If there is a STIPULATION allowing such

deposit to third person.

-if deposit with a third person is allowed, the depositary is

liable for the loss if he deposited the thing with a person who is
manifestly careless or unfit. The depositary is responsible for the
negligence of his employees. (ART. 1973)
d. LIABILITY OF THE DEPOSITARY IF THE THING IS
LOST DUE TO FORTUITOUS EVENT (ART. 1979)
The depositary is liable for the loss of the thing through a
fortuitous event:
1. U - ses the thing without the depositor’s permission;
2. D - elays its return
3. A - llows others to use it, even though he himself, may
have been authorized to use the same;
4. S-tipulated that he is liable if the thing is lost due to
fortuitous event. (ART. 1979)
LAW ON PLEDGE AND MORTGAGE

I. LOAN AS PRINCIPAL CONTRACT OF PLEDGE

AND MORTGAGE

A. MEANING OF LOAN
B. KINDS OF LOAN
1. Mutuum (e.g. Bank savings account – May 1977 CPA
Board Exam)

2. Commodatum

C. Mutuum and Commodatum: Basic Distinctions

II. PLEDGE AND MORTGAGE AS ACCESSORY
CONTRACTS OF A CONTRACT OF LOAN
A. SIMILARITIES OF PLEDGE AND MORTGAGE
(S.A.N.L.A.)

1. S – ecurity Contract
- ubsidiary Contract
2. A – ccessory Contract
- bsolute Ownership of the Pledgor or Mortgagor ogf the
thing Pledged or Mortgaged
3. N - on-divisibility from the Contract of Loan
4. L - egal authority to Pledge or Mortgage if the Pledgor or
Mortgagor has no Free disposal of the thing Pledged or
Mortgaged
5. A - utomatic Appropriation by the Creditor (Pactum
Comissorium) is Prohibited
C. PLEDGE AS AN ACCESSORY CONTRACT OF LOAN
1. Meaning of Pledge
– is a contract by virtue of which the debtor delivers to the
creditor or to a third person a movable, or instrument
evidencing incorporeal rights for the purpose of securing the
fulfilment of a principal obligation with the understanding that
when the obligation is fulfilled, the thing delivered shall be
returned with all its fruits and accessions.

2. Characteristics of Pledge
a. Real Contract – delivery of the object to the creditor is
required (Oct. 1980; Oct. 1982; Oct. 1996 CPA Board Exams)

b. Unilateral Contract – creditor’s obligation to return the

object once the loan is paid.
 c. Subsidiary Contract – if the loan is not paid on time, the
object will be sold and the proceeds thereof to be used in its payment.

d. Accessory Contract – intended to secure the payment of the

loan (Oct. 1993; May, 1995; Oct. 1996 CPA Board Exams)

e. Nominate – with a special name (“Pledge”) differentiating it

from other contracts.

3. KINDS OF PLEDGE

a. Voluntary or Conventional Pledge – that which is

constituted by the mutual consent of the pledgor and the pledgee.
 b. LEGAL PLEDGE (Nov. 1976; May 1998 CPA Board
Exams) – refers to the right of a person to retain a thing until he
receives payment of his claim.

(1) Mechanic’s Lien

(2) Hotel Innkeeper’s Lien
(3) Agent’s right to retain the object of the agency until he is
reimburse by his principal
(4) Possessor’ in good faith’s right to retain the thing until
reimbursement of his necessary expenses
(5) Depositary’s right to retain the object of the deposit
until he is paid what is due to him.
4. RULES IN CASE OF LEGAL PLEDGE
a. Foreclosure Sale
- to be sold in a public auction within one (1) month
after demand for payment was made

b. Disposition of Proceeds
- apply first in payment of the expenses of the sale
and the remaining to the claim of the creditor
- if there be excess, the excess goes to the debtor
(Legal pledgor).
if there be deficiency, it is recoverable from the
debtor. (NOTE: similarity with mortgage).
5. PRINCIPAL RIGHTS OF THE PLEDGEE
(P.R.E.N.D.A)

a. P – ayment of the loan once it becomes due otherwise he

may sell the thing pledged for the payment of said debt (Art.
2087)
b. R – eimbursement for the expenses in preserving the
object (Art. 2099)
c. E – ntrust or deposit the object with a third person only
if there be stipulation allowing such (Art. 2100)
d. N – ot to return the object until he is paid (Art. 2105)
e. D – emand replacement of the object should he be
deceived on its substance or quality (Art. 2109)
f. A – pply the object’s fruits to the payment of the interests
and afterwards tot eh principal (Art. 2102)
6. PRINCIPAL OBLIGATIONS OF THE PLEDGEE
a. Take care of the thing pledged with the diligence of a
good father of family (Art. 2099)
b. Inform the pledgor, without delay, of any danger to the
thing pledged (Art. 2107)
c. Answer and be liable for:
1) acts of his agents or employees with respect to the
thing pledged (Art. 2100)
2) the loss or deterioration of the thing pledged in
conformity with the provisions of the New Civil Code (Art. 2099)
d. Return the object pledged to the pledgor once the loan is
paid
e. Not to use the thing pledged without its owner’s
authorization (Art. 2104) except if its preservation requires it use.
f. Not to automatically appropriate the thing pledged once
the debt is not paid (Pactum Commissorium) except if after two
(2) successive auction, there be no buyer.
7. EXTINGUISHMENT OF PLEDGE
a. When the principal obligation (loan) is paid.
b. When the thing pledged is returned by the pledgee to the
pledgor (Art. 2110)
c. Abandonment of the pledge in writing (Art. 2111)
d. Sale of the thing pledged (Art. 2115) and
e. Appropriation of the thing pledged by the pledgee (Art.
2112).
D. MORTGAGE AS AN ACCESSORY CONTRACT OF
LAON

1. Meaning of Mortgage –

REAL MORTGAGE (real estate mortgage) – is a contract

by which the debtor secures to the creditor the fulfilment of a
principal obligation by subjecting to such security real property
or rights over real property in case of non-fulfillment of said
obligation at the time stipulated.
2. CHARACTERISTICS OF MORTGAGE
a. F – ormal contract (Nov. 1976; May 1982; May 1980 CPA
Board Exams) – requires documentation and registration
b. U – nilateral Contract
c. S – ubsidiary Contract
d. A – ccessory Contract (Oct. 1993; May 1995; Oct 1996 CPA
Board Exams)
e. N – ominate Contract.

3. KINDS OF MORTGAGE
A. Real Mortgage – object is immovable
B. Chattel Mortgage – object is movable

CHATTEL MORTGAGE – is a contract by virtue of which

personal property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation. (Art. 2140, NCC)
4. RIGHTS OF THE MORTGAGEE
a. To have the Mortgage registered to bind Third Persons
b. To foreclose the mortgage if the debtor fails to pay
c. To demand from the debtor the deficiency if the proceeds
of the foreclosure sale turns out to be insufficient to cover the
payment of the mortgage debt
d. To demand inclusion, as part of the mortgage, the
object’s natural accessions, improvements, growing fruits, and
rents or income (Art. 2127)
e. To alienate or assign to a third person the mortgage credit
in whole or in part (Art. 2128)
f. To demand advanced payment should the object be lost
due to fortuitous event
5. OBLIGATIONS OF THE MORTGAGEE
a. To give to the Debtor the Excess if the Proceeds of the
Foreclosure Sale Turns out to be more than the Mortgage debt to
be paid
b. Not to appropriate the thing mortgage in the event the
debtor fails to pay

6. RIGHTS OF THE MORTGAGOR

a. To extinguish the mortgage by paying the principal debt
once it become due
b. To sell the object of the mortgage before the debt
becomes due
REAL MORTGAGE
- even without the consent
of the mortgagor and
- Notwithstanding that
there is a stipulation
disallowing such sale or
alienation (NOTE: Such
stipulation is VOID – Art. 2130)
CHATTEL MORTGAGE
- must be with the written
authorization of the mortgagee
otherwise such sale or
alienation would be a crime.

c. To demand the Excess if the Proceeds of the Foreclosure Sale Turns

out to be more than the Principal amount to be paid as Debt.

d. In case of real mortgage, to redeem the immovable property

-before it is sold in the foreclosure sale (Equity of Redemption)
-if judicial foreclosure, anytime before the sale is confirmed by
the court
-if extrajudicial foreclosure, within one (1) year from and after
the date of the registration of the sale (NOTE: Not from the time of
sale but from the registration of the sale).
LAW ON GUARANTY

I. PRELIMINARY CONSIDERATION
A. Meaning of Guaranty (ART. 2147)
-By guaranty a person, called the guarantor, binds himself to
the creditor to fulfill the obligation of the principal debtor in case
the latter should fail to do so.

B. Parties to a Contract of Guaranty

1. Creditor - who extended the loan
2. Principal Debtor - the one whom the loan was extended
3. Guarantor - (Secondary debtor) -the one who binds
himself to pay in the event the principal debtor cannot pay.
 C. Kinds of Guaranty
1. Broadly classified:
a. Personal Guaranty (in its strict sense) - object is the credit extended
by the guarantor; and
b. Real Guaranty - object is property. Hence, if immovable, it partake
the form of real mortgage or antichresis, and if movable, chattel mortgage.
2. As to origin
a. Conventional Guaranty - by agreement or contract
b. Legal Guaranty - by operation of Law; and
c. Judicial Guaranty - required by a court to secure the satisfaction of a
claim under litigation should it be favorably ruled upon
3. As to consideration
a. Gratuitous Guaranty - free and no consideration is received by the
guarantor;
b. Onerous Guaranty - guarantor receives valuable consideration
4. As to the identity of the Person Guaranteed
a. Single guaranty - solely for the principal obligation
b. Double Guaranty - to secure a prior guaranty (guarantor’s guarantor)
5. As to Extent
a. Definite Guaranty - up to the principal obligation only; and
b. Indefinite Guaranty - Extends to its accessories inclu-judicial cause.
D. DIFFERENCE FROM SURETYSHIP

GUARANTY SURETYSHIP
Insurer of the Insurer of the DEBT
SOLVENCY of the (Binds himself to pay if the
debtor (Binds himself to principal DEBTOR does
pay if the principal not pay)
DEBTOR cannot pay)
Secondary promisor Original promisor
(Secondarily liable
Right of Excussion Right of Excussion has no
applies application
E. Concept of Right of Excussion
-This is a right given by law to the
guarantor which states that he cannot be
legally compelled to pay the creditor for the
debt he guaranteed unless and until all the
properties of the principal debtor has been
exhausted and the creditor had already
resorted to all of the legal remedies against
such debtor. (See ART. 2058)
 F. Characteristics of a Contract of Guaranty
1. Accessory Contract - it is intended only to secure the
satisfaction of a debt in a contract of loan. It exists because there
is a loan.
2. Subsidiary Contract - it is effective only if the loan was
not paid and after all the properties of the debtor has been
exhausted and all remedies resorted to but to no avail.
3. Unilateral Contract - only one obligation is created and it
is on the part of the guarantor;
4. Covered by the Statute of Fraud - Hence, if not in
writing, it is unenforceable and cannot be sued upon in court for
its enforcement.
5. Gratuitous Contract - unless there is a stipulation to the
contrary ( Article 2048)
G. Rights of the Guarantor
BEFORE PAYING (ART. 2071)
-The guarantor, even BEFORE having paid, may proceed
against the principal debtor:
1. When he issued for the payment;
2. In case of insolvency of the principal debtor;
3. When the debtor has bound himself to relieve him from the
guaranty within a specified period, and this period has expired;
4. When the debt has become demandable, by reason of expiration of
the period for payment;
5. After the lapse of 10 years, when the principal obligation has no
fixed period for its maturity, unless it be of such nature that it cannot be
extinguished except within a period longer than 10 years;
6. If there are reasonable grounds to fear that the principal debtor
intends to ABSCOND;
7. If the principal debtor is in imminent danger of becoming
INSOLVENT.
(Note In all of these 7 cases, the action of the guarantor is to obtain
release from the guaranty, or to demand a security that shall protect him from
any proceedings by the creditor and from the danger of insolvency of the
debtor - ART. 2071)
 AFTER PAYING |Article 2006 - 2067)
-The guarantor who pays for a debtor must be
INDEMNIFIED by the latter. The indemnity comprises:
1. The total amount of the debt
2. The legal interest thereon from the time the payment was
made known to the debtor, even though it did not earn interest
for the creditor;
3. The expenses incurred by the guarantor after having
notified the debtor that payment had been demanded of him;
4. Damages, if they are due [ART. 2066)
The guarantor who pays is subrogated by virtue thereof to
all the rights which the creditor had against the debtor (ART.
2067)
 H. Extinguishment of Guaranty
1. Thru any of the causes for extinguishing obligations in
general(ART. 2076) such as payment, condonation, compensation
or novation)
2. Accepting voluntarily Immovable or other property in
payment of a debt (Art. 2077 (NOTE: Dacion en pago)
3. Release by the creditor of one of the guarantors this act
benefits all to the extent of the share of the guarantor released
(Art. 2078)
4. Extension granted by the creditor to the debtor
WITHOUT the guarantor’s consent (art. 2079)
5. Release of solidary guarantors where by some act the
creditor they cannot be subrogated to the rights, mortgages and
preferences of the latter. (Art. 2080)
I. RIGHT OF EXCUSSION OF THE
GUARANTOR

1. Meaning of the Right of Excussion

- The right of the guarantor not to be
compelled to pay the creditor unless and until the
creditor has exhausted all the property of the
debtor, and has resorted to all the legal remedies
against the debtor. (ART. 2058)
2. Instances When the Guarantor is NOT entitled to the
Right of Excussion (I.S.C.A.P.E.)
a. I -nsolvency of the debtor
b. S -olidarily bind himself (guarantor) with the debtor
c. C -annot be sued within the Philipines unless he has
left a manager or representative
d. A –bsconded
e. P -resumed that an execution on the property of the
principal would NOT result in the satisfaction of the obligation
f. E -xpress renunciation of the guarantor of the guaranty
3. Other Concepts Related to Right of Excussion
a. Pre-requisite for the Guarantor to avail of the benefit of Excussion
“ART. 2060. In order that the guarantor may make use of the benefit of
exclusion, he must set it up against the creditor upon the latter's demand for payment
from him, and point out to the creditor available property of the debtor within
Philippine territory, sufficient to cover the amount of the debt.”

b. Effect of the Creditor’s Negligence in Exhausting the Debtor’s Property

“ART. 2061. The guarantor having fulfilled all the conditions required in the
preceding article, the creditor who is negligent in exhausting the property pointed
out shall suffer the loss, to the extent of said property, for the insolvency of the debtor
resulting from such negligence.

c . Notice of the Suit Against the Principal Debtor to the Guarantor

“ART. 2062. In every action by the creditor, which must be against the principal
debtor alone, except in the cases mentioned in article 2059, the former shall ask the court
to notify the guarantor of the action. The guarantor may appear so that he may, if he so
desire, set up such defenses as are granted him by law. The benefit of excussion
mentioned in article 2058 shall always be unimpaired, even if judgment should be
rendered against the principal debtor and the guarantor in case of appearance by the
latter.

 d. Right of Excussion of the Guarantor’s Guarantor
“ART. 2064. The guarantor of a guarantor shall enjoy the benefit of excussion,
both with respect to the guarantor and to the principal debtor.”
I. MEANING OF ANTICHRESIS
-ART. 2123. By the contract of
antichresis the debtor acquires the right to
receive the FRUITS of an IMMOVABLE of
his debtor, with the obligation to apply them
to the payment of the INTEREST, if owing,
and THEREAFTER TO THE PRINCIPAL
of his credit."
II. FEATURES OF ANTICHRESIS
A. Existence of a loan
B. As security for the payment of the loan, an
immovable property is delivered to the
creditor by the debtor for the creditor to use;
C. In using the immovable, the fruits will be
applied from in the payment of the interest and
the remaining in pay of the amount of the
principal debt.
III. CHARACTERISTICS OF ANTICHRESIS
A. Formal Contract - "Article 2134. The amount of the
principal and of the interest shall be specified IN WRITING
otherwise, the contract of antichresis shall be VOID."
B. Accessory Contract - Existing only because there is a
loan
C. Nominate-Given a special name that differentiates from
other contracts
D. Consensual - Although delivery of the immovable to
the creditor is a legal requirement for this kind of security
contract, its perfection however requires only more consent.

E. Security Contract – it ensures the payment of a loan.

 IV. DIFFERENCES FROM CONTRACT OF A REAL
MORTGAGE

CONTRACT OF ANTICHRESES CONTRACT OF REAL MORTGAGE

Immovable is DELIVERED to the Immovable is NOT DELIVERED to the
creditor creditor. It is retain by the debtor.
Creditor acquires right to the FRUITS of The creditor DOES NOT ACQUIRE right
the immovable over the FRUITS of the immovable.
Unless there be stipulation to the The creditor DOES NOT pay taxes and
contrary, the CREDITOR pays the charges on the immovable.
TAXES and CHARGES on said
immovable. (ART. 2135)
Perfected by mere consent ( a Requires that it must be a public instrument
CONSENSUAL CONTRACT) (FORMAL CONTRACT)

Creditor CANNOT SELL the Creditor CAN SELL the immovable if the
immovable. He my however petition the debtor fails to pay
court for the sale of said real property
(ART. 2137)
V. OTHER CONCEPTS RELATED TO ANTICHRESIS
A. Determination of the Value of the Fruits to be Applied
“ART. 2133. The actual market value of the fruits at the
time of the application thereof to the interest and principal shall
be the measure of such application.”

B. Effect if the amount of the principal and of the

interest are NOT specified IN WRITING
“ART. 2134. The amount of the principal and of the
interest shall be specified in writing; otherwise, the contract of
antichresis shall be void.”
 C. Obligation to Pay Taxes and Charges on the
immovable Subject of an Antichretic Contract (Creditor’s
Obligation)
“ART. 2135. The creditor, unless there is a stipulation to the
contrary, is obliged to pay the taxes and charges upon the estate.”

D. Obligation to Pay for the Expenses Necessary for

the Preservation and Repair of the Immovable
 - For the Creditor’s account. “He is also bound to bear
the expenses necessary for its preservation and repair.” (ART.
2135)

E. Right of the Creditor if He Pay Taxes and Charges

on the Immovable, as well as the Necessary Expenses for its
Repair and Preservation
“The sums spent for the purposes stated in this article shall
be deducted from the fruits.”(ART. 2135)
 F. Right of the Antichretic Debtor to REACQUIRE the
Immovable
“ART. 2136. The debtor cannot reacquire the enjoyment of
the immovable without first having totally paid what he owes the
creditor.
But the latter, in order to exempt himself from the obligations
imposed upon him by the preceding article, may always compel the
debtor to enter again upon the enjoyment of the property, except
when there is a stipulation to the contrary.”

G. Right of the Antichretic Creditor to Acquire the

Immovable for the Non-payment of the Debt Within the
Period Agreed Upon
“ART. 2137. The creditor does not acquire the ownership of
the real estate for non-payment of the debt within the period agreed
upon.
Every stipulation to the contrary shall be void. But the
creditor may petition the court for the payment of the debt or the
sale of the real property. In this case, the Rules of Court on the
foreclosure of mortgages shall apply.”
 H. Effect it the Interest Applied Exceed that
Allowed by the Usury Law
“ART.2138. The contracting parties may
stipulate that the interest upon the debt be
compensated with the fruits of the property
which is the object of the antichresis, provided
that if the value of the fruits should exceed the
amount of interest allowed by the laws against
usury, the excess shall be applied to the
principal.”