LOAN

Article 1933: By the contract of loan, one of the parties delivers to another,
either something not consumable so that the later may use the same for a
certain time and return it, in which case the contract is called a
COMMUDATUM; or

money or other consumable thing, upon the condition that same amount of
the same kind and quality shall be paid, in which case the contract is simply a
LOAN or MUTUUM.

COMMODATUM is essentially gratuitous.

SIMPLE LOAN may be gratuitous or with a stipulation to pay interest.
In COMMODATUM the bailor retains the ownership of the thing loaned, while in
SIMPLE LOAN, ownership passes to the borrower.

MEANING OF CONSUMMABLE AND NON-CONSUMMABLE-

-consumable things refer to movables which cannot be used in a manner

appropriate to their nature without their being consumed; all others come within
the category of non-consumable.

-while some movables may by their nature be considered consumable, if

they are loaned for use as, for instance, in connection with certain exhibition or
advertising display, they may for that purpose be treated as non-consumable,
and therefore, may be the proper object of commodatum.

COMMODATUM SIMPLE LOAN (mutuum)

-Refers to nun-fungible, not refers to fungible; money or other consumable

consumable thing in the case
of mutuum

-essentially gratuitous may be gratuitous or for renumeration; or

onerous (if there is a stipulation to pay interest)

-the ownership of the thing ownership is transferred, consequently

is not transferred to the borrower

-lender bears the risk because borrower bears the risk of loss of the
he remains the owner thing because he becomes the owner

-loan for use loan for consumption

-bailee returns to bailor the return a different thing but an equal

Identical thing loaned amount of the same kind and quality

HOW PERFECTED:

Commodatum and simple loan not constituting a consensual contract,

they are not perfected by mere consent of the parties. Their nature is that of a
REAL CONTRACT and is not perfected until delivery of the object thereof. Its
delivery is a condition sine qua non for the existence of the contract of loan.

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 However, an accepted promise to deliver may be binding upon the parties,
and may give rise to an action for specific performance; but until performed, it
does not constitute a commodatum or a simple loan. (see 1934)

ARTICLE 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.

The accepted promise becomes a consensual contract; its non-fulfillment

will give rise to an action for damages, but it does not constitutes the real
contract of loan, which requires the delivery of the thing for its perfection, and
which gives rise to obligations only on the part of the borrower.

COMMODATUM

ART. 1935: The bailee in commodatum acquires the use of the thing loaned
but not its fruits; if any compensation is to be paid by him who acquires the use,
the contract ceases to be a commodatum.

The criterion or distinction between commodatum, on the one hand, and

a) deposit, refers to the purpose of the contract; b) lease, refers to the price; and
c) usufruct, refers to its fruits and the nature of the right.

Commodatum /deposit/lease/usufruct:

The principal purpose of a contract of DEPOSIT is the safekeeping of the

thing deposited, while in commodatum, the principal purpose is the gratuitous
use of the thing by the borrower. As distinguished from lease, commodatum
is essentially gratuitous while LEASE is always for a price. In commodatum,
the bailee acquires a mere use of the thing, but acquires no rights over the
fruits thereof in the absence of stipulation to that effect, while in
USUFRUCT, the usufructuary acquires a right over the fruits. Furthermore,
usufruct is a real right; commodatum is merely a personal right.

COMMODATUM AS A GRATUITOUS LOAN FOR USE- Under the law the

bailee does not acquire title to the thing loaned in commodatum, but only its
use; not even to its fruits unless so stipulated(1940). And for the use of the
thing he is not under obligation to pay the bailor. If he does pay, the contract
ceases to be commodatum. It becomes something else, such as, a contract
for hire or lease of things.

Commodatum, or gratuitous loan for use, is where goods or chattels are

loaned gratis to be used by the bailee, and then to be resorted in specie. In
effect, commodatum is a form of bailment for the bailee’s sole benefit.

USUFRUCT DISTINGUISHED FROM COMMODATUM:

USUFRUCT- is constituted by law, by contract, by testamentary succession, or

by prescription (ART 1933); commodatum is created by the parties;

U. creates a real right to the fruits of another’s property; while commodatum

creates only a purely personal right to use another’s property, and requires a
stipulation to enable the bailee to “make use” of the fruits (1939, 1940);

U. may be onerous while C. is always or essentially gratuitous (1933, 1935)

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The contract constituting U is consensual; while C. is a real contract (perfected
only by the delivery of the subject matter thereof.)

However, both involve the enjoyment by a person of the property of another,

differing only as to the extent and scope of such enjoyment (jus fruendi in one
and jus utendi in the other);

both may have as subject matter either immovable or movable; and both may be
constituted over consumable goods (574, 1936)

A consumable thing may be the subject matter of an abnormal usufruct but in a

normal usufruct, the subject matter may be used only for exhibition. A
commodatum of a consumable thing may be only for the purpose of exhibiting,
not consuming it.

UNILATERAL CHARACTER- after the delivery of the thing by the bailor

to the bailee, nothing is left to be done by the bailor. It is now the bailee who
incurs certain obligations, which clearly shows the unilateral character of this
juridical relationship, and that is, while he enjoys the use of the thing during the
time expressly or impliedly agreed upon by the parties, he is under obligation to
return the thing upon the termination of his right to use.

Compared to a similar contract called PRECARIUM it may be said that

while in commodatum the return of the thing depends upon the termination of the
right to use, in PRECARIUM it depends solely upon the will of the bailor, who
may demand the return of the thing at any time, regardless of whether the bailee
has made use of it or not.

ART 1936. Consumable goods may be the subject of commodatum if the

purpose of the contract is not the consumption of the object, as when it is merely
for exhibition.

SUBJECT MATTER OF COMMODATUM – as a rule the subject matter of C.

should be NON-CONSUMABLE, for unless it is so the identical thing loaned
cannot be returned after its use. Yet, consumable goods may likewise be the
subject of commodatum where the purpose of the contract is something other
than consumption, such as, for exhibition or display.

Art. 1937. Movable or immovable property may be the object of

commodatum.

Immovable or real property may be objects of C.

EXAMPLES of commodatum over immovables are: the grant of a right to hunt in

an immovable; or the grant of the right to camp or hold excursions, etc. Where a
brother allowed another brother to occupy his lot and build a warehouse therein
for a period of 30 years without any payment of rentals, the contract was held to
be one of commodatum.

Art. 1938. The bailor in commodatum need not be the owner of the thing
loaned.

BAILOR NEED NOT BE OWNER OF THING LOANED- While in the case

of simple loan or mutuum the person making the delivery need be the owner or at
least one duly authorized to dispose, in C. that is not essential.

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 A lessee or a usufructuary may give the thing in commodatum.
Commodatum merely transfers the use and not the ownership of the thing. The
lessee, by a contract of sublease, may transfer to another the enjoyment of the
thing leased for a consideration, so there is no reason why he cannot cede
gratuitously its use to the borrower.

Thus, when the bailee accepts the thing given in C., the implication is that
he admits the right of the bailor in respect to the property is thereby established.
The bailee is thus under estoppel to dispute the title of the bailor. Hence, the
bailee cannot set up legally want of title on the part of the bailor as an excuse for
his refusal to redeliver or return the thing in accordance with their 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.

PERSONAL NATURE OF COMMODATUM – a contract of C. is

extinguished by the death of either the bailor or the bailee for the reason
that this contract is purely personal in character.

The right of either party is not transmitted upon the death of either
party. The death of either the bailor or the bailee extinguishes the contract
of C.

For the same reason, the bailee is forbidden by law to lend or lease
the subject-matter to a third person. However, members of the bailee’s
household may not be considered third person, and may thus use the
thing loaned unless there is a stipulation forbidding them to do so or
unless the very nature of the thing forbids such use by another.

Art. 1940. A stipulation that the bailee may make use of the fruits of
the thing loaned is valid.

While Article 1935 prohibits the bailee to use the fruits of the thing
loaned, that prohibition is not absolute but only relative. By stipulation, the
contract of C may permit the bailee to make use of the fruits. This,
however, cannot be presumed; it calls for an express stipulation.

SECTION 2. - Obligations of the Bailee

 
Art. 1941. The bailee is obliged to pay for the ordinary expenses for
the use and preservation of the thing loaned.

PRESERVATION OF THE THING LOANED AS OBLIGATION OF

BAILEE- the nature of a contract of C implies confidence and trust, such
that the bailee is expected to exercise due care and diligence in protecting
and keeping safely the thing subject of the C.

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 The bailee is thus bound to preserve the thing subject of the C. and
the ordinary expenses for the use thereof which expense is borne by the
bailee.

Art. 1942. The bailee is liable for the loss of the thing, even if it should be
through a fortuitous event:

(1) If he devotes the thing to any purpose different from that for
which it has been loaned;

(2) If he keeps it longer than the period stipulated, or after the

accomplishment of the use for which the commodatum has been
constituted;

(3) If the thing loaned has been delivered with appraisal of its value,
unless there is a stipulation exemption the bailee from responsibility
in case of a fortuitous event;

(4) If he lends or leases the thing to a third person, who is not a

member of his household;

(5) If, being able to save either the thing borrowed or his own thing,
he chose to save the latter.

LIABLITY OF BAILEE IN CASE OF LOSS- generally, the bailee should

be held liable for the loss of the thing except when it was due to a
fortuitous event. However, under the following instances the bailee is
responsible for the loss even if the same was caused by a fortuitous
event.

a. BAILEE WHEN GUILTY OF MISUSE- when the bailee devotes

the thing loaned to any purpose different from that for which it has been
loaned, he is guilty of misuse or abuse for which he is held responsible to
the owner to the full extent of the loss, although the loss was inevitably
incurred by reason for a fortuitous event.

b. WHEN KEEPING THE PROPERTY BEYOND PERIOD- when

the bailee keeps the thing longer than the period stipulated, or after the
accomplishment of the use for which the C had been constituted, he
becomes in default. Hence, even if the thing has not been loaned at all, he
is bound to account for the same.

c. PREVIOUS APPRAISAL OF THING LOANED- when the thing

loaned in C has been delivered by the bailor and accepted by the bailee
with an appraisal of its value, the presumption is that the bailee agrees to
be liable therefore in case of loss, however this may have occurred.
Otherwise, the appraisal would be meaningless. Exception, if there has
been a stipulation exempting the bailee from responsibility in case of
fortuitous event.

d. WHEN THING LOST WAS USED BY THIRD PERSONS- the

bailee is responsible in case he lends or leases the thing to third persons
and it is subsequently lost even through a fortuitous event. Reason-
because of the personal character of the contract of C. “third person” does
not include one who is a member of the household of the bailee.

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 e. BAILEE SAVES HIS PROPERTY INSTEAD OF THE THING
LOANED- Bailments in general may be constituted for the sole benefit of
the bailor, or for the mutual benefit of both parties, or for the sole benefit of
the bailee. A contract of C, as a form of bailment, is constituted for the
sole benefit of the bailee.

As between the bailee’s own property and another similar property

of the bailor in commodatum, the bailee is bound to exercise more
diligence and care for the latter because it was loaned solely for his own
benefit. He is thus duty bound to exercise extraordinary care over said
property of the bailor. Consequently, if he is able to save only one of the
two things, he must save that which was loaned to him in preference to
that of his own.

Art. 1943. The bailee does not answer for the deterioration of the
thing loaned due only to the use thereof and without his fault.

The borrower is not liable for deterioration caused by the diligent

use of the thing or by its own nature or inherent defect. But he will be
liable, if he uses the thing in a manner different from that intended, or
beyond the period stipulated, or when there is negligence on his part.

Art. 1944. The bailee cannot retain the thing loaned on the ground
that the bailor owes him something, even though it may be by reason
of expenses. However, the bailee has a right of retention for
damages mentioned in Article 1951.

IRT to 1951- the bailor who, knowing the flaws of the thing loaned,
does not advise the bailee of the same, shall be liable to the latter for the
damage which he may suffer by reason thereof.

While the bailee has the right to retain the thing loaned to satisfy
damages such as those in 1951, his right extends no further than its
retention until payment of the sum for which it is chargeable. Thus, the
baillee cannot lawfully sell the property for his reimbursement of the
damages suffered.

The mere failure of the bailee to return the subject matter of

commodatum to the bailor does not mean adverse possession of the
borrower.

Art. 1945. When there are two or more bailees to whom a thing is
loaned in the same contract, they are liable solidarily.

LIABLITY OF TWO OR MORE BAILEES- not joint but SOLIDARY.

As to whether the bailor and the bailees may agree otherwise, the
law is silent. And although the law intends to safeguard more effectively
the rights of the bailor, the latter is not precluded from waiving that
safeguard provided he expressly agrees thereto.

SECTION 3. - Obligations 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

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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.

RETURN OF THE THING LOANED AT THE INSTANCE OF THE BAILOR-

while the contract of C subsists, the bailor cannot as a rule demand the return of
the thing loaned. However, in a special case as where the bailor has an urgent
need to use it, the return may be demanded by the bailor, in which event the
contract of C is deemed suspended while the thing is in the possession of the
bailor. Under ordinary circumstances it is a matter of right for the bailee to
withhold the thing loaned until the expiration of the period agreed or after the
accomplishment of the use for which C has been constituted.

In the absence of an agreement as to the time when the article should be

returned, the same may be demanded at will.

In a contract of commodatum the bailor retains the ownership of the thing

loaned, and at the expiration of the period, or after the use for which it was
loaned has been accomplished, it is the duty of the bailee to return the thing itself
to its owner, or to pay him damages if through the fault of the bailee the thing
should have been lost or injured.

If the loan is for an illegal or immoral use, the contract is void, and the
lender can immediately recover the thing, but he cannot recover damages for
non-performance of the obligations of the borrower as such.

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

(2) If the use of the thing is merely tolerated by the owner.

COMMODATUM Vs. PRECARIUM- while C refers to a species of bailment, by

which one of the parties binds himself to return to the other certain personal
chattels which the latter delivers to him to be used by him without reward;
PRECARIUM refers to a contract by which the owner of the thing, at the request
of another person, gives him a thing to use as long as the owner shall please. In
C the period depends upon the agreement of the parties or the accomplishment
of the use for which the contract was constituted. In precarium, the period is
wholly dependent upon the will of the owner or bailor. Thus, it is not possible to
constitute a precarium where there is stipulation regarding period, express or
implied.

Precarium is a kind of commodatum, in which the borrower is bound to

return the thing upon the lender’s demand. The contract is precarium, however,
even if the use or period is not stipulated, if there is a custom with respect to
such use or period.

Tolerance refers to case where the holding of a thing belonging to another

is without a previous contract and unknown to or by the tolerance of the owner.
This is not a case of precarium.

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Art. 1948. The bailor may demand the immediate return of the thing if the
bailee commits any act of ingratitude specified in Article 765.

IRT to 765- GROUNDS FOR INGRATITUDE as applied to C:

1. if the bailee should commit some offense against the person, honor or property
of the bailor, or his wife or children under his parental authority;

2. if the bailee imputes to the bailor any criminal offense, or any act involving
moral turpitude, even though he should prove it, unless the crime or the act has
been committed against the bailee himself, his wife, his children under his
authority;

3. if the bailee refuses the bailor support when the bailee is legally or morally
bound to give support to the bailor.

REASON: in C the bailee benefits himself by the use of the property loaned to
him by the bailor, for which the latter gets no compensation. In return, the bailee
should be grateful for such benefit, and trust reposed in him by the bailor. Now, if
the bailee commits an act of ingratitude, he has thereby made himself unworthy
and should, thus, return immediately the thing entrusted to him, without the
necessity of any demand from the bailor.

Art. 1949. The bailor shall refund the extraordinary expenses during the
contract 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.

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 there is a stipulation to the
contrary.

EXTRAORDINARY EXPENSES IN CONNECTION WITH PRESERVATION- the

law fixes differently responsibility for the extraordinary expenses incurred. If
incurred for the preservation of the thing loaned, the liability falls upon the bailor
exclusively; if by reason of the actual use, the bailor and the bailee become liable
share and share alike.

Expenses for preservation are ordinary and shall be borne by the bailee
because it is incumbent upon the bailee to preserve the thing. Extraordinary
expenses borne by the bailor under the rule that a thing perishes for its owner.
Bailee must notify bailor unless it is so urgent the bailee must take the necessary
measures to meet the exigency.

Extraordinary expense to be incurred by reason of actual use of the thing

loaned, it shall be borne equally by the bailor and the bailee unless a contrary
stipulation is provided. Reason, this redounds to their benefit.

Art. 1950. If, for the purpose of making use of the thing, the bailee incurs
expenses other than those referred to in Articles 1941 and 1949, he is not
entitled to reimbursement.

OTHER UNRECOVERABLE EXPENSES OF THE BAILEE- although said

expense may augment the value of the thing or improve the same- 1950

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apparently contemplates that if the ordinary expenses as incurred by the bailee
has nothing to do with the use for which the thing was loaned, the same shall be
for the exclusive account of the bailee. Also, even if the expenses as incurred be
extraordinary, if they were so incurred, not for the preservation of the thing
loaned, the same shall likewise be for the account of the bailee.

Unrecoverable expenses include those for ostentations as well as ordinary

repairs and other items for expenditures incurred as a matter of course in
connection with the use and preservation of the thing.

Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not
advise the bailee of the same, shall be liable to the latter for the damages
which he may suffer by reason thereof.

BAILOR’S LIABILITY FOR DAMAGES- bad faith on the part of the bailor,
as when he loans something with knowledge of the existence of some flaws
unknown to the bailee, renders the bailor liable for consequential damages.

This may happen when the thing loaned is defective, and this fact is
known to the bailor who withholds it from the bailee. If the bailee should suffer
damages as a result of the defect, the bailor is guilty of bad faith, if not fraud, and
should be punished therefore.

This article refers to hidden defects of the thing loaned. If the defect is
apparent, it is the same as if the borrower had been notified thereof; the lender is
justified in believing that the borrower knows it, and bad faith cannot be attributed
to him. Hence, he cannot be held liable for damages.

Art. 1952. The bailor cannot exempt himself from the payment of expenses
or damages by abandoning the thing to the bailee.

BAILOR’S LIABILITY IS NOT EXTINGUISHED BY ABANDONMENT OF

THINGS LOANED- abandonment of the thing on the part of the bailor is not bad
per se so long as it will not prejudice the bailee. But when this is done in order to
evade a responsibility, the law will not permit it.

CHAPTER 2
SIMPLE LOAN OR MUTUUM
 
Art. 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor
an equal amount of the same kind and quality.

Mutuum is a loan of personal chattels to be consumed by the borrower,

and to be returned to the lender in kind and quantity, as a loan of corn, wine, or
money, which are to be used and consumed, and are to be replaced by other
corn, wine, or money.

A contract of “loan”, as that term is used in the statute, signifies the giving
of a sum of money, goods or credits to another, with a promise to repay, but
not a promise to return the same thing. It has been defined as an
advancement of money goods or credit upon a contract or stipulation to repay,
not to return, the thing loaned at some future day in accordance with the terms of
the contract. The moment the contract is complete, the money, goods or chattels
given cease to be the property of the former owner and become the property of
the obligor to be used according to his own will, unless the contract itself
expressly provides for a special or specific use of the same.

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 At all events, the money, goods or chattels, the moment the contract is
executed cease to be the property of the former and become the sole property of
the obligor.

Art. 1954. A contract whereby one person transfers the ownership of non-
fungible things to another with the obligation on the part of the latter to
give things of the same kind, quantity, and quality shall be considered a
barter.

LOAN DISTUINGUISHED FROM CREDIT: Credit of an individual means

his ability to borrow money by virtue of the confidence or trust reposed by the
lender that he will pay what he may promise; while a loan means the delivery by
one party and the receipt by the other party of a given sum of money, upon an
agreement, express or implied, to repay the sum loaned, with or without interest.

LOAN DISTINGUISHED FROM DEPOSIT: The main difference between

loan and deposit is that in the former the ownership of the thing given passes,
while in the latter the ownership is retained by the giver. In the case of a loan the
receiver may dispose of the thing given as it were his own, with the obligation
however to return an equal amount of the same kind and quality. In the case of a
deposit the receiver is under obligation to return the same thing, and if it be lost
or destroyed, to pay damages.

While money, as a rule, is subject of a loan, it may in some special

instance be also subject of a deposit.

LOAN DIFFERED FROM BARTER: One essential difference between

loan and barter is that while in loan the subject-matter must be fungible; in barter
it must be non-fungible

Another striking difference is the lack of a period provided in the contract

of barter. It is very apparent in the law that the exchange or mutual transfer of
ownership between the parties take place simultaneously.

Art. 1955. The obligation of a person who borrows money shall be

governed by the provisions of Articles 1249 and 1250 of this Code.

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.

OBLIGATIONS OF DEBTOR GOVERNED BY DIFFERENT RULE

ACCORDING TO THING ACTUALLY LOANED: If the thing loaned was money
the obligation of the debtor is to pay it in money in the currency stipulated and, if
this cannot be done, in the currency which is the legal tender in the Philippines.
Where payment is permitted by the delivery of promissory notes payable to
order, or bills of exchange or other mercantile documents, the debt is not
considered extinguished until after they have been cashed. In case of
extraordinary inflation or deflation of the currency stipulated, the basis of
payments is the value of the currency at the time the obligation was incurred.

If the thing was a fungible thing other than money, the borrower is bound
to return another thing of the same kind, quantity and quality, regardless of its
value. But if the borrower cannot deliver the same kind, he must pay its value as
of the time of the perfection of the loan.

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 ALL OBLIGATIONS UNDERSTOOD TO BE PAYABLE IN LEGAL
TENDER: In the absence of any agreement to the contrary, it is always
understood that the payment of an obligation is to be made in legal tender.

PERIOD FIXED IN LOAN PRESUMED FOR BENEFIT OF DEBTOR AND

CREDITOR: Under the provision of Art 1196 of the New Civil Code, the term or
period fixed in obligations is presumed to be for the benefit of both debtor and
creditor, and for that reason the debtor cannot make payment before the time
stipulated without the consent of the creditor. The presumption is rebuttable.

Art. 1956. No interest shall be due unless it has been expressly stipulated
in writing.

The moratorium law has the effect of suspending the collection or

payment of the principal obligation and since the obligation to pay interest is but
an accessory to the payment of the principal obligation, the same must be
deemed affected in the same manner.

The legal rate of interest from 6% to 12% per annum (now 6% per annum,
per BSP-MB Circular No. 799, effective July 1, 2013) applies only to
forbearances of money, goods or credit and court judgments thereon, but not to
court judgments for damages which does not involve a loan in which cases the
rate remains at 6%.

Although a defective consignation made by a debtor does not discharge

the mortgage debt, the running of interest on the loan is suspended by the offer
and tender of payment.

LEGAL RATE OF INTEREST PRIOR TO ENACTMENT OF USURY

LAW: Where sale under pacto de retro has been reduced to a mortgage, the
“rent” stipulated under the former will ipso facto become interest. On the basis of
a loan of P800.00, the annual “rent” of P480.00 payable by the debtor would be
equivalent to 60% interest per annum, and therefore usurious. As the loan thus
fails to name a lawful rate of interest, it was held that on and after May 1, 1916,
the date when the Usury Law took effect, the debtor would be liable for interest at
the legal rate of 6% per annum. However, under similar circumstances, for a
contract made prior to the enactment of the Usury Law, the debtor would likewise
be liable for interest at not more than the legal rate of 6% per annum.

Art. 1957. Contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury shall be void. The borrower
may recover in accordance with the laws on usury.

There seems to be conflict between the present article and Art. 1413, as
to the amount that can be recovered by the debtor. The second sentence of this
article allows the borrower to recover according to the laws on usury. Under the
Usury Law, Sec. 6, the borrower can recover :the whole interest, commissions,
premiums, penalties and surcharges paid” within two years after payment; but
under Article 1413 of the present Code, it is provided that only interest paid in
excess of that allowed by the Usury Law may be recovered by the debtor.

In a decision of the Supreme Court it was held that only the amount paid
in excess of the legal rate can be recovered.
While the law is clear on this point, the debtor for whose benefit the statute
exists can waive it. Thus, the failure to object to oral evidence to prove the

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express stipulation to pay interest is a waiver of the above-quoted provision of
Art. 1956 as a defense.

Art. 1958. In the determination of the interest, if it is payable in kind, its

value shall be appraised at the current price of the products or goods at the
time and place of payment.

MAY INTEREST BE PAYABLE IN KIND? While the law permits that interest be
payable in kind, such as products or goods, the determination of the value is not
dependent upon the current price at the time and place of the constitution of the
obligation, but rather at the time and place of payment.

Art. 1959. without prejudice to the provisions of Article 2212, interest due
and unpaid shall not earn interest. However, the contracting parties may by
stipulation capitalize the interest due and unpaid, which as added principal
shall earn new interest.

WHEN INTEREST MAY EARN INTEREST: As a rule interest may not

earn new interest. However, the parties to a loan are not forbidden to enter into
an agreement under which interest due and unpaid be capitalized for the purpose
of earning new interest, in the same way as the original capital. Where interest
on interest, however, is not so stipulated or agreed upon, the only instance where
interest may earn new interest is when there is a judicial demand of the
obligation, in which case the rate thereof is limited to the legal interest of 12% per
annum (now 6% per annum) from date of such demand.

The contracting parties may stipulate that the interest due upon the loan
shall constitute a new principal debt from the time it becomes due, in which case
the interest upon said interest due must not be considered as earned by the
principal debt. The stipulation, however, must be clear to authorize capitalization.

Art. 1960. If the borrower pays interest when there has been no stipulation
therefor, the provisions of this Code concerning solutio indebiti, or natural
obligations, shall be applied, as the case may be.

Payment of interest by mistake, where no stipulation therefore has been

made is governed by the provisions on solutio indebiti or by the law on natural
obligations.

Art. 1961. Usurious contracts shall be governed by the Usury Law and
other special laws, so far as they are not inconsistent with this Code.

NOTE:

1. Increase in interest stipulated upon is void if there is no corresponding

stipulation to decrease the interest due when the law reduces the rate of
interest.

2. With respect to the collection of money or promissory note, it being a

forbearance of money, the legal rate of interest for having defaulted on the
payment of 12% (now 6% per annum) will apply. With respect to damages,
it is 6% from the time of the final demand up to the time of finality of the
decision and 12% (now 6%) of the total amount from finality of judgment
until the judgment credit is fully paid. The court considers the latter as
forbearance of money.

12
3. While it is true that the interest ceiling set by the usury law are no longer
in force, it has been held that PD. NO. 1684 and CB Circular No. 905 merely
allow contracting parties to stipulate freely on any adjustment in the
interest rate on a loan or forbearance of money but do not authorize a
unilateral increase of the interest rate by one party without the others
consent.
DEPOSIT
 
CHAPTER 1
DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS
 
Art. 1962. 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.

DEPOSIT IN GENERAL: a deposit is a contract whereby a party called

the depositor delivers a thing to another party called the depositary to keep it,
usually without compensation or reward, and to return it when requested to do so
or according to the object and purpose of the original trust.

Fixed, savings, and current deposits of money in banks and similar

institutions are not true deposits. They are considered simple loans.

There are two essential elements of a deposit: 1.) the delivery of the thing,
and 2) safekeeping - purpose. The last element distinguishes it from other
contracts where the custody of things is an accessory obligation.

A person who received the whole sum due from an obligation of which he
is entitled only to a part becomes a depositary of the remainder to be held in trust
for the other creditor and he has no right to dispose of such remainder or
arbitrarily to deduct therefrom any charges which he alleges should be paid by
the owner of the remainder. But the fact that a credit is given the name of deposit
does not make it one.

Distinguished from Loan: The depositor can demand the return of the
thing at any time, while a lender cannot seek restitution until the time for payment
as provided in the contract, has arisen.

Distinguished from Commodatum: These two are both real contracts

and in both there is obligation to return the thing to the bailor. However, they
have the following differences: 1.) the depositary, in principle, cannot use the
thing, but must simply keep it; while the borrower in commodatum receives the
thing precisely to use it. 2.) the deposit may be for a compensation, but
commodatum is essentially gratuitous. 3.) the depositary can always be required
to return the thing at anytime; while the borrower in commodatum can use the
thing for the period stipulated, and can be required to return only in case of
urgent need.

Distinguished from lease: In lease, the principal purpose is the use of

the thing, while in deposit, it is the safekeeping of the thing.

Distinguished from sale: in sale, the ownership of the thing is

transferred; in deposit, it is retained by the depositor.

13
 Art. 1963. An agreement to constitute a deposit is binding, but the
deposit itself is not perfected until the delivery of the thing.

DEPOSIT NOT PERFECTED BY MERE AGREEMENT: While agreement

to constitute a deposit is binding and may be enforced in law, the deposit is not
deemed to be perfected unless accompanied by delivery of the thing.

DEPOSIT AS A REAL CONTRACT: As to the perfection of the contract, it

is to be observed that what is true in mutuum and commodatum is also true in
deposit. Deposit is not a consensual contract that may be perfected by mere
consent of the parties, such as sale, hiring and mandate. It calls for something
more than consent. It requires delivery of the thing, without which there can be
no valid deposit. The law imposes upon the depositary the obligation to return the
thing. Naturally such obligation cannot be complied with if there was nothing
delivered.

Art. 1964. A deposit may be constituted judicially or extrajudicially.

Judicial deposit- refers to that made by order of a court in a judicial

proceeding

Extrajudicial deposit- refers to that made by act of the parties which may
be:
1. Voluntary deposit- is that made in the absence of necessity; that is
conventional or by contract of the parties.

2. Necessary deposit- is that made upon some sudden emergency, such

as the occurrence of fire or in case of shipwreck.

Gratuitous deposit and onerous deposit. As a rule, deposit is considered

gratuitous, but it admits of exceptions, as when there is an agreement to the
contrary or when the depositary is engaged in the business of storing goods, or
operating a warehouse business.

Art. 1965. A deposit is a gratuitous contract, except when there is an

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

Art. 1966. Only movable things may be the object of a deposit.

Only movables can be the object of deposit, because this contract is

intended to insure the restitution of things which are susceptible of disappearing.
The movables must be corporeal, because his rights are not susceptible of
material custody. A contract may be entered into where one party binds himself
to take care of an immovable while its owner is away, and to give it back to him
upon his return. This would be a lease of services, if compensation is to be paid;
or an innominate contract akin to deposit, if it is gratuitous.

As expressly limited by law, only movables may be the object of

deposit. However, in case of sequestration or judicial deposit, immovables
may likewise be object thereof as provided in ARTICLE 2006 of the Civil Code.

Art. 1967. An extrajudicial deposit is either voluntary or necessary.

14
 CLASSIFICATION OF DEPOSITS: Deposits in general, may be judicial or
extrajudicial. A judicial deposit refers to that made by order of a court in a judicial
proceeding, while extrajudicial deposit refers to that made by act of the parties.
Deposits may also be voluntary or necessary. A voluntary deposit is made in the
absence of necessity, that is conventional or by contract of the parties; while a
necessary deposit is that made upon some sudden emergency, such as the
occurrence of fire or in case of shipwreck.

There is also another kind of deposit, denominated irregular deposit,

where money is deposited to be returned not in specie, but by an equal sum,
such as in the case of a savings account with a bank.

VOLUNTARY DEPOSIT
 
SECTION 1. - General Provisions
 
Art. 1968. A voluntary deposit is that wherein the delivery is made by the
will of the depositor. A deposit may also be made by two or more persons
each of whom believes himself entitled to the thing deposited with a third
person, who shall deliver it in a proper case to the one to whom it belongs.

VOLUNTARY DEPOSIT IN GENERAL: A voluntary deposit is generally

constituted by a person who is the owner of the thing, in which case only two
persons may be necessary. In some cases, however, a third person may be
needed, as where two or more persons disputing the ownership of the thing may
agree to deliver it to a third person in trust, pending final determination of their
respective rights to the thing deposited. In all these cases, deposit is made
according to the free will of the parties concerned.

Art. 1969. A contract of deposit may be entered into orally or in

writing.

OWNERSHIP OF DEPOSIT NOT ESSENTIAL REQUISITE: It is not

essential that the depositor be the lawful owner of the thing delivered. It is
enough that he believes himself to be entitled thereto. As a matter of fact, even a
thief may constitute a deposit of the thing stolen; the depositary cannot demand
that the depositor prove his ownership of the thing deposited. Of course, the
depositary is not bound to keep the thing as soon as it has come to his
knowledge that the thing deposited with him was stolen.

By coincidence, however, it may happen that the depositary turns out to

be the lawful owner of the stolen property. Under the circumstance the deposit
automatically becomes null and void, it being essential that the depositary be
another person than the owner.

DELIVERY NEED NOT BE ACTUAL: The transfer of possession from the

depositor to the depositary may be actual or symbolical, like goods in a
storehouse where delivery of the key, or goods in the hands of a carrier by
delivery of the bill of lading is sufficient.

FORMAL REQUISITE: The law does not prescribe any form for a contract
of deposit. In fact, it may be entered into even orally.

However, the mere absence of a written agreement will not preclude one
to establish that a contract of deposit was actually entered into, inasmuch as it
can legally be shown that the contract was entered into orally, corroborated by
the delivery of the thing deposited.

15
 Art. 1970. If a person having capacity to contract accepts a deposit
made by one who is incapacitated, the former 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.

LEGAL CAPACITY OF PARTIES: The general rights and obligations

of the parties to a contract of deposit, when entered into by one who is
legally capacitated with another who is not are governed by the provisions
of the Civil Code.

DEPOSITOR UNDER LEGAL INCAPACITY: Where the depositor is a

minor incapacitated to contract and the depository who accepted the thing
delivered has the legal capacity, the contract of deposit remains valid, especially
with respect to the obligations imposed by law upon the depositary, until
annulled. The return of the thing may be demanded at the instance of the
guardian or legal representative of the minor or the latter himself when his
incapacity has been removed.

DEPOSITARY UNDER LEGAL INCAPACITY: Where it is depositary that

is under legal incapacity and the depositor is capacitated, the latter may choose
either one of two alternative, namely: 1. to recover the thing from the
incapacitated depositary if it is still with him, or 2. to ask for the reimbursement to
him of such amount as the incapacitated depositary has profited himself by the
deposit. But where the title to the thing given in deposit has already passed to an
innocent third person; the depositor can no longer recover the same. In other
words, between an innocent third party who acquired the thing in good faith and
the owner who is to blame for dealing with a person under legal incapacity, the
former shall be preferred.

Art. 1971. If the deposit has been made by a capacitated person with
another who is not, the depositor shall only have an action to recover the
thing deposited while it is still in the possession of the depositary, or to
compel the latter to pay him the amount by which he may have enriched or
benefited himself with the thing or its price. However, if a third person who
acquired the thing acted in bad faith, the depositor may bring an action
against him for its recovery.

If the depositary has transferred the possession of the thing to another,

with a fraudulent intention to make it difficult for the depositor to recover it, he can
be sued as if he were in possession of the thing. He may also be sued if, acting
with discernment, he destroys the thing intentionally. His liability, if it cannot be
based on the contract of deposit, can be based on his fraudulent act.

SECTION 2. - Obligations of the Depositary

 
Art. 1972. The depositary is obliged to keep the thing safely and to return it,
when required, to the depositor, or to his heirs and successors, or to the
person who may have been designated in the contract. His responsibility,
with regard to the safekeeping and the loss of the thing, shall be governed
by the provisions of Title I of this Book.

If the deposit is gratuitous, this fact shall be taken into account in

determining the degree of care that the depositary must observe.

16
 SAFEKEEPING AS DEPOSITARY’S PRIMARY DUTY: In order that the
depositary may be able to comply with his obligation to return the thing, it is his
primary duty to keep it safely, or be held responsible therefore according to
circumstances.

DILIGENCE REQUIRED OF DEPOSITARY: As a rule the depositary as

the obligor is bound to exercise the degree of diligence commensurate with the
nature of the obligation to be performed by him. But where the law or contract
does not state the diligence which is to be observed, it is presumed to be that
expected of a good father of a family.

It is required that he exercise the same degree of diligence in the

safekeeping and preservation of the deposit as he would do if the thing were his
own. One reason advanced is because the juridical relationship between the
parties is essentially one of confidence; and the other reason is because the
depositor in choosing the depositary must have taken into account how the
depositary customarily takes care of his own property, and presumes that the
property deposited will receive the same care in the hands of the depositary.

WHEN DEPOSITARY’S RESPONSIBILITY AGGRAVATED:

The responsibility of the depositary in case of loss or damage of the thing
deposited is aggravated in any of the following cases:

1. When there was express or implied agreement of the parties. Here,

the depositary may assume full or greater responsibility under any or all
circumstances.

2. When the depositary has voluntarily offered to receive the deposit.

The offer implies a promise or assurance to exercise more diligence in the care
and safekeeping of the thing deposited, and this must have inspired or led the
depositor to give greater confidence.

3. When the depositary has received compensation. It is only logical to

assume that the responsibility of the depositary who has been paid should be
greater. The degree of care that the depositary must observe is, of course,
comparatively less, if the deposit is gratuitous.

4. When the deposit was made for the benefit of the depositary. Where
the depositary receives benefits, the reaction that can reasonably be expected of
him is the exercise of more care and diligence than is ordinarily expected, if
otherwise.

5. When the return of the thing was delayed. In case of delay in the
return of the thing and such delay is attributable to the depositary, the latter
cannot be free from blame. It can be presumed that were it not for the delay, the
loss or damage caused may not have occurred at all.

The depositary is under obligation to restore the things deposited to the

owner upon demand, together with all the fruits and accessions of the thing
deposited, if any, without any right to retain them even under the pretext of
receiving compensation for other credits or an indemnity for expenses made for
its preservation.

The diligence expressed in the contract, and in the absence of agreement,

the diligence of a good father of a family. This may, however, be increased, as
when a higher degree of diligence is stipulated, or when it is the depositary who

17
voluntarily offered to keep the thing, or when the deposit is compensated or
produces benefit to the depositary.

Art. 1973. Unless there is a stipulation to the contrary, the depositary

cannot deposit the thing with a 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.

RESPONSIBILITY IN CASE OF LOSS OF DEPOSIT: The depositary,

unless allowed, cannot pass the thing deposited with him to another person; and
even if allowed, he is not free from responsibility in case of loss of the thing when
the other person chosen proves to be careless and unfit. The reason for this
restriction is if we consider that a contract of deposit imports a personal trust or
confidence which cannot be transferred. The depositary is also responsible for
loss or damage that may be caused by his employee’s fault or negligence.

DEPOSITARY LIABLE EVEN IF THING LOST WAS INSURED- where

the thing deposited was lost due to fault or breach of contract on the part of the
depositary, although it was insured and the depositor was able to collect the
insurance, still the depositary is liable therefore, if not to the depositor, to the
insurance company, and sometimes even to both. See 2207

Under 1981, the fault on the part of the depositary is presumed unless
there is proof to the contrary.

Art. 1974. The depositary may change the way of the deposit if under
the circumstances he may reasonably presume that the depositor would
consent to the change if he knew of the facts of the situation. However,
before the depositary may make such change, he shall notify the depositor
thereof and wait for his decision, unless delay would cause danger

CHANGE OF THE MODE OF DEPOSIT- the depositary in the exercise of

the diligence expected of him as a good father of a family may find it necessary
to change the way of the deposit. If it is for the better, there can be no question.
But the change contemplated or done may be the result of miscalculation. In
fairness to the depositor, the latter is entitled to previous notice thereof under
ordinary circumstances.

Art. 1975. The depositary holding certificates, bonds, securities or

instruments which earn interest shall be bound to collect the latter when it
becomes due, and to take such steps as may be necessary in order that the
securities may preserve their value and the rights corresponding to them
according to law.

The above provision shall not apply to contracts for the rent of safety
deposit boxes.

DUTY TO COLLECT INTEREST ON SECURITIES HELD- for the

preservation of the value of the securities held under deposit and their earnings,
if any, the law imposes upon the depositary the duty not only to collect, when
due, the interest thereon but also to take such other measures necessary to
maintain the value of said securities.

Art. 1976. Unless there is a stipulation to the contrary, the depositary

may commingle grain or other articles of the same kind and quality, in

18
which case the various depositors shall own or have a proportionate
interest in the mass.

COMMINGLING OF THINGS HELD- implied authority of the depositary to

commingle grain and other articles of the same kind and quality. This will make
the handling of similar deposits from different sources less difficult. However, if a
particular depositor is not agreeable to such practice, he has the perfect right to
stipulate to forbid the depositary to commingle his deposit with the others.

Art. 1977. The depositary cannot make use of the thing deposited without
the express permission of the depositor.

Otherwise, he shall be liable for damages.

However, when the preservation of the thing deposited requires its use, it
must be used but only for that purpose.

The depositary cannot make use of the thing deposited without the
permission of the depositor; neither can he dispose of the same for the use of
another, especially if the purpose for which the thing was deposited would be
frustrated by the allowance of its use.

Depositary can make use of the thing deposited only with express
permission of the depositor, but in that event the contract may change its nature
by being converted into mutuum, if the thing to be used will be consumed
thereby, or commodatum, if it is non-consumable. The only exception to the rule
is where the safekeeping of the thing, notwithstanding its use, remains to be the
primary purpose of the contract.

Art. 1978. When the depositary has permission to use the thing deposited,
the contract loses the concept of a deposit and becomes a loan or
commodatum, except where safekeeping is still the principal purpose of
the contract.

The permission shall not be presumed, and its existence must be proved.

If the use allowed to the bailee is secondary, and the principal purpose of
safekeeping remains unaltered, the contract retains its character as a deposit. So
long as the main purpose of the contract is for the benefit of the bailor, the
incidental benefit to the bailee does not convert it into a commodatum.

In the case of a bank, authority to use money deposited is deducible from

the fact that the bank pays, and the depositor asks, for interest on the deposit.

It may also be noted that in some special instances the use of the thing
may be considered legally required, when its preservation demands its use. In
that case, it becomes the duty not the right, of the depositary to make use of the
thing. Thus, the express consent of the depositor may not be necessary if the
use contemplated is reasonably required for the preservation of the thing.

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;

19
 (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.

EXCEPTIONS TO THE RULE OF NON-LIABILITY DUE TO

FORTUITOUS EVENT-(1979)

BASIS OF THE EXCEPTION- under the first exception, the depositary by

agreeing to the stipulation that he will be responsible for the loss regardless of
fortuitous event that may cause it, assumes the risk of an insurer of the thing
deposited.

By using the thing without the depositor’s permission, the depositary has
already violated the law (art 1977) under which he is held liable for damages.

Beyond the period fixed for the return of the thing, the depositary assumes
all risk of loss or damage. Reason- based upon the presumptions that were it not
for the delay the loss would not have occurred.

By allowing someone else to use the thing, the depositary is guilty of a

breach of trust, especially where he himself could not have used it without the
owner’s permission. But even assuming that the depositary has been granted the
permission to use the thing himself, it cannot be denied that the trust or
confidence reposed in him is purely personal and this cannot just be transferred
without committing an act of abuse, if not misuse of another’s property.

Art. 1980. Fixed, savings, and current deposits of money in banks

and similar institutions shall be governed by the provisions concerning
simple loan.

Money deposited in Bank not governed by law on deposit- when a person

deposits money with a bank, there is created a relation of creditor and debtor,
with the depositor as the creditor and the bank as the debtor. The law governing
their relation is that of mutuum or simple loan.

Bank deposit may be set-off indebtedness/compensation can take place.

The depositor may be allowed to set- off his indebtedness to the bank, or to
apply credit with the bank against the loans he had obtained from his deposit.

Art. 1981. When the thing deposited is delivered closed and sealed, the
depositary must return it in the same condition, and he shall be liable for
damages should the seal or lock be broken through his fault.

Fault on the part of the depositary is presumed, unless there is proof to the
contrary.

As regards the value of the thing deposited, the statement of the depositor
shall be accepted, when the forcible opening is imputable to the
depositary, should there be no proof to the contrary. However, the courts
may pass upon the credibility of the depositor with respect to the value
claimed by him.

When the seal or lock is broken, with or without the depositary's fault, he
shall keep the secret of the deposit.

20
 CLOSED DEPOSIT and depositary’s LIABLITY FOR DAMAGES- basis
of the depositary’s obligation with respect to closed or sealed box deposit is the
confidence reposed on him by the depositor.

Where the cattle taken for pasturage and received either as deposit, or
according to the local custom of pasturing cattle, are claimed to have perished,
the burden of explanation of the loss rests upon the depositary and the fault of
such loss is presumed to be his.

Art. 1982. When it becomes necessary to open a locked box or

receptacle, the depositary is presumed authorized to do so, if the key has
been delivered to him; or when the instructions of the depositor as regards
the deposit cannot be executed without opening the box or receptacle.

WHEN DEPOSITARY JUSTIFIED TO OPEN: The depositary may justify

the opening of the box receptacle, when called upon to do so by necessity, even
without the express authority from the depositor, provided that any of the
following conditions exist:

1. Where the key has been turned over to the depositary, for in this case
the implication is that the key would not have been delivered for no purpose at
all;

2. Where the depositary was given instructions concerning the contents of

the sealed box, which could not be carried out without opening the same. As an
instance of this, the depositary may have instructions to dispose of or pawn so
much of the jewels locked in the box as may be necessary, after the lapse of one
year, in case the depositor should fail to return from abroad, the proceeds to
defray the expenses of his family left behind.

Art. 1983. The thing deposited shall be returned with all its products,
accessories and accessions.

Should the deposit consist of money, the provisions relative to agents in

article 1896 shall be applied to the depositary.

WHAT TO RETURN: When the thing deposited is returned by the

depositary, the depositor has the right to expect that all products, accessories
and accessions therof, which by operation of law belong also to the same owner
of the principal, should likewise be turned over to him.

It will be noted that where money was the object of the deposit, the
depositary upon the return of the deposit is bound to pay interest on the money
he has applied to his own use as well as on the sum still owes after the
termination of the contract of deposit.

However, where money was deposited in court it draws no interest. Thus,

where the Manila Railroad Company not only deposited the money in court, but
also stood ready and willing to pay the person to whom it belonged as soon as
that fact should be determined, it was held, as a general rule, that unless an
obligation, by its terms, or by understanding of the parties, bears interest from
date, it will draw interest only from the deposit in court as required by law, such
deposit by its nature does not draw interest except when there is an agreement
to the contrary.

21
 FAILURE TO RETURN: There can be no question that if the depositary
should fail to return the deposit, he will be held liable for damages and, in same
instances, may even be prosecuted criminally.

Where the sum of money is received as a deposit or as earnest money

intended merely to bind the parties to a contract, and such contract is not carried
out because of circumstances beyond the control of the parties, for which neither
can be blamed, equity requires that said deposit be returned.

Art. 1984. The depositary cannot demand that the depositor prove his
ownership of the thing deposited.

Nevertheless, should he discover that the thing has been stolen and who
its true owner is, he must advise the latter of the deposit.

If the owner, in spite of such information, does not claim it within the
period of one month, the depositary shall be relieved of all responsibility by
returning the thing deposited to the depositor.

If the depositary has reasonable grounds to believe that the thing has not
been lawfully acquired by the depositor, the former may return the same.

OWNERSHIP OF DEPOSITOR NEED NOT BE ESTABLISHED: When

the depositor requests for the return of the thing, it is not necessary for him to
prove to the satisfaction of the depositary that he is the owner. The depositor
need not be the owner, and the mere fact that the thing deposited turns out to be
a stolen property will not operate to invalidate the contract of deposit.

PRESUMPTION AS TO OWNERSHIP OF THING DEPOSITED: From the

foregoing provision of law, it would seem that the thing deposited can safely be
presumed to be lawfully owned by the depositor or at least that it came into his
possession through legal means. Thus, the depositor maybe a carrier or a
commission agent or a factor or a lessee. So long as the contrary is not shown,
the depositary is bound to honor the right of the depositor. However, where the
contrary appears, that this fact as well as the identity of the true owner is made
known to the depositary, the latter is bound to notify the owner so that this party
may avail himself of the opportunity not to seize the property but to take lawful
means to have the property restored to him. To enforce the right of the owner,
the depositary cannot be held liable if he returns the thing to the depositor.

The provisions of the second and third paragraphs of this article have no
application to things which have been lost by their owner and deposited by the
finder.

Art. 1985. When there are two or more depositors, if they are not solidary,
and the thing admits of division, each one cannot demand more than his
share.

When there is solidarity or the thing does not admit of division, the
provisions of Articles 1212 and 1214 shall govern. However, if there is a
stipulation that the thing should be returned to one of the depositors, the
depositary shall return it only to the person designated.

TWO OR MORE DEPOSITORS OF SAME PROPERTY:

22
 RIGHT OF CO-DEPOSITOR TO DEMAND RETURN ILLUSTRATED: By
way of illustration, if A and B deposited five typewriters of the same brand with C,
three belonging to A and two belonging to B, if these depositors are not solidary,
A and B separately may demand from C the return of the things deposited, but A
cannot get more than three of these typewriters, nor B more than two.

However, if the depositors in the above cases are solidary, anyone of

them may demand the return of all the typewriters. But if the deposit happens to
be indivisible, such as an automobile the legal limitation is that A or B may do
whatever may be useful to the other, but not anything that may be prejudicial.
Thus, A cannot ask for the return of one-half of the motor vehicle. If the
depositors are solidary, anyone of them may demand judicially or extrajudicially
the return of the whole thing. Of course, if anyone of them was expressly
designated to demand and receive the deposit, the depositary is bound to return
it only to him.

Art. 1986. If the depositor should lose his capacity to contract after
having made the deposit, the thing cannot be returned except to the
persons who may have the administration of his property and rights.

DEPOSITOR BECOMING INCAPACITATED:

The person referred to, who may have the administration for the property
and rights of someone who has lost his capacity, is the legal guardian or one duly
appointed by the court. The return of the property to the incapacitated depositor
is not necessarily without effect; it is still valid but only insofar as the property
remaining with or kept by the depositor or to such an extent as has benefited
such depositor.

Art. 1987. If at the time the deposit was made a place was designated for
the return of the thing, the depositary must take the thing deposited to
such place; but the expenses for transportation shall be borne by the
depositor.

If no place has been designated for the return, it shall be made where the
thing deposited may be, even if it should not be the same place where the
deposit was made, provided that there was no malice on the part of the
depositary.

PLACE TO RETURN DEPOSIT: As may be observed from the above legal

provision, the expenses for the transportation of the thing deposited to the place
designated for its return are to be borne by the depositor. It can be inferred
therefrom that the designation of such place is the prerogative of the depositor,
without need of agreement with the depositary.

Art. 1988. The thing deposited must be returned to the depositor upon
demand, even though a specified period or time for such return may have
been fixed.

This provision shall not apply 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. In these cases, the depositary must immediately inform the
depositor of the attachment or opposition.

RETURN OF DEPOSIT DEMANDABLE ANYTIME: As a rule, the period

within which the deposit may remain with the depositary depends not so much

23
upon what has previously been fixed, but upon the sole disposal by the
depositor.

PERIOD BINDING UPON DEPOSITARY BUT NOT UPON DEPOSITOR:

A deposit being presumed to be for the benefit of the depositor, the longer the
property is held in the custody of the depositary for safekeeping, the better for the
depositor in view of the continued benefit accruing to him. Hence, if the depositor
demands for the return of the thing earlier than the time fixed, that is his privilege
to do without need of making justification.

As may be observed, the thing deposited may be withdrawn by the

depositor from the depositary at will even if a period or time has been fixed. The
same thing can be done if no time was fixed. Thus it was held that where the
document is in fact clearly a deposit, according to its terms, without a fixed time,
the sum deposited may be withdrawn at anytime.

On the other hand, the depositary cannot, when a period has been fixed,
just return the thing at will, for that would be violation of his obligation under the
contract of deposit. Of course, if the depositary has reasonable grounds to
believe that the thing has not been lawfully acquired by the depositor, the law
exempts him from continuing with his obligation to keep the thing; he may return
it immediately to the depositor.

However, where the thing has been judicially attached while in his
possession or that there is an open opposition to the return of the thing, the
depositary is under obligation to withhold it until duly ordered by competent
authority to do otherwise. Meanwhile, what he may do is to advise the depositor
of the attachment or opposition.

A deposit without a fixed period may be withdrawn at anytime, and there is

no need to secure a judicial order allowing its withdrawal.

Art. 1989. Unless the deposit is for a valuable consideration, the depositary
who may have justifiable reasons for not keeping the thing deposited may,
even before the time designated, return it to the depositor; and if the latter
should refuse to receive it, the depositary may secure its consignation
from the court.

CONSIGNATION OF DEPOSIT: If the contract of deposit is gratuitous

and the depositary has justifiable reasons, he may return the thing to the
depositor without waiting for the expiration of the period fixed, and in case the
depositor should refuse to accept it, the thing may be delivered to the court by
way of consignation.

As may be seen, the foregoing provision does not apply to a case of

deposit for valuable consideration. It seems that even if there exist good reasons
in such case, the depositary as a rule cannot return the deposit earlier than the
time agreed upon.

It is not fair or equitable to oblige the depositary to continue keeping the

thing deposited, if it would result in serious prejudice to his person or property.
When the deposit has been for an excessively long period of time; or when there
is serious danger that the property may be lost- these, according to Goyena, are
examples of just causes for giving up the deposit. The sufficiency of the cause,
however, must be real, and not merely alleged or imagined; hence, the law does
not permit impulsive renunciations which might produce injury to the depositor.

24
Art. 1990. If the depositary by force majeure or government order loses the
thing and receives money or another thing in its place, he shall deliver the
sum or other thing to the depositor.

Art. 1991. The depository's heir who in good faith may have sold the thing
which he did not know was deposited, shall only be bound to return the
price he may have received or to assign his right of action against the
buyer in case the price has not been paid him.

The responsibility of the depositary’s heir is limited to the extent that he

benefited from the thing deposited. If instead of selling the thing, he consumed it
in the belief that it is his, he benefits to the extent of its value at the time it is
consumed; so, he must pay such value to the depositor. But if he destroys the
thing in good faith thinking it is useless, or too expensive to keep, of for any other
reason, he is not liable to the depositor, unless he benefited from the destruction.

If the heir uses the thing in such manner that it cannot be separated
without injury to his property to which he has attached it, he is liable for its price
to the depositor. Thus, where the thing deposited is lumber, and it is used by the
heir in the construction of a house, the depositor cannot demand the destruction
of the house but only to the price of the lumber.

When the thing has been alienated to a third person who acquired it in
good faith, the depositor cannot recover it from the transferee, his action being
limited to a recovery of the price.

SECTION 3. - Obligations of the Depositor

Art. 1992. If the deposit is gratuitous, the depositor is obliged to reimburse

the depositary for the expenses he may have incurred for the preservation
of the thing deposited.

REIMBURSEMENT OF EXPENSES FOR PRESERVATION: It is the

primary obligation of the depositor to reimburse the depositary for the expenses
that may be incurred for the preservation of the thing deposited, where the
deposit is gratuitous. As to whether extraordinary expenses shall be deemed
included, the law seems to be silent. It is submitted, however, that so long as the
expenses were so incurred for the preservation of the property deposited, the
reimbursement thereof cannot be legally denied the depositary.

Art. 1993. The depositor shall reimburse the depositary for any loss arising
from the character of the thing deposited, unless at the time of the
constitution of the deposit the former was not aware of, or was not
expected to know the dangerous character of the thing, or unless he
notified the depositary of the same, or the latter was aware of it without
advice from the depositor.

REIMBURSEMENT FOR LOSS SUFFERED BY DEPOSITARY: If the

depositary suffers any loss by reason of the deposit, the law entitles him to
recover from the depositor. To this rule there are four exceptions: 1.) where the
depositor did not know of the dangerous character of the deposit at the time; 2)
where the depositor was not expected to know it under the circumstances;
3.)where the depositary knew it himself 4.)where the depositary was expected to
know it.

Art. 1994. The depositary may retain the thing in pledge until the full
payment of what may be due him by reason of the deposit.

25
RIGHT OF RETENTION:

Art. 1995. A deposit its extinguished:

(1) Upon the loss or destruction of the thing deposited;

(2) In case of a gratuitous deposit, upon the death of either the

depositor or the depositary.

EXTINGUISHMENT OF DEPOSIT: While it is true that the loss or

destruction of the thing deposited will operate to extinguish the deposit, the
depositary is not free from the consequent obligation to pay damages to the
depositor if the loss or destruction is attributable to the depositary’s fault or
default. This rule applied whether the deposit be gratuitous or otherwise.

Upon the death of the depositor or of the depositary, where the deposit is
gratuitous, the contract is extinguished and the thing deposited must be returned
to the depositor or his heirs of legal representative.

CHAPTER 3
NECESSARY DEPOSIT
 
Art. 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;

(2) When it takes place on the occasion of any calamity, such as fire,
storm, flood, pillage, shipwreck, or other similar events.

DEPOSITARY WHEN DEEMED NECESSARY: A deposit is deemed to be

necessary when constituted by reason of law or by the circumstances of a
calamity.

Necessary Deposits in Compliance with a legal obligation:

1. The judicial deposit of a thing the possession of which is being disputed in a

litigation by 2 or more persons.

2. The deposit with a bank or public institution of public bonds or instruments of

credit payable to order or bearer given in usufruct when the usufructuary does
not gave proper security for their conservation.

3. The deposit of a thing pledged when the creditor uses the same without the
authority of the owner or misuses it in any other way.

4. Those required in suits as provided for in the Rules of Court.

5. Those constituted to guarantee contracts with the government. In these last

cases the deposit arises from an obligation of a public or administrative
character.

Art. 1997. The deposit referred to in No. 1 of the preceding article shall be
governed by the provisions of the law establishing it, and in case of its
deficiency, by the rules on voluntary deposit.

The deposit mentioned in No. 2 of the preceding article shall be regulated

by the provisions concerning voluntary deposit and by Article 2168.

26
WHAT GOVERN NECESSARY DEPOSIT: A deposit made in compliance
with the law is to be governed by the provisions of said law, and in default thereof
by the rules governing voluntary deposit. A deposit made on the occasion of a
calamity, while regulated by the law on voluntary deposit, imposes upon the
owner the obligation to pay just compensation to the person who saved it from
destruction.

Article 2168 referred to above, provides that: When during a fire, flood, storm, or
other calamity, property is saved from destruction by another person without the
knowledge of the owner, the latter is bound to pay the former just compensation.”

ILLUSTRATION OF DEPOSIT IN COMPLIANCE WITH LEGAL OBLIGATION:

Under the provision of Section 892 of the Revised Administrative Code, a person
arriving in the Philippines, having in his possession any firearms or ammunition
for which he has no license, is under obligation to deposit the same with the
Collector of Customs for delivery to the Chief of Constabulary for safekeeping.
This deposit is necessary to comply with a legal obligation.

Art. 1998. The deposit of effects made by the travelers in hotels or inns
shall also be regarded as necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided that notice was given to
them, or to their employees, of the effects brought by the guests and that,
on the part of the latter, they take the precautions which said hotel-keepers
or their substitutes advised relative to the care and vigilance of their
effects.

GUEST’S BELONGINGS IN HOTEL ALSO REGULATED AS NECESARRY- for

the security and protection of travelers who must necessarily have to deposit
their personal effects in hotels or inns during their temporary accommodation, the
law has included such belongings of theirs within the category of necessary
deposits, and prescribes a distinct set of rules to govern the same.

Art. 1999. The hotel-keeper is liable for the vehicles, animals and articles
which have been introduced or placed in the annexes of the hotel.

LIABILITY EXTENDED TO HOTEL ANNEX- for the purpose of this extended

liability of the hotel-keeper, it is necessary that the guest notify him or his hotel
employee of the things said guest will keep or place in the hotel annex, and that
the same guest take the necessary precautions given him.

Art. 2000. The responsibility referred to in the two preceding articles

shall include the loss of, or injury to the personal property of the guests
caused by the servants or employees of the keepers of hotels or inns as
well as strangers; but not that which may proceed from any force majeure.
The fact that travellers are constrained to rely on the vigilance of the
keeper of the hotels or inns shall be considered in determining the degree
of care required of him.

NON-LIABLITY IN CASE OF FORCE MAJEURE- while the inn- keeper or hotel-

keeper is responsible for the loss or damage to hotel guest’s belongings,
although caused by the hotel servants or employees, or even outsiders, it does
not cover loss or injury through force majeure.

Art. 2001. The act of a thief or robber, who has entered the
hotel is not deemed force majeure, unless it is done with the
use of arms or through an irresistible force.

27
REASON FOR SPECIAL LIABLITY- travelers, who are usually strangers to
the place, may be given the special care and attention that they deserve for
which they are charged. A hotel keeper holds out a general invitation to travelers
to come to his house, and receives substantial compensation for his hospitality,
hence the law imposes upon him the corresponding duties one of which is to
protect the property of those whom he receives as guests.

As a rule, he is practically an insurer of the goods of his guests, but is excused

from liability when the loss results from force majeure or by fault, direct or
implied, of the guest himself.

To hold the hotel-keepers or inn keepers liable for the effects of their guests, it is
not necessary that they be actually delivered to the inn keepers or their
employees. It is enough that said effects are within the inn or hotel.

ROBBERY NOT NECESSARILY CONSTITUTING FORCE MAJEURE- In order

that the act of a thief or robber may constitute force majeure, and exempt the
hotel- keeper from liability, it is necessary that it be accomplished with the uses
of arms or through an irresistible force.

EXAMPLE- If a thief scaled the hotel window while the guest was out and forced
open a locked drawer to get the money of the guest kept there, there being
neither arms nor irresistible force employed, there was no force majeure and the
inn-keeper is still liable for the loss.

Art. 2002. The hotel-keeper is not liable for compensation if the loss is due
to the acts of the guest, his family, servants or visitors, or if the loss arises
from the character of the things brought into the hotel.

LOSS ATTRIBUTABLE TO GUESTS OR HIS SERVANTS- Where the loss may

be attributed to the acts of the guest himself, or his companions or visitors, or
resulted from the nature of the things brought to the hotel, the inn-keeper is
EXEMPT from responsibility.

PRESUMPTIVE LIABLITY- the hotel-keeper is prima facie liable for the loss or
damage to the goods brought by his guest to the hotel. It is, therefore, incumbent
upon him to show that the goods were not lost or damaged by reason of his
negligence or fault, but by the acts of the guest, his family, servants or visitors, or
that it was caused by the character of the things brought into the hotel.

Art. 2003. The hotel-keeper cannot free himself from responsibility by

posting notices to the effect that he is not liable for the articles brought by
the guest. Any stipulation between the hotel-keeper and the guest whereby
the responsibility of the former as set forth in articles 1998 to 2001 is
suppressed or diminished shall be void.

HOTEL POSTERS DISCLAIMING ANY RESPONSIBILTY WITHOUT EFFECT-

the usual notices posted by hotel-keepers in their premises disclaiming any
responsibility of the management for articles of the guests that may be lost are
WITHOUT FORCE AND EFFECT.

However, the hotel keeper may make such regulations in the management of his
hotel or inn as will more effectively secure the property of his guests and operate
as a protection to himself. It is incumbent upon the guest, if he means to hold the
inn-keeper liable to his responsibility, to comply with any regulations that are just
and reasonable, when he is requested to do so.

28
Art. 2004. The hotel-keeper has a right to retain the things brought into the
hotel by the guest, as a security for credits on account of lodging, and
supplies usually furnished to hotel guests.

SECURITY FOR HOTEL CHARGES- the law grants the hotel-keeper a LIEN on
the goods and articles brought in by the guest for unsettled hotel charges. He
may RETAIN them until the account of the guest has been settled.

In fact, for non-payment of his hotel charges, the hotel guest may be charged
with estafa.

CHAPTER 4
SEQUESTRATION OR JUDICIAL DEPOSIT
 
NATURE AND PURPOSE OF SEQUESTRATION- it is a judicial process by
which property, real or personal, as may be subject of conflicting claims of
ownership, liens or other special rights, is taken and kept in legal custody in order
to preserve it during the pendency of the litigation, subject to further disposition of
the court.

Art. 2005. A judicial deposit or sequestration takes place when an

attachment or seizure of property in litigation is ordered.

WHEN SEQUESTRATION TAKES PLACE – upon the issuance of the

corresponding writ or order by the court.

The appointment of a receiver by the court to take charge of the property

involved in litigation has the effect of seizing the property out of the possession of
the defendant. This is also a form of sequestration or judicial deposit.

Art. 2006. Movable as well as immovable property may be the object of

sequestration.

Art. 1966 refers to extrajudicial deposits which has subject matter only movables

Art. 2007. The depositary of property or objects sequestrated cannot be

relieved of his responsibility until the controversy which gave rise thereto
has come to an end, unless the court so orders.

RESPONSIBILITY OF DEPOSITARY OF SEQUESTERED PROPERTY- for the

preservation of the property under judicial deposit, the depositary is bound to
exercise the diligence of a good father of a family, and unless the court orders
otherwise, he is not relieved of his responsibility until the termination of the
litigation.

Art. 2008. The depositary of property sequestrated is bound to comply, with

respect to the same, with all the obligations of a good father of a family.

Art. 2009. As to matters not provided for in this Code, judicial sequestration
shall be governed by the Rules of Court.

Liability of principal comes first, that of the g. next G that’s from surety

G’tor an insurer of debtor’s solvency only- debtor cannot pay

29
Characteristics of G:

1. Collateral Undertaking

2. Accessory Obligation

3. Subsidiary Obligation

4. Unilateral Contract

5. G to 3rd person

G. presumed to be gratuitous

G. supported by same consideration of principal contract capacity to G.

Knowledge or consent of debtor not essential to G. (2050-1236-1237)

Classification of G. (2051)

Obligations that may be G (2052)

Also future debt (2053) with condition

Limitation of G’tors liability (2054)

G’tor’s liability may be less than that of principal

Liability of G’tor (2055)

Qualifications of g’tor (2056-2057)

Qualifications required only at perfection of contract

Effects of G:

G. given prospective effect- offer of g subject to acceptance by creditor

Recourse against G’tor 2058- 2059

Judgment against G’tor premature without prior demand

Benefit of exhaustion or excussion- exceptions (2059 p.45)

Insolvency of debtor- Insolvency proceeding- only g’tor final liquidation of his

estate

G’tor to set up excussion and point out debtor’s property

Creditor’s negligence relieves g’tor (2061)

Action to be against debtor alone (2062)

Purpose of notice to g’tor

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 Title XV. - GUARANTY
 
CHAPTER 1
NATURE AND EXTENT OF GUARANTY
 
Art. 2047. 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.

If a person binds himself solidarily with the principal debtor, the provisions
of Section 4, Chapter 3, Title I of this Book shall be observed. In such case
the contract is called a suretyship.

NATURE OF CONTRACT OF GUARANTY- a contract of guaranty is

CONSENSUAL, ACCESSORY to a principal obligation, and gives rise to a
SUBSIDIARY OBLIGATION on the part of the guarantor, it is a UNILATERAL
CONTRACT

NOTICE OF ACCCEPTANCE- where there is merely an offer, or proposition for

a guaranty, the guaranty does not become a binding obligation until it is accepted
by the guarantee, and unless there is a waiver of notice, until notice of such
acceptance is given to, or acquired by the guarantor or until he has notice or
knowledge that the guarantee has performed the conditions and intends to act
upon the guarantee.

The reason for requiring acceptance by the guarantee and notice thereof to the
guarantor is that it is essential to a meeting of the minds of the parties and an
inception of the contract. The guarantor is also entitled to NOTICE in order that
being secondarily liable, he may know the nature and extent of his liability and
have an opportunity of taking indemnity from the principal obligor or of otherwise
securing himself from the principal obligor or of otherwise securing himself
against loss, and have a reasonable time in which to arrange for the necessary
funds to pay the amount of his guaranty, if the principal defaults, and to avail
himself of the appropriate means in law and equity to compel the other parties to
discharge him from future responsibility.

FORM OF ACCEPTANCE- the acceptance need not necessarily be express or

in writing, but may be indicated by acts amounting to acceptance.

WHEN NOT NECESARRY- Where the transaction is not merely an offer of

guaranty but amounts to a direct or unconditional promise of guaranty, unless
notice of acceptance is made a condition of the guaranty, all that is necessary to
make the promise binding is that the promise should act upon it, and notice of
acceptance is not necessary, the reason being that the contract of guaranty is
unilateral.

COMPROMISE 2063

Material Alteration

Sub-g’tor entitled to benefit of excussion (2064)

Co- g’tors of same debtor entitled to benefit of division (2065)

Benefit of Division ceases (2059)

Proper time to invoke benefit of division

31
G’tor entitled to indemnity after payment 92066)

-actual payment a pre-requisite to indemnity

G’tor’s right of subrogation (2067)

G’tor bound to notify debtor BEFORE payment

G’tor paying debt before maturity (2069)

Exceptions

Double payment by fault of G’tor (2070)

Preliminary remedy of G’tor (2071)

Additional recourse of g’tor (2072)

Recourse of g’tors as between themselves (2073)

Defense available as between co-guarantors

Sub-guarantor’s responsibility to co-guarantors (2075)

Extinguishment of G. 2076

Extinguishment of Debt relieves G, but not vise versa

Extinguishment of G due to Novation

-increase of credit granted debtor, without consent of G’tor releases g’tor

-change of rate of interest without consent of surety

Effect of release of 1 of gurantor’s 92078)

Extension of period (2079)

G not extinguished by mere failure of creditor to collect debt in time

Effect of default in payment of installment

Liability of guarantor conditioned upon right of subrogation (2080)

SURETY DISTINGUISHED FROM GUARANTOR:

A surety and a guarantor are alike in that each promise to answer for the
debt or default of another.

SURETY- Assumes liability as a regular party to the undertaking

-a surety is charged as an ORIGINAL PROMISOR;

-the obligation of the surety is PRIMARY;

- the surety undertakes to pay if the principal DOES NOT pay;

32
 -insurer of the debt

GUARANTY- liability of the guarantor depends upon an independent agreement

to pay the obligation if the primary party fails to do so;

-the engagement of the guarantor is a COLLATERAL UNDERTAKING

-the obligation of the guarantor is SECONDARILY;

-the guarantor only binds himself to pay if the principal CANNOT PAY

-insurer of the solvency of the debtor

SOLIDARY CO DEBTOR- and SURETY- A guarantor who binds himself in

solidum with the principal debtor does not become a solidary co-debtor to all
intents and purposes. There is a difference between a solidary co-debtor and a
surety. The surety, outside of the liability he assumes to pay the debt before the
property of the principal debtor has been exhausted, retains all the other rights,
actions and benefits which pertain to him by fiansa; while a solidary co-debtor
has no other rights than those given to him in Sec. 4, Chapter 2, Title I, Book IV
of the CC.

Second par. of 2047 is practically equivalent to the contract of suretyship. The

reference in the second par, to the provisions on solidary obligations does not
mean that suretyship is withdrawn from the applicable provisions governing
guaranty.

Suretyship cannot exist without a valid obligation. The obligation of surety cannot
extend beyond what is provided in the surety bond.

Art. 2049. A married woman may guarantee an obligation without the

husband's consent, but shall not thereby bind the conjugal partnership,
except in cases provided by law.

Art. 2048. A guaranty is gratuitous, unless there is a stipulation to the

contrary.

Art. 2050. If a guaranty is entered into without the knowledge or consent, or

against the will of the principal debtor, the provisions of Articles 1236 and
1237 shall apply.

GUARANTY WITHOUT KNOWLEDGE OF DEBTOR- the principal debtor is

legally bound to pay what his guarantor had advanced to the creditor,
notwithstanding the fact that the guaranty had been given without his knowledge.

Art. 2051. A guaranty may be conventional, legal or judicial, gratuitous, or

by onerous title.

It may also be constituted, not only in favor of the principal debtor, but also
in favor of the other guarantor, with the latter's consent, or without his
knowledge, or even over his objection

CLASSIFICATION OF GUARANTY BY CAUSE OR ORIGIN- Guaranty is

conventional when it is created by agreement of the parties. It is legal, when it is
required by law, such as that required of a usufructuary. It is judicial when it is
required by the court, such as that required in the lifting of an attachment or a
preliminary injunction.

33
Art. 2052. A guaranty cannot exist without a valid obligation.

Nevertheless, a guaranty may be constituted to guarantee the performance

of a voidable or an unenforceable contract. It may also guarantee a natural
obligation.

VALID PRINCIPAL OBLIGATION- suretyship or guaranty cannot exist without a

valid obligation. The obligation which arises from a cancelled contract or that
which arises from a contract which has not been perfected, is not a valid
obligation, and cannot be guaranteed.

CONSIDERATION OF GUARANTY- a contract of guaranty or suretyship, being

merely an accessory contract, a guarantor or surety is deemed bound by the
same consideration that makes the principal contract effective between the
principal parties thereto.

It is not necessary that a guarantor or surety should receive any part of the
benefit, if such there be, accruing to his principal. It is enough if it benefits or is
favorable to the principal debtor.

DEFECTIVE PRINCIPAL OLIGATION- the guaranty of the obligations

mentioned in 2nd par must be considered binding only if the guarantor knew the
defective character of the principal obligation.

The guarantor cannot be presumed to pay an obligation which the principal

debtor himself could not be compelled to pay, and to the paralyzation of his right
to recover from such principal debtor. His liability, therefore, rests upon his
knowledge of such character when he bound himself under the contract of
guaranty, in which case, upon paying, he cannot enforce the obligation against
the debtor, because he merely steps into the shoes of the creditor.

NATURAL OBLIGATIONS- the guaranty of a natural obligation implies the

debtor’s acceptance of the remedies to enforce the guaranty; he thereby, in
effect, promises to comply with the obligation. This converts the natural obligation
into a civil obligation.

The guarantor who pays a natural obligation has no recourse against the
principal debtor; who cannot be obliged to pay such obligation. Hence, this is
more of a principal obligation than a guaranty.

Art. 2053. A guaranty may also be given as security for future debts, the
amount of which is not yet known; there can be no claim against the
guarantor until the debt is liquidated. A conditional obligation may also be
secured.

LIQUIDATED DEBT- a debt for the price of goods to be delivered in the future
must be considered liquidated within the meaning of Art. 2053 for the purpose of
maintaining an action against a guarantor of such debt when the price of the
goods to be delivered is fixed by the contract and the seller offers to deliver
within the time stipulated and according to the terms of the contract.

Art. 2054. A guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous nature of the
conditions.

Should he have bound himself for more, his obligations shall be reduced to
the limits of that of the debtor.

34
LIMITED GUARANTY- Where the contract expressly limits the amount of the
guarantor’s liability; the creditor may recover only up to, but not exceeding the
amount specified.

Thus, an increase in the amount of indebtedness does not render the sureties
liable, if they did not agree to guaranty payment of the additional credit. Similarly,
the sureties are discharged from further liability by payment of the debtor of the
principal obligation for which a bond is given, notwithstanding the fact that the
creditor applied the payment to other indebtedness of the debtor which was not
included in the bond. Where, under the bond, the surety merely answered for the
debts of the principal obligor by virtue of a contract of agency, the surety was
held not liable for the debt of a former agency which the principal obligor
assumed, and which the surety was not aware.

Creditors, however, suing on a suretyship bond may recover from the surety as
part of their damages, interest at the legal rate, even if the surety would thereby
become liable to pay more than the amount stipulated in the bond. The surety is
made to pay interest, not by reason of the contract, but by the reason of its failure
to pay when demanded, and for having compelled the plaintiff to resort to the
courts to obtain payment. The interest does not run from the time the obligation
became due, but from the filing of the complaint.

Art. 2055. A guaranty is not presumed; it must be express and cannot

extend to more than what is stipulated therein.

If it be simple or indefinite, it shall compromise not only the principal

obligation, but also all its accessories, including the judicial costs,
provided with respect to the latter, that the guarantor shall only be liable for
those costs incurred after he has been judicially required to pay.

FORM OF GUARANTY- the law requires that the guaranty be EXPRESS,

without providing that it be in writing. Art. 1403, however, the Statute of Frauds
requires “a special promise to answer for the debt, default or miscarriage of
another” which includes guaranty, to be in writing; otherwise, it is unenforceable
unless ratified.

GUARANTY NOT PRESUMED- G. must be expressed and cannot be inferred or

presumed because of the existence of a contract or principal obligation. Thus, a
mere allegation that a person stood as a surety for another, without evidence of
an actual contract, is insufficient to bind the former, a guarantor.

The requirement that the guaranty must be express is for the protection of the
guarantor. He may, therefore, waive the protection, and cure the defect of form
by performing his obligation under the guaranty.

LIMITS OF GUARANTY- if the guaranty is for a specific amount, or only for the
amount of the debt, or under any terms which indicate a limit, it cannot be
enforced beyond that limit. But if the guaranty is simple or indefinite, as when a
person merely agrees to be the guarantor of the debtor, the guaranty extends to
all the consequences of the non-performance of the principal obligation.

The rule is settled that the obligation of the surety is strictly construed and cannot
be extended by implication beyond its specified limits. A surety should be liable
only in the manner and to the extent, and under the circumstances pointed out in
the contract of suretyship or which may be clearly deduced therefrom.

35
NO RETROACTIVITY- a contract of guaranty or suretyship is not retrospective.
As a consequence of this rule, no liability attaches to the guarantor or surety for
debts or defaults of the principal debtor accruing before the contract is entered
into, and the contract will be construed as a covering only loses or liabilities
which are incurred after the execution of the contact, unless an intent to be
retrospectively liable is clearly indicated.

CONDITION OR PERIOD- the guaranty may be made subject to a suspensive or

resolutory condition or it may be only for a definite period. This implies that if the
principal debtor is not required to pay within a period of i.e. 2 months and the
guarantor is for only 2 months from the constitution of the obligation, then the
guarantor is released.

The period of guaranty may be even shorter than that of the principal obligation.
This may take place where the principal debtor is required to make payments
from time to time during the existence of the contract, such as an agent turning in
his collections to his principal, or a lessee paying rents, or a debtor paying in
installments. In these cases, the guarantor is not liable for the payments which
the creditor does not enforce against the debtor within the stipulated period.

Art. 2056. One who is obliged to furnish a guarantor shall present a person
who possesses integrity, capacity to bind himself, and sufficient property
to answer for the obligation which he guarantees. The guarantor shall be
subject to the jurisdiction of the court of the place where this obligation is
to be complied with.

WHEN QUALITIES MUST BE PRESENT- The law requires the qualities

required of guarantors to be present ONLY AT THE TIME OF THE
PERFECTION of the contract of guaranty. Once the contract has become
perfected and binding, the supervening incapacity of the guarantor would not
operate to exonerate him of the eventual liability he has contracted; and this is
also true of his integrity.

The supervening dishonesty of the guarantor, that is, the disappearance of his
integrity after he has become bound, does not terminate the contract but merely
entitles the creditor to demand a replacement of the guarantor.

WAIVER OF QUALIFICATIONS- the qualifications required by law of a

guarantor are for the private interest of the creditor, hence, he can waive them
and accept a guarantor who may not have all those qualifications.

Art. 2057. If the guarantor should be convicted in first instance of a crime

involving dishonesty or should become insolvent, the creditor may demand
another who has all the qualifications required in the preceding article. The
case is excepted where the creditor has required and stipulated that a
specified person should be the guarantor.

Waiver of replacement- the demand for a replacement of the guarantor,

after the loss of his integrity, is OPTIONAL with the creditor, it is his right,
not his duty, he may waive it if he chooses and hold the guarantor to his
bargain.

EFFECT OF DEATH- the guarantor’s liability is not extinguished by his death,

and in such event, the obligee has the right to file against the estate, a contingent
claim for reimbursement.

36
The nature of the obligation of the surety or guarantor does not warrant the
conclusion that his peculiar individual qualities are contemplated as a principal
inducement for the contract. The creditor expects of the surety nothing but the
reimbursement of the money that said creditor might have to disburse on account
of the obligation of the principal debtors. This reimbursement is a payment of a
sum of money resulting from an obligation to give; and to the creditor, it is
indifferent that the reimbursement should be made by the surety himself or by
someone else in his behalf, so long as the money was paid to it.

CHAPTER 2
EFFECTS OF GUARANTY
 
Effects of Guaranty
Between the Guarantor and the Creditor

 
Art. 2058. The guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor and has resorted to all
the legal remedies against the debtor.

RIGHTS AFFECTING LIABILITY: In a simple guaranty, the guarantor has two

rights affecting his liability to the creditor: 1.) the benefit of excussion, 2.) the
benefit of division. These benefits disappear in the cases provided in Art 2059.

BENEFIT OF EXHAUSTION: By the contract of guaranty, the principal guarantor

binds himself to pay only in the event the principal debtor is unable to pay; he
cannot be compelled to pay until it is shown that the debtor is unable to pay.
Thus, no action will lie unless the creditor has exhausted all legal remedies
against the debtor, i.e., he has sued the debtor and exhausted the assets of the
latter, and it is shown that the debtor is unable to pay. Such inability of the
principal debtor to pay can only be shown or proven by the return of a writ of
execution unsatisfied and not merely by the fact that the debtor has been
declared insolvent in insolvency proceedings in which the extent of the
insolvent’s inability to pay is not determined until the final liquidation of his estate.
And even when action has been instituted against the guarantor, no writ of
execution will issue against him until the principal debtor should have been sued
and his assets exhausted. However, the right to the benefit of exhaustion should
be interposed as a defense before judgment is rendered against the guarantor.

EFFECT OF COLLATERAL: The right of guarantors to demand exhaustion of the

property of the principal debtor exists only when a pledge or a mortgage has not
been given as special security for the payment of the principal obligation. A
mortgagor is not entitled to the exhaustion of the property of the principal debtor.

NOTICE OF DEFAULT TO GUARANTOR: The guarantor is entitled to a notice of

default in the fulfillment by the principal debtor of his obligation. The purpose of
this notice is to enable the guarantor, if he elects to pay, to reimburse himself for
the moneys thus paid, or to cancel the undertaking. However, the guarantor may
waive this right. And delay in the giving of notice of default is of importance only
in the event that it has resulted in injury to the guarantor; otherwise he will be
held liable on the guaranty notwithstanding the lack of said notice.

Art. 2059. The excussion shall not take place:

(1) If the guarantor has expressly renounced it;

37
 (2) If he has bound himself solidarily with the debtor;

(3) In case of insolvency of the debtor;

(4) When he has absconded, or cannot be sued within the Philippines

unless he has left a manager or representative;

(5) If it may be presumed that an execution on the property of the

principal debtor would not result in the satisfaction of the obligation.

6.) surety

7.) judicial

8.) fails to set up benefit of excussion

9.) natural

It is submitted that the guarantor has no benefit of excussion also in case

where the debt is a natural obligation, or an unenforceable obligation, because in
these cases the creditor has no action against the principal debtor. Neither does
he have this right if the guaranty is in judicial bond. A surety does not have this
right, for he can be sued independently.

The benefit of excussion cannot also be availed of when the guarantor,

upon the creditor’s demand for payment from him, fails to set up such benefit
against the creditor and to point out to the latter available property of the debtor
to cover the amount of the debt.

APPLICABLE RULES: In the cases provided for in this article, the guaranty
does not loss its character as such; it continues to be an accessory obligation
with its legal implications, except that the benefits of excussion and of division
disappear.

In all other respects it is governed by the same rules that apply to simple
guaranty. The guarantor does not become a principal debtor.

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.

REQUISITES OF BENEFIT OF EXHAUSTION:

1. Require it to the creditor as soon as the creditor makes demand on him

for payment

2. Point out to the creditor property of the debtor which is salable within
the Philippine and sufficient to cover the amount of the debt.

The demand intended by this article can be made only after judgment on
the debt against the debtor has been rendered, because of exhaustion of the
principal’s property cannot even begin to take place before the judgment has
been obtained. Joining the guarantor in the suit against the principal debtor is not
the demand intended by this article.

38
 DESIGNATION OF PROPERTY OF DEBTOR: It is not only sufficient that
the guarantor claim the benefit of exhaustion in time to be entitled to avail of the
defenses. It is also necessary that he designate property of the debtor to satisfy
the debt. Such property should be realizable and must be situated within the
Philippines.

The guarantor is required to point out only property which can be levied
upon in execution by the creditor. He need not point out property in litigation, nor
property mortgaged or pledged to secure another obligation.

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.

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.

NOTICE OF GUARANTOR: Notice to the guarantor is mandatory in the action

against the principal debtor. The guarantor, however, is not duty bound to appear
in the case, it being optional for him to do so, and his non-appearance shall not
constitute default, with its consequential effects, for the reason that after all, his
benefit of exhaustion is reserved and the time for him to pay the obligation has
not yet ripened.

The purpose of the notification is to give the guarantor the opportunity to

allege and substantiate whatever defenses he may have against the principal
obligation, and the chance to set up such defenses as are afforded him by law if
he so desires.

Failure to give due notice to the surety of the application for damages
does not release the surety from the obligation of the bond. But the surety cannot
be deprived of his right to the notice of his right to be heard if he so desire.
Consequently, “no judgment for damages may be entered and executed” against
the surety without giving the latter an opportunity to be heard, otherwise, fraud or
collusion may be perpetrated against the surety.

JOINING DEBTOR AND GUARANTOR: The creditor may include the guarantor
in the same action in case he sued the principal debtor but in such a case the
benefit of exhaustion shall always be reserved even when judgment is rendered
against both of them. In other words, no writ of execution shall be issued against
the guarantor until the assets of the debtor shall have been exhausted.

However, even if the benefit of exhaustion is reserved to the guarantor

under this article, to avail himself of the benefits thereof, he has to comply with
the conditions set forth in the preceding article, i.e., set up the right in time and
point out to the creditor available and sufficient property of the debtor.

The inclusion of the guarantor in the suit against the principal debtor is not
an infringement of the provisions of this article of the Code. On the contrary, the
citation under the new Code is obligatory, and by his inclusion, he is accorded an

39
occasion to plead and support his defense against the judicial vitality and
effectivity of the principal obligation and is not left to venture on the possible
inaction, indifference, or negligence of the principal obligor.

Art. 2063. A compromise between the creditor and the principal debtor
benefits the guarantor but does not prejudice him. That which is entered
into between the guarantor and the creditor benefits but does not prejudice
the principal debtor.

Art. 2064. The guarantor of a guarantor shall enjoy the benefit of excussion,
both with respect to the guarantor and to the principal debtor. (1836)

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.
The creditor cannot claim from the guarantors except the shares which
they are respectively bound to pay, unless solidarity has been expressly
stipulated.

The benefit of division against the co-guarantors ceases in the same cases
and for the same reasons as the benefit of excussion against the principal
debtor.

BENEFIT OF DIVISION: The benefit granted to a guarantor under this article is

known as the “benefit of division”, and entitles him to ask for a division of the
liability among his co-guarantors and to pay only his aliquot part of the debt in
case the debtor defaults in the payment of his obligation. This right is similar to
the benefit of exhaustion in that it should be claimed at the time demand for
payment is made as provided in Article 2060 and that it ceases to exist under the
same circumstances provided in Article 2059.

But where the sureties are bound solidarily, execution might issue against
the properties of any of them to satisfy the claim up to the maximum limit
stipulated in their respective solidary obligation.

Effects of Guaranty
Between the Debtor and the Guarantor
 
Art. 2066. 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 interests 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.

40
 RIGHT TO INDEMNITY: This is strictly indemnity and he cannot recover
more than what he has actually incurred. As a general rule, a guarantor
must first pay the debt before he can exact payment from the principal
debtor. As a necessary part of damages, a guarantor may also recovery
against the debtor interest and costs.

INSOLVENCY OF PRINCIPAL DEBTOR: Should file a contingent claim

in the insolvency proceedings to the end that the court may conditionally
pass upon and approve it. Failure to take this step, would bar his claim
and right of action under the Insolvency Law.

Art. 2067. The guarantor who pays is subrogated by virtue thereof to all the
rights which the creditor had against the debtor.

If the guarantor has compromised with the creditor, he cannot demand of

the debtor more than what he has really paid.

RIGHT OF SUBROGATION: A guarantor who pays the debt is entitled to every

remedy which the creditor has against the principal debtor, to enforce every
security and all means of payment. However, subrogation of the guarantor to the
rights of the creditor takes place only after the debt is paid, and not before.

PLURALITY OF DEBTORS: The obligation may be joint or solidary. The

guaranty may be for all debtors or for one or some only. If the obligation is joint
and the guarantor pays under his guaranty, he is subrogated to the rights of the
creditor against the debtor or debtors for whom he has paid, for their respective
shares.

If the obligation is solidary, and the guaranty is for all, the payment by the
guarantor subrogates him in the rights of the creditor against all of the solidary
debtors, he may therefore require payment from any of them.

Art. 2068. If the guarantor should pay without notifying the debtor, the latter
may enforce against him all the defenses which he could have set up
against the creditor at the time the payment was made.

The guarantor should wait for the natural course of guaranty; that is, that the
creditor collect first from the principal debtor, and it is only when the latter does
not or cannot pay, in whole or in part, that the guarantor should pay. If he pays at
once, then he merely places himself in the position of a third person who pays
the debt; the debtor may set up against him defenses available against the
creditor at the time of payment.

Art. 2069. If the debt was for a period and the guarantor paid it before it
became due, he cannot demand reimbursement of the debtor until the
expiration of the period unless the payment has been ratified by the debtor.

Art. 2070. If the guarantor has paid without notifying the debtor, and the
latter not being aware of the payment, repeats the payment, the former has
no remedy whatever against the debtor, but only against the creditor.
Nevertheless, in case of a gratuitous guaranty, if the guarantor was
prevented by a fortuitous event from advising the debtor of the payment,
and the creditor becomes insolvent, the debtor shall reimburse the
guarantor for the amount paid.

GUARANTOR PAYING BEFORE DEBTOR: A distinction should be made

between a case where the payment by the guarantor was without the previous

41
consent of the debtor, and one in which the payment was previously authorized
by him. In the first case, the debtor is presumed to be without knowledge of the
payment made by the guarantor, and the rules stated in this article applies,
unless it is proved that the debtor paid after having learned of the payment of the
guarantor. In the second case, even if the payment was made without notifying
the debtor, the fact that he had previously authorized the payment makes him
liable to the guarantor; before paying, the debtor should have ascertained
whether the guarantor, availing himself of the previous authorization, has already
paid. The remedy of the debtor in this last case is to recover from the creditor
under the rules of solutio indebiti.

GUARANTOR PAYING AFTER DEBTOR: Where the debtor has already paid
the debt, and then the guarantor pays the same without notifying the former,
Article 2068 will apply. The guarantor cannot recover from the debtor, because
the debt was already extinguished when the former paid it. The remedy of the
guarantor would be to recover from the creditor what has been paid by mistake.

Art. 2071. The guarantor, even before having paid, may proceed against the
principal debtor:

(1) When he is sued 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 the

expiration of the period for payment;

(5) After the lapse of ten 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 ten 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.

In all these 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.

INTERPRETATION: This article constitutes an exception to the general rules

that the guarantor can sue the debtor after he has paid the debt.

This article is likewise applicable to a surety.

COMPARED WITH ARTICLE 2066: Article 2066 provides for the enforcement of
the rights of the surety against the debtor after he has paid the debt. Article 2071
provides for his protection before he has paid but after he has become liable to
do so. The one gives a right of action after payment, the other a protective
remedy before payment.

42
EXTENT OF REMEDY: The remedies available to the guarantor under this
article include release from the guaranty or security to protect him against any
proceedings of the creditor and from the danger or insolvency of the debtor. An
action by the guarantor against the principal debtor for payment, before the
guarantor has paid the creditor, is premature.

CHOICE OF SPECIFIC REMEDY: The guarantor who brings an action under

this article must choose the remedy and apply for it specifically.

Art. 2072. If one, at the request of another, becomes a guarantor for the
debt of a third person who is not present, the guarantor who satisfies the
debt may sue either the person so requesting or the debtor for
reimbursement.

Effects of Guaranty as Between Co-Guarantors

 
Art. 2073. When there are two or more guarantors of the same debtor and
for the same debt, the one among them who has paid may demand of each
of the others the share which is proportionally owing from him.

If any of the guarantors should be insolvent, his share shall be borne by

the others, including the payer, in the same proportion.

The provisions of this article shall not be applicable, unless the payment
has been made by virtue of a judicial demand or unless the principal debtor
is insolvent.

Art. 2074. In the case of the preceding article, the co-guarantors may set up
against the one who paid, the same defenses which would have pertained
to the principal debtor against the creditor, and which are not purely
personal to the debtor.

Art. 2075. A sub-guarantor, in case of the insolvency of the guarantor for

whom he bound himself, is responsible to the co-guarantors in the same
terms as the guarantor.

EXTINGUISHMENT OF GUARANTY

Art. 2076. The obligation of the guarantor is extinguished at the same time
as that of the debtor, and for the same causes as all other obligations.

EXTINCTION OF PRINCIPAL OBLIGATON: The obligation of the guarantor is

extinguished at the same time as that of the debtor and for the same causes as
all other obligations, such as payment, novation and merger.

NOVATION: It is fundamental in the law of suretyship that any agreement

between the creditor and the principal debtor which essentially varies the terms
of the principal contract, without the consent of the surety, will release the surety
from liability.

The guarantor may give his consent to the alteration of the principal
contract. Consent need not be express, but may be implied. It may be given in
advance, given at a time subsequent to the alteration.

WITHDRAWAL BY GUARANTOR: The guarantor has no right to withdraw from

the guaranty; but such right can be conferred by agreement with the creditor.

43
Art. 2077. If the creditor voluntarily accepts immovable or other property in
payment of the debt, even if he should afterwards lose the same through
eviction, the guarantor is released.

It seems logical that when the creditor by eviction loses the thing given by
way of dation in payment, the claim against the debtor should be revived; and
since the relation between the debt and the guaranty is one of principal and
accessory, the latter should follow the principal and likewise be revived. The law,
however, releases the guarantor, because it considers his obligation so onerous
that it should not be re-established once he has been legitimately freed from the
undertaking.

Art. 2078. A release made by the creditor 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. 2079. An extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. The mere failure on
the part of the creditor to demand payment after the debt has become due
does not of itself constitute any extension of time referred to herein.

REASON FOR THE RULE: The object of the provision is to avoid prejudice to
the guarantor. If the payment is delayed on account of the extension, the debtor
might become insolvent and then the right of the guarantor to reimbursement will
become useless. Besides, an extension of payment is an alteration of the terms
under which the guarantor consented to be bound, which alteration cannot be
made without his consent.

EXTENSION OF TERM: An extension granted to the principal without the

consent of the guarantor extinguishes the guaranty and releases the guarantor.

The extension of the term which produces the extinction of the liability of
the surety under this article must of necessity be based on some new agreement
between the creditor and principal debtor, by virtue of which the creditor deprives
himself of his right to immediately bring an action of the enforcement of his claim.

DEFERRING DEMAND FOR FULFILLMENT: The mere fact that the creditor
does not demand fulfillment of the obligation upon the same becoming due, or
that he defers filing of an action against the debtor, does not mean or reveal an
intention to grant an extension to the debtor. It does not constitute novation
because this must be expressed.

In the following cases, however, such delay extinguishes the guaranty 1)

when the delay is for such length of time as to allow prescription of the action to
enforce payment; 2.) when upon maturity the guarantor requires the creditor to
enforce payment against the debtor, but the creditor fails to act the debtor
subsequently becomes insolvent.

APPLIES TO SURETIES: The present article applies to sureties as well

as to guarantors. But where a surety is liable for different payments, such as
installments of rent, or upon a series of promissory notes, an extension of time as
to one or more will not affect the liability of the surety for the others.

44
Art. 2080. The guarantors, even though they be solidary, are released from
their obligation whenever by some act of the creditor they cannot be
subrogated to the rights, mortgages, and preference of the latter.

IMPOSSIBILITY OF SUBROGATION: If the difficulty or impossibility of

subrogation by the guarantor to the rights of the creditor is attributable, not to any
act of the creditor, but to the guarantor himself, the latter cannot be released from
his obligation. And the guarantor cannot claim the benefit under this article before
demand for payment is made on him. Moreover, this right should be claimed at
the proper time, i.e., when the guarantor is sued by the creditor and not merely
by motion when judgment has already been rendered.

The rights, mortgages and preferences of the creditor, referred to by this

article, are only those existing before the contract of guaranty. Hence, if by some
act of the creditor, the guarantor cannot enjoy them, as when the creditor cancels
a mortgage or returns the thing pledged before the debt is paid, the guarantor is
released from responsibility. The loss of rights or liens which were acquired by
the creditor subsequent to the contract of guaranty does not release the
guarantor.

NEGLIGENCE OF CREDITOR: The mere negligence of the creditor, resulting in

the loss of his rights, liens, or preferences, is sufficient to release the guarantor.

Omission or negligence prevents the subrogation to the securities of the

creditor. An example would be: when the creditor fails to register the mortgage in
his favor thus enabling a third party to inscribe an attachment on the property
mortgaged, or he allows the debtor to take possession of a thing over which he
has a lien which is thereby lost.

LOSS AFTER PAYMENT: If the guarantor has already paid the creditor when
the latter allows his liens and preference to be extinguished, said creditor will
have to indemnify the guarantor for the damages which he may suffer thereby.

Art. 2081. The guarantor may set up against the creditor all the defenses
which pertain to the principal debtor and are inherent in the debt; but not
those that are personal to the debtor.

DEFENSES OF THE PRINCIPAL DEBTOR: Defenses of the principal debtor

which the surety may utilize and which may be inherent in the debt, are all those
connected with the obligation secured by the bond, all which may contribute to
weaken or destroy the vinculum juris existing between the creditor and the
principal debtor, all means of defenses which may invalidate the original contract
from which the right of action of the creditor arises against the surety, such as
defenses of fraud or of violence, which annul consent, that of sine action as is
founded on a payment already made, that of res judicata, that of prescription,
that of nullity of the loan made to a minor child, and others of the same class.

COMPENSATION: If the guarantor is at the same time a creditor of the creditor

in whose favor the guaranty exists, the former can set up compensation of his
own credit against the latter. This defense is not available to the debtor himself. If
the guarantor sets up compensation, it will have the same effect as if he had paid
the obligation and he can recover from the principal debtor.

REMISSION: If the creditor remits the obligation of the guarantor, the principal
debtor remains liable; only the guaranty is extinguished. But if the creditor ha
received something from the guarantor for the release, it must be applied to the
debt and therefore benefits the principal debtor.

45
CONFUSION: Takes place between the person of the creditor and the guarantor,
the guaranty ceases to exist; but the principal debtor can still be sued for the
debt. The confusion between the principal debtor and the creditor extinguishes
the principal obligation and therefore, also the guaranty.

LEGAL AND JUDICIAL BONDS

 
Art. 2082. The bondsman who is to be offered in virtue of a provision of law
or of a judicial order shall have the qualifications prescribed in Article 2056
and in special laws. (1854a)

Art. 2083. If the person bound to give a bond in the cases of the preceding
article, should not be able to do so, a pledge or mortgage considered
sufficient to cover his obligation shall be admitted in lieu thereof. (1855)

Art. 2084. A judicial bondsman cannot demand the exhaustion of the

property of the principal debtor.

A sub-surety in the same case cannot demand the exhaustion of the

property of the debtor of the surety.

PLEDGE
 
PROVISIONS COMMON TO PLEDGE AND MORTGAGE
 
Art. 2085. The following requisites are essential to the contracts of pledge
and mortgage:
(1) That they be constituted to secure the fulfillment of a principal
obligation;

(2) That the pledgor or mortgagor be the absolute owner of the thing
pledged or mortgaged;

(3) That the persons constituting the pledge or mortgage have the
free disposal of their property, and in the absence thereof, that they
be legally authorized for the purpose.

Third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property.

PLEDGE- is the bailment of personal property as security for some debt or

engagement.

Pledge is constituted by the delivery of possession of movable by a debtor

to his creditor, to be kept until the debt is discharged, and, in default thereof, to
be sold at public auction to satisfy the obligation.

ESSENTIAL REQUISITES: (same as mortgage) provided in Art.2085.

PLEDGE AS ACCESSORY TO PRINCIPAL-

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PLEDGE OF PROPERTY BELONGING TO ANOTHER- he who is not the owner
or proprietor of the property pledged to guaranty the fulfillment of a principal
obligation, CANNOT LEGALLY CONSTITUTE SUCH GUARANTY as may validly
bind the property in favor of his creditor.

-real owner may recover the property pledged. The situation is different
where the true owner has knowingly allowed his property to be pledged by
another. Under the principle of estoppel, one who has allowed another to assume
apparent ownership of personal property for the purpose of making any transfer
of it, cannot, if he received the sum for which a pledge has been constituted, set
up his own title to defeat the pledge of the property, made by the other to a
pledgee who received the same in good faith and for value.(Art 1438)

FREE DISPOSAL BY PLEDGOR- a pledge of property of which the pledgor is

not the owner cannot be made, unless with the consent or authority of the owner.
When the owner grants someone authority to sell, the latter cannot pledge; so
also when the authority granted is to pledge, he cannot sell. But, a person may
be the owner and yet under certain circumstances as when he is under legal
incapacity he himself cannot pledge his own property unless he acts through his
guardian and authorized to do so by competent authority.

Whether the pledgor be the owner or someone else, he must have the
free disposal of the property either as owner or as the duly authorized
representative.

-where a person delivers a personal property to another for sale on

commission, the latter pledged the same to a third party, that person has the right
to recover the property from the third person without the obligation of redeeming
the same, even if the latter acquired possession of said property by lawful means
and in good faith. The recourse of the third party in such a case is to go against
the person who executed the pledge.

THIRD PERSON AS PLEDGOR- just as in the case of mortgage, the pledgor

need not be the debtor himself. A third person may pledge his own property to
guarantee the obligation of a principal debtor.

OWNERSHIP OF PROPERTY: He who is not the owner or proprietor of the

property pledged or mortgaged to guarantee the fulfillment of a principal
obligation, cannot legally constitute such a guaranty as may validly bind the
property in favor of his creditor, and the pledgee or mortgagee in such a case
acquires no right whatsoever in the property pledged or mortgaged. Hence,
future property cannot be the object of these contracts, because at the time the
contract is made the pledgor or mortgagor would not yet be the owner of the
property. Where the mortgage was constituted before the issuance of a patent to
the mortgagor, the mortgage is void. A pledge or mortgage by one who is not the
owner is null and void.

DELIVERY TO AND POSSESSION BY PLEDGEE- to consummate the contract

and to constitute a valid pledge there must be a delivery of the property pledged,
either actual or constructive, to the pledgee, or a pledge holder who may be a
third person designated by common agreement, coupled with a continuous
retention of such possession by him, and in good faith does not avail the pledgee
in the absence of delivery and possession either actual or constructive. Until the
act of delivery is performed, the special property that the bailee is entitled to hold
does not vest in him.

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 It should not be construed, however, that when the possession of the
property belonging to another is delivered to a creditor simply as a guaranty for
the payment of a debt, the title passes to the temporary possessor. The latter has
no right to damage or destroy the property, and is liable for any injury that he
may cause thereto.

NEED OF PUBLIC INSTRUMENT- Art.2096, requirement that the date of the

pledge must be made to appear in public instrument and also a description
of the thing pledged. The public instrument referred to need not be the contract
of pledge; it may be an entirely different agreement, making only some reference
therein as to the date and description of the thing pledged.

PLEDGE CONSTITUTED BY OPERATION OF LAW:

1. Art. 546- where a possession in good faith has incurred necessary or

useful expense in the preservation of the thing, he is entitled to be reimbursed
therefore, and until this is done he may retain its possession;

2. In the case of a mechanic or someone who has performed some job

upon a movable. Until he is paid therefore, he has a right to retain it. (Art.1731)

3. (1994) in connection with deposit, the depositary may retain the thing as
if it were in pledge until full payment is made of what may be due him.

In all these cases, by the right of retention of the thing until full payment is
made to the possessor thereof, a pledge is constituted in legal contemplation.

PLEDGE TO SECURE A VALID OBLIGATION- (2086, the provisions of 2052

are applicable to a pledge. Thus, a pledge cannot exist without a valid obligation.
But like a guarantee, it may be constituted to secure the performance of a
voidable or an unenforceable contract, as well as a natural obligation.

CREDITOR CANNOT ACQUIRE OR APPRORIATE PLEDGE UPON DEFAULT

OF DEBTOR- as the title of the thing pledged does not pass to the creditor, the
latter cannot acquire, much less appropriate it, for himself simply because the
debtor has failed to pay the obligation secured.

The pledge must be sold at public auction according to procedure, and

only in case the creditor outbids other interested persons in due course may be
acquire and appropriate it. i.e when creditor may appropriate thing in pledge, is if
after two auction sales thereof shall have failed for lack of interested bidders.
(Art. 2087)

PACTUM COMMISSORIUM VOID- is a contract or an agreement whereby the

mere failure on the part of the debtor to pay the loan at maturity shall divest him
irrevocably of all his rights and interests in the specific property given as security,
without any right on his part to redeem or to have the property sold to pay the
debt. VOID.

The creditor has no right to appropriate unto himself the personal property
and chattels pledged, nor can he make payment by himself and to himself for his
own credit with the value of the said property, because he is only permitted to
recover his credit from the proceeds of the sale at public auction of the chattels
and personal property pledged.

However, where property has been delivered not by way of pledge,

mortgage or antichresis, but with the intention of selling the same, and the owner

48
borrowed money with the understanding that in case the amount is not paid
within the stipulated period, the property shall be considered as absolutely sold
for said sum, it was held that the agreement was not pactum commissorium
which presumes the existence of a contract of pledge, or mortgage or
antichresis, none of which has concurred in the loaned mentioned in the case.

EFFECT OF PACTUM COMMISSORIUM UPON PRINCIPAL CONTRACT-

besides being contrary to the express provision of law is also immoral; hence,
void. But the mere fact that it is added to the principal contract of pledge or
mortgage does not substantially and necessarily affect the validity and efficacy of
the principal contract, for the reason that the contract being perfect in itself could
have subsisted even if the parties had not agreed as to the manner the creditor
could collect his credit from the proceeds of the things pledged.

INDIVISIBILITY OF PLEDGE- as a rule a pledge is indivisible. Neither the

successors to the debtor or to the creditor may split the thing in pledge or treat it
separately in part according to their respective interests or shares. A pledge
cannot be discharged partially, while the other parts subsist, even if the debtors
be solidarily liable. EXCEPTION- cases where several things given in pledge and
each guarantees a distinct portion of the obligation. (Art. 2089)

CONSIDERATION OF MORTGAGE: The consideration of a mortgage, which is

an accessory contract, is that of the principal contract, from which it receives its
life, and without which it cannot exist as an independent contract, even if the
obligation thereby secured is of a third person, and therefore it will be valid, if the
principal one is valid, and cannot be avoided on the ground of lack of
consideration.

The validity of a mortgage depends upon the validity of the principal

contract of loan secured.

Mortgages given to secure future advancements are valid and legal

contracts and the amounts as consideration in said contract do not limit the
amount for which the mortgage may stand as a security; if from the four corners
of the instrument the intent to secure future and other indebtedness can be
gathered. A mortgage given to secure advancements is a continuing security and
is not discharged by repayment of the amount named in the mortgage, until the
full amount of the advancements is paid.

NULLITY OF MORTGAGE; EFFECT ON PRINCIPAL OBLIGATIONS: The

nullity of a purported mortgage does not affect the validity of efficacy of the
principal obligation sought to be secured.

Art. 2086. The provisions of Article 2052 are applicable to a pledge or

mortgage.

Art. 2087. It is also of the essence of these contracts that when the
principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor.

SALE OF MORTGAGED PROPERTY: In case of default of the principal

debtor, the property mortgaged is subject to sale to satisfy the mortgage
obligation, although the owner of the mortgaged property acted merely as surety
to the principal debtor. Mere inadequacy of price is insufficient by itself to annul
an order confirming the foreclosure sale.

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 A mortgage creditor has a single cause of action against the debtor for
non-payment of a note secured by a mortgage; hence, he cannot split up his
cause of action by filling a complaint for payment of the debt, and thereafter
another complaint for foreclosure.

The only right of a mortgagee in case of non-payment of a debt secured

by mortgage would be to foreclose the mortgage and have the encumbered
property sold to satisfy the outstanding indebtedness.

UPSET PRICE: Even though a clause be inserted in a mortgage, fixing an

upset price to become operative in the event of foreclosure, the sale musty
nevertheless take place and sold to the highest bidder.

Art. 2088. The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the contrary is
null and void.

ELEMENTS OF PACTUM COMMISSORIUM:

1. There should be a pledge or mortgage wherein a property is pledged or

mortgaged by way of security of the payment of the principal obligation.

2. There should be stipulation for an automatic appropriation by the creditor of

the thing pledged or mortgaged in the event of non-payment of the principal
obligation within the stipulated period.

A mortgage is but security and not a satisfaction of the indebtedness.

The mortgagor’s default will not operate to vest in the mortgagee the ownership
of the encumbered property. Ownership is retained by the mortgagor.

EFFECT OF NULLITY: The vice or nullity of the pactum commissorium

does not affect substantially the contract of pledge or mortgage with regard to its
validity and efficacy. The pledge or mortgage may be enforced in the manner
provided by law.

AGREEMENTS TO SELL OR ASSIGN: There can be no pactum

commissorium in a contract of loan where the borrower agrees to sell or assign
to the lender a piece of property, the value of which is fixed as the amount of
money loaned, if within a fixed time, such amount loaned is not paid. The
contract may validly authorize the pledgee to purchase the things pledged at the
current market price.

It has also been held that the idea of pactum commissorium is not present
in a contract of sale, where the parties have agreed in its penal clause to the
express waiver by the vendee of any and all sums he had paid, if upon his
inability to comply with his duty, the vendor seeks to recover possession of the
property.

NATURE OF UNDERTAKING: Where the mortgagor promised to sell the

property mortgaged to the mortgagees in case he desires to sell it in the future,
such undertaking, obligation or promise to sell does not bind the land. It is just a
personal obligation of the mortgagor and the latter could validly sell the property
to a third person. The only action available to the mortgagee would be a personal
action for damages against the mortgagor.

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Art. 2089. A pledge or mortgage is indivisible, even though the debt may be
divided among the successors in interest of the debtor or of the creditor.

Therefore, the debtor's heir who has paid a part of the debt cannot ask for
the proportionate extinguishment of the pledge or mortgage as long as the
debt is not completely satisfied.

Neither can the creditor's heir who received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of the other heirs who have
not been paid.

From these provisions is excepted the case in which, there being several
things given in mortgage or pledge, each one of them guarantees only a
determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the
pledge or mortgage as to the portion of the debt for which each thing is
specially answerable is satisfied.

EFFECT OF INDIVISIBILTY: The indivisibility of the mortgage or pledge

does not affect the divisibility of the principal obligation.

When the same thing is pledged or mortgaged to several creditors, the

indivisibility of the pledge or mortgage entitles each and every creditor to the
same action against the thing, which is liable in its entirety for the individual share
of each creditor. On the other hand, if there are several debtors, the payment by
one or more does not reduce the encumbrance, and the thing still remains liable
in its entirety for the payment of the unpaid shares of the other debtors. These
principles are applied to the heirs of the creditor or to the debtor.

WAIVER: The indivisibility of a mortgage or pledge, although inherent in

the nature of the contract, can by express stipulation be waived by the parties,
because it does not involve any principle of public order. The waiver may be
contemporaneous or subsequent to the contract.

SEVERAL THINGS: When several things are pledged or mortgaged, each

thing for a determinate portion of the debt, the pledges or mortgages are
considered separate from each other. But when the several things are given to
secure the same debt in its entirety, all of them are liable for the debt, and the
creditor does not have to divide his action by distributing the debt among the
various things pledged or mortgaged. Even when only a part of the debt remains
unpaid, all the things are still liable for such balance. Hence, a mortgage
voluntarily constituted by the debtor on two or more parcels of land is one and
indivisible, and the mortgagee has the right to have either or both parcels, jointly
or singly sold to satisfy his claims. In case the mortgaged properties are a house
and lot, it cannot be claimed that the lot and the house should be sold separately
and not together.

Art. 2090. The indivisibility of a pledge or mortgage is not affected by the

fact that the debtors are not solidarily liable. (n)

Art. 2091. The contract of pledge or mortgage may secure all kinds of
obligations, be they pure or subject to a suspensive or resolutory
condition.

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KINDS OF OBLIGATION SECURED

Art. 2092. A promise to constitute a pledge or mortgage gives rise only to a

personal action between the contracting parties, without prejudice to the
criminal responsibility incurred by him who defrauds another, by offering
in pledge or mortgage as unencumbered, things which he knew were
subject to some burden, or by misrepresenting himself to be the owner of
the same.

PROMISE TO EXECUTE MORTGAGE: A promise to constitute a

mortgage gives rise only to a personal obligation between the contracting parties,
and creates no real right in the property; such an agreement is lawful and can be
enforced by the creditor, being in no way inconsistent with the right to recover the
indebtedness.

PROMISE TO PLEDGE ENFORCEABLE BY PERSONAL ACTION-

while a pledge is constituted by delivery of the thing pledged, a promise to
constitute a pledge, when accepted, is valid and may be enforced by a personal
action.

Art. 2093. In addition to the requisites prescribed in Article 2085, it is

necessary, in order to constitute the contract of pledge, that the thing
pledged be placed in the possession of the creditor, or of a third person by
common agreement.

REQUISITES OF PLEDGE:

1. That it be constituted to secure the fulfillment of a principal obligation

2. That the pledgor be the absolute owner of the thing pledged

3. That the person constituting the pledge has the free disposal of the property,
and in the absence thereof, that he be legally authorized for the purpose.

POSSESSION OF PLEDGE: A contract of pledge is void unless the creditor or a

third person appointed by common consent of the contracting parties has taken
possession of the goods pledged. The creditor acquires no right in the property
until this is done, because a pledge is a mere lien, and possession is
indispensable to the right of lien.

There must be a real transfer or the actual holding of the thing. Hence, a
constructive symbolic delivery, which leaves the thing in the hands of the debtor,
is not enough to give effect to this contract.

The pledgee can temporarily entrust the physical possession of the

chattels pledges to the pledgor without invalidating the pledge. In such a case,
the pledgor is regarded as holding the pledged property merely as a trustee for
the pledgee, and his possession is subject to the order of the pledgee.

Where the goods in a warehouse are the subject of a pledge, for purposes
of showing the transfer of control to the pledge, delivery to him of the keys to the
warehouse is sufficient.

RIGHTS AND OBLIGATIONS OF PLEDGEE:

The rights of a pledgee are as follows:

52
1. The right of retention

2. The right to recover the thing if it should be stolen or lost.

3. The right to have it sold upon non-payment at maturity

4.The right to have the thing adjudicated to him if there is no buyer

5. The right of preference to the price realized in the sale.

The obligations are:

1. To take care of the thing with due diligence

2. To abstain from using or benefiting from the thing

3. To return it upon payment of the debt.

Art. 2094. All movables which are within commerce may be pledged,
provided they are susceptible of possession.

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of

lading, shares of stock, bonds, warehouse receipts and similar documents
may also be pledged. The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be indorsed.

PLEDGE OF RIGHTS WITHOUT TITLE: Possession of the thing pledged

is required, not so much from the juridical nature of the transaction as from the
possibility of its material disposition by the pledgor.

PLEDGE CERTIFICATE: A pledge certificate (papel de agencia) is not a

negotiable instrument, and the pledgor or owner cannot validly alienate the thing
pledged by mere indorsement or delivery of the certificate, but should first secure
the consent of the pledgee to such alienation. The certificate gives no absolute
right to its holder to redeem the thing pledged after the pledge was duly notified
of the loss of the certificate.

Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not appear in
a public instrument.

EFFECTIVENESS AGAINST THIRD PERSONS: A pledge, to be valid

against third persons must be evidenced by a public instrument. Furthermore,
evidence of its date must also appear in the public instrument. This is not a mere
ruled of adjective law prescribing the mode whereby proof may be made of the
date of a pledge contract, but a rule of substantive law, prescribing a condition
without which the execution of a pledge contract cannot affect third persons
adversely.

Art. 2097. With the consent of the pledgee, the thing pledged may be
alienated by the pledgor or owner, subject to the pledge. The ownership of
the thing pledged is transmitted to the vendee or transferee as soon as the
pledgee consents to the alienation, but the latter shall continue in
possession.

ALIENATION OF THING PLEDGED- a valid pledge being a lien on the property,

the alienation of the latter would be immaterial to the creditor, in the sense that

53
whoever acquires it must respect the obligation for which it is liable. However and
possibly to minimize fraud, the consent of the pledgee to such alienation is
legally required.

Art. 2098. The contract of pledge gives a right to the creditor to retain the
thing in his possession or in that of a third person to whom it has been
delivered, until the debt is paid.

INHERENT RIGHT AND CONSEQUENT OBLIGATION OF THE PLEDGEE-

while the pledgee has the inherent right to retain the thing pledged until the
obligation is settled, he has the duty to preserve it.

Art. 2099. The creditor shall take care of the thing pledged with the
diligence of a good father of a family; he has a right to the reimbursement
of the expenses made for its preservation, and is liable for its loss or
deterioration, in conformity with the provisions of this Code.

PLEDGE HOW PRESERVED: as the pledge or holder of the collateral security is

entitled to its possession and to the extent of his interest is substantially the
owner thereof, he must, to a certain extent at least, assume the duties of
ownership, and furthermore must protect the interests of his pledgor as well as
his own, because the latter, by giving the collateral security has parted with the
power to protect himself. The contract carries with it the implication that the
security shall be made available to discharge the obligation. Thus, it carries with
it the further implication that the property, no matter what its character shall not
be lost through negligence or inattention of the pledgee.

Art. 2100. The pledgee cannot deposit the thing pledged with a third
person, unless there is a stipulation authorizing him to do so.

The pledgee is responsible for the acts of his agents or employees with
respect to the thing pledged.

PLEDGE NOT TRANSFERABLE- for the protection of the pledgor or owner of

the thing pledged, the pledgee cannot transfer the thing to a third person unless
authorized to do so.

Art. 2101. The pledgor has the same responsibility as a bailor in

commodatum in the case under Article 1951.

RESPONSIBILITY OF PLEDGOR FOR DAMAGES DUE TO DEFECT OF

THING DELIVERED- the responsibility of the pledgor by reason of the flaw of the
thing delivered is defined in Art. 2101,

The pledgor, who knowing the flaws of the thing delivered, does not advise the
pledgee of the same, shall be liable to the latter for DAMAGES which he may
suffer by reason thereof.

Art. 2102. If the pledge earns or produces fruits, income, dividends, or

interests, the creditor shall compensate what he receives with those which
are owing him; but if none are owing him, or insofar as the amount may
exceed that which is due, he shall apply it to the principal. Unless there is a
stipulation to the contrary, the pledge shall extend to the interest and
earnings of the right pledged.

54
In case of a pledge of animals, their offspring shall pertain to the pledgor or
owner of animals pledged, but shall be subject to the pledge, if there is no
stipulation to the contrary.

OWNERSHIP OF FRUITS OF THING PLEDGED- the earnings of the thing

pledged belong to the pledgor. As to who the same may be availed of to
compensate what is owing the pledge, Art.2102 provides the rule.

Art. 2103. Unless the thing pledged is expropriated, the debtor continues to
be the owner thereof.

Nevertheless, the creditor may bring the actions which pertain to the owner
of the thing pledged in order to recover it from, or defend it against a third
person.

RIGHT OF PLEDGEE TO RECOVER THING FROM THIRD PERSONS- while

ownership of the thing pledged remains with the pledgor, the pledgee may sue or
be sued to recover it from or defend it against a third person.

Art. 2104. The creditor cannot use the thing pledged, without the authority
of the owner, and if he should do so, or should misuse the thing in any
other way, the owner may ask that it be judicially or extrajudicially
deposited. When the preservation of the thing pledged requires its use, it
must be used by the creditor but only for that purpose.

USE OF THE PROPERTY

Art. 2105. The debtor cannot ask for the return of the thing pledged against
the will of the creditor, unless and until he has paid the debt and its
interest, with expenses in a proper case.

RIGHT TO RETAIN- the creditor cannot be compelled to return the thing pledged
until he is paid the obligation owing him, and this may include the principal, the
interest and the expenses incurred for preservation. If the continuous possession
by the pledgee will expose the thing to loss or destruction by reason of his fault
or negligence, the remedy available to the pledgor is to ask that the deposit be
transferred to third person who may be designated by common consent.
However, if the pledgee is not to blame for the damage that may be caused the
property, the pledgor may be permitted to substitute the thing with another of the
same kind and quality and if the pledgee refuses, the ultimate remedy is to cause
it to be sold at public auction.

WHEN TERM STIPULATED: in a contract of loan secured by a pledge, wherein

a term is fixed for payment, the right of the pledgor to demand, and of the
obligation of the pledgee to return the thing pledged, arises only after the
expiration of the term fixed. Consequently, an action to recover the thing pledged
before the expiration of the term is premature.

PRESCRIPTION: Runs from the date on which the debtor may have paid the
debt and demanded the return of the goods pledged.

Art. 2106. If through the negligence or willful act of the pledgee, the thing
pledged is in danger of being lost or impaired, the pledgor may require that
it be deposited with a third person. (n)

Art. 2107. If there are reasonable grounds to fear the destruction or

impairment of the thing pledged, without the fault of the pledgee, the

55
pledgor may demand the return of the thing, upon offering another thing in
pledge, provided the latter is of the same kind as the former and not of
inferior quality, and without prejudice to the right of the pledgee under the
provisions of the following article.

The pledgee is bound to advise the pledgor, without delay, of any danger to
the thing pledged. (n)

Art. 2108. If, without the fault of the pledgee, there is danger of destruction,
impairment, or diminution in value of the thing pledged, he may cause the
same to be sold at a public sale. The proceeds of the auction shall be a
security for the principal obligation in the same manner as the thing
originally pledged. (n)

Art. 2109. If the creditor is deceived on the substance or quality of the thing
pledged, he may either claim another thing in its stead, or demand
immediate payment of the principal obligation. (n)

REMEDIES OF CREDITOR WHEN DECEIVED BY PLEDGE GIVEN- where the

creditor has been deceived on accepting the thing pledged because of
misrepresentation made to him, he has two alternatives: he may either require
that either thing be pledged to him be replaced or to demand immediate
payment.

Art. 2110. If the thing pledged is returned by the pledgee to the pledgor or
owner, the pledge is extinguished. Any stipulation to the contrary shall be
void.

If subsequent to the perfection of the pledge, the thing is in the possession

of the pledgor or owner, there is a prima facie presumption that the same
has been returned by the pledgee. This same presumption exists if the
thing pledged is in the possession of a third person who has received it
from the pledgor or owner after the constitution of the pledge.

PRESUMPTION REGARDING POSSESSION OF THE THING PLEDGED

Art. 2111. A statement in writing by the pledgee that he renounces or

abandons the pledge is sufficient to extinguish the pledge. For this
purpose, neither the acceptance by the pledgor or owner, nor the return of
the thing pledged is necessary, the pledgee becoming a depositary. (n)

PLEDGEE RENOUNCING PLEDGE BECOMES DEPOSITARY

Art. 2112. The creditor to whom the credit has not been satisfied in due
time, may proceed before a Notary Public to the sale of the thing pledged.
This sale shall be made at a public auction, and with notification to the
debtor and the owner of the thing pledged in a proper case, stating the
amount for which the public sale is to be held. If at the first auction the
thing is not sold, a second one with the same formalities shall be held; and
if at the second auction there is no sale either, the creditor may appropriate
the thing pledged. In this case he shall be obliged to give an acquittance
for his entire claim.

FORECLOSURE OF PLEDGE- in case of default on the part of the debtor in

pledge, the creditor may proceed with the foreclosure by causing the thing
pledged to be sold at public auction by a notary public after due notice to the
debtor and the owner. In the auction sale the pledgor or owner, as well as the

56
pledgee, may participate in the bidding, although the pledgee is not entitled to the
award if there is no other bidder than himself. However, where the first auction
sale fails, a second auction with the same formalities maybe set for another date,
in which case the pledgee may be permitted to appropriate the property should
there be again no other bidder.

The creditor is NOT UNDER OBLIGATION TO FORECLOSE THE PLEDGE. If

he prefers, another remedy is available to him, and that is, by instituting an action
in court for collection or performance, wherein if he succeeds may hold liable not
only the thing pledged, but also the other property of the debtor nor otherwise
exempt from execution to satisfy the judgment.

Art. 2113. At the public auction, the pledgor or owner may bid. He shall,
moreover, have a better right if he should offer the same terms as the
highest bidder.

The pledgee may also bid, but his offer shall not be valid if he is the only
bidder. (n)

Art. 2114. All bids at the public auction shall offer to pay the purchase price
at once. If any other bid is accepted, the pledgee is deemed to have been
received the purchase price, as far as the pledgor or owner is concerned.
(n)

Art. 2115. The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the amount
of the principal obligation, interest and expenses in a proper case. If the
price of the sale is more than said amount, the debtor shall not be entitled
to the excess, unless it is otherwise agreed. If the price of the sale is less,
neither shall the creditor be entitled to recover the deficiency,
notwithstanding any stipulation to the contrary. (n)

Art. 2116. After the public auction, the pledgee shall promptly advise the
pledgor or owner of the result thereof. (n)

Art. 2117. Any third person who has any right in or to the thing pledged
may satisfy the principal obligation as soon as the latter becomes due and
demandable.(n)

Art. 2118. If a credit which has been pledged becomes due before it is
redeemed, the pledgee may collect and receive the amount due. He shall
apply the same to the payment of his claim, and deliver the surplus, should
there be any, to the pledgor. (n)

Art. 2119. If two or more things are pledged, the pledgee may choose which
he will cause to be sold, unless there is a stipulation to the contrary. He
may demand the sale of only as many of the things as are necessary for the
payment of the debt. (n)

NOT ALL THINGS PLEDGED NEED BE SOLD

Art. 2120. If a third party secures an obligation by pledging his own

movable property under the provisions of Article 2085 he shall have the
same rights as a guarantor under Articles 2066 to 2070, and Articles 2077
to 2081. He is not prejudiced by any waiver of defense by the principal
obligor.

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Thus this pledgor is entitled to such rights as that of indemnity, of subrogation, of
all defenses available to the principal debtor and inherent in the debt, the period
agreed upon for settlement, the right to be released when the creditor accepts
other property in payment of debt, and other rights to which a guarantor may be
entitled.

Art. 2121. Pledges created by operation of law, such as those referred to in

Articles 546, 1731, and 1994, are governed by the foregoing articles on the
possession, care and sale of the thing as well as on the termination of the
pledge. However, after payment of the debt and expenses, the remainder of
the price of the sale shall be delivered to the obligor.

PECULARITIES OF PLEDGES CREATED BY LAW: while pledges

created by operation of law are in general governed by the same legal
provisions, they have some peculiarities, such as the following:

1. Before such pledge may be sold, prior demand for payment is required as a
prerequisite;

2. Auction sale shall take place within one month after demand, otherwise the
debtor may ask for the return of the thing;

3. In case of excess in the proceeds of the foreclosure sale, the debtor is entitled
thereof.

RIGHT OF RETENTION: it is the right by virtue of which the holder of a thing

belonging to another is authorized to continue retaining it until the payment of
what its owner owes to such holder. Technically, it is not a pledge, because it
refers to both personal and real property. When involving immovable property, it
is similar to antichresis.

Aside from the articles mentioned, articles 612, 1914 and 2004 also
provide for this right of retention. This is also provided for carriers, overland and
maritime, in the Code of Commerce.

An examination of the provisions conferring this right gives rise to two

conclusions:

1. Sometimes the right of retention is a mere consequence derived from a

real right, such as usufruct and possession, in which case it has the
characteristics of a real right.

2. Sometimes it is conceded as a consequence of a personal right, in

which case it partakes of the nature of a pledge.

We have serious doubts, therefore, as to the propriety of designating this

right as a pledge, and of applying the rules on the sale of pledged property even
to immovables subject to this right. It would have been more appropriate to apply
the provision on antichresis when the property involved is immovable.

Art. 2122. A thing under a pledge by operation of law may be sold only after
demand of the amount for which the thing is retained. The public auction
shall take place within one month after such demand. If, without just
grounds, the creditor does not cause the public sale to be held within such
period, the debtor may require the return of the thing. (n)

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Art. 2123. With regard to pawnshops and other establishments, which are
engaged in making loans secured by pledges, the special laws and
regulations concerning them shall be observed, and subsidiarily, the
provisions of this Title.

PAWNSHOPS SUBJECT TO SPECIAL LAWS

Chattel Mortgage: ACT NO. 1508

Art.2140

-conditional sale under Sec 3 Art 1508

-chattel mortgage as conditional sale leaves mortgagor right of redemption.

-subject matter

-house

-machinery

-interest in business but must be properly described

-shares of stock

-growing crops gathered

-vessels (Philippine Coast Guard) motor vehicle(Land Transportation

Commission)

-where to register

-effect of registration

-mortgage binding to subsequent purchasers

-sale of chattel without consent of mortgagor Art 319 p.2 RPC

-Effect of failure to register

-affidavit of good faith, effect of omission-vitiates mortgage as against creditors

and subsequent encumbrance unenforceable against 3 rd persons

-future debt

-registration of assignment of mortgagor

-debtor who is not notified of assignment and pays debt not liable any more.

MORTGAGE
 
Art. 2124. Only the following property may be the object of a contract of
mortgage:
(1) Immovables;

(2) Alienable real rights in accordance with the laws, imposed upon
immovables.
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Nevertheless, movables may be the object of a chattel mortgage.

LAWS GOVERNING CHATTEL MORTGAGE- chattel mortgages are

governed by Act. No. 1508, Chattel Mortgage Law. The civil code does not
supersede nor amend this law. Whenever conflict arises in the application, the
Chattel Mortgage Law should prevail. (see. Art. 2141)

Under Philippine Law, chattel mortgage is not looked upon as a sale or

something that transfers title, like in common-law countries, yet our chattel
mortgage law defines it in a tenor conveying the idea of a conditional sale, as
follows:

Se. 3, Act. 1508. A chattel mortgage is a conditional sale of personal

property as security for the payment of some other obligation specified therein,
the condition being that the sale shall be void upon the seller paying to the
purchaser a sum of money or doing some other act named. If the condition is
performed according to its terms the mortgage and sale immediately becomes
void, and the mortgagee is thereby divested of his title.

The civil code, on the other hand, defines chattel mortgage in a different light.
Article 2140 provides: by a chattel mortgage, personal property is recorded in
the Chattel Mortgage Register as a security for the performance of an obligation.
If the movable, instead of being recorded, is delivered to the creditor or a third
person, the contract is a pledge and not a chattel mortgage.

SUPREME COURT- defines a chattel as a contract which purports to be, as in

form is, a sale of personal property, intended as security for the payment of debt,
or the performance of some other obligation specified therein, upon the condition
subsequent that such shall be void upon payment of the debt or performance of
the specified obligation according to the terms of the contract.

The true nature of a chattel mortgage as a sale only in form, while in substance
essentially a contract of security.

SUBJECT MATTER- Sec. 2, Act 1508, as amended; only PERSONAL

PROPERTY may be subject of chattel mortgage.

A building is not personal property. However, if the owner of the building

is distinct and different from the owner of the land, it may be considered a
personal property upon stipulation of the parties, for the purpose of constituting a
chattel mortgage. So also, where a building erected on land belonging to another
is merely superimposed on the soil or is sold for immediate demolition, the same
may be considered as movable or personal property.

Thus, it was held that while a house is inherently real property, a chattel
mortgage executed on a house may be perfectly valid, for its well settled that an
object placed on land by one who has only a temporary right to the same, such
as a lessee or usufructuary, does not become immobilized by attachment.

Hence, if a house belonging to a person stands on a rented land

belonging to another person, it may be mortgaged as a personal property if so
stipulated in the document of mortgage.

With respect to the house as subject matter of a chattel mortgage, it was

held that the parties to a deed of chattel mortgage may agree to consider a
house as personal property, for purposes of such a contract, shall be deemed
good only insofar as the contracting parties are concerned and is not applicable

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to strangers to the contract or to a case where there is no contract whatsoever
with respect to the status of the house.

Consequently, the right under such a chattel mortgage over a house may
yield to that under a real estates mortgage subsequently constituted in which
such house was included as security, inspite of the prior registration of the chattel
mortgage.

MACHINERY and FIXTURE AS SUBJECT MATTER- are personal property by

their very nature and there can be no question as a rule they may be object of
chattel mortgage, however, if they are attached to real property or placed in a
factory building or plant, with the character of permanence according to their
purpose, and in such manner that they cannot be detached thereform without
causing destruction of, or material injury, to the things real with which they are
connected, they would be regarded as part of the real estate and therefore
cannot be object of a valid chattel mortgage. Especially so when the owner of the
fixture or machinery is the same owner of the land or building on which it is
attached. On the other hand, if they are so placed by a tenant, or a usufructuary,
or someone else having only a temporary right on the real property, then they
may be treated as movable property and made object of a valid chattel mortgage.

An INTEREST IN A BUSINESS mortgageable provided it is described in such a

manner that can be identified. An interest in a business is personal property
capable of appropriation and it is not included among the real properties
enumerated in Article 415 of the Civil Code.

EQUITY IN SHARES OF STOCK there are questions whether it may also be

subject matter of a chattel mortgage. It was held that such chattel mortgage will
at least operate as a conditional equitable assignment valid between the parties
and third persons with actual knowledge.

It is now considered that certificate of stock or of stock dividends, under the

Corporation Law, are quasi-negotiable instruments in the sense that they may be
given in pledge or mortgage to secure an obligation.

GROWING CROPS are personal property and may thus be the subject matter of
a chattel mortgage, where they are “ungathered products” that have the nature of
personal property, at least for purposes of the chattel mortgage law.

VESSELS- considered personal property under civil law. Art 585 of the code of
commerce provides that for all purposes of law vessels shall continue to be
considered personal property.

IMMOVABLES MORTGAGED: While a mortgage of land necessarily includes

buildings, a building itself may be mortgaged apart from the land on which it has
been built. The mortgage is still a real estate mortgage for the building would still
be considered immovable property even if dealt with separately from the land. A
mortgage executed by a person on his own building erected on the land
belonging to another is a valid mortgage.

Improvements on a parcel of land, which fall under Art. 415 of the Civil Code are
immovable property insofar as third persons are concerned, and the mortgage
constituted thereon must be susceptible as a real estate mortgage.

Art. 2125. In addition to the requisites stated in Article 2085, it is

indispensable, in order that a mortgage may be validly constituted, that the
document in which it appears be recorded in the Registry of Property. If the

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instrument is not recorded, the mortgage is nevertheless binding between
the parties.

The persons in whose favor the law establishes a mortgage have no other
right than to demand the execution and the recording of the document in
which the mortgage is formalized.

WHERE TO REGISTER A CHATTEL MORTGAGE- Sec. 4 of Chattel

Mortgage Law imposes the requirement that, except where the possession of
the property has been delivered to and retained by the mortgagee, the chattel
mortgage be registered in the office of the Register of Deeds of the city or
province where the mortgagor resides and also where the property is situated,
unless the two places coincide. However, with the enactment of RA 2711,
approved on June 18, 1960, it is sufficient that the registration be effected in the
place where the property is situated.

However, where the object of a chattel mortgage is a vessel, registration thereof

in the office of the register of deeds is no longer required. What is legally required
is its registration in the record of the Collector of Customs at the port of entry.

SHARES OF STOCK (Sec. 4, Act 1508) that the property in the shares may be
deemed to be situated in the city or province in which the corporation has its
principal office or place of business. The chattel mortgage should be registered
both at the owner’s domicile and in the province where the corporation has its
principal office or place of business. The property mortgaged is not the certificate
but the participation and share of the owner in the assets of the corporation.

EFFECT OF REGISTRATION- while registration adds nothing to the instrument,

considered as the source of title of the mortgagee, it operates as a constructive
notice of the existence of the chattel mortgage. The registration thereby becomes
binding against third persons.

An otherwise invalid or legally defective document is not validated or cured of its

legal defects by its registration.

MORTGAGE BINDING TO SUBSEQUENT PURCHASERS- instruments of

mortgage are binding, while they subsist, not only upon the parties executing
them but also upon those who later, by purchase or otherwise acquire the
mortgaged properties. The right of those who so acquire said properties should
not and cannot be superior to that of the creditor who has in his favor an
instrument of mortgage executed with the formalities of the law, in good faith, and
without the least indication of fraud.

Chattel mortgage lien attaches to the mortgaged property wherever it may be

and a buyer acquires such mortgaged property subject to the liens and
encumbrances existing thereon at the time of execution.

RECORDED MORTGAGE: A recorded real estate mortgage is a right in

rem effective against third persons, it is a lien inseparable from the property
mortgaged. Until discharged, it follows the property. It subsists notwithstanding
changes of ownership; all subsequent purchasers of the property must respect
the mortgage, whether the transfer to them be with or without the consent of the
mortgagee.

Where the mortgagor of a parcel of land was prohibited in the deed of

mortgage from creating any other encumbrance, without the mortgagee’s
consent, the leasehold rights over the same land, which came into existence

62
after the execution of the mortgage deed, cannot be annotated as an adverse
claim on the title of the land over the mortgagee’s opposition.

UNRECORDED MORTGAGE: A mortgage is binding between the parties

even if the instrument is not recorded. As between them, the failure to record the
mortgage cannot be a bar to foreclosure.

UNREGISTERED PROPERTY: Under section 194 of the Revised

Administrative Code, as amended by Act No. 3344, the mortgage of real estate
not registered under the provisions of the Land Registration Act or under the
Spanish Mortgage Law, is valid between the parties whether it is registered or
not; and if it be registered in the special registry contemplated by said section
194, it is valid as against everybody except a third person having a better
right. Thus, when such a mortgage is registered, the credit secured thereby
takes precedence over a judgment lien the execution of which by attachment and
public auction sale was made subsequent to the registration of the aforesaid
mortgage.

Art. 2126. The mortgage directly and immediately subjects the property
upon which it is imposed, whoever the possessor may be, to the fulfillment
of the obligation for whose security it was constituted.

ALTERNATIVES OF MORTGAGEE: A mortgage creditor may institute against

the mortgage debtor either a personal action for the recovery of the debt, or a
real action to foreclose the mortgage, but not both. He cannot split his cause of
action by filing a case for collection of the debt, and, thereafter, another action for
foreclosure. The mere filing of a collection suit constitutes a waiver of
foreclosure. A mortgagee who sues and obtains a personal judgment against a
mortgagor upon his credit waives his right to enforce the mortgage securing it. If
he being an ordinary collection suit, he has a right to execute the judgment
therein against all the properties of the mortgagor and is not limited to the
mortgaged property.

ON THE MORTGAGE: The property of third persons which has been expressly
mortgaged to guarantee an obligation to which the said persons are foreign, is
directly and jointly liable for the fulfillment thereof, in the same manner as the
mortgaged property of the debtor himself.

DISPOSAL OF PROPERTY BY OWNER: The fact that the mortgagor has

transferred the mortgaged property to a third person does not relieve him from
his obligation to pay the debt to the creditor, although the person to whom he has
transferred the property has assumed the obligation to pay said debt, and the
creditor accepted the payments from said transferee on account of the debt; for,
said transfer having been made without the consent of the creditor, the contract
was thereby novated. The sale or transfer does not affect or release the
mortgage, as the latter follows the property whoever the possessor may be.

SALE OF CHATTEL WITHOUT CONSENT OF MORTGAGEE- while a

mortgagor of real estate may sell the mortgaged property even without the
consent of the mortgagee, the rule is not the same in the case of chattel
mortgage. Article 319, par. 2, Revised Penal Code- any mortgagor who shall
sell or pledge personal property already pledged or mortgaged in the Chattel
Mortgage Law, without the consent of the mortgagee written on the back of the
mortgage and noted on the record thereof in the office of the Register of Deeds
of the province or city where such property is located, incurs criminal
responsibility. Even if the purchaser or pledgee has knowledge of the fact that
the things he bought or accepted as security for a loan are encumbered by a

63
prior loan, for the seller or pledgor is criminally responsible where he sells or
pledges the chattel without the written consent of the first mortgagee.

GOVERNMENT’S LIEN SUPERIOR TO MORTGAGE LIEN

EFFECT OF FAILURE TO REGISTER- where there exists a chattel mortgage

contract in due form, but for some reason or another it was not as it should be
registered in the office of the register of deeds concerned, the effect would be
that it still remain a valid chattel mortgage as against the mortgagor, his
executors or administrators (Sec.4, Chattel Mortgage Law), but void as against
third persons, such as intervening purchasers or creditors claiming liens by
attachment, judgment or execution.

AFFIDAVIT OF GOOD FAITH, EFFECT OF OMISSION- Sec.5 of the Chattel

Mortgage Law describes an affidavit of good faith in the following form:

“We severally swear that the foregoing mortgage is made for the purpose
of securing the obligations specified in the condition thereof, and for no other
purpose, and that the same is a just and valid obligation, and one not entered
into for the purpose of fraud”

This affidavit is required to be appended to such mortgage and recorded

therewith.

The absence of such affidavit vitiates a mortgage as against creditors and

subsequent encumbrances; unenforceable as against third persons. The chattel
mortgage may, however, be valid as between the parties even in the absence of
the affidavit of good faith.

CANCELLATION OF CHATTEL MORTGAGE- upon settlement of the principal

obligation secured by the chattel mortgage, it is the duty of the mortgagee to
discharge the mortgage in the manner provided by law. In case of his failure to
do so within ten (10) days after being requested by the mortgagor or any other
person entitled to redeem, the mortgagee may be held liable for his negligence
as well as for all damages occasioned thereby in an action in court. (Se. 8, CML)

REDEMPTION RIGHT OF JUNIOR MORTGAGEE AND ATTACHING

CREDITOR- when the condition of a chattel mortgage is broken, the mortgagor
or person holding a subsequent mortgage, or a subsequent attaching creditor
may redeem the same by paying or delivering to the mortgagee the amount due
on such mortgage and the reasonable costs and expenses incurred by such
breach of condition before the sale thereof. An attaching creditor who so
redeems shall be subrogated to the rights of the mortgagee and entitled to
foreclose the mortgage in the same manner that the mortgagee could foreclose it
by the terms of the law.

After a first mortgage has been executed by the mortgagor, what remains
with him is a mere right of redemption, and only this right passes to the second
mortgagee when a second mortgage is executed. It was held therefore that as
between the first and second mortgagees, the second mortgagee has at most
only the right to redeem, and even when the second mortgagee goes through the
formality of a foreclosure, the purchaser acquires no more than the right of
redemption from the first mortgagee. The senior mortgagee does not waive the
priority of his lien by instituting a civil action to obtain a judgment on the mortgage
debt and causing an execution to be levied on the mortgaged property.

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NATURE OF FORECLOSURE: A proceeding for judicial foreclosure of mortgage
is an action quasi in rem based on a personal claim sought to be enforced
against a specific property of the defendant. Its purpose is to have the property
seized and sold by court order to the end that the proceeds thereof be applied to
the payment of plaintiff’s claim. The order to sell is given if the mortgagor fails for
a period of not less than 90 days to pay the judgment debt.

FORECLOSURE OF CHATTEL MORTGAGE; CONDITION PRECEDENT-

Before foreclosure may be resorted to, it is necessary as a condition precedent
that there be a violation of the condition of the chattel mortgage and that at least
30 days shall have elapsed since then. (Sec. 14, CML).

EFFECT OF FORECLOSURE: When the foreclosure sale is validly confirmed by

the court, title in the property rests upon the purchaser and the confirmation
retroacts to the date of the sale. All rights of the mortgagor in the property
terminates and is vested in the purchaser.

EXTRAJUDICIAL FORECLOSURE: Act No. 3135, as amended by Act No.

4118, regulates the sale of mortgaged property at public auction without judicial
proceedings. The parties are allowed to stipulate a special power in the mortgage
granting authority to extrajudicially foreclose the mortgage and sell the property.
The stipulation is an ancillary stipulation supported by the same cause or
consideration for the mortgage and forms an essential and inseparable part of
the agreement.

CLAIM FOR DEFICIENCY: The mortgagee has by law the right to claim for the
deficiency resulting from the price obtained in the sale of the property at public
auction and the outstanding obligation at the time of the foreclosure proceedings.
The right to claim payment of deficiency after foreclosure of real mortgage
prescribes in ten (10) years under Articles 1144 and 1142 of the Civil Code.

REDEMPTION BY MORTAGOR: The equity of redemption is different form the

right of redemption. Equity of redemption is the right of the mortgagor after the
judgment in foreclosure proceedings, within a period of not less than 90 days,
before the sale or confirmation of the sale, to pay into the court the amount of the
judgment debt. On the other hand, right of redemption is the right of the
mortgagor, after the sale of the mortgaged property, to redeem the property by
paying to the purchaser in the sale or for him to the sheriff who made the sale,
the amount paid by him, with interest, within one year from the sale.

There is no right of redemption, only equity of redemption, in a judicial

foreclosure under the Rules of Court. The right of redemption is provided by
special laws in two cases: 1.)foreclosures by banks or banking institutions, as
provided in their charters or in the General Banking Act, and 2.) extrajudicial
foreclosures under Act No.3135.

The REQUISITES for a VALID REDEMPTION of mortgaged property

are:

1. The redemption must be made within twelve (12) months from the date of
registration of the sale in the Office of the Register of Deeds.

2. Payment of the purchase price of the property involved, plus 1% interest per
month thereon, together with the amounts of assessments of taxes thereon, if
any, paid by the purchaser after the sale with the same rate of interest;

65
3. Writ of notice of the redemption must be served on the officer who made the
sale and a duplicate filed with the Register of Deeds of the province.

The one year period for redemption must be counted from the registration
of the certificate of sale in the office of the register of deeds, not from the date of
the auction of the sale.

While payment to the purchaser is necessary for redemption, deposit in

the hands of the sheriff will be enough when the payment to the purchase could
not be made, consignation in court is not necessary.

The right of the purchaser at a foreclosure sale is merely inchoate until

after the period of redemption has expired without the right being exercised.

POSSESSION OF PROPERTY: Under Section 7 of Act 3135 the

purchaser is entitled to the possession of the property during the redemption
period provided that a proper motion has been filed, a bond approved (indemnity
bond), and no third person is involved. After the lapse of redemption period
without any redemption made, a writ of possession can be issued in favor of the
purchaser.

No independent action is necessary to obtain possession of the property,

the issuance of a writ of possession being ministerial, unless a third party is
actually holding the property adversely to the judgment debtor.

SECOND MORTGAGE: After a first mortgage is executed, there remains

in the mortgagor a mere right of redemption, and only this right passes to the
second mortgagee by virtue of the second mortgage; as between the first and
second mortgagees, therefore, the second mortgagee has at most only the right
to redeem, and even when he goes through the formality of foreclosure, the
purchaser acquires no more than the right of redeeming the property from the
first mortgagee. The owner of the first mortgage retains his lien. If the first
mortgage is foreclosed, the rights of the second mortgage retain his lien. If the
first mortgage is foreclosed, the rights of the second mortgagee are extinguished,
except the right of redemption, which he may exercise in the same proceeding
for foreclosure of the first mortgage. If the proceeds of the sale in the foreclosure
of the first mortgage exceeds the mortgagor’s obligation, the excess may be
claimed by the second mortgagee.

The first mortgagee may proceed to foreclose his mortgage on the

property without making the second mortgagee a party defendant; but the failure
to make the second mortgagee a party to such proceeding will not affect the lien
of the second mortgage on the equity of redemption. Nevertheless, the first
mortgagee may maintain an independent foreclosure proceeding against the
second mortgagee, in which proceeding the court should require the second
mortgagee to redeem from the first mortgagee within three months, under
penalty of being barred from the exercised of his right to redeem.

Art. 2127. The mortgage extends to the natural accessions, to the

improvements, growing fruits, and the rents or income not yet received
when the obligation becomes due, and to the amount of the indemnity
granted or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the
estate remains in the possession of the mortgagor, or it passes into the
hands of a third person.

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IMPROVEMENTS AND FIXTURES INCLUDED: It is a rule that in a mortgage of
real estate, the improvements made on the same are included; therefore, all
objects permanently attached to a mortgaged building or land, although they may
have been placed thereafter the mortgage was constituted, are also included.
Thus, it was held that even where there is no contractual stipulation, the following
are deemed included in a mortgage of real property: a) new plantings; b) fruits,
except those collected before the obligation falls due, and those removed and
stored when it falls due; and c) accrued and unpaid rents, as well as those which
should have to be paid while the credit remains wholly unsatisfied.

In order that the machinery and other objects placed upon and used in
connection with a mortgaged estate may be deemed excluded from the
mortgage, when it was stated in the mortgage that the improvements, buildings,
and machinery that existed thereon were also comprehended, it is indispensable
that the exclusion thereof be stipulated between the contracting parties.

The temporary removal of equipment covered by a mortgage, from the

land of which it forms a part, does not release the mortgage over it.

PREFERENCE OF OTHER CREDITORS: Paragraph (11) of article 2241

of the Civil Code provides that credits from seeds and expenses of cultivation
and harvesting, advanced to the debtor, are preferred with respect to the fruits of
the crops which they were used to produce. Thus, where it appears that a third
person as a creditor in possession has in good faith made advances for the
growth and production of sugar cane, in a suit by the mortgagee to recover the
value of the growing fruits under this article, such creditor must first be paid the
amount of his advances before the mortgagee is entitled to any growing fruits
under the said article.

The right of preference established by paragraph (3) of article 2241, of the

Civil Code, in favor of the vendor of personal property sold and in the possession
of the purchaser, for the unpaid purchase price, is not lost by the mere fact that
such personal property is converted into real property by destination, whenever,
its form and substance are not changed and it has not lost its identity. The
preference granted to the vendor of personal property by said provision of law, is
superior to any other real right or lien, such as mortgage and attachment.

Art. 2128. The mortgage credit may be alienated or assigned to a third

person, in whole or in part, with the formalities required by law. (1878)

NOTICE TO DEBTOR REQUIRED: The transfer of the mortgage credit

does not affect the debtor unless he is notified of it. If the debtor pays to the
original mortgagee in ignorance of the assignment, he will be released from the
debt, even if the assignment has been registered. The registration of the
assignment does not satisfy the requirement of notice to the debtor; the assignee
should, as the party principally interested, determine whether the debtor has
been notified.

EFFECT OF LACK OF REGISTRATION: The alienation or assignment of

a credit secured by a mortgage is valid and efficient and legally transfers the
dominion or ownership of the same even if the transfer of said credit were not
recorded in the registry. The registration of the assignment or alienation of a
credit secured by mortgage, required, among others, by article 152 of the
Mortgage Law, is only necessary in order that it may be effectual as against third
parties.

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Art. 2129. The creditor may claim from a third person in possession of the
mortgaged property, the payment of the part of the credit secured by the
property which said third person possesses, in the terms and with the
formalities which the law establishes. (1879)

WHEN POSSESSOR LIABLE: An assignee or transferee of mortgaged

property is liable for the payment of the debt secured by said mortgage only from
the time the creditor demands payment of him, it being necessary that a demand
for payment should have previously been made upon the debtor and the latter
should have failed to pay. The spirit of the Civil Code is to let the obligation of the
debtor to pay the debt stand although the property mortgaged to secure payment
of said debt may have been transferred to a third person. Such purchaser,
however, does not assume liability for the entire debt, but only to the extent of the
value of the mortgaged property in his possession.

When a mortgagee relies wholly on his mortgage for the payment of his
claim and the mortgagor’s estate has been distributed summarily among his
heirs, the mortgaged property being given to one of them, the mortgagee may
take action against the heir to whom said property has been allotted.

Art. 2130. A stipulation forbidding the owner from alienating the immovable
mortgaged shall be void. (n)

RIGHTS OF MORTGAGOR: Before the creditor institutes the action for

foreclosure of the mortgage, the owner preserves, in principle all the attributes of
the rights of ownership. He can fully administer and enjoy the immovable, make
leases and receive its fruits, alienate it, encumber it with new mortgages, or with
usufructs or servitudes, or constitute an antichresis over it.

But he cannot, to the prejudice of the mortgagee execute any act of

disposition which directly and by its nature may diminish the guaranty of the
mortgagee by affecting the value of the immovable. Thus, any act of the owner
creating a real right of the thing or extinguishing a real right beneficial to it, such
as servitudes in its favor, done after the registration of the mortgage, cannot
prejudice the mortgagee.

Art. 2131. The form, extent and consequences of a mortgage, both as to its
constitution, modification and extinguishment, and as to other matters not
included in this Chapter, shall be governed by the provisions of the
Mortgage Law and of the Land Registration Law. (1880a)

CANCELLATION OF MORTGAGE: The mere fact that the mortgagee has

authorized the debtor to mortgage the property described in the mortgage
contract, to secure the debtor’s debt to a third party, does not imply the
cancellation of said mortgage contract, for which the cancellation of its
registration in the registry of property is necessary, nor the extinction of the debt,
which subsists even supposing that the mortgage was cancelled.

CHATTEL MORTGAGE

Art. 2140. By a chattel mortgage, personal property is recorded in the

Chattel Mortgage Register as a security for the performance of an
obligation. If the movable, instead of being recorded, is delivered to the
creditor or a third person, the contract is a pledge and not a chattel
mortgage. (n)

68
 EFFECT ON CHATTEL MORTGAGE LAW: It is needed even as between
the contracting parties, because it is now part of the very definition of chattel
mortgage, hence, there would be no chattel mortgage if there is no registration.

Under Section 4 of the Chattel Mortgage Law, delivery of possession to

the mortgagee is substituted for registration, to make the chattel mortgage
effective against third persons. The new Code makes the contract one of pledge,
if instead of registration there is merely delivery to the creditor. In this case,
delivery becomes likewise essential even as between the parties alone, because
such delivery is one of the requisites of the contract of pledge. Therefore, if there
is neither delivery nor registration, there is neither pledge nor chattel mortgage.

REGISTRATION: The present article requires that for a chattel mortgage

to be considered as such, the deed of mortgage must be recorded in the Chattel
Mortgage Register. Mere entry in the Day Book has been held not sufficient, and
registration is not deemed completed until after entry in the Chattel Mortgage
Register.

A chattel mortgage over a motor vehicle, to be binding upon third persons,

should not only be registered in the chattel mortgage registry in the Registry of
Deeds, but also recorded in the corresponding Motor Vehicles Office as required
by section 5(e) of the Revised Motor Vehicles Law. A chattel mortgage over a
vehicle not recorded in the Motor Vehicles Office cannot prevail over the sale of
the same vehicle which was duly recorded in the Motor Vehicles Office.

PLACE OF REGISTRATION: The registration referred to in this article is

registration in those chattel mortgage registries specified by the Chattel Mortgage
Law, so that, where the Chattel Mortgage Law indicates that the deed of chattel
mortgage must be registered in two registries, the deed of chattel mortgage must
be registered in both in order that a chattel mortgage may exist. Hence, where
the property subject matter of the chattel mortgage is situated in a province
different and distinct from that in which the mortgagor resides, the deed of chattel
mortgage must be registered in the respective registers of both provinces. Failure
to register in one or both of these registries would nullify the effects of the chattel
mortgage.

REAL MORTGAGE AND CHATTEL MORTGAGE: DIFFERENCE IN

REGISTRATION: A deed of mortgage covering registered land is considered
registered from the time the same is recorded in the Entry Book; in the case of
chattel mortgage, however, the document must be recorded in the chattel
mortgage register, and however, the document must be recorded in the chattel
mortgage register. In the first, entry in the Day Book is sufficient; in the second,
there must be entry, not only in the Day Book, but also in the chattel mortgage
register.

ALTERNATIVES IN FORECLOSURE- foreclosure may be carried out

extrajudicially in accordance with the procedure laid out in section 14 of the CML,
unless the mortgagee elects to institute an ordinary action in court, instead, to
recover the indebtedness, with right to execute the judgment thereon on all the
properties of the debtor, including the subject matter of the mortgage. In the latter
event, if the mortgage should fail, he will be precluded from pursuing the further
remedy he has waived.

However, where the mortgagor refused to deliver possession of the

mortgaged property, the mortgagee cannot take the law into his hands. Neither
can he do it thru the sheriff. In such case, the creditor must either resort to a civil
action to recover possession as a preliminary to a sale or preferably he may

69
bring an action to obtain judicial foreclosure also under the CML. Without
prejudice to the provisions of arts 1484-86 of the Civil Code relating to chattel
mortgage constituted in connection with the sale on installment basis.

PROCEDURE FOR FORECLOSURE: Sec. 14 CML

1. Notices are posted for at least 10 days in at least 2 public places in the
municipality where the mortgaged property is to be sold, designating the time,
place and purpose of the sale;

2. The mortgagee, his executor, administrator, assign, notifies in writing, at least

10 days before the sale, the mortgagor or person holding under him and other
persons holding subsequent mortgages, of the time and place of the sale, said
notice to be delivered personally to the party if residing in the same municipality
or sent by mail if residing outside;

3. The mortgaged property is sold at public auction by a public officer at a public

place in the municipality;

4. Within 30 days after the sale, the public official who conducted the sale makes
a return of his doings, the same to be filed and recorded with the office of the
Register of Deeds where the mortgage has been recorded. The officer’s return
describing the articles sold and stating the amount received for each article,
operates as a discharge of the lien created by the mortgage.

5. The proceeds of the sale will be distributed and applied to the following
payments:

a. cost and expenses of keeping and sale;

b. amount of demand or obligation secured by the chattel mortgage

c. obligations due to persons holding subsequent mortgages in their order;

and

d. balance turned over to the mortgagor or person holding under him on

demand.

SALE OF CHATTELS IN SINGLE LOT IS VIOLATIVE OF LAW- the sale must

be made article by article and a violation of which the sale can be set aside.

DEFICIENCY IN PROCEEDS FROM FORECLOSURE- should there be a

deficiency, an independent action may be instituted for the recovery of said
deficiency. Article 2115 on pledge, denying recovery not applicable to chattel
mortgage.

Art. 2141. The provisions of this Code on pledge, insofar as they are not in
conflict with the Chattel Mortgage Law shall be applicable to chattel
mortgages.

DEFICIENCY: The provisions of Article 2115 of the Civil Code on pledge

is inconsistent with the provisions of the Chattel Mortgage Law; accordingly, the
latter prevails and the chattel mortgage creditor may maintain an action for
deficiency.

70
 REAL ESTATE MORTGAGE

Definition- a mortgage is a real right constituted to secure an obligation upon

real property or rights therein, to satisfy with the proceeds of the sale thereof
such obligation when the same becomes due and has not been paid or fulfilled.

A mortgage is a mere lien, and not one creating a title or estate in fee. In
the Philippines, we do not follow the common law concept; the owner who
constitutes a mortgage retains title to the property and does not lose his
attributes as an owner. He only creates a lien or encumbrance upon his property.

EESENTIAL REQUISITES OF MORTGAGE- Article 2085, 2125 (registration

with register of deeds to bind third persons)

CONSENT of both parties NOT NECESSARY FOR REGISTRATION- it is the

execution of the mortgage that is voluntary. Once executed the mortgagee has
the right to have the mortgage registered despite opposition or without consent of
the mortgagor.

SPECIAL CHARACTERISTICS OF REAL ESTATE MORTGAGE:

1. REALTY AS SUBJECT MATTER- only real property or alienable rights and

interest therein may be the subject matter of real estate mortgage. Thus even the
rights of a mortgage or other encumbrances may be the objects of another
mortgage (art.214).

2. REAL RIGHT- a mortgage lien is a real right and as such it is good and
binding against the whole world, and may be enforced by real action against all
persons who may have existing rights or interests in the same property, not
registered prior to the mortgage. It was held that even if personal action on the
debt secured has prescribed, a suit to enforce the mortgage will still lie so long as
such debt has not been paid.

3. ACCESSORY OBLIGATION- The consideration of the mortgage is the same

as that of the principal obligation it secures.

4. INDIVISIBILITY- even though the debt secured may be divided among the
debtors, or the creditors or their successors-in-interest, the mortgage shall
remain as one and indivisible, unless there have been several things given in
mortgage and each of them guarantees only a determinate portion of the
obligation. In the latter case, the creditor may claim from a third person in
possession of the mortgaged property, the payment of the part of the credit
secured by the property which said third person possesses. (arts.2089, 2129)

5. INSEPARABILITY- the mortgage lien and the property affected are

inseparable, so much so that whoever may subsequently acquire title to the
mortgaged property is bound by the terms of the mortgage, whether the transfer
be with or without the consent of the mortgagee. 2126, the mortgage direct and
immediately subjects the property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the obligation for whose security it was
constituted.

6. RETENTION OF POSSESSION- the mortgagor retains possession of the

mortgaged property in as much as a mortgage is a mere lien and title to the
property does not pass to the mortgagee.

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MORTGAGE DISTINGUISHED FROM ANTICHRESIS:

1. AS TO POSSESSION- if the property given in security, the debtor retains it in

case of MORTGAGE; the creditor takes over it in the case of ANTICHRESIS;

A mortgage coupled with the delivery of the land to the creditor becomes
Antichresis.

2. WITH RESPECT TO FRUITS- in a M. the creditor does not gather or receive

them; A. the creditor generally receives them, with the obligation to apply them to
the payment of interest due and , if any still remaining, to the principal obligation;

3. In A. the creditor is obliged to pay for the taxes and charges upon the estate;
in M. it is the debtor.

REAL ESTATE M. DISTUINGUISHED FROM CHATTEL M. –aside from the

subject matter, another difference is in the formality required for their constitution.
REM is required to be constituted by means of a public instrument, CM may be
constituted in private document only, provided the latter be accompanied with an
Affidavit of Good Faith.

MORTGAGEE may ASSIGN his mortgage-must also be registered

MORTGAGE BY NON OWNER UNENFORCEABLE

CONSIDERATION OF MORTGAGE

EXTENT OF SUBJECT- MATTER OF MORTGAGE- improvements, fruits, rents

CONTINUING CREDIT SECURED BY MORTGAGE (credit line)

MORTGAGE DEED MUST BE IN A PUBLIC DOCUMENT, if not REGISTERED

not bind third persons

STIPULATION AGAINST SUBSEQUENT MORTGAGE- valid what is void is

stipulation against subsequent alienation of the property mortgaged

DISCHARGE- mortgage execute of deed of discharge to be registered also

DEFICIENCY JUDGMENT- may be recovered from debtor

B. Characteristics

1. It is an accessory and subsidiary contract.

2. It is also unilateral because it creates only an obligation on the part of the

creditor who must free the property from the encumbrance once the obligation is
fulfilled.

3. The mortgagor, as a general rule, retains possession of the property

mortgaged as security for the payment of the sum borrowed from the mortgagee,
and pays the latter a certain percent thereof as interest on his principal by way of
compensation for his sacrifice in depriving himself of the use of said money and
the enjoyment of its fruits, in order to give them to the mortgagor.

4. The objects of a real mortgage are immovable (Article 415) and alienable real
rights imposed upon immovables.

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 Note: While a mortgage of land necessarily includes, in the absence of
stipulation, the improvements thereon, a building by itself may be mortgaged
apart from the land on which it is built. Possessory rights over said property
before title is vested on the grantee may be validly transferred or conveyed as in
a deed of mortgage. (Pudential Bank v. Panis, 153 SCRA 390 (1967); Nortales v.
GSIS, 156 SCRA 205(1987).

5. In order that a mortgage may be validly constituted, it must appear in a public

document duly recorded in the Registry of Property (see Gaotian v. Gaffud,
24SCRA 706 (1969).

Note: If the instrument of mortgage is not recorded, the mortgage is

nevertheless binding between the parties.

6. A mortgage creates a real right (see Tuazon v. Grosco, 5 Phil. 596 (1905), a
lien inseparable from the property mortgaged, which is enforceable against the
whole world. Until discharged, it follows the property wherever it goes and
subsists notwithstanding changes of ownership.

Note:

a.) If the mortgagor sells the mortgaged property, the property remains
subject to the fulfillment of the obligation secure by it. (see Bonnevie v. Court of
Appeals, 125 SCRA 122 (1983). All subsequent purchasers of the property must
respect the mortgage, whether the transfer to them be with or without the
consent of the mortgagee. But the mortgage must be registered (Art. 2125) or, if
not registered, the buyer must know of its existence. (see Phil. National Bank &
Trust Corp. v. Court of Appeals, 193 SCRA 158 (1991). The mortgagor may not
be the principal debtor (Art.2085, 2nd par.).

b. The right or lien of an innocent mortgagee for value upon the

mortgaged property must be respected and protected, even if the mortgagor
obtained his title through fraud. The remedy of the persons prejudiced is to bring
an action for damages against the person who caused the fraud and if the latter
is insolvent, an action against the Treasurer of the Philippines may be filed for
the recovery of damages against the Assurance Fund (Philippine National Bank
v. Court of Appeals, 187 SCVRA 735 (1990).

c. Effect of Mortgage

1. The only right of a mortgagee in case of non-payment of a debt secured

by real mortgage would be to foreclose the mortgage and have the encumbered
property sold to satisfy the outstanding indebtedness (Guanzon v. Argel, 33
SCRA 474 (1970)

2. The mortgagor’s default does not operate to vest in the mortgagee the
ownership of the encumbered property. His failure to redeem the property does
not automatically vest ownership of the property to the mortgagee which would
grant the latter the right to appropriate the property or dispose of it for such effect
is against public policy as enunciated by Article 2088. (Reyes v. Sierra, 93 SCRA
472 (1979).

Adlawan v. Torres
(233 SCRA 645)
By mortgaging a piece of property, a debtor merely subjects it to lien but
ownership thereof is not parted with.

73
D. extent of Mortgage

General Rule: A mortgage constituted on immovable property is not

limited to the property itself but also extends to all its accessions, improvements,
growing fruits and rents or income (see Article 2102) as well as to the proceeds
of insurance should the property be destroyed or the expropriation value of the
property should it be expropriated.

Exception: contrary stipulation.

E. Alienation or Assignment of Mortgage

1. Said assignment is valid and assignee may foreclose the mortgage in

case of nonpayment of the mortgage indebtedness. (Santiago v. Pioneer Savings
and Loan Bank, 157 SCRA 100 (1988).

2. The fact that the mortgagor has transferred the mortgaged property to a
third person does not relieve him from his obligation to pay the debt to the
mortgagee-creditor in the absence of novation (McCallough &Co. v. Sierra,
41Phil.1 (1921).

3. The mortgage credit being a real right which follows the property, the
creditor may demand from any possessor the payment of the credit secured by
said property. It is necessary, however, that prior demand for payment must have
been made on the debtor and the latter failed to pay. (Bank of the Phil. Island v.
Concepcion &Hijos, Inc., 53 Phil. 906 (1929)

4. An assignee cannot acquire greater rights than those pertaining to an

assignor (Koa v. Court of Appeals, 219 SCRA 541).

F. Stipulation Forbidding Alienation of Mortgaged Property

1. Such a stipulation is void. However, if the mortgagor alienates the

property, the transferee is bound to respect the encumbrance because being a
real right, the property remains subject to the fulfillment of the obligation for
whose guaranty it was constituted. (Article 2126).

G. Foreclosure of Mortgages

1. Judicial foreclosure governed by Rule 68 of the Rules of Court.

2. Extrajudicial Foreclosure governed by Act. No. 3135 as amended Act 4118, if

and when the mortgagee is given a specific power or express authority to do so.

a. Public auction must be conducted in the province where the property is

situated.

b. Posting of notice of sale in at least 3 public places therein.

c. Publication in a newspaper of general circulation

d. Personal notice to mortgagor is not required (Bonnevie v. Court of

Appeals, 125 SCRA 122 (1983); GSIS v. Court of Appeals, 170 SCRA
533 (1989).

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 e. Debtor has the right to redeem the property sold within the term of one
year from and after the date of the sale (Section 6). The reckoning date in
case of registered land is from the registration of the certificates of sale
since it is only from such date that the sale takes effect as a conveyance.
(Jose Blue, 42 SCRA 351, (1971); Gorospe v. Santos, 69 SCRA 191
(1976); General v. Brrameda, 60 SCRA 162 (1976). “Every conveyance of
lands acquired under the free patent or homestead provisions, when
proper, shall be subject to repurchase by the applicant, his widow or legal
heirs, within a period of five years from the date of the conveyance.”
(Section 119, C.A. No. 141 (Public Land Law), as amended or foreclosure
sale (Tupas v. Damasco, 132 SCRA 593 (1984).

Note: Cerna v. CA (220 SCRA 517): The filling of a collection suit bars
foreclosure of mortgage.

H. Right of Mortgagee to Recover Deficiency

1. If there be a balance due to the mortgagee after applying the proceeds of

the sale, the mortgagee is entitled to recover the deficiency. (Development Bank
of the Philippines v. Mirang, 66 SCRA 141 (1975). In judicial foreclosure, the
Rules of Court specifically gives the mortgagee the right to claim for deficiency in
case a deficiency exists (Section 6, Rule 70). While Act No. 3135 governing
extrajudicial foreclosures of mortgage does not give a mortgagee the right to
recover deficiency after the public auction sale, neither does it expressly or
impliedly prohibit such recovery.

Note: This right to recover deficiency had been categorically resolved in State
Investment v. Court of Appeals (217 SCRA 32 (1930). Ergo, the mortgagee is
entitled to recover the deficiency in case the sale proceeds are not sufficient to
cover the debt in extrajudicial foreclosures.

2. The action to recover a deficiency after foreclosures prescribes after ten

(10) years from the time the right of action accrues as provided in Article 1142(2)
of the Civil Code (Development Bank of the Philippines v. Tomeldan, 101 SCRA
171 (1980).

k. Right of Redemption

1. In all cases of extrajudicial sale, the mortgagor may redeem the property
at any time within the term of one year from and after the date of registration of
the sale (see Section 6, Act No. 3135; Reyes v. Tolentino 42 SCRA 365 (1971).

2. In judicial foreclosure of real estate mortgage, there is equity of

redemption which he can exercise at any time after service of judgment of
foreclosure and within the 90- day period and even thereafter provided he does
so before the foreclosure sale is confirmed by the court. (Anderson v. Reyes, 54
Phil 944). Confirmation of the sale of mortgaged real property cuts off all the
rights or interests of the mortgagor and of the mortgage and persons holding
under him, and with them the equity of redemption in the property and vests them
in the purchaser. Confirmation retroacts to the date of the sale. It is a final order,
not interlocutory. (Ocampo v. Domalanta, 20 SCRA 136 (1967); Binalbagan
Estate, Inc. v. Gatuslao, 76 Phil. 128 (1946); Villar v. Javier, 97 Phil 604 (1955);
Lonzome v. Amores, 134 SCRA 380 (19850.

Exception: However, if the property has been mortgaged in favor of the DBP
(CA 459) Philippine National Bank (RA 1300), banking and credit institutions (RA
337, of the General Banking Act) or rural banks (RA 2670), redemption is allowed

75
within one year from the registration of the sale. (Gonzales v. Phil. National Bank,
48 Phil. 824 (1926). The redemption must be made within one year after the sale
if he mortgagee is a bank, banking or credit institution (Section 78, RA No. 337;
Piano v. Cayanog, supra). Under the Revised Charter of the PNB, the period is
one year from the registration of the foreclosure sale.

l. Requisites for Valid Redemption

1. The redemption must be made within 12 months from the time of the
registration of the sale.

2. Payment of the purchase price of the property plus 1% interest per month
together with the taxes thereon, if any, paid by the purchaser with the same rate
of interest computed from the date of registration of the sale; and

3. Written notice of the redemption must be served on the officer who made
the sale and a duplicate filed with the proper Register of Deeds. (Rosales v.
Yboa, 120 SCRA 869 (1983).

Ramirez v. Court of Appeals

(219 SCRA 598)

Acceptance of redemption price after the expiration of the statutory period

for redemption is deemed a waiver of the one-year period to redeem foreclosed
property.

m. Recent Jurisprudence on Real Mortgages

Noel v Court of Appeals

(240 SCRA 78)

In the absence of proof of gross inadequacy of the price, the fact that the
sale was made with what might appear as an inadequate consideration does not
make the contract one of mortgage.

Mercado v. Court of Appeals

(240 SCRA 616)

A co-owner does not lose his part ownership of a co-owned property

where his share is mortgaged by another co-owner without the former’s
knowledge and consent.

Tarnate v. Court of Appeals

(241 SCRA 254)

It is a settled rule that a mortgage may recover any deficiency in the

mortgage account which is not realized in a foreclosure sale and that the action
for recovery of that deficiency may be filed even during the redemption period.

Olea v. Court of Appeals

(247 SCRA 274)

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a.) A stipulation that the ownership of the property would automatically pass to
the vendee in case no redemption is effected within a stipulated period is void for
being a pactum commissorum which enables the mortgagee to acquire
ownership of the mortgaged property without need of foreclosure.

b.) Where in a contract of sale with pacto de retro, the vendor remains in physical
possession of the land sold as lessee or otherwise, the contract should be
considered an equitable mortgage.

c.) Where in a contract contains a stipulation that upon payment by the vendor of
the purchase price within a certain period the document shall become null and
void and have no legal force an effect, the purported sale should be considered a
mortgage contract.

d.) In case of doubt, a contract purporting to be sale with the right of purchase
shall be considered an equitable mortgage.

e.) A mortgage action prescribes after 10 years.

DBP v. Court of Appeals

(249 SCRA 331)

The fact that the annulment of the sale will also result in the invalidity of
the mortgage does not have an effect on the validity and efficacy of the principal
obligation, for even an obligation that is unsupported by any security of the
debtor may also be enforced by means of an ordinary action. Where a
mortgaged is not valid, as where it is executed by one who is not the owner of
the property, or the consideration of the contract is simulated or false, the
principal obligation which it guaranteed is not thereby rendered null and void.
That obligation matures and becomes demandable in accordance with the
stipulations pertaining to it.

Gabonseng v. Court of Appeals

(246 SCRA 472)

The application for foreclosure of mortgage is premature where the

debtors have not yet defaulted on the payment of either the principal or the
interest on their loans.

Ajax Marketing & Development

Corporation v. Court of Appeals
(248 SCRA 222)

An action to foreclose a mortgage is usually limited to the amount

mentioned in the mortgage but where the intent of the contracting parties is
manifest that the mortgaged property shall also answer for future loans or
advancements then the same is not improper as it is valid and binding between
the parties.

Filinvest Credit Corporation v. Court of Appeals

(248 SCRA 549)

a.) if the mortgagee cannot obtain possession of a mortgaged property for its
sale on foreclosure, it must bring a civil action either to recover such possession
as a preliminary step to the sale or to obtain judicial foreclosure.

77
b.) Replevin is the appropriate action to recover possession preliminary to the
extrajudicial foreclosure of a chattel mortgage.

Philippine Bank of Communications

v. Court of Appeals
(253 SCRA 241)

Issue: The mortgage contract provides: “This mortgage is given as security for
the payment to the MORTGAGEE on demand or at maturity, as the case may be,
of all promissory notes, letters of credit, trust receipts, bill of exchange, drafts,
overdrafts and all other obligations of every kind already incurred or which
hereafter may be incurred.”

Can the bank charge penalty based on said provision?

Held:

1. The obligation in this case was not a series of indeterminate sums

incurred over a period of time, but two specific amounts procured in a single
instance. Thus, the inapplicability of the ruling in Lim Julian v. Lutero (19 Phil.
703) which pertains only to mortgages securing future advancements. Instead,
what applies here is the general rule that “an action to foreclosure a mortgage
must be limited to the amount mentioned in the mortgage.”

2. The mortgage provision relied upon by the petitioner is known in American

Jurisprudence as a “dragnet” clause, which is specifically phrased to subsume
all debts of past or future origin. Such clauses are carefully scrutinized and
strictly construed.”

3. The mortgage contract is also one of adhesion as it was prepared solely

by the petitioner and the only participation of the other party was the affixing of
his signature or “adhesion” thereto. Being a contract of adhesion, the mortgage is
to be strictly construed against the petitioner, the party which prepared the
agreement.

4. A reading, not only of the earlier quoted provision, but of the entire
mortgage contract yields no mention of penalty charges. Construing this silence
strictly against the petitioner, it can fairly be concluded that the petitioner did not
intend to include the penalties on the promissory notes in the secured amount.
This explains the finding by the trial court, as affirmed by the Court of Appeals,
the “penalties and charges are not due for want of stipulation in the mortgage
contract.”

5. Indeed, a mortgage must sufficiently describe the debt sought to be

secured, which description must not be such as to mislead or deceive, and an
obligation is not secured by a mortgage unless it comes fairly within the terms of
the mortgage. In this case, the mortgage contract provides that it secures notes
and other evidences of indebtedness. Under the rule of ejusdem genris, where a
description of things of a particular class or kind is “accompanied by words of a
generic character, the generic words will usually be limited to things of a kindred
nature with those particularly enumerated…” A penalty charge does not belong to
the species of obligations enumerated in the mortgage; hence, the said contract
cannot be understood to secure the penalty.

6. A mortgage and a note secured by it are deemed parts of one transaction

and are construed together, thus, an ambiguity is created when the notes provide

78
for the payment of a penalty but the mortgage contract does not construing the
ambiguity against the petitioner, it follows that no penalty was intended to be
covered by the mortgage.

DBP v Court of Appeals

(253 SCRA 414)

Issue: Whether the land in dispute could have been validly mortgaged while still
the subject of a Free Patent Application with the government.

1. Petitioner bank did not acquire valid title over the land in dispute because
it was public land when mortgaged to the bank. We cannot accept petitioner’s
contention that the lot in dispute was no longer public land when mortgaged to it
since the Olidiana spouses had been in open, continuous, adverse and public
possession thereof for more than thirty (30) years. In Visayan Realty, Inc. v. Meer
(86 Phil. 515), we ruled that the approval of a sales application merely authorized
the applicant to take possession of the land so that he could comply with the
requirements prescribed by law before a final patent could be issued in his favor.
Meanwhile the government still remained the owner thereof, as in fact the
application could still be cancelled and the land awarded to another applicant
should it be shown that the legal requirements had not been complied with. What
divests the government of title to the land is the issuance of the sales patent and
its subsequent registration with the Register of Deeds. It is the registration and
issuance of the certificate of title that segregates public lands from the mass of
public domain and convert it into private property. Since the disputed lot in the
case before us was still the subject of a Free Patent Application when mortgaged
to petitioner and no patent was granted to the Olidiana spouses, Lot No. 2029
(Pls-61) remained part of the public domain.

2. With regard to the validity of the mortgage contracts entered into by the
parties, Art 2085, par.2 of the New Civil Code specifically requires that the
pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged.
Thus, since the disputed property was not owned by the Olidiana spouses when
they mortgaged it to petitioner, the contracts of mortgage and all their
subsequent legal consequences as regards Lot No. 2029 (Pls-61) are null and
void. In a much earlier case (Vda. De Bautista v. Marcos,3 SCRA 434), we held
that it was an essential requisite for the validity of a mortgage that the mortgagor
be the absolute owner of a property mortgaged, and it appearing that the
mortgage was constituted before the issuance of the patent to the mortgagor, the
mortgage in question must of necessity be void and ineffective. For the law
explicitly requires an imperative for the validity of a mortgage that the mortgagor
be the absolute owner of what is mortgaged.

State Investment House, Inc.

v. Court of Appeals
(254 SCRA 368)

1. State’s registered mortgage right over the property is inferior to that of

respondent-spouses’ unregistered right. The unrecorded sale between
respondents-spouses and SOLID is preferred for the reason that if the original
owner (SOLID), in this case) had parted with his ownership of the thing sold then
he no longer had ownership and free disposal of that thing so as to be able to
mortgage it again. Registration of the mortgage is of no moment since it is
understood to be without prejudice to the better right of third parties.

79
2. As a general rule, where there is nothing in the certificate of title to indicate
any cloud or vice in the ownership of the property, or any encumbrance thereon,
the purchaser is not required to explore further than what the Torrens title upon
its face indicates in quest for any hidden defect or inchoate right that may
subsequently defeat his right thereto. This rule, however, admits of an exception
as where the purchaser or mortgagee has knowledge of a defect or lack of title in
his vendor, or that he was aware of sufficient facts to induce a reasonably
prudent man to inquire into the status of the title of the property in litigation. In
this case, petitioner was well aware that it was dealing with SOLID, a business
entity engaged in the business of selling subdivision lots. In fact, the OAALA
found that “at the time the lot was mortgaged, respondent State Investment
House, Inc. (now petitioner) has been aware of the lot’s location and that said lot
formed part of Capital Parks/Homes Subdivision. In Sunshine Finance and
Investment Corp. v. Intermediate Appellate Court (203 SCRA 210), the court,
noting petitioner therein to be a financing corporation, deviated from the general
rule that a purchaser or mortgagee of a land is not required to look further than
what appears on the face of the Torrens Title.

3. The above-enunciated rule should apply in this case as petitioner admits of

being a financing institution. We take judicial notice of the uniform practice of
financing institutions to investigate, examine and assess the real property offered
as security for any loan application especially where, as in this case, the subject
property is a subdivision lot located at Quezon City, M.M. It is a settled rule that a
purchaser or mortgagee cannot close its eyes to facts which should put a
reasonable man upon his guard, and then claim that he acted in good faith under
the belief that there was no defect in the title of the vendor or mortgagor.
Petitioner’s constructive knowledge of the defect in the title of the subject
property, or lack of such knowledge due to its negligence, takes the place of
registration of the rights of respondents’ spouses. Respondent court thus
correctly ruled that petitioner was not a purchaser or mortgagee in good faith
hence, petitioner cannot solely rely on what merely appears on the face of the
Torrens Title.

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 ANTICHRESIS

Art. 2132. By the contract of antichresis the creditor 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.

CONCEPT- the creditor in antichresis does not acquire the title to the property by
failure of the debtor to pay the debt, nor can the debtor recover the possession
and enjoyment thereof without first paying the creditor all that he owes. On the
other hand, the creditor is obliged to apply the fruits of the property to the
payment, first, of the interest upon the debt, if there is any, and then to the
payment of the principal.

CONTRACT OF ANTICHRESIS: When the creditor acquires the right to receive

the fruits thereof the obligation to apply them to the payment of the interests, if
any, and afterwards to the satisfaction of the principal, or to set them off wholly or
partially against the interest on the debt.

COMPARED WITH PLEDGE AND MORTGAGE: Like pledge and mortgage,

antichresis is a real right and an accessory contract, which cannot exist without a
valid principal obligation. It is not essential in antichresis that the properties pass
to the possession of the creditor or a third person. But it differs from the pledge in
that it refers to immovable property, and from mortgage in that the creditor has
the right to receive the fruits of the thing, although their application is determined
by law.

Where by agreement the mortgaged property is delivered to the

mortgagee, such mortgagee in possession is subject to the obligation of an
antichretic creditor to apply the fruits to the payment, first, of the interest and,
later, of the principal.

RIGHTS OF CREDITOR:

1. The right to the fruits and income of the thing

2. The right to retain the thing until the debt is paid

3. The right to have the thing sold upon non-payment at maturity

4. The right of preference to the proceeds of the sale of the thing.

CONTRACT NOT ANTICHRESIS: When contract of loan with security

does not stipulate the payment of interest but provides for the delivery to the
creditor by the debtor of the real property constituted as security for the payment
thereof, in order that the creditor may administer the same and avail himself of
the fruit, without stating that said fruits are to be applied to the payment of
interest, if any, and afterwards to that of the principal of the credit, the contract
shall be considered to be one of mortgage and not of antichresis.

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.

VALUE OF FRUITS, HOW DETERMINED- the value of the fruits to be applied in

payment of interest and principal is to be measured by the current market price at
the time.

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A. COMPARED WITH PLEDGE- A is a consensual contract in the sense that it
can be perfected without delivery of the thing pledged. As to subject matter, only
real property or immovable may be the object of A; in P, it is movable or personal
property. To constitute a valid P, it is indispensable that the possession of the
property be held and retained by the creditor or someone else designated by
common consent; in A the contract may still subsist even if the possession of the
thing given in security is returned to the debtor, as when the creditor desires to
be exempt from the obligation to pay its taxes and other expenses necessary for
its preservation.

A. DISTINCTION FROM MORTGAGE AND PACTO DE RETRO SALE- when

money is loaned and the debtor places the creditor in possession of real property
as security for the sum loaned, the contract is not one of mortgage,
notwithstanding the terms thereof, specially where the contract was not
evidenced by a public instrument, and, even if so, where it does not appear to
have been recorded in the property registry.

Neither can such a contract be classified as one of sale under pacto de

retro, notwithstanding that it is set forth therein that the debtor cedes and
conveys to the creditor the ownership and possession of the said real property.
Such a contract should be classified as Antichresis, by means of which the
creditor acquires the right to collect the fruits of the real property turned over to
him by his debtor, but with the obligation to apply them to the payment of
whatever interest is due, and the contracting parties may stipulate that the
interest of the debt be paid by the fruits of the property given in A.

Art. 2134. The amount of the principal and of the interest shall be
specified in writing; otherwise, the contract of antichresis shall be void. (n)

PRINCIPAL AND INTEREST NEED BE SPECIFIED IN WRITING- it is essential

for the validity of a contract of A that the amount of the principal obligation as well
as the interest that it will be specified in writing.

Art. 2135. The creditor, unless there is a stipulation to the contrary, is

obliged to pay the taxes and charges upon the estate.

He is also bound to bear the expenses necessary for its preservation and
repair.

The sums spent for the purposes stated in this article shall be deducted
from the fruits. (1882)

OBLIGATION OF THE CREDITOR- it is the general rule in A that the creditor

shall preserve the property the possession of which has been delivered to him,
by the payment of the taxes and other assessments that may be levied upon it as
well as the necessary expenses to keep it in proper shape, all of which, however,
to be chargeable against the fruits.

OBLIGATIONS TO PAY CHARGES: In the absence of any stipulation to the

contrary, the antichretic creditor is under the obligation to pay the taxes and
charges which burden the estate. Failure of the antichretic creditor to observe
this obligation, such as to pay the taxes on the house, and the rent on the lot
where the same is built, renders him liable in damages to the antichretic debtor
who suffers thereby.

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Obligation of the creditor in A. 1.) to pay the taxes and charges which burden the
estate, in the absence of an agreement to the contrary; and 2.) to pay any
expenses necessary for its preservation and repair.

DEFICIENCY OF FRUITS: If the fruits are not sufficient to cover the taxes and
charges. The deficiency must be borne by the creditor, unless otherwise
stipulated.

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. (1883)

POSSESSION BY CREDITOR A MATTER OF RIGHT- the debtor cannot

recover the enjoyment and use of the real property given in A, without having
previously paid to the creditor all the debt and interest due him. That being so,
the creditor may enforce his right of possession according to law even as against
the owner himself.

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.
(1884a)

If the creditor desires to be exempt from the legal obligation to pay taxes
and other charges upon the property and the necessary expenses for its
preservation and repair, he can compel the debtor to take over the
possession of the property.

EFFECT OF NON-PAYMENT OF DEBT: The creditor in antichresis cannot by

mere possession of the real property which he received by virtue of an
antichresis acquire ownership over the same for failure of the debtor to pay the
debt within the stipulated time, any agreement to the contrary being void. On the
other hand, the debtor on his part cannot recover the enjoyment and used of the
real property given in antichresis to the creditor, without having previously paid to
the latter all his debt and interests thereon, the creditor being entitled to ask the
courts that the said real property be sold to satisfy his credit.

The parties may validly stipulate for the extrajudicial foreclosure of the
security in the same manner as they are allowed to do so in contracts of
mortgage and of pledge.

CREDITOR’S REMEDY IN CASE OF DEBTOR’S FAULT- the remedy available

to the creditor in case of non-payment of the debt within the period stipulated is
to institute an action in court for collection or for the sale of the property, as in the
case of judicial foreclosure of mortgage. He cannot appropriate the property to
himself even if there should be any stipulation to that effect.

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

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amount of interest allowed by the laws against usury, the excess shall be
applied to the principal. (1885a)

FRUITS GATHERED IN EXCESS OF INTEREST ALLOWED BY USURY LAW

TO BE APPLIED TO PRINCIPAL- nothing in excess of the interest allowed
under the usury law may be so applied to the interest. Such excess is to be
reckoned in payment of the principal.

Art. 2139. The last paragraph of Article 2085, and Articles 2089 to 2091 are
applicable to this contract. (1886a)

OTHER CHARACTERISTICS OF A.- thus, as in the case of pledge or

mortgage, a third person who is not the debtor may secure the obligation by
delivering real property of his own to the creditor in A. This contract has also the
characteristics of indivisibility; it may also guarantee all kinds of obligations, be
they pure or subject to a suspensive or resolutory condition.

A. HOW EXTINGUISHED- the extinguishment of the right of the creditor, which

marks the termination of his use and possession of the real property given in A,
depends upon the full payment of the debt and its interests, after the liquidation
of the amounts entered on the account of the debtor and received by the creditor.

CREDITOR NOT ENTITLED TO OWNERSHIP BY PRESCRIPTION: the creditor

in A can never by prescription acquire the ownership of the real property received
in A, as he entered into the possession of the same not as an owner but as a
creditor with the right only to collect his credit from the fruits of said real property.

Title to land does not pass by A. Thus, sale of the same by the antichretic
creditor to a third party will not prejudice the owner, nor can the creditor or
purchaser acquire ownership by prescription.

CONCURRENCE AND PREFERENCE

OF CREDITS
 
GENERAL PROVISIONS
 
Art. 2236. The debtor is liable with all his property, present and future, for
the fulfillment of his obligations, subject to the exemptions provided by
law. (1911a)

Art. 2237. Insolvency shall be governed by special laws insofar as they are
not inconsistent with this Code. (n)

Art. 2238. So long as the conjugal partnership or absolute community

subsists, its property shall not be among the assets to be taken
possession of by the assignee for the payment of the insolvent debtor's
obligations, except insofar as the latter have redounded to the benefit of
the family. If it is the husband who is insolvent, the administration of the
conjugal partnership of absolute community may, by order of the court, be
transferred to the wife or to a third person other than the assignee. (n)

Art. 2239. If there is property, other than that mentioned in the preceding
article, owned by two or more persons, one of whom is the insolvent
debtor, his undivided share or interest therein shall be among the assets to
be taken possession of by the assignee for the payment of the insolvent
debtor's obligations. (n)

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Art. 2240. Property held by the insolvent debtor as a trustee of an express
or implied trust, shall be excluded from the insolvency proceedings. (n)

CLASSIFICATION OF CREDITS
 
Art. 2241. With reference to specific movable property of the debtor, the
following claims or liens shall be preferred:
(1) Duties, taxes and fees due thereon to the State or any subdivision
thereof;

(2) Claims arising from misappropriation, breach of trust, or

malfeasance by public officials committed in the performance of
their duties, on the movables, money or securities obtained by them;

(3) Claims for the unpaid price of movables sold, on said movables,
so long as they are in the possession of the debtor, up to the value
of the same; and if the movable has been resold by the debtor and
the price is still unpaid, the lien may be enforced on the price; this
right is not lost by the immobilization of the thing by destination,
provided it has not lost its form, substance and identity; neither is
the right lost by the sale of the thing together with other property for
a lump sum, when the price thereof can be determined
proportionally;

(4) Credits guaranteed with a pledge so long as the things pledged

are in the hands of the creditor, or those guaranteed by a chattel
mortgage, upon the things pledged or mortgaged, up to the value
thereof;

(5) Credits for the making, repair, safekeeping or preservation of

personal property, on the movable thus made, repaired, kept or
possessed;

(6) Claims for laborers' wages, on the goods manufactured or the

work done;

(7) For expenses of salvage, upon the goods salvaged;

(8) Credits between the landlord and the tenant, arising from the
contract of tenancy on shares, on the share of each in the fruits or
harvest;

(9) Credits for transportation, upon the goods carried, for the price of
the contract and incidental expenses, until their delivery and for
thirty days thereafter;

(10) Credits for lodging and supplies usually furnished to travellers

by hotel keepers, on the movables belonging to the guest as long as
such movables are in the hotel, but not for money loaned to the
guests;

(11) Credits for seeds and expenses for cultivation and harvest
advanced to the debtor, upon the fruits harvested;

85
 (12) Credits for rent for one year, upon the personal property of the
lessee existing on the immovable leased and on the fruits of the
same, but not on money or instruments of credit;

(13) Claims in favor of the depositor if the depositary has wrongfully

sold the thing deposited, upon the price of the sale.

In the foregoing cases, if the movables to which the lien or

preference attaches have been wrongfully taken, the creditor may
demand them from any possessor, within thirty days from the
unlawful seizure. (1922a)

Art. 2242. With reference to specific immovable property and real rights of
the debtor, the following claims, mortgages and liens shall be preferred,
and shall constitute an encumbrance on the immovable or real right:
(1) Taxes due upon the land or building;

(2) For the unpaid price of real property sold, upon the immovable
sold;

(3) Claims of laborers, masons, mechanics and other workmen, as

well as of architects, engineers and contractors, engaged in the
construction, reconstruction or repair of buildings, canals or other
works, upon said buildings, canals or other works;

(4) Claims of furnishers of materials used in the construction,

reconstruction, or repair of buildings, canals or other works, upon
said buildings, canals or other works;

(5) Mortgage credits recorded in the Registry of Property, upon the

real estate mortgaged;

(6) Expenses for the preservation or improvement of real property

when the law authorizes reimbursement, upon the immovable
preserved or improved;

(7) Credits annotated in the Registry of Property, in virtue of a

judicial order, by attachments or executions, upon the property
affected, and only as to later credits;

(8) Claims of co-heirs for warranty in the partition of an immovable

among them, upon the real property thus divided;

(9) Claims of donors or real property for pecuniary charges or other

conditions imposed upon the donee, upon the immovable donated;

(10) Credits of insurers, upon the property insured, for the insurance
premium for two years. (1923a)

Art. 2243. The claims or credits enumerated in the two preceding articles
shall be considered as mortgages or pledges of real or personal property,
or liens within the purview of legal provisions governing insolvency. Taxes
mentioned in No. 1, Article 2241, and No. 1, Article 2242, shall first be
satisfied. (n)

Art. 2244. With reference to other property, real and personal, of the debtor,
the following claims or credits shall be preferred in the order named:

86
 (1) Proper funeral expenses for the debtor, or children under his or
her parental authority who have no property of their own, when
approved by the court;

(2) Credits for services rendered the insolvent by employees,

laborers, or household helpers for one year preceding the
commencement of the proceedings in insolvency;

(3) Expenses during the last illness of the debtor or of his or her
spouse and children under his or her parental authority, if they have
no property of their own;

(4) Compensation due the laborers or their dependents under laws

providing for indemnity for damages in cases of labor accident, or
illness resulting from the nature of the employment;

(5) Credits and advancements made to the debtor for support of

himself or herself, and family, during the last year preceding the
insolvency;

(6) Support during the insolvency proceedings, and for three months
thereafter;

(7) Fines and civil indemnification arising from a criminal offense;

(8) Legal expenses, and expenses incurred in the administration of

the insolvent's estate for the common interest of the creditors, when
properly authorized and approved by the court;

(9) Taxes and assessments due the national government, other than
those mentioned in Articles 2241, No. 1, and 2242, No. 1;

(10) Taxes and assessments due any province, other than those
referred to in Articles 2241, No. 1, and 2242, No. 1;

(11) Taxes and assessments due any city or municipality, other than
those indicated in Articles 2241, No. 1, and 2242, No. 1;

(12) Damages for death or personal injuries caused by a quasi-delict;

(13) Gifts due to public and private institutions of charity or

beneficence;

(14) Credits which, without special privilege, appear in (a) a public

instrument; or (b) in a final judgment, if they have been the subject of
litigation. These credits shall have preference among themselves in
the order of priority of the dates of the instruments and of the
judgments, respectively. (1924a)

Art. 2245. Credits of any other kind or class, or by any other right or title
not comprised in the four preceding articles, shall enjoy no preference.
(1925)
 

87
 ORDER OF PREFERENCE OF CREDITS
 
Art. 2246. Those credits which enjoy preference with respect to specific
movables, exclude all others to the extent of the value of the personal
property to which the preference refers.

Art. 2247. If there are two or more credits with respect to the same specific
movable property, they shall be satisfied pro rata, after the payment of
duties, taxes and fees due the State or any subdivision thereof. (1926a)

Art. 2248. Those credits which enjoy preference in relation to specific real
property or real rights, exclude all others to the extent of the value of the
immovable or real right to which the preference refers.

Art. 2249. If there are two or more credits with respect to the same specific
real property or real rights, they shall be satisfied pro rata, after the
payment of the taxes and assessments upon the immovable property or
real right. (1927a)

Art. 2250. The excess, if any, after the payment of the credits which enjoy
preference with respect to specific property, real or personal, shall be
added to the free property which the debtor may have, for the payment of
the other credits. (1928a)

Art. 2251. Those credits which do not enjoy any preference with respect to
specific property, and those which enjoy preference, as to the amount not
paid, shall be satisfied according to the following rules:

(1) In the order established in Article 2244;

(2) Common credits referred to in Article 2245 shall be paid pro rata
regardless of dates. (1929a)
 

LIABLITY OF DEBTOR IN GENERAL

Art. 2236

EXTENT OF DEBTOR’S LIABILITY- the liability of the debtor extends to all his
present and future property, except such as may be needed by him under his
right to live.

PROPERTY EXEMPT FROM LIABILITY- the right to live or to begin all over
again cannot be denied to a free man. To attain such a humane purpose even
the Rules of Court provide those properties that are exempt from execution or
liability of debtor.

In determining the amount for the necessary support of a family which is exempt
from execution, what should be considered is everything that is indispensable for
the sustenance, dwelling, clothing and medical attendance, according to the
social position of the family, as well as the education of the person entitled to be
supported until he completes his education or training for some profession, trade
or vocation even beyond the age of majority.

88
Art.2237

INSOLVENCY, WHAT LAW GOVERNS- while insolvency is primarily governed

by the Insolvency Law or other special laws on the subject, these laws are
subordinate to the Civil Code in the sense that, where there should arise any
conflict in the legal provisions, the Civil Code shall be the one to apply.

INSOLVENT MEANING- an insolvent is a person who is in a state of insolvency,

and he is in such a state when he is unable to pay his debts. One who is unable
to meet his obligations as they accrue in due course of trade, and is unable to
proceed in business without making some arrangement with his creditors, with
regards to the ultimate sufficiency of his assets in liquidation.

If one has means from which payments could be enforced, he is not insolvent,
even though he is in embarrassed circumstances, and unable to make present
payment, or has even been compelled to suspend business.

Art. 2238

CONJUGAL PROPERTY LIABLE ONLY TO INSOLVENT’S OBLIGATION THAT

REDOUND TO BENEFIT OF FAMILY- should be read together with the Family
Code.

Art. 2239

PROPERTY OWNED BY INSLOVENT ONE COMMON WITH OTHER

PERSONS- where the insolvent holds property jointly with other persons, what
may be seized by the assignee to satisfy the debtor’s obligation is limited only to
his share of interest therein.

Art. 2240

PROPERTY HELD IN TRUST TO BE RESPECTED- the insolvency proceedings

cannot affect the property held by the debtor in trust and the reason therefore is
obvious.

PROPERTY TRANSFERRED BY INSOLVENT- Sec.70 of the Insolvency Law

considers as fraudulent any transfer of property made by the insolvent within 30
days of the filing by or against him of a petition for insolvency, unless the transfer
is for valuable pecuniary consideration and is made in good faith. For the
purpose of determining whether the transfer was made within 30-day period, the
date of transfer and not the date of registration of the sale should be considered.

BADGES OF FRAUD- to determine whether or not certain transfers are

fraudulent:

1. the fact that the consideration of the conveyance is fictitious or is inadequate;

2. a transfer made by a debtor after suit has been begun and while it is pending
against him;

3. a sale upon credit by an insolvent debtor

4. evidence of large indebtedness or complete insolvency

5. the transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially;

89
6. the fact that the transfer is made between father and son, when there are
present others of the above circumstances.

CLASSIFICATION OF CREDITS

ART 2241

PREFERRED CLAIMS WITH RESPECT TO SPECIFIC PROPERTY-

preferred claims or credits are classified into 2 main groups- 1) those with
respect to specific movable property of the debtor; and 2) those with respect to
specific immovable and real rights of the debtor.

It is to be borne in mind that the enumerations in 2241 and 2242 does not
necessarily constitute an order of preference. With the exception of item No. 1
referring to taxes due upon the land or building, all other credits listed may
concur with respect to specific real property, and should be satisfied by division
according to share, interest or liability of each. And with respect to the
materialman’s lien under item No. 4, the same may be enforced only against the
specific building or construction where the materials have been supplied.

ART 2243

TAXES AS PARAMOUNT LIEN- of the various preferred lien enumerated

in article 2241 and 2242 that for taxes due the government shall be paramount.

MECHANIC’S LIEN- this exists in favor of persons who have performed

work of furnished material in and for the erection of a building. Their lien attaches
to the land as well as to the building, and is intended to secure for them a priority
of payment.

Thus the contractor can retain possession of the movable in the

enforcement of his claim for compensation. The right to be paid for work done on
the movable is on the nature of a mechanic’s lien which subjects the movable,
object of the work, to the payment of the amount due. Even in the absence of an
express contract, the lien is validly constituted and the owner is placed under
obligation to pay for the work, particularly where he consents to the work and
seeks to derive benefit. This lien attaches to the property itself, without any
reference to ownership, and overrides all other rights in the property.

When the holder of a mechanic’s lien enforces its lien by causing the sale
of the movable property over which it holds a lien, whoever acquires the property
in the process, acquires it absolutely free from any claim of the owner thereof.
The only claim against the specific movable property which are due on the
specific movable property, to the State or to any of its subdivisions as provided in
Article 2241(1)

PREFERRED CREDIT OF UNPAID VENDOR- where goods, wares and

merchandise have been sold and not yet paid for, preference may be claimed by
the vendor provided the identity of the property sold can be established.

Thus it has been held that an unpaid vendor is a preferred creditor with
respect to the property sold while it is on the possession of the vendee. And even
if said property is subsequently attached and sold under execution, the vendor
does not lose his preferred right over the proceeds of the same.

90
 Article 2241 of the Civil Code does not give to the creditor a lien upon the
property of the debtor. It simply provides that when the proceeds of the property
are distributed the preferred creditor shall first be paid; and if the property is sold
for less than the claim of the preferred creditor, the latter is entitled to the whole
of the proceeds.

The preference established by law in favor of the vendor to personal property

sold and in the possession of the purchaser, for the purchase price is not lost by
the mere fact that such personal property is converted into real property by
destination, whenever its form and substance are not changed and it has not lost
its identity. Neither does the vendor lose such right notwithstanding the fact that
the personal property converted into real property by destination, without having
lost its identity, is sold with the real property to which it is attached, for lump sum,
and the vendor has not requested its separation before the sale.

LIEN ON PERSONAL PROPERTY FOR UNPAIID RENTS- as between the

landlord and the tenant, it seems clear from 2241 that the former has the jus
retentions over the personal property of the latter on the estate leased to the
extent of one year’s rent which gives the creditor the right within 30 days to
retrieve the personal property in case it has been removed from the premises.

ART.2244 PRIORITY OF CLAIMS AGAINST PROPERTY OF DEBTOR- with

respect to other property of the debtor, there are certain recognized claims and
credits which may be enforced in accordance with certain order of preference.

ART 2245

OTHER CLAIMS NOT ENTITLED TO PREFERENCE- claims and credits other

than those enumerated in Arts. 2241 to 2244 are not entitled to preference.

CLAIMS BEFORE MATURITY NOT ENTITLED TO PREFERENCE- where a

claim or credit is not yet due or demandable, it cannot in any way be preferred.
The credits to which the Civil Code gives preference are credits due, and until
they are demandable the legal provisions on preferential credits are not
applicable thereto.

ORDER OF PREFERENCE OF CREDITS

RULE FOR APPLICATION OF PREFERRED CREDITS AGAINST SPECIFIC

MOVABLES- with the exception of the preferred credit on duties, taxes and fees
due the government, which has to be satisfied before all others, the list of such
preferred claims or credits are enumerated in 2241 with reference to specific
movable property of the debtor represents nothing more than a general
classification and has no reference to the order that preferred claims or credits
shall enjoy among themselves when several exist against the same property.

To determine the priority of such preferred credits, with respect to specific

movable property of the debtor, art.2246 and 2247 provide the rule.

RULE FOR APPLICALTION OF PREFERRED CREDITS AGAINST SPECIFIC

IMMOVABLE OR REAL RIGHTS- to determine the priority of preferred credits,
with respect to specific real property or real rights of the debtor, 2248 and 2249
provides the rule.

While credits referring to the same specific real property or real rights are to be
satisfied pro rata according to 2249, for purposes, however, of satisfying other

91
such credits as have been registered or annotated on a certificate of title, the rule
is still preference according to priority of the credits in the order of the dates of
their registration.

ART.2250

RELATIVE PREFERENCE OF SECURED CREDIT OVER UNSECURED

CREDIT- with respect to specific immovable property and real rights of the
debtor, it was held that a mortgage constituted thereon and duly recorded in the
office of the Register of Deeds is deemed preferred insofar as such property
mortgages as concerned over other unsecured credits.

ART 2251

NON-PREFERRED CREDITS, HOW SATISFIED- claims or credits which are not

preferred at all are to be satisfied in accordance with 2251 of the CC.

Real Mortgage is a contract whereby the debtor secures to the creditor the
fulfillment of a principal obligation, specially subjecting to such security
immovable property or real rights over immovable property in case the principal
obligation is not complied with at the time stipulated,.

CONCURRENCE AND PREFERENCE OF CREDITS

CHAPTER 1
GENERAL PROVISIONS

Introductory Comment ( Features of the Title)

"The title on 'Concurrence and Preference of Credits' is characterized by four

features:
(1) the liens and mortgages with respect to specific movable and immovable
property have been increased:
(2) the proposed Civil Code and the Insolvency Law have been brought into
harmony:
(3) preferred claims as to the free property of the insolvent have also been
augmented; and
(4) the order of the preference laid down in articles 1926 and 1927 of the Civil
Code, among claims with respect to specific personal and real property, has
been abolished, except that taxes must first be satisfied." (Report of the Code
Commission, pp. 163-164).

Art. 2236 The debtor is liable with all his property, present and future, for
the fulfillment of his obligations, subject to the exemptions provided by
law. (1911a)

COMMENT:
(1) What Creditor Can Do If Debtor Has No Money

If a debtor has no money, what can the creditor do to collect the credit?

ANS.:
(a) attach properties not exempt from attachment, forced sale, or execution
(b) exercise accion subrogatoria (the right to exercise all rights and actions
except those inherent in the person)
(c) exercise accion pauliana (impugn or rescind acts or contracts done by the
debtor to defraud the creditors) (Art. 1177; see also Arts. 1380 to 1389)

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(d) in certain cases ask for datio in solutum, cession (assignment in favor of
creditors). file insolvency proceedings (provided all the requisite conditions are
present)
(e) wait till the debtor has money or property in the future (after all liability is with
present and future property)

NOTE: The obligations must already be DUE (Jacinto v. De Leon, 5 Phil. 992).

(2) Examples of Properties Exempt from Attachment

(a) the family home judicially or extrajudicially created) except in certain cases
(Arts. 232 and 243
(b) the right to support, annuities, pensions (in certain instances)
(c) property in custodia legis (Springer v. Odlin, 3 Phil. 348)
(d) properties of a municipal corporation used for governmental purposes (Viuda
de Tantoco v. Mun. Council of Holo, 19 Phil. 52)
(e) in certain cases, homesteads acquired under the Public Land Act (See Beach
. PCC and Sheriff, 49 Phil 365)
(f) those mentioned in Rule 39, Sec. 12, Rules of Court

Art. 2237 Insolvency shall be governed by special laws insofar as they are
not inconsistent with this Code. (n)
COMMENT:

Civil Code Superior to Special Laws on Insolvency

(a) In Velayo v. Shell Co. (Phil) (100 Phil. 187), the Supreme Court held that
while the acts of a creditor who disposes of his own credit, and not the insolvent's
property, but in a scheme to remove such property from the possession and
ownership of the insolvent, may not come within the purview of Sec. 37 of the
Insolvency Law which makes a person coming under it liable for double the value
of the property sought to be disposed of, still said creditor be so held liable for
such damages under Arts, 2229, 2232, 2142 and 2143

(b) It is clear under the Article that in case of conflict it is the Civil Code that
prevails.

Art. 2238 So long as the conjugal partnership or absolute community

subsists, its property shall not be among the assets to be taken
possession of by the assignee for the payment of the insolvent debtor's
obligations, except insofar as the latter have redounded to the benefit of
the family. If it is the husband who is insolvent, the administration of the
conjugal partnership or absolute community may, by order of the court, be
transferred to the wife or to a third person other than the assignee (n)

COMMENT

Exemption of Properties of the Conjugal Partnership or of the Absolute

Community

The exemption applies provided that

(a) the conjugal partnership or the absolute community subsists AND
(b) the obligation did NOT redound to the benefit of the family

Art. 2239 If there is property, other than that mentioned in the preceding
article, owned by two or more persons, one of whom is the insolvent
debtor, his undivided share or interest therein shall be among the assets to

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be taken possession of by the assignee for the payment of the insolvent
debtor's obligations. (n)

COMMENT

Rule in Case of Co-Ownership

The undivided share or interest shall be possessed by the assignee

Art. 2240. Property held by the insolvent debtor as a trustee of an express

or implied trust, shall be excluded from the insolvency proceedings. (n)

COMMENT:

Property Held Because of An Express or implied Trust

The reason for the exemption is obvious: the trustee is NOT the owner of the
property held. Hence, it should not respond for the insolvent trustees obligations.

CHAPTER 2
CLASSIFICATION OF CREDITS

ART. 2236. The debtor is liable with all his property, present and future, for
the fulfillment of his obligations, subject to the exemptions provided by
law.

Art. 2237. Insolvency shall be governed by special laws insofar as they are
not inconsistent with this Code. (n)

Art. 2238. So long as the conjugal partnership or absolute community

subsists, its property shall not be among the assets to be taken
possession of by the assignee for the payment of the insolvent debtor's
obligations, except insofar as the latter have redounded to the benefit of
the family. If it is the husband who is insolvent, the administration of the
conjugal partnership of absolute community may, by order of the court, be
transferred to the wife or to a third person other than the assignee. (n)

Art. 2239. If there is property, other than that mentioned in the preceding
article, owned by two or more persons, one of whom is the insolvent
debtor, his undivided share or interest therein shall be among the assets to
be taken possession of by the assignee for the payment of the insolvent
debtor's obligations. (n)

Art. 2240. Property held by the insolvent debtor as a trustee of an express

or implied trust, shall be excluded from the insolvency proceedings. (n)  
 

Rule 39 of the Rules of Court:

Sec. 13. Property exempt from execution. 

Except as otherwise expressly provided by law, the following
property, and no other, shall be exempt from execution: 
(a) The judgment obligor's family home as provided by law,
or the homestead in which he resides, and land necessarily
used in connection therewith;

94
(b) Ordinary tools and implements personally used by him in
hs trade, employment, or livelihood;
(c) Three horses, or three cows, or three carabaos, or other
beasts of burden such as the judgment obligor may select
necessarily used by him in his ordinary occupation;
(d) His necessary clothing and articles for ordinary
personal use, excluding jewelry;
(e) Household furniture and utensils necessary for
housekeeping, and used for that purpose by the judgment
obligor and his family, such as the judgment obligor may
select, of a value not exceeding one hundred thousand pesos;
(f) Provisions for individual or family use sufficient for
four months;
(g) The professional libraries and equipment of judges,
lawyers, physicians, pharmacists, dentists, engineers,
surveyors, clergymen, teachers, and other professionals, not
exceeding three hundred thousand pesos in value;
(h) One fishing boat and accessories not exceeding the total
value of one hundred thousand pesos owned by a fisherman and
by the lawful use of which he earns his livelihood;
(i) So much of the salaries, wages, or earnings of the
judgment obligor of his personal services within the four
months preceding the levy as are necessary for the support
of his family;
(j) Lettered gravestones;
(k) Monies benefits, privileges, or annuities accruing or in
any manner growing out of any life insurance;
(l) The right to receive legal support, or money or property
obtained as such support, or any pension or gratuity from
the Government;
(m) Properties specially exempt by law. 
But no article or species of property mentioned in his
section shall be exempt from execution issued upon a
judgment recovered for its price or upon a judgment of
foreclosure of a mortgage thereon.

EXEMPTION OF FAMILY HOME – must be set up and proved to the Sheriff

before the sale of the property at public auction. The exemption may be waived
or barred by laches by the failure to set up and prove the status of the property
as a family home at the time of the levy or at a reasonable time thereafter.

Note: Family home not exempt from certain credits – Non-payment of taxes,
debts incurred prior to the constitution; debts secured by mortgages before or
after constitution; and debts due to laborers, mechanics, architects, builders,
material men and others who have rendered service or furnished materials for
the construction of the building.

PURPOSE OF CONCURRENCE AND RPEFERENCE OF CREDITS – to effect

an equitable distribution of the insolvent’s property among his creditors.

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Concurrence of credit: Concurrence of credits occurs when the same specific
property of the debtor or all of his property is subjected to the claims of several
creditors. The concurrence of credits raises no questions of consequence where
the value of the property or the value of all assets of the debtor is sufficient to pay
in full all the creditors. However, it becomes material when said assets are
insufficient for then some creditors of necessity will not be paid or some creditors
will not obtain the full satisfaction of their claims. In this situation, the question of
preference will then arise that is to say who of the creditors will be paid ahead of
the others.

Preference of credit: A preference of credit bestows upon the preferred creditor

an advantage of having his credit satisfied first ahead of other claims which may
be established against the debtor. Logically, it becomes material only when the
properties and assets of the debtor are insufficient to pay his debts in full; for if
the debtor is amply able to pay his various creditors in full, there is no necessity
to determine which of his creditors shall be paid first or whether they shall be
paid out of the proceeds of the sale of the debtor's specific property

Requirement of liquidation proceedings: A preference of credit points out solely

the order in which creditors inventoried and appraised during bankruptcy,
insolvency or liquidation proceedings. Moreover, a preference does not exist in
any effective way prior to, and apart from, the institution of these proceedings, for
it is only then that the legal provisions on concurrence and preference of credits
begin to apply." In this jurisdiction, bankruptcy, insolvency and general judicial
liquidation proceedings provide the only proper venue for the enforcement of a
creditor's preferential right such as that established in Article 110 of the Labor
Code, for these are in rem proceedings binding against the whole world where all
persons having any interest in the assets of the debtor are given the opportunity
to establish their respective credits. A liquidation of similar import or "other
equivalent general liquidation" must also necessarily be a proceedings in rem so
that all in interested persons whether known to the parties or not may be bound
by such proceeding

Classification of Credits: The Civil Code classifies credits against a particular

insolvent into three general categories, namely —

1) Special preferred credits listed in Articles 2241 and 2242;

2) Ordinary preferred credits listed in Article 2244;

and

3) Common credits under Article 2245

Art. 2241. With reference to specific movable property of the debtor, the
following claims or liens shall be preferred:
(1) Duties, taxes and fees due thereon to the State or any subdivision
thereof;
(2) Claims arising from misappropriation, breach of trust, or malfeasance
by public officials committed in the performance of their duties, on the
movables, money or securities obtained by them;
(3) Claims for the unpaid price of movables sold, on said movables, so long
as they are in the possession of the debtor, up to the value of the same;
and if the movable has been resold by the debtor and the price is still
unpaid, the lien may be enforced on the price; this right is not lost by the
immobilization of the thing by destination, provided it has not lost its form,

96
substance and identity; neither is the right lost by the sale of the thing
together with other property for a lump sum, when the price thereof can be
determined proportionally;
(4) Credits guaranteed with a pledge so long as the things pledged are in
the hands of the creditor, or those guaranteed by a chattel mortgage, upon
the things pledged or mortgaged, up to the value thereof;
(5) Credits for the making, repair, safekeeping or preservation of personal
property, on the movable thus made, repaired, kept or possessed;
(6) Claims for laborers' wages, on the goods manufactured or the work
done;
(7) For expenses of salvage, upon the goods salvaged;
(8) Credits between the landlord and the tenant, arising from the contract of
tenancy on shares, on the share of each in the fruits or harvest;
(9) Credits for transportation, upon the goods carried, for the price of the
contract and incidental expenses, until their delivery and for thirty days
thereafter;
(10) Credits for lodging and supplies usually furnished to travellers by
hotel keepers, on the movables belonging to the guest as long as such
movables are in the hotel, but not for money loaned to the guests;
(11) Credits for seeds and expenses for cultivation and harvest advanced
to the debtor, upon the fruits harvested;
(12) Credits for rent for one year, upon the personal property of the lessee
existing on the immovable leased and on the fruits of the same, but not on
money or instruments of credit;
(13) Claims in favor of the depositor if the depositary has wrongfully sold
the thing deposited, upon the price of the sale.
In the foregoing cases, if the movables to which the lien or preference
attaches have been wrongfully taken, the creditor may demand them from
any possessor, within thirty days from the unlawful seizure. (1922a)

CREDITS OVER SPECIFIC PERSONAL PROPERTIES

a) The order in this article is not important

b) What is important is that:
1. Those credits which enjoy preference with respect to specific
movables exclude all others to the extent of the value of the
personal property to which the preference refers;
2. If there are two or more credits with respect to the same specific
movable property, they shall be satisfied pro rata, after the
payments of duties, taxes and fees due the State or any obligation.

2nd par. Refers to UNPAID PRICE OF MOVABLES

Par. 5 – refers to MECHANIC’s LIEN – lien for making repairs and safekeeping

IRT to Art. 1731 – “he who has executed work upon a movable has a right
to retain it by way of pledge until he is paid. “
The mechanic’s liens is akin to a contractor’s or warehouseman’s lien in that by
way of pledge, the repairman has the right to retain possession of the movable
until he is paid. However, the right of retention is condition upon the execution of
work upon the movable.

The creation of a mechanic’s lien does not depend upon the owner’s
nonpayment. Rather, the contractor “creates” his or her own lien by performing
the work or furnishing the materials.

97
 A person who has made repairs upon an automobile at the request of the
owner is entitled to retain it until he has been paid the price of the work executed.

LABORER’s WAGES – Art. 1710 of the CC provided, “the laborer’s wages shall
be a lien on the goods manufactured or the work done.”
One of the preferred credits with respect to movable properties (par. 6 Art.
2241) is claims for laborer’s wage’s on the goods manufactured or the work
done. The lien referred to in the first article is on the goods manufactured or work
done. Article 1797 CC seems to contemplate chattels and not immovable
property as confirmed by art. 2241. “For the payment of the laborer’s wages,
article 1701 creates a lien on the goods manufactured or word done, if the
laborer be engaged by the owner of the goods to be manufactured or work to be
done.” Art. 1707 and no. 6 of article 2241 does not apply where there is a
contractor. See Art. 1729.

Nature of the Claims or Credits

The claims or credits enumerated in Art. 2241 considered:

(a) pledges of personal property
(b) or liens with the purview of legal provisions of governing insolvency (Art.
2243)

NOTE: As liens, they are considered charges generally, unless otherwise stated,
they
are NOT possessory liens with the right of retention. (See grano v. Paredes, 50
Phil. 6)]

Par. 1 - Taxes, etc.

The duties, taxes, and fees referred to are those ON the specific movable
concerned.

Par. 3 - Unpaid Price of Movables SOLD

There are two liens referred to here:

(a) possessory lien (as long as the property is still in the possession of the
debtor)
(b) ordinary lien on the PRICE (not a possessory lien) if the property has been
resold and still unpaid (See Banco Español-Filipino v. Peterson, 7 Phil. 409;
Hunter, Kerr and Co. v. Murray, 48 Phil. 499)

Par. 4 - Pledge or Chattel Mortgage

Under the old law, the Court held that a repairer has preferential rights over a
chattel mortgage of the same property; thus the chattel mortgagee cannot get the
property from the repairer without first paying for the services. (Bachrach Motor
Co. v. Mendoza, 43 Phil. 410; PCC v. Webb and Falcon, 51 Phil. 745; Phil. Trust
Co. v. Smith Navigation Co., 64 Phil. 830)

It would seem however that the preference has now been abolished under Art.
2247.

Par. 6 - Laborers Wages

(a) This applies only to personal, not to real property (The latter is governed by
Par. 3 of Art. 2242)

98
(b) The laborer must have been employed by the owner of the goods, not by the
contractor who in turn was employed to do the work (See Bautista v. Auditor
General, 97 Phil. 244)

Last Paragraph Wrongful Taking

This applies only when the debtor still OWNS the property wrongfully taken not
when he has lost ownership over the same (See Peña v. Mitchell, 9 Phil. 588)

Art. 2242. With reference to specific immovable property and real rights of
the debtor, the following claims, mortgages and liens shall be preferred,
and shall constitute an encumbrance on the immovable or real right:
(1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold, upon the immovable sold;
(3) Claims of laborers, masons, mechanics and other workmen, as well as
of architects, engineers and contractors, engaged in the construction,
reconstruction or repair of buildings, canals or other works, upon said
buildings, canals or other works;

(4) Claims of furnishers of materials used in the construction,

reconstruction, or repair of buildings, canals or other works, upon said
buildings, canals or other works;
(5) Mortgage credits recorded in the Registry of Property, upon the real
estate mortgaged;
(6) Expenses for the preservation or improvement of real property when the
law authorizes reimbursement, upon the immovable preserved or
improved;
(7) Credits annotated in the Registry of Property, in virtue of a judicial
order, by attachments or executions, upon the property affected, and only
as to later credits;
(8) Claims of co-heirs for warranty in the partition of an immovable among
them, upon the real property thus divided;
(9) Claims of donors or real property for pecuniary charges or other
conditions imposed upon the donee, upon the immovable donated;
(10) Credits of insurers, upon the property insured, for the insurance
premium for two years. (1923a)

Credits Over Specific Real Properties

Comments Nos. 1 and 2 in the preceding article are applicable to this article,
except that the reference to "movables should now apply to "real property or im
movables." (See Arts. 2248 and 2249)

Concurrence, not Preference

Again, it must be stressed that with the sole exception of the State, the creditors
with respect to the SAME specific immovable merely CONCUR; there is NO
PREFERENCE (See Arts. 2248 and 2249)

Refectionary Credit

This is a credit for the repair or reconstruction of something that had previously
been made (See Art. 2242, No. 3) Ordinarily an entirely new work is not included,
although Spanish jurisprudence appears to have sanctioned this broader
conception in certain cases (Director of Public Works v. Sing Joco, 53 Phil. 205).

CONTRUCTOR’S LIEN – or REFECTIONARY CREDITS

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 The preference in par. 3 and 4 of 2242 attaches only to the building,
canals or works upon which the refection or work was made. It does not attach to
the properties like the land.
Art. 2242 only finds application when there is a concurrence of credits, i.e. when
the same specific property of the debtor is subjected to the claims of several
creditors and the value of such property of the debtor is insufficient to pay in full
all the creditors. In such a situation, the question of preference will arise, that is,
there will be a need to determine which of the creditors will be paid ahead of the
others. Fundamental tenets of due process will dictate that this statutory lien
should then only be enforced in the context of some kind of proceeding where
the claims of all the preferred creditors may be bindingly adjudicated, such as
insolvency proceedings.

Art. 2243. The claims or credits enumerated in the two preceding articles
shall be considered as mortgages or pledges of real or personal property,
or liens within the purview of legal provisions governing insolvency. Taxes
mentioned in No. 1, Article 2241, and No. 1, Article 2242, shall first be
satisfied. (n)

Nature of the Claim ore Credits

They are considered as pledges or mortgages.

Comment of the Code Commission

The question as to whether the Civil Code and the Insolvency Law can be
harmonized is settled in this article. The preference named in Arts. 2241 and
2242 are to be enforced in accordance with the Insolvency Law. Taxes on the
specific property will be paid first.

Art. 2244. With reference to other property, real and personal, of the debtor,
the following claims or credits shall be preferred in the order named:

(1) Proper funeral expenses for the debtor, or children under his or her
parental authority who have no property of their own, when approved by
the court;
(2) Credits for services rendered the insolvent by employees, laborers, or
household helpers for one year preceding the commencement of the
proceedings in insolvency;

(3) Expenses during the last illness of the debtor or of his or her spouse
and children under his or her parental authority, if they have no property of
their own;

(4) Compensation due the laborers or their dependents under laws

providing for indemnity for damages in cases of labor accident, or illness
resulting from the nature of the employment;

(5) Credits and advancements made to the debtor for support of himself or
herself, and family, during the last year preceding the insolvency;

(6) Support during the insolvency proceedings, and for three months
thereafter;

(7) Fines and civil indemnification arising from a criminal offense;

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(8) Legal expenses, and expenses incurred in the administration of the
insolvent's estate for the common interest of the creditors, when properly
authorized and approved by the court;

(9) Taxes and assessments due the national government, other than those
mentioned in Articles 2241, No. 1, and 2242, No. 1;

(10) Taxes and assessments due any province, other than those referred to
in Articles 2241, No. 1, and 2242, No. 1;

(11) Taxes and assessments due any city or municipality, other than those
indicated in Articles 2241, No. 1, and 2242, No. 1;

(12) Damages for death or personal injuries caused by a quasi-delict;

(13) Gifts due to public and private institutions of charity or beneficence;

(14) Credits which, without special privilege, appear in (a) a public

instrument; or (b) in a final judgment, if they have been the subject of
litigation. These credits shall have preference among themselves in the
order of priority of the dates of the instruments and of the judgments,
respectively. (1924a)

Order of Preference In Connection With OTHER Properties

(a) The order of preference here is VERY IMPORTANT (See Art. 2251)
(b) The order of preference here does not refer to specific real or personal
property. It refers to other properly

Taxes

Note that under Art. 2244, taxes (duties, assessments) are placed only as Nos.
9, 10, 11. This rule applies to property other than specific. If the property is
specific, taxes, duties, assessments) on said property (not other taxes) are given
first preference.(See Arts. 2243, 2247 2249)

Re Par. 14 ( Ordinary Credits and Final Judgments)

It would seem here that an ordinary credit evidenced by a public

instrument and a final judgment are placed on an EQUAL PLANE; hence, if both
are of the same date, there will be a pro rata sharing.

EFFECT OF LABOR CODE. Article 2244(2) Article 110 of the Labor “Code
modified Art. 2244(2) by removing the one-year limitation and by elevating these
credits from 2nd to 1st. As thus modified, the excess of the properties that
answered for special preferred credits plus the other properties that are not
subject to such special preferred credits shall be satisfied in accordance with the
order of preference under 2244.

Art. 2245. Credits of any other kind or class, or by any other right or title
not comprised in the four preceding articles, shall enjoy no preference.
(1925)

All other kinds of credits

No preference- this is the rule indicated for these credits.

101
 CHAPTER 3
ORDER OF PREFERENCE OF CREDITS

Art. 2246. Those credits which enjoy preference with respect to specific
movables, exclude all others to the extent of the value of the personal
property to which the preference refers.
Art. 2247. If there are two or more credits with respect to the same specific
movable property, they shall be satisfied pro rata, after the payment of
duties, taxes and fees due the State or any subdivision thereof. (1926a)

Art. 2248. Those credits which enjoy preference in relation to specific real
property or real rights, exclude all others to the extent of the value of the
immovable or real right to which the preference refers.

Art. 2249. If there are two or more credits with respect to the same specific
real property or real rights, they shall be satisfied pro rata, after the
payment of the taxes and assessments upon the immovable property or
real right. (1927a)

Art. 2250. The excess, if any, after the payment of the credits which enjoy
preference with respect to specific property, real or personal, shall be
added to the free property which the debtor may have, for the payment of
the other credits. (1928a)

Art. 2251. Those credits which do not enjoy any preference with respect to
specific property, and those which enjoy preference, as to the amount not
paid, shall be satisfied according to the following rules:

(1) In the order established in Article 2244;

(2) Common credits referred to in Article 2245 shall be paid pro rata
regardless of dates. (1929a)

Special preferred credits:

Concept: These credits constitute liens or encumbrances on the specific movable

or immovable property to which they relate. Article 2243 makes clear that these
credits "shall be considered as mortgages or pledges of real or personal
property, or liens within the purview of legal provisions governing insolvency.

Order of preference among special preferred credits: Articles 2241 and 2242
jointly with Articles 2246 to 2249 establish a two-tier order of preference. The first
tier includes only taxes, duties and fees due on specific movable or immovable
property (or tax liens). All other special preferred credits (non-tax liens) stand "
the same second tier to be satisfied. Pari passu and pro rata, out of any residual
value of the specific property to which such other credits relate. Thus

1) Duties, taxes and fees due on specific movable property of the insolvent to the
State or any subdivision thereof and taxes due upon the insolvent's land or
building stand first in preference in respect of the particular movable or
immovable property to which the tax liens have attached. Article 2243 is quite
explicit: "[Taxes mentioned in number 1, Article 2241 and number 1, Article 2242
shall first be satisfied."

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2) The claims listed in numbers 2 to 13 in Article 2241 and in numbers 2 to 10 in
Article 2242, all come after taxes in order of precedence; such claims enjoy their
privileged character as liens and may be paid only to the extent that taxes have
been paid from the proceeds of the specific property involved (or from any other
sources) and only in respect of the remaining balance of such proceeds. What is
more, these other (non-tax) credits, although constituting liens attaching to
particular property, are not preferred one over another inter se. Provided tax liens
shall have been satisfied, non-tax liens or special preferred credits which subsist
in respect of specific movable or immovable property are to be treated on an
equal basis and to be satisfied concurrently and proportionately.

Special preferred takes precedence over ordinary preferred credits: Credits

which are specially preferred because they constitute liens tax or non-tax) in turn,
take precede over ordinary preferred credits so far concerns the property to
which the liens attached. The specially preferred credits must be discharged first
out of the proceeds of the property to which they relate, before ordinary preferred
creditors may lay claim to any part of such proceeds.

Effect of excess or deficiency: If the value of the specific property involved is

greater than the sum total of the tax liens and other specially preferred credits,
the residual value will form part of the "free property" of the insolvent i.e.,
property not impressed with liens by operation of Articles 2241 and 2242. If, on
the other hand, the value of the specific movable or immovable is less than the
aggregate of the tax liens and other specially preferred credits, the unsatisfied
balance of the tax liens and other such credits are to the treated as ordinary
credits under Article 2244 and to be paid in the order of preference there set up.

Ordinary preferred credits:

Concept: In contrast with Art. 2241 and 2242, Article 2244 creates no liens on
determinate property which follow such property. What Article 2244 creates are
simply rights in favor of certain creditors to have the cash and other assets of the
insolvent applied in a certain sequence or order of priority. Only in respect of the
insolvent's "free property" is an order of priority established by Article 2244.

Effect of worker's preference under Article 110 of Labor Code: Republic Act No.
6715 expanded the concept of "worker preference" to cover not only unpaid
wages but also other monetary claims to which even claims of the Government
must be deemed subordinate. But the right of first preference as regards unpaid
wages recognized by Article 110 does not constitute a lien on the property of the
insolvent debtor in favor of workers. It is but a preference of credit in their favor, a
preference in application. It is a method adopted to determine and specify the
order in which credits should be paid in the final distribution of the proceeds of
the insolvent's assets. It is a right to a first preference in the discharge of the
funds of the judgment debtor.480 The preference given by Article 110 of the
Labor Code, when not falling within Article 22416) and Article 2242(3), of the Civil
Code and not attached to any specific property, is all ordinary preferred credit
although its impact is to move it from second priority to first priority in the order of
preference established by Article 2244 of the Civil Code. Stated otherwise, the
worker's preference under Article 110 of the Labor Code is an ordinary preferred
credit. While this provision raises the worker's money claim to first priority in the
order of preference established under Article 2244 of the Civil Code, the claim
has no preference over special preferred credits.

A mortgage credit is a special preferred credit that enjoys preference with respect
to a specific determinate property of the debtor. On the other hand, the worker's
preference under Article 110 of the Labor Code is an ordinary preferred credit.

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While this provision raises the worker money claim to first priority in the order of
preference established under Article 2244 of the Civil Code, the claim has no
preference over special preferred credit.

Claims for unpaid wages classified as special preferred credit: Claims for unpaid
wages falling within the category of specially preferred credits are the following

1) Claims for laborers' wages, on the goods manufactured or the work done; or

2) Claims of laborers and other workers engaged in the construction,

reconstruction or repair of buildings, canals and other works, upon said buildings
canals or other works.

NOTE: To the extent that claims for un paid wages fall outside the scope of
article 2241, number 6 and 2242, number 3, they would come within the ambit of
the category of ordinary preferred credits under Article 2244.

Order of preference among the ordinary preferred credits: Insofar as ordinary

preferred credits are concerned, they are to be paid in the order mentioned in
Article 2244, except that the worker's claim for unpaid wages has been moved
from second priority to first priority in the order of preference.

In addition, the one year limitation in Article 2244, No. 2 has already been
remove

Common credits:
Concept: Those which are not included in Articles 2241, 2242 and 2244

Rule with respect to common credits: There shall be no preference among

them6e and they are to be paid pro rata regardless of dates.

DAMAGES
A. DAMAGES

Kinds of Damages: (MENTAL)

MORAL
EXEMPLARY
NOMINAL
TEMPERATE
ACTUAL
LIQUIDATED

1. ACTUAL/COMPENSATORY- adequate compensation for

a) The value of loss suffered
b) Profits which obligee failed to obtain

Exception:
a. provided by law
b. by stipulation

WHAT MUST BE DONE TO COLLECT ACTUAL DAMAGES:

1.) Plead or allege the loss

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 GENERAL DAMAGE- natural, necessary and logical consequences of
a particular wrongful act which result in injury; need not be specifically
pleaded because the law itself implies or presumes that they resulted from
the wrongful act

SPECIAL DAMAGES- damages which are the natural, but not the
necessary and inevitable result of the wrongful act; need to be
pleaded

2.) Pray for the relief that claim for loss be granted
3.) Prove the loss

WHEN LOSS NEED NOT BE PROVED:

1.) Liquidated damages previously agreed upon, liquidated
damages take the place of actual damages except when
additional damages incurred
2.) If damages other than what are actually are sought
3.) Loss is presumed (ex: loss of a child or spouse)
4.) Forfeiture of bonds in favor of the government for the purpose of
promoting public interest or policy (ex: bond for temporary stay
of alien)

CONTRACTS AND QUASI CONTRACTS

1. Damages in case of good faith-
a. Natural and probable consequence of breach of obligation and
b. Parties have foreseen or could have reasonably foreseen at time
obligation was constituted
2. Damages in case of bad faith
a. It is sufficient that damages may be reasonably attributed to the non-
performance of the obligation

CRIMES AND QUASI CRIMES

 Defendant is liable for all damages that are natural and probable
consequence of the act/omission complained of
 Not necessary that damages have been foreseen or could have been
reasonably foreseen

a) VALUE OF LOSS SUFFERED- destruction of things, fines or

penalties, medical and hospital bills, attorney’s fees, interests, cost
of ligation

DAMAGES RECOVERABLE:
1.) Medical and hospital bills

2.) Loss or impairment of earning capacity (in case of physical

disability)

3.) Damages for death

a) Minimum amount: P50,000

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 b) Loss of earning capacity unless deceased had permanent
physical disability not caused by defendant so that deceased
had no earning capacity at time of death
c) Support, if deceased was obliged to give support (for period not
more than 5 years)
d) Moral damages

4.) Attorney’s fees- as a general rule, attorney’s fees (other than

judicial costs) are NOT RECOVERABLE, except:

a) Stipulation between parties

b) When exemplary damages are awarded
c) When defendant’s act/omission compelled plaintiff to
litigate with 3rd persons or incur expenses to protect his
interest
d) Malicious prosecution
e) Clearly unfounded civil action or proceeding against
plaintiff
f) Defendant acted in gross and evident bad faith in refusing
to satisfy plaintiff’s just and demandable claim
g) Legal support actions
h) Recovery of wages of household helpers, laborers and
skilled workers
i) Actions for indemnity under workmen’s compensation
and employer liability laws
j) Separate civil action to recover civil liability arising from
crime
k) When double judicial costs are awarded
5.) Judicial costs
6.) Interest- discretionary on part of the court

WHEN DAMAGES MITIGATED:

1.) Contributory negligence
2.) In contracts, quasi-contracts and quasi-delict-
a. Plaintiff has contravened the terms of contract
b. Plaintiff derived some benefit as result of contract
c. In case where exemplary damages are to be awarded, that the
defendant acted upon the advice of counsel
d. That the loss would have resulted in any event
e. That since the filing of action, the defendant has done his best
to lessen the plaintiff’s loss or injury

2. MORAL DAMAGES-(PBMF-MWSS) ]
a. Physical suffering
b. Besmirched reputation
c. Mental anguish
d. Fright
e. Moral shock
f. Wounded feelings
g. Social humiliation
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 h. Serious anxiety

Notes:
 Sentimental value of real or personal property may be
considered in adjudicating moral damages
 The social and economic/financial standing of the offender
and the offended party should be taken into consideration in the
computation of moral damages
 Moral damages is awarded only to enable the injured
party to obtain means, diversions or amusements that will
serve to alleviate the moral suffering he has undergone, by
reason of defendant’s culpable action and not intended to enrich
a complainant at the expense of defendant

IN WHAT CASES MAY MORAL DAMAGES BE RECOVERED

(enumeration not exclusive):
a. Criminal offense resulting in physical injuries
b. Quasi-delicts causing physical injuries
c. Seduction, abduction, rape or other acts of lasciviousness
d. The parents of the female seduced , abducted, raped or abused
e. Adultery and concubinage
f. Illegal or arbitrary detention or arrest
g. Illegal search
h. Libel, slander or other forms of defamation
i. Malicious prosecution
j. Acts mentioned in art 309 of the RPC relating to disrespect of the
dead and interference with the funeral
k. Spouse, descendants, ascendants and brother and sisters for acts
mentioned in art 309 – any person who shows disrespect to the
dead, or wrongfully interferes with a funeral shall be liable to the
family of the deceased for damages, material and moral.
l. Acts and actions referred to in arts 21,26, 27, 28, 29, 30, 32, 34,
and 35
m. Art 2220- in cases of willful injury to property or breaches of
contract where defendant acted fraudulently or in bad faith

3. NOMINAL DAMAGES- adjudicated in order that a right of the plaintiff,

which has been violated or invaded by the defendant, may be vindicated or
recognized, and not for the purpose of indemnifying the plaintiff for any
loss suffered by him
ELEMENTS:
a. Plaintiff has a right
b. Right of plaintiff is violated
c. Purpose is not to indemnify but vindicate or recognize right
violated

4. TEMPERATE OR MODERATE DAMAGES-more than nominal but less

than compensatory where some pecuniary loss has been suffered but its
amount can’t be proved with certainty due to the nature of the case
REQUISITES:
a. Some pecuniary loss
b. Loss is incapable of pecuniary estimation

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 c. Must be reasonable

5. LIQUIDATED DAMAGES- those agreed upon by the parties to a

contract, to be paid in case of breach thereof
WHEN LIQUIDATED DAMAGES MAY BE EQUITABLY REDUCED:
a. Iniquitous or unconscionable
b. Partial or irregular performance

6. EXEMPLARY OR CORRECTIVE DAMAGE- imposed by way example or

correction for the public good, in addition to the moral, temperate, liquidated to
compensatory damages.

ARTICLE 2196 – 2210

2462. In case of conflict between the Civil Code and Special Laws insofar
as damages are concerned, which should prevail?
The provision of the Civil Code on damages shall prevail ( Art. 2196 CC).
2463. What are the exceptions?
Compensation for workmen and other employees in case of death, injury
or illness regulated under special laws shall prevail over the provisions of the
Civil Code insofar as damages are concerned ( Art. 2196 CC).
2464. Captain Virgilio Tolosa ( husband of Evelyn Tolosa) was master of the
vessel M/V Donna owned by Quana-Kaiun, and was hired through its
managing agent, Asia Bulk Transport Phils.,Inc. (Asia Bulk). During
channeling activities upon the vessel’s departure from Yokohama on
November 6, 1992, Capt. Tolosa was drenched with rainwater.
Subsequently, he contracted fever on November 11 which was later on
accompanied by loose bowel movement for the succeeding 12 days. His
condition was reported to Asia Bulk and the US Coast Guard Headquarters
in Hawaii on November 15. However, before he could not be evacuated, he
died on November 18, 1992. Evelyn Tolosa, the widow, filed a complaint
before the POEA for damages against Pedro Garate, Chief Mate of the
vessel, Mario Asis, Second Mate, Asia Bulk and Quana-Kaiun. The case
was transferred to the NLRC. The Labor Arbiter ruled in favor of the widow,
awarding ACTUAL DAMAGES PLUS LEGAL INTEREST, AS WELL AS
MORAL AND EXEMPLARY DAMAGES AND ATTORNEY’S FEES. On appeal
to the NLRC, the decision of the Labor Arbiter was vacated and the
complaint was dismissed for lack of jurisdiction over the subject matter of
the action pursuant to the provisions of the Labor Code, as amended.
Sustaining the NLRC, the CA ruled that the labor commission had no
jurisdiction over the subject matter of the action filed by petitioner. Her
cause did not arise from an employer-employee relation, but from a quasi-
delict or tort. Under Article 217 (a)(4) of the Labor Code which allows an
award of damages incident to an employer-employee relation, the damages
awarded were not proper as she is not an employee, but merely the wife of
an employee.
Do the Labor Arbiter and the NLRC have jurisdiction over petitioner’s
action?
The Court affirmed that the claim for damages was filed not for claiming
damages under the Labor Code but under the Civil Code. The Court was
convinced that the allegations were based on a quasi-delict or tort. Also, she had
claimed for actual damages for loss of earning capacity based on a life
expectancy of 65 years, which is cognizable under the Civil Code and can be
recovered in an action based on a quasi-delict. Though damages under a quasi-
delict may be recoverable under the jurisdiction of labor arbiters and the NLRC,
the relief must be based on an action that has reasonable casual connection with
the Labor Code, labor statutes or CBA’s. It must be noted that a worker’s loss of

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earning capacity and backlisting are not to be equated with wages, overtime
compensation or separation pay, and other labor benefits that are generally
cognized in labor disputes. The loss of earning capacity is a relief or claim
resulting from a quasi-delict or a similar cause within the realm of Civil Law. In
the present case, Evelyn Tolosa’s claim for damages is not related to any other
claim under Article 217, other labor statutes, or CBA’s. She cannot anchor her
claim for damages to Article 161 of the Labor Code, which does not grant or
specify a claim or relief. This provision is only a safety and health standard under
Book IV of the same Code. The enforcement of this labor standard rests with the
labor secretary. It is not the NLRC but the regular courts that have
jurisdiction over action for damages, in which the employer-employee
relation is merely incidental, and in which the cause of action proceeds
from a different source of obligation such as a tort. (2) On the finality of the
award, the Court ruled that issues not raised in the court below cannot be raised
for the first time on appeal. Thus, the issue being not brought to the attention of
the Court of Appeals first, this cannot be considered by the Supreme Court. It
would be tantamount to denial of the right to due process against the
respondents to do so. (Evelyn Talosa v. NLRC, G.R. No. 149578 April 10, 2003)
2466. What
is the FUNDAMENTAL RULE ON DAMAGES?
The fundamental principle of the law of damages is that one injured by a
breach of a contract or by a wrongful or negligent act or omission shall
have fair and just compensation commensurate with the loss sustained in
consequence of the defendant’s act, which gives rise to the action. Hence,
actual pecuniary compensation is the general rule, whether the action is on
contract or in tort, except where the circumstances warrant the allowance of
exemplary damages. In general, the damages awarded should be equal to,
and precisely commensurate with, the injury sustained.
2467. DEFINE “DAMAGES”.
Damages may be defined as a sum of money which the law awards or
imposes as pecuniary compensation, recompense, or satisfaction for an injury
done or a wrong sustained as a consequence of the breach of some duty or
violation of some right (People vs. Ballesteros, GR No. 120921, January 29,
1998). Damages are the pecuniary consequences which the law imposes for the
breach of some duty or the violation of some right.
2468. DEFINE “DAMAGE”
“Damage” is the detriment, injury or loss which is occasioned by
reason of fault of another in the property or person.
INJURY – There is a material distinction between damages and injury.
Injury is the illegal invasion of a legal right; damage is the loss, hurt, or harm
which results from the injury; and damages are the recompense or compensation
awarded for the damage suffered.
2469. Distinguish damages from injury.
Damages (from the latin “damnum” or “demo””- to take away) refers to the
harm done and what may be recovered, while injury refers to the wrongful or
unlawful or tortuous act.
The former is the measure of recovery, while the latter is the legal wrong
to be redressed.
There may be damages without injury, and an injury without damages.
There can be damage without injury in those instances in which the loss or harm
was not the result of a violation of a legal duty. This is what is called damnum
absque injuria. In order that the law will give redress for an act causing damage,
that act must not be only hurtful, but wrongful. There must be DAMNUM ET
INJURIA.
2470. What is the principle of “DAMNUM ABSQUE INJURIA”?

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 “Damnum Absque Injuria” means damage without injury. A person may
have suffered physical hurt or injury, but for as long as no legal injury or wrong
has been done, there is no liability.
2471. Give examples illustrating “damnum absque injuria”.
Where the government exercised a contractual right to cancel an agency,
although by such cancellation, the agent would suffer damages (De la Rama
Steamship Co., Inc. vs. Judge Tan and the NDC (99 Phil 1034).
Where one complies with a government-promulgated rule cannot be held
liable for damages that may be caused to other persons. (Janda vs. Lepanto
Cons.-Mining Co., May 25, 1956).
2472. What are the different kinds of damages recoverable under the Civil
Code? Define each of them.
The various kinds of damages differ as to the necessity of proof of pecuniary
loss, the purpose of and grounds for their award and the need for stipulation. The
rule is that, in every case, the trial courts must specify the award of each item of
damages and make a finding thereon in the body of the decision.
The different kind of damages recoverable under the Civil Code are: (Art. 2179)
1. Actual or compensatory damages, or the compensation awarded to a
person for such pecuniary loss suffered by him as he has duly proved;
2. Moral damages, or the compensation awarded to a person for physical
suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation, and similar injury;
3. Nominal Damages, or an amount awarded to a person in order that his
right, which had been violated or invaded, may be vindicated or
recognized;
4. Temperate or moderate damages, or the compensation which is more
than nominal but less than compensatory damages, awarded to a person when
the court finds that he has suffered some pecuniary loss, but its amount cannot,
from the nature of the case, be proved with certainty;
5. Liquidated damages, or that agreed upon by the parties to a contract,
to be paid in case of breach thereof; and
6. Exemplary or corrective damages, or that imposed by way of
example or correction for the public good, in addition to the moral, temperate,
liquidated or compensatory damages.
2473. What is the nature of a complaint for damages?
A complaint for damages is a PERSONAL ACTION.
2474. What is the implication of Art. 2198 of the Civil Code?
It is clear that the general law on damages as adopted under the Civil
Code should not run in conflict with the latter, otherwise, it is the Civil Code that
prevails.
2475. What is meant by “the principles of the general law on damages”
referred to in Art. 2198?
The basic provisions on damages of the present Civil Code are based on
the Spanish Civil Code. However, some principles of the American Law on
damages, such as those on moral and temperate damages have been adopted
and incorporated in the Civil Code. It is reasonable to believe that “the principles
of the general law on damages” referred to in the above legal provisions are
those principles which are generally recognized and accepted in Anglo-American
and Spanish law.
2476. What is meant by ACTUAL OR COMPENSATORY DAMAGES?
Art. 2199 provides “Except as provided by law or by stipulation, one is entitled to
an adequate compensation only for such pecuniary loss suffered by him as he
has duly proved.
Actual or compensatory damages represent the adequate compensation for
pecuniary loss suffered and for profits the obligee failed to obtain.
They are aimed at repairing the wrong done. Pertaining as they do to such
injuries or losses that are actually sustained and susceptible of measurement,

110
they are intended to put the injured party in the position in which he was before
he was injured.
They are those recoverable because of pecuniary loss (in business, trade,
property, profession, job, or occupation). ( Algara v. Sandejas, 27 Phil. 284)
Adequate compensation for the value of LOSS SUFFERED OR PROFITS
which obligee failed to obtain.
2477. What are the kinds of actual or compensatory damages and the
requirements?
KINDS OF ACTUAL OR COMPENSATORY DAMAGES
Art. 2200 CC, Two components to actual or compensatory damages -
indemnification for damages shall comprehend not only the value of the loss
suffered, or actual damages (“damnum emergens”) but also that of the profits
which the obligee failed to obtain, or compensatory damages (“lucrum cessans”)
a. General Damage - natural, necessary and logical consequences of
a particular wrongful act which result in injury; need not be specifically pleaded
because the law itself implies or presumes that they resulted from the wrongful
act
b. Special Damages - damages which are the natural, but not the
necessary and inevitable result of the wrongful act. (i.e., attorney’s fees)
REQUIREMENTS:
There must be pleading and proof of actual damages suffered for the same to be
recovered. In addition to the fact that the amount of loss must be capable of
proof, it must also be actually proven with a reasonable degree of certainty,
premised upon competent proof or the best evidence obtainable. The burden of
proof of the damage suffered, is imposed on the party claiming the same who
should adduce the best evidence available in support thereof, like sales and
delivery receipts, cash and check vouchers and other pieces of documentary
evidence of the same nature. In the absence of corroborative evidence, self-
serving statements of account are not sufficient basis for an award of actual
damages.
Claim for actual damages cannot be predicated on flimsy, remote,
speculative, and insubstantial proof, courts, are, likewise, required to state the
factual bases of the award.
i. Need to be pleaded
ii. Pray for the relief that claim for loss be granted
iii. Prove the loss
2478. What are the two (2) specific kinds of actual or compensatory
damages? Define each of them
They are: “DANO EMERGENTE, OR DAMNO VITANDO”- the value of
the loss suffered.
The following are some examples of “dano emergente”:
1. destruction of the things;
2. fines or penalties that had to be paid;
3. medical and hospitalization expenses; and
4. rents and agricultural products not received in an agricultural lease
(J.M. Tuason, Inc. vs. Santiago, et al.. July 31, 1956).
AND “LUCRO CESANTE, LUCRO CAPTANDO, OR LUCRUM CESSANS”
refers to the profits which the obligee failed to obtain.
The following are some examples of “lucro cesante”:
1. profits that could have been earned had there been no interruption in
the plaintiff’s business as evidenced by the reduced receipts of the
enterprise. (Algarra vs. Sandejas, 27 Phil. 284);
2. profits because of a proposed future re-sale of the property being
purchased—if the existence of a contract there was known to the
delinquent seller. (Enriquez de la cavoda vs. Diaz, 37 Phil. 982); and

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 3. interest on rentals that were not paid. (Here, the interest undeniably
forms profits which could have been realized had the rents been given.
(J.M. Tuason, Inc. vs. Santiago, et al.. July 31, 1956).
2479. Because of a breach of contract on the part of the sellers of
materials, the buyers were not able to construct the house they had
intended to build (at a certain estimated cost). Can they recover said cost
from the delinquent party?
No, they are not entitled to be awarded said estimated costs because after
all they did not lose this amount. The amount was an expense, not expected
income that had been lost. (Bert Osmena and Associates vs. Court of Appeals,
Jan 28, 1983).
2480. Is it necessary to plead and pray for actual damages before it can be
awarded?
To be recoverable, actual damages must be specifically pleaded or
prayed for. However, when a prayer mentions only exemplary damages, moral
damages, and attorney’s fees and “such further relief as the Court may deem just
and equitable,” the phrase “such further relief” may include “actual damages” if
and when they are proved. (Heirs of Justiva vs. CA, Jan 31, 1963).
2481. Aside from specifically pleading actual damages, what other things
must be done in order that it may be awarded?
Actual damages must be proved and the amount of damages must
possess at least some degree of certainty. (Chua Teck Hee vs. Phil.
Publishing Co., 34 Phil 447). If there is no proof of loss, or if the proof is flimsy
and unsubstantial, no damages will be given. The Court cannot rely on its own
speculations as to the fact and amount of damages, but must depend on
ACTUAL PROOF that damage had been suffered and actual proof of the
amount. (Suntay Tanjangco vs. Jovellanos, June 30 1960).
2482. What if an attorney fails to perfect an appeal in a civil case, should he
be held liable for the damages that could have possibly been recovered
from that unperfected appeal?
No. The damages are highly speculative. Actual damages must be proved
and the amount must at least possess some degree of certainty. A court cannot
rely on speculation, conjecture, or guesswork as to the fact and amount of
damages but must depend on competent proof that they have suffered, and on
evidence of the actual amount thereof. (Phil. Nat’l Railways vs. Ethel Brunty and
Juan Manuel Garcia, November 2, 2006).
2483. May the parents of an unborn foetus recover actual damages in case
of an accident where the mother had miscarriage? Why?
No, because that would be speculation, as the parents cannot yet expect
help, support or service from an unborn child. They can, however recover moral
damages for the illegal arrest of the normal development of the foetus. (Geliz vs.
CA, July 20, 1061)
2484. May the Court in awarding actual damages, also award nominal
damages?
No. If there be an award of compensatory damages, there can be no
award of nominal damages. The reason is that the purpose of nominal
damages is to vindicate or recognize a right that has been violated, in order
to preclude further cost thereon, and “not for the purpose of indemnifying the
plaintiff for any loss suffered by him”. (Medina, et al. vs. Cresencia, et al.,
July 11, 1956).
2485. The general rule is that actual damages must be proved with
reasonable degree of certainty, give the exceptions.
The following are the exceptions:
1. When a penalty clause have been agreed upon (Art. 1226);
2. When liquidated damages have been agreed upon (Art 2226);
3. When the loss is presumed as when a child or spouse dies as a result
of the act or omission of a person ( Manzanares vs. Moreta 38 Phil 821);

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 4. Forfeiture of bonds in favor of the government for the purpose of
promoting public policy or interest ( Far eastern Surety and Insurance Co. vs. Ca,
104 Phil 702); and
5. “Damages for death caused by a crime or delict” which can be awarded
forthwith to the heirs of the victim by proof of such fact of death.
2486. May actual damages be recovered on the basis of mere testimony?
In the case of Fuentes vs. CA (253 SCRA 430), the Court held that as
there is no tangible document upon which the actual damages is based, actual
damages cannot be recovered on the basis of mere testimony. Actual
damages to be awarded must be proven by clear evidence.
MEASURE OF DAMAGES:
In general: Indemnification for damages comprehends not only the loss suffered,
that is the actual damages, but also profits which the obligee failed to obtain
(compensatory damages. DAMAGES MAY BE RECOVERED –
1. For loss or impairment of earning capacity in cases of temporary or
permanent injury;

2. For injury to the plaintiff’s business standing or commercial credit;

2487. What may comprise indemnification for damages?

Under Art. 2200 of the Civil Code it provides that “Indemnification for
damages shall comprehend not only the value of the loss suffered, but also
that of the profits which the obligee failed to obtain.”
2490. Jojo wanted to send a telegram message, “No truck available”, but
the telegram company sent “truck available”. Can Jojo recover damages?
Yes. It has been held that where defendant erroneously transmitted
plaintiff’s telegram reading “No truck available” as “truck available”, the plaintiff
was allowed to recover not only its actual loss but also loss of goodwill and
customers. (Radio Communications of the Philippines vs. Court of Appeals, 103
SCRA 359).
2491. In contracts and quasi- contracts, what is the extent of liability of the
obligor in case of breach of his obligation?
a.) If breach is in good faith and damages resulted thereto, he is liable for
the natural and probable consequences of the obligation; and to those which he
foresaw or could have reasonably foreseen at the time the obligation was
constituted.
b.) If breach is in bad faith and damages resulted thereto, he is liable for
all damages which may be reasonably attributed to non-performance of the
obligation. In here, the relation of cause and effect is enough.
2492. What is the fundamental difference between the first paragraph and
the second paragraph of Art. 2201?
Art. 2201. In contracts and quasi-contracts, the damages for which the
obligor who acted in good faith is liable shall be those that are the natural and
probable consequences of the breach of the obligation, and which the parties
have foreseen or could have reasonably foreseen at the time the obligation was
constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the non-
performance of the obligation.
In the first paragraph, the breach of obligation was due to mere
carelessness, while in the second paragraph, there was a deliberate or wanton
wrongdoings.
2493. How are damages measured?
The damages resulting from a tort are measured in the same manner
as those due from a contractual debtor in bad faith, since he must answer for
such damages whether he had foreseen them or not, just as he must

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indemnify not only for damnum emergens but also for lucrum cesans as required
by Article 1106.
2494. Teodorica Endencia obligated herself to sell a parcel of land to the
plaintiff. It was agreed that the final deed of sale will be executed when the
land was registered in Endencia’s name. Subsequently, the Torrens Title
for the land was issued in her favor but in the course of the proceedings for
registration it was found that the land involved in the sale contained a
greater area than what Endencia originally thought and she became
reluctant to consummate the sale of the land to the plaintiff. This
reluctance was due to the advice of the defendant corporation which
exercised a great moral influence over her. However, in advising Endencia
that she was not bound by her contract with the plaintiff, the defendant was
not actuated with improper motives but did so in good faith believing that,
under the circumstances, Endencia was not really bound by her contract
with the plaintiff. In view of Endencia’s refusal to make the conveyance, the
plaintiff instituted a complaint for specific performance against her. May
the defendant be held liable?
Yes. The most that can be said with reference to the conduct of Teodorica
Endencia is that she refused to carry out a contract for the sale of certain land
and resisted to the last action for specific performance in court. The result was
that the plaintiff was prevented during a period of several years from exerting that
control over the property which he was entitled to exert and was meanwhile
unable to dispose of the property advantageously.
The defendant was liable to the plaintiff for the use and occupation of the
land in question and condemned the defendant to pay the plaintiff Pesos
2,497.00 as damages. (Daywalt vs. Corporacion de PP. Agustinos Recoletos, 39
Phil. 587)
2495. What is the measure of damages for the wrongful detention of real
property by the vendor after the time has come for him to place the
purchaser in possession?
The extent of the liability for the breach of a contract must be determined
in the light of the situation in existence at the time the contract is made; and the
damages ordinarily recoverable in all events limited to such as might be
reasonably foreseen in the light of the facts then known to the contracting
parties. Where the purchaser desires to protect himself, in the contingency of the
failure of the vendor promptly to give possession, from the possibility of incurring
other damages than such as are incident to the normal value of the use and
occupation, he should cause to be inserted in the contract a clause providing for
stipulated amount to be paid upon failure of the vendor to give possession; and
no case has been called to our attention where, in the absence of such a
stipulation, damages have been held to be recoverable by the purchase in
excess of the normal value of use and occupation. On the contrary, the most
fundamental conceptions of the law relative to the assessment of damages are
inconsistent with such idea. (Daywalt vs. Corporacion de PP. Agustinos
Recoletos, 39 Phil. 587)
2496. Plaintiff seeks damages amounting to P500,000.00 pesos for
plaintiff’s failure to sell the land in question to a sugar growing and milling
enterprise. Should this prayer be granted by the court?
The said damages could not be recovered from the defendant, first,
because the damages in question are special damages which were not within
contemplation of the parties when the contract was made, and secondly,
because said damages are too remote to be subject of recovery. This conclusion
is also necessarily fatal to the right of the plaintiff to recover such damages from
the defendant corporation for, as already suggested, by advising Teodorica
Endencia not to perform the contract, said corporation could in no event render
itself more extensively liable than the principal in the contract. (Daywalt vs.
Corporacion de PP. Agustinos Recoletos, 39 Phil. 587)

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2497. Mendoza was the owner of a theater in Naga, Camarines Sur. The
fiesta of the City held on Sept. 17 and 18 yearly was usually attended by
many people mostly from the Bicol region. Mendoza, as a good
businessman, taking advantage of these circumstances, decided to exhibit
a film which would fit the occasion and have a special attraction and
significance to the people attending said fiesta. A month before the
holiday, he contracted with the LVN Pictures, Inc. for the showing of a
Tagalog film entitled “Himala ng Birhen” in his theater and advertised it by
means of posters and newspaper announcements. The advertisements
stated that the film would be exhibited in his theater on Sept. 18th and 19th.
On Sept. 17, 1948, the LVN Pictures, Inc. delivered the said film in Manila to
the Phil. Air Lines, in a can containing the film was loaded in the
defendant’s plane but due to the fault of employees of the defendant it was
not unloaded from the plane when it arrived at the airport and it was
brought back to Manila. After several inquiries, the film was located in
Manila on September 18th and was shipped on Sept. 20th. Plaintiff received
the film on the same day and exhibited in his theater but he failed to realize
the profits which he expected because the people who attended the fiesta
had already returned to their towns. An action was brought by Mendoza to
recover damages for Pesos 3,000.00 representing the profits which he
claimed he failed to earn. Should the action prosper?
Under Art. 2201 of the Civil Code, a debtor in good faith like the
defendant herein, may be held liable only for damages that were foreseen
or might have been foreseen at the time the contract of transportation was
entered into. The trial court correctly found that the defendant company could
not have foreseen the damages that would be suffered by Mendoza upon failure
to deliver the can of film on the 17th of Sept. 1948 for the reason that the plans of
Mendoza to exhibit that film during the town fiesta and his preparations,
especially the announcement of said exhibition by posters and advertisement in
the newspaper, were not called to the defendant’s attention.
2498. What is the DOCTRINE FORESEEABLE OR ANTICIPATED
CONSEQUENCES?
The doctrine states that only those injuries which could have been
reasonably foreseen by the parties at the time the contract was entered into
are recoverable contract damages.
2499. “A” a fourth year medical student at the University of Santo Tomas,
was severely injured in an accident while he was a passenger in a bus
operated by the Laguna-Tayabas Bus Co. As a result of the accident, he
became virtually an invalid both physically and mentally, and as a
consequence, he was unable to continue with his studies. Subsequently,
he and his parents brought an action for damages against the bus
company. The record show that at the time of the accident, “A” was a
professional student, being supported by his parents; and the proximate
cause of the accident was the negligence of the driver of the bus; and that
the defendant company had exercised due diligence in the selection and
supervision of its employees. In case defendant company is liable, is “A”
entitled to recover the income which he could have earned had he finished
his medical course?
Yes. The fact that “A” is a fourth year student and could have earned
income had he finished his medical course is not only a natural and probable
consequence of the accident but also could have been reasonably foreseen
by the parties at the time “A” boarded the bus of the defendant. It can very well
be assumed that he could have finished the course in said reputable university
and would have passed the board examination in due time. As regards the
income that he could have possibly earned as a medical practitioner, the amount
of P300 could be easily be expected as his minimum income had he finished his
studies. Using this as basis, a total award of P25,000.00 compensatory

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damages, including medical and hospitalization expenses would be fair. (Cariaga
vs. Laguna tayabas Bus Co., 110 Phil 346).
NOTE: Defense of diligence in the selection of employees does not apply
to obligations arising from quasi-contract. It applies only in Quasi-delicts. In this
case, the bus company is liable under culpa contractual. (Contract of carriage).
2500. In crimes and quasi-delicts, what is the extent of liability of the
defendant?
The defendant shall be liable for all damages which are the natural and
probable consequences of the act or omission complained of. It is not
necessary that such damages have been foreseen or could have
reasonably been foreseen by the defendant. (Art. 2202)
2501. If a taxi driver should kill his passenger, what is the basis of the civil
liability of the driver? Of the taxicab owner?
As to the taxi driver, his civil liability is based on his having committed a
crime. As to the taxicab owner, his civil liability for damages is based on culpa
contractual or the contract of carriage. (Maranan vs. Perez, June 26, 1967)
2502. In a tort or quasi-delict suit, what must the victim prove?
The victim must prove the following:
1. a causal connection between the tort and the injury; and
2. the amount and extent of injury.
2503. What does “NATURAL AND PROBABLE CONSEQUENCES” imply?
“Natural and probable” consequences implies that the damage would not
have resulted without the fault or negligence of the defendant (or accused) and
that the fault of the defendant (or accused) would normally or ordinarily result in
the damage suffered by the injured or offended party.
2504. What is the responsibility of a party suffering loss or injury because
of the act or omission of another?
The party suffering loss or injury must exercise the diligence of a good
father of a family to minimize the damages resulting from the act or
omission in question. (Art. 2203)
2505. Who has the burden of proving the exercise of diligence under Art.
2203?
The person sued has the burden of proving that the victim could have
mitigated the damage. (Lemoine vs. Alkan, 33 Phil. 162)
2506. A, in order to minimize the injuries he suffered from the tortuous act
of B, went to the United States to have a plastic surgery. However, the
same could have been also performed into the Philippines. Can A recover
the cost of surgery performed in the United States?
A victim cannot recover the cost of plastic surgery in the United States if it
is proved that the operation could have been completely performed in the
Philippines by local practitioners. (Araneta, et al., vs. Arreglado, et al., 104 Phil
529).
2507. Defendant owner of a public garage in the town of San Fernando, La
Union, undertook to take plaintiffs from San Fernando to Currimao, Ilocos
Norte. On leaving San Fernando, the automobile was operated by a
licensed chauffeur but later the chauffeur allowed his assistant, who had
no driving license but who had some experience in driving, to drive. After
crossing the Abra River in Tagudin, the car zigzagged for about half a
kilometer, left the road and went down an embankment. The car overturned
and the plaintiffs were pinned down under it. Lasam escaped with a few
contusions but his wife received serious injuries, among which was
compound fracture of one of the bones in her left wrist. There is a conflict
of evidence as to the cause of the accident, plaintiffs claiming that it was
due to the reckless driving of the driver’s assistant and the defendant
claiming that it was due to a defect in the steering gear. The lower court
granted the plaintiff Pesos 1,254.10 as damages. From this decision,

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plaintiffs appealed claiming that they are entitled to Pesos 7,832.80
damages.
Should the appeal be granted?
No, the defendant should not be charged with these expenses.
There can be no doubt that the expenses incurred by the plaintiffs as a
result of the accident greatly exceeded the amount of the damages awarded. But
bearing in mind that in determining the extent of the liability for losses for
damages resulting from negligence in the fulfillment of a contractual obligation,
the courts have a “discretionary power to moderate the liability according to the
circumstances”. As pointed out by that court in its well-reasoned and well-
considered decision, by far the greater part of the damages claimed by the
plaintiffs resulted from the fracture of a bone in the left wrist of Joaquina Sanchez
(plaintiff’s wife) and from her objections to having a decaying splinter of the bone
removed by a surgical operation. As a consequence of infections ensued and
which required constant and expensive medical treatment for several years.
2508. Can DAMAGES IN CRIMES be increased or lessened?
Yes. Article 2204 of the Civil Code provides: “In crimes, the damages to
be adjudicated may be respectively increased or lessened according to the
aggravating or mitigating circumstances.”
2509. In obligations arising from crimes, are the mitigating and aggravating
circumstances important?
Yes. In crimes, the damages to be adjudicated may be respectively
increased or decreased according to the aggravating or mitigating
circumstances. (Art. 2204)
2510. What is the rule in damages for loss or impairment of earning capacity?
One who is injured in his person may recover for any resulting LOSS
OF TIME AND CONSEQUENT LOSS OF EARNINGS CAPACITY. Art. 2205 of
the Civil Code provides that: “Damages may be recovered: (1) For loss or
impairment of earning capacity in case of temporary or permanent personal
injury.”
Such damages covers the loss sustained by the dependents or heirs of the
deceased, consisting of the support they would have received from him had he
not died because of the negligent act of another.
ONLY NET EARNINGS CONSIDERED. The loss is not equivalent to the entire
earnings of the deceased, but only that portion that he would have used to
support his dependents or heirs.
Hence, deduct from his gross earnings the necessary expenses supposed to be
used by the deceased for his own needs.
The amount recoverable by the heirs of a victim of a tort is not the loss of the
entire earnings, but rather the loss of that portion of the earnings which the
beneficiary would have received. In other words, only net earnings, not gross
earnings, are to be considered, that is, the total of the earnings less expenses
necessary in the creation of such earnings or income and minus living and other
incidental expenses.
Villa Rey Transit, Inc. vs. CA (31 SCRA 511; 1970):”x x x the award of damages
for loss of earning capacity is concerned with the determination of the losses or
damages sustained by the private respondents, as dependents and intestate
heirs of the deceased, and that said damages consist not of the full amount of his
earnings, but of the support they received or would have received from him had
he not died in consequence of the negligence of petitioner’s agent. In fixing the
amount of that support, we must reckon with the ‘necessary expenses of his own
living,’ which should be deducted from his earnings.
Earning capacity, as an element of damages to one’s estate for his death by
wrongful act is necessarily his NET earning capacity or his capacity to acquire
money, ‘less the necessary expense for his own living.’ The amount recoverable
is not loss of the entire earning but rather the loss of that portion of the earnings
which the beneficiary would have received. Only net earnings, not gross earning

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are to be considered, the total of the earnings less expenses necessary in the
creation of such earnings or income and less living and other incidental
expenses.

FORMULA FOR COMPUTATION OF LOSS OF EARNING CAPACITY:

Another factor considered in determining the award of loss of earning capacity is
the LIFE EXPECTANCY of the deceased which takes into account his work,
life-style, age and state of health prior to the accident.
Capacity = Life expectancy x Gross annual Income – Living Expenses.
Life Expectancy is determined as follows: 2/3 x [80- age of deceased] (Adopted
in the American Expectancy Table of Mortality or the Actuarial of Combined
Experience Table of Mortality)
As to the amount of living expenses that should be deducted from the
deceased’s gross annual income, more recent jurisprudence shows that the
Court consistently pegged the amount at 50% of the gross annual income.
Smith Bell Dodwell Shipping Agency Corp v. Borja (383 SCRA 341; 2002 – when
there is no showing that the living expenses constituted a smaller percentage of
the gross income, the living expenses must be fixed at half of the gross income,
thus: “only net earnings, not gross earning, are to be considered; that is, the total
of the earnings less expenses necessary in the creation of such earnings or
income, less expenses necessary in the creation of such earnings or income,
less living and other incidental expenses. When there is no showing that the
living expenses constituted a smaller percentage of the gross income, we fix the
living expenses at half of the gross income. To hold that one would have used
only a small part of the income, with the larger part going to the support of one’s
children, would be conjectural and unreasonable.”
NEED FOR DOCUMENTARY EVIDENCE; As a rule, documentary evidence
should be presented to substantiate the claim for damages for loss of earning
capacity. EXCEPTION: damages for loss of earning capacity may be awarded
despite the absence of documentary evidence when:
1. the deceased is self-employed and earning less than the minimum
wage under current labor laws, in which case, judicial notice may be taken of the
fact that in the deceased’s line of work, no documentary evidence is available or
2. the deceased is employed as a daily wage worker earning less than
the minimum wage under current labor laws.
2511. Can plaintiff recover damages because of INJURY SUFFERED BY ITS
BUSINESS STANDING OR CREDIT?
Under 2205 of the Civil Code, damages may be recovered for:
1. loss or impairment of earning capacity in cases of temporary or
permanent personal injury; and
2. injury to the plaintiff’s business standing or commercial credit.
The financial credit of a businessman is a prized and valuable asset, it being a
significant part of the foundation of his business. Any adverse reflection thereon
constitutes some material loss to him. Hence, the same is compensable.
“Business reputation or business standing”, “loss of goodwill and loss of
customers or shippers who shifted their patronage to competitors.
The grant thereof is proper under Art. 2205 which provides that damages may be
recovered “for injury to the plaintiff’s business standing or commercial credit.”
And even if not recoverable as compensatory damages, they may still be
awarded in the concept of temperate or moderate damages. There are cases
were from the nature of the case, definite proof of pecuniary loss cannot be
offered, although the court is convinced that there has been such loss. For
instance, injury to one’s commercial credit or to the goodwill of the business firm
is often hard to show with certainty in terms of money. Should damages be
denied for this reason? The judge should be empowered to calculate moderate
damages in such cases, rather than that the plaintiff should suffer, without
redress from the defendant’s wrongful act.

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2512. How may LOSS OF PROFITS be determined?
LOSS OF PROFITS (Lucrum Cessans) may be determined by
considering the average profit for the preceding years multiplied by the
number of years during which the business was affected by the wrongful act or
breach.
2513. Distinguish LOSS OF EARNINGS FROM LOSS OF PROFITS.
It should be borne in mind that loss of earnings is distinct from loss of
profits the difference being that EARNINGS are the fruit or reward of labor, the
price of services performed, while PROFITS represent the net gain made
from an investment or from the prosecution of some business after the
payment of all expenses incurred. The injured person is entitled to
compensation for loss of earnings derived from personal effort, skill or
ability or for the destruction or impairment of his ability to perform labor or
render service which is essentially and fundamentally personal in
character. Generally, in either case, compensation is limited to earnings
which are the result of personal effort.
2514. How may FUTURE EARNINGS BE RECOVERED?
Generally, a recovery may also be had for loss of future earnings,
provided they are shown with reasonable certainty and are not merely
speculative in character. The plaintiff, however, cannot recover for the value of
his time to his family. One who is injured in his person by the wrongful act of
another may recover for any loss sustained thru being temporarily deprived of
this capacity to perform his ordinary business; that is, he may recover for a loss
of time and consequent loss of earnings.
2515. What is the MEASURE OF DAMAGES FOR LOSS OF TIME?
The measure of damages for loss of time is the value of the plaintiff’s time
while prevented from working by reason of the fault or negligence of the
defendant, the true test being what his services might be worth to him in his
ordinary employment or business. The plaintiff must establish a reasonable
probability that his injury did bring about a loss of earnings, must afford a basis
for a reasonable estimate of the amount of that loss, and to this end must prove
both the amount of time lost and its value. He may show what he was
making at the time of, or before, the injury.
2516. What is required in the process of ascertaining the amount of
compensation to be awarded for impairment of the capacity to work?
The process of ascertaining the amount of compensation to be awarded
for impairment of the capacity to work requires (1) the determination of the extent
to which such capacity has been diminished; and (2) the fixing of the amount of
money which will compensate for the determined extent of impairment. The
extent of the diminution or impairment of earning capacity is generally to be
arrived at by comparing what the injured party was capable of earning at or
before the time of the injury with what he was capable of earning after it
occurred. The nature and extent of the plaintiff’s business, profession or
employment, his skill and ability in his occupation or profession, the loss or
diminution of capacity to follow it as a consequence of the injury, and the
damages he has suffered by reason of such loss or diminution may be shown
and taken into consideration. The extent and seriousness of the plaintiff’s injury
may be shown, and as a basis for comparison, proof as to his condition since the
injury is admissible.
2517. May compensation for injury to one engaged in business include the
value of his services in such business? On what should it depend?
The compensation for injury to one engaged in business may include the
value of his services in such business and must depend upon the nature and
extent of the business, the amount of his personal direction and labor in
connection with the business, and the amount of capital invested and labor
employed. One may recover any pecuniary loss sustained by reason of the
suspension of his personal direction of, and attention to, his business during his

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absence on account of his injuries, and because of his decreased ability to give
such direction and attention after he returned to work and in the future. If the
business could not be continued with the same success after his injury, as
before, a fair compensation may be made for loss of his earning power if it
can be fairly and approximately measured. This compensation should not
exceed the amount usually paid to persons performing similar services for
others, and care must be taken not to make the responsible party an insurer
of prospective profits.
2518. In the case of a person engaged in business, what evidence is
required in order to recover damages?
In the case of a person engaged in business, from the very nature of the
situation, the amount of loss cannot be proved with exactitude, and all that can
be required is that the evidence, with such certainty as the nature of the
particular case may permit, lay a foundation which will enable the investigator of
facts to make a reasonable estimate. It is competent and proper to show the
nature and extent of the business and the part the plaintiff transacted therein, the
pecuniary loss sustained by reason of the partial or total absence of his personal
attention and labor, and what his services in the business were worth, the
compensation paid to persons doing such business for him and, under some
circumstances, what the injured person’s services were worth if employed under
like circumstances by another in a similar capacity. The plaintiff may also show
the amount of his daily earnings and, in some cases, state the profits of the
business and taken into consideration. In further proof of his personal incapacity
but not as an independent element of recovery, the plaintiff may show that he
was compelled to employ servants to work done by himself but, according to
some of the courts, not the amount paid for such services.
2519. In the case of a PROFESSIONAL MAN, what is the proper MEASURE
OF DAMAGES for loss of time?
In the case of a professional man, the proper measure of damages for
loss of time is the amount he would have earned by the practice of his
profession. In order to recover for loss of time, a professional man must prove
the amount he would have earned in the practice of his profession during the
time in question, and the court should consider the probability of his being
employed during the period for which he seeks to recover. Testimony as to what
he had been previously receiving for his services is admissible, and he may show
his actual earnings during the period of the previous year corresponding to that in
which he was injured. If he was not engaged in the practice of his profession
immediately thereafter, it is proper to show what he earned thereafter, not as
establishing in itself the value of his time, but as evidence to aid the court in fixing
it.
2520. Aside from damages for loss or impairment of earning capacity, Art.
2205 of the Civil Code also provides that damages may be recovered for
injury to PLAINTIFF’S BUSINESS STANDING OR COMMERCIAL CREDIT. Is
this kind of damage easy to prove?
By its very nature, this kind of damage is often hard to prove in terms of
money. That should not, however, prevent the court from allowing such damages
for Arts. 2224 and 2225 of the Civil Code which precisely provides for the award
of temperate damages in cases where it is proven that plaintiff has suffered
some pecuniary loss but its amount cannot, from the nature of the case, be
proven with certainty. In cases like this the court will fix the amount of the
damage taking into account the circumstances of the case.
2521. How much is the AMOUNT OF DAMAGES RECOVERABLE FOR
DEATH CAUSED BY A CRIME OR QUASI-DELICT?
The amount of damages for death caused by a crime or quasi-delict shall be at
least P3,000 even though there may have been mitigating circumstances. In
addition: (now P50,000.00)

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 1. The defendant shall be liable for the loss of the earning capacity of
the deceased, and the indemnity shall be paid to the heirs of the latter, such
indemnity shall in every case be assessed and awarded by the court, unless the
deceased on account of permanent disability not caused by the defendant, had
no earning capacity at the time of his death;
2. If the deceased was obliged to give support according to law, the
recipient who is not an heir called to the decedent’s inheritance by the law of
estate or intestate succession, may demand support from the person causing
the death, for a period not exceeding five (5) years, the exact duration to be
fixed by the court;
3. the spouse, legitimate and illegitimate descendants and ascendants of
the deceased may demand moral damages for mental anguish by reason of
the death of the deceased. (Art. 2206 of Civil Code).
2522. What is meant by “at least Pesos 3,000.00, even though there may
have been mitigating circumstances” in Art. 2206 of the Civil Code?
“When the first paragraph says “at least Pesos 3,000.00, even though
there may have been mitigating circumstances, it is meant that the Court must
not stop after awarding Pesos 3,000.00, because the life of a captain of
industry, scientist, inventor, a great writer or statesman is materially more
valuable to the family and to the community than that of an ordinary man.
Moreover, aggravating circumstances should cause exemplary damages to
be awarded. The court must, therefore, in certain cases, allow much more than
Pesos 3,000.00 . In addition, indemnity for the loss of earning capacity must in
every case be assessed and awarded, except in the case mentioned in No. 1 of
the said Article.
2523. According to Art. 2206 of the NCC, in determining the amount
recoverable in case of death caused by a crime or a quasi-delict, the
defendant can be held liable, among others, for the loss of earning capacity
of the deceased which will be paid to the heirs of the latter. How do we
determine the amount of such loss of earning capacity?
In Villa Rey Transit, Inc. vs. CA (31 SCRA 511), the SC held that the
determination of the amount depends upon two (2) factors, namely: 1) the
number of years on the basis of which the damages shall be computed;
and 2) the rate at which the losses sustained by plaintiff’s should be fixed.
Formula:
{2/3 x (80-age of deceased at the time of death)} x monthly earnings x 12
2
Variables considered are:
1. Life expectancy computed as:
{2/3 x ( 80-age at the time death)}
2. Net income/earnings- the total of the earnings less expenses
necessary for the creation of such earnings and less living or other incidental
expenses.
2524. A son was convicted for having killed his father. May he be required
to indemnify the victim’s heirs (the defendant’s mother, brothers, and
sisters) even they had testified in his favor?
Yes, for they have suffered, even if their natural impulses compelled them
to exoneration of the guilty son. (People vs. Santiago Manos. Dec. 24, 1970).
2525. What are the rights granted to an insurer who indemnifies a person
injured or suffered losses arising out of the act or omission of another
person?
If the plaintiff’s property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or
breach of contract complained of, the insurance company shall be subrogated
to the rights of the insured against the wrongdoer or the person who has
violated the contract. (Art. 2207 of the Civil Code).

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2526. What if the amount paid by the insurance company does not fully
cover the injury or loss suffered by the plaintiff?
If the amount paid by the insurance company does not fully cover the
injury or loss, the aggrieved party shall be entitled to recover the deficiency
from the person causing the loss or injury. (Art 2207 of the Civil Code).
2527. What is the concept of “attorney’s fees” as damages?
The attorney’s fees do not refer to the duty of a client to pay his own
attorney. Such payment generally involves only the client and his attorney. The
concept of “attorney’s fees” as damages apply rather to instances when a client
may recover from the other party the fees which the former may pay the
former’s attorney. (Tan Ti vs. Alvear, (26 Phil 566).
2528. Is a pauper litigant exempt from the payment of attorney’s fees?
While a pauper litigant is exempt from the payment of legal fees and filing
an appeal bond, a printed record on appeal, and a printed brief, he is not
exempt from the payment of attorney’s fees. An award of attorney’s fees
whether in favor of or against a pauper litigant is thus proper. (Luz G.
Cristobal vs. Employee’s Compensation Commission, Feb. 26, 1981).

2529. Who are entitled to “attorney’s fees” as provided under Art. 2208 of
the Civil Code?
The Court’s award of attorney’s fees is an indemnity to the party and
not to counsel, and the fact that the contract between the client and his
counsel was on a contingent basis does not affect the client’s right to
counsel fees. A litigant who improvidently stipulated higher counsel fees than
those to which he is lawfully entitled, does not for that reason earn the right for a
larger indemnity, but by parity of reasoning he should not be deprived of counsel
fees if by law he is entitled to recover. (Necesito, et al., vs. Paras, et al., 104 Phil
75).
2530. When are ATTORNEY’S FEES and expenses of litigation recoverable
as damages?
In the absence of stipulation, attorney's fees and expenses of
litigation, other than judicial costs, cannot be recovered except:
(1) When exemplary damages are awarded;
(2) When the defendant's act or omission has compelled the plaintiff to
litigate with third persons or to incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the
plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing
to satisfy the plaintiff's plainly valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and
skilled workers;
(8) In actions for indemnity under workmen's compensation and
employer's liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that
attorney's fees and expenses of litigation should be recovered.
In all cases, the attorney's fees and expenses of litigation must be
reasonable. (Art. 2208 of the Civil Code)
2531. If the obligation consists in the payment of a sum of money, is the
rule on Art. 1169 of the Civil Code relating to delay applicable? ( to put a
debtor in delay there must be judicial or extrajudicial demand made on him)
No. Art. 1169 of the Civil Code is applicable only when the obligation is to
give something other than money, otherwise Art. 2209 shall apply.

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 Art. 2209. If the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six per cent
per annum.
2532. What is the indemnity for damages in case the obligor incurs in delay
in an obligation to give a sum of money?
If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per annum. (Art.
2209 of the Civil Code).
2533. Jay sues Joy for (a) collection on a promissory note for a loan, with
no agreement on interest, on which Joy defaulted, and (b) damages caused
by Joy on Jay’s priceless Michaelangelo painting on which Joy
accidentally spilled acid while transporting it. The court finds Joy liable on
the promissory note and awards damages to Jay for the damaged painting,
with interest for both awards. What rates of interest may the court impose
with respect to both awards?
On the award for payment of the loan, there being no agreement on
interest, the rate of interest should be 6% per annum. On the award for damages,
the rate of interest should be 6% per annum. The legal rate of interest on
monetary obligations not arising from loans or forbearance of money of
credits or goods is 6% per annum in the absence of stipulations to the
contrary.
2534. From what moment does interest run?
In the absence of stipulation, interest (as damages) runs from default
(after a judicial or extrajudicial demand, except when demand is not necessary).
If there is no evidence of extrajudicial demand, the period starts from the judicial
demand, which naturally is in the form of a complaint in court.
2535. Under Art. 1956 of the Civil Code, interest can only be demanded
when there is a stipulation in writing, give an exception to this rule.
Interest by way of damages or penalty as provided under Art. 2209 may
be demanded even if there is no stipulation to that effect. (Zobel vs. City of
Manila 47 Phil. 169)
2536. If the term of payment was left to the will of the debtor, when should
the interest run and from when should it be counted?
If the term of the payment was left to the will of the debtor, the interest
should not run from the time the action was commenced in court, but only from
default of payment AFTER the period was fixed by the Court pursuant to Art.
1180 and 1197 of the Civil code. Tiglao vs. Manila Railroad Co. Jan 2, 1956).
A partnership borrowed some P20,000 from a warehousing company at
clearly usurious rate from 2% to 2-1/2% per month. The partnership paid
said interest.
2537. Can the creditor recover the principal debt despite alleged usurious
interest?
Yes, the creditor can recover the principal debt. The contract of loan with a
usurious interest is valid as to the principal loan and void only with respect to the
interest.
2538. Can the debtor recover the interest paid?
Since the interest is void, the debtor may recover what he has paid.
2539. When does actual damages given by the court in a breach of contract
earn legal interest?
Actual damages given by the court in a breach of contract shall earn legal
interest, not from the date of the filing of the complaint but from the date the
judgment of the trial court is rendered. (Soberano vs. Manila Railroad Co.,
Nov. 23, 1966).

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2540. A judgment from the RTC ordering payment of a sum of money with
interest was appealed to the CA on the question of prescription. The CA
affirmed the RTC judgment but neglected to give interest. In executing the
judgment, should interest be also given?
Yes, despite the silence of the CA judgment. The reason is the CA
decided merely the issue of prescription. Interest was not discussed in the CA
judgment. Its affirmance of the RTC decision can only mean affirmance also of
the grant of interest.

ARTICLE 2211 – 2225

2541. In a criminal action, the court rendered its judgment finding Pedro
guilty and also ordered him to pay interest as a part of the damages. Pedro
questioned the decision of the court contending that an interest cannot be
a part of damages. Is Pedro correct?
No, Pedro is not correct.
Under Article 2211 of the Civil Code, it provides that in crimes and quasi-
delicts, interest as a part of damages may, in a proper case, be adjudicated
in the discretion of the court.
In the given problem, the court exercised its discretion by appropriately
imposing interest as part of the damages. Therefore, Pedro’s contention is
improper.

2542. Article 2211 of the Civil Code, provides that in crimes and quasi-
delicts, interest as a part of damages may, in a proper case, be adjudicated
in the discretion of the court. What is the basis of the interest?
The basis of the interest is the legal rate which is 6% per annum.
2543. What kind of interest is due in an obligation?
This is better known as “ACCRUED INTEREST.”
2544. Pongkach, a businessman, bought 1000 kilos worth Php 30,000 from
Sibuma Sugar Co. to be paid on Dec.31, 2010. In the contract, it did not
mention about interest on the obligation. Pongkach failed to pay his
obligation and despite repeated demands from the sugar co, still he was
not able to pay. The Sugar Co., brought an action to the court and on its
decision, the court awarded legal interest on the obligation. Pongkach
argues that there should be no legal interest because it is not even
stipulated in the contract. Who is correct? Explain briefly.
The court is correct in awarding legal interest.
Under the Art.2212 of the Civil Code, it provides that interest due shall
earn legal interest from the time it is judicially demanded, although the
obligation is silent on this point.
As a rule, accrued interest earns legal interest from the time of
judicial demand and not from default. In the given problem, the filing of the
complaint or bringing of the action already constitutes judicial demand by the
Sugar Co. and therefore imposition of legal interest is proper and such interest is
earned even if the obligation did not mention it on the contract.
2545. What is the effect of absence of stipulation to pay interest?
If no interest had been stipulated in the contract of the parties, there would
be no compounding of interest.
2546. When shall it be proper to IMPOSE INTEREST UPON INTEREST?
Interest upon interest shall be applicable only to obligations containing a
stipulation for payment of interest.
2547. When shall an accrued interest earn legal interest?
Accrued interest earns legal interest from the time of judicial demand
and not from default.
2548. Can an interest be imposed from unliquidated claims or damages?
Explain briefly your answer.

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 No because unliquidated claims are not fixed or predetermined unlike
liquidated damages which are fixed by the parties to a contract. Consequently,
for not being fixed or determined, no interests can be imposed or collected from
unliquidated damages for lack of basis until their amounts had been
established with reasonable certainty.
2549. What is the reckoning time when legal interest may be collected from
unliquidated damages?
Interest on unliquidated damages should start from the date of the
decision of the trial court as it is only then that the claims or damages are
definitively ascertained.
2550. Lex, a businessman ordered certain equipment and paid
downpaynment. Because of some alleged violations of warranties, he
refused to pay the balance to the seller, Lana. Instead of tendering payment
of said balance, Lex sought to have the sale rescinded on account of the
alleged breach of warranty. The alleged warranty was not however, proved.
Should the buyer, Lex pay the interest on the balance?
No, Lex is not liable to pay the interest on the balance. The price of the
equipment under their contract of sale was not determined and known, hence,
unliquidated.
The law provides that interest cannot be recovered upon unliquidated
claims or damages, except when the damage can be established with
reasonable certainty.
Consequently, for not being fixed or determined, no interests can be imposed or
collected from unliquidated damages for lack of basis until their amounts had
been established with reasonable certainty
2551. What are LIQUIDATED DAMAGES?
Liquidated damages are those agreed upon by the parties to a
contract, to be paid in case of breach thereof.
2552. What is the effect of contributory negligence of Plaintiff?
The contributory negligence of the plaintiff has the effect of reducing or
mitigating the damages he can recover from the defendant.
2553. Jose is driving his car. Late for work, he rushes towards his place of
work. Suddenly, a driving mishap took place between Jose and another
driver Wally. Both of their cars collided because neither of them put on the
breaks when they were at the intersection. Wally admitted he was texting
while driving when the incident happened while Jose admits that he was
driving fast because he was already late for work. Can the court award the
recovery of full damages in favor of Jose?
No. Under the law, the contributory negligence of the plaintiff has the
effect of reducing or mitigating the damages he can recover from the
defendant.
In the given problem, Jose admits his contributory negligence of driving
fast although the immediate and proximate cause of his damage is still mainly the
negligence or omission of the defendant because Wally was texting while driving
and such is a negligent act on his part.
Furthermore, in the given situation, it is mitigating because the loss would
have resulted in any event because of the negligence or omission of another,
and where such negligence or omission is the immediate and proximate cause of
the damage or injury. Therefore, the court should mitigate the award of damages
to Jose because of his contributory negligence.
2554. What is the reason why the law allows mitigation in damages in
quasi-delicts? Explain briefly.
The reason for the MITIGATION OF DAMAGES IN QUASI-DELICT is the
contributory negligence of the plaintiff although the immediate and proximate
cause of his damage is still mainly the negligence or omission of the defendant.
His partial contribution to his injury justifies the reduction of the damages
claimed.

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2555. Give instances of grounds for MITIGATION OF DAMAGES FOR
CONTRACTS:
(1) Violation of terms of the contract by the plaintiff himself;
(2) Retention or enjoyment of benefit under the contract by the plaintiff
himself;
(3) Defendant acted upon the advice of counsel in cases where exemplary
damages are to be awarded;
(4) Defendant has done his best to lessen plaintiff’s injury or loss.

2556. Give instances of grounds for MITIGATION OF DAMAGES FOR

QUASI-CONTRACTS:
(1) In cases where exemplary damages are to be awarded;
(2) Defendant has done his best to lessen the plaintiff’s injury or loss.

2557. Give instances of grounds for mitigation of damages for quasi-

delicts:
(1) That the loss would have resulted in any event because of the negligence
or omission of another, and where such negligence or omission is the
immediate and proximate cause of the damage or injury;
(2) Defendant has done his best to lessen the plaintiff’s injury or loss.

2558. Manny, a carpenter was hired by Freddie to paint the roof of his
house. Under their contract, Manny should finish the painting of the roof
within five days. On the fifth day, Freddie asked Manny to paint the dog
house of Abu, his beloved pet. Manny complained that it was not part of
their contract. Freddie told Manny that he would not pay him if he would
not comply. Manny painted the dog house but he was so mad because the
dog almost bit him while painting. Manny was so fumed that he did not
return on the 6th day because the contract was only for 5 days while
Freddie argued that Manny agreed to paint the dog’s house not knowing it
was against the latter’s will. Freddie sued for full recovery of damages
against Manny. Decide.

Manny is liable for not finishing his work under the terms of the contract.
Likewise, Freddie is also liable for violating the terms of the contract wherein it
exclusively says that only the roof of the house is the cause of the obligation and
nothing else. Because of these circumstances, the court may equitably mitigate
the damages on the grounds that Plaintiff himself contravened the terms of the
contract and he has derived some benefit as a result of the contract by asking
Manny to paint his dog house without an additional payment.

2559. In a judgment of a case, the court denied the prayer for moral,
nominal and exemplary damages on the ground that there was no
pecuniary loss proven. Is the court correct? Explain briefly.

No, the court is not correct.

The law provides that no proof of pecuniary loss is necessary or

required in order that moral, nominal, temperate, liquidated or exemplary
damages may be adjudicated. What is essential is that there be a clear
showing of the facts giving rise to such damage.

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2560. Aside from actual or compensatory, what are the other kinds of
damages?

The other kinds of damages are the following:

(a) Moral
(b) Nominal
(c) Temperate
(d) Liquidated
(e) Exemplary or corrective.

2561. Among the other kinds of damages above-mentioned, which of these

does not require proof of pecuniary loss?
Only liquidated damages.
2562. What is the nature of Moral damages?
Moral damages, though incapable of pecuniary estimation, are in the
category of an award designed to compensate the claimant for actual injury
suffered and not to impose a penalty on the wrongdoer. Moral damages are
emphatically not intended to enrich a complainant at the expense of the
defendant.
2563. WHEN MORAL DAMAGES ARE RECOVERABLE?
First, it must first be established that the act or omission of the defendant
is the proximate cause of the damage or injury suffered by the plaintiff.
Moral damages cannot be recovered in the absence of wrongful act or
omission or fraud or bad faith. Thus, it is essential that they sprung from a
wrongful act or omission, fraud, malice, or bad faith was the proximate cause
thereof.
2564. What are Moral damages?
Moral damages includes :
1.) Physical suffering;
2.) Mental suffering;
3.) Mental anguish
4.) Fright
5.) Serious anxiety;
6.) Besmirched reputation;
7.) Moral shock; and
8.) Social humiliation

2565. Juanita and Erik, were celebrating their first anniversary so they
decided to dine at Good Taste Restaurant. Juanita wore her best dress on
that occasion. The couple ordered their favorite food which is “crispy pata”
served with ice tea as their drinks. As the waiter was ready to serve their
order, he accidentally lost grip of the tray spilling the ice tea over Juanita.
Other customers drew their attention to them as Juanita’s dress was
dripping with ice tea. Juanita filed a complaint for recovery of moral
damages on the ground that she was embarrassed that night. Decide.
In a long line decision of the Supreme Court, it ruled that simple
embarrassment is not a ground for grant of moral damages. The
embarrassment allegedly suffered by Juanita when the waiter accidentally lost
his grip on the tray containing the glass of ice tea falling on her is a very shallow
reason in granting moral damages.
2566. What damage/ damages is/are recoverable in an EJECTMENT SUIT?

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 The only damages recoverable in an ejectment suit is the full rental
value or reasonable compensation for the use or occupation of the realty
and attorney’s fees (Sparrevohn vs. Fischer, 2 Phil.266)
2567. Give some instances when MORAL DAMAGES WERE NOT
GRANTED:
1. The feelings which are products of sensitiveness do not justify grant of
moral damages.
2. The worries and anxieties of a defendant in a litigation that was not
maliciously instituted are not the grounds for moral damages as
contemplated in the law.
3. Moral damages cannot be recovered from a person who has filed a
complaint against another in good faith, or without malice or bad faith.
4. When the complaint filed was found reasonable to a certain extent, moral
damages cannot be recovered.
5. The husband or next of kin is not entitled to moral damages for the
physical injuries suffered by the wife.

2568. IN ADJUDICATION OF MORAL DAMAGES, WHAT OTHER THINGS

MAY BE CONSIDERED?
Article 2218 provides that in the adjudication of moral damages, the
sentimental value of property, real or personal may be considered.
2569. What is the concept of SENTIMENTAL VALUE of property in
adjudication of moral damages? Discuss.
Sentimental value of a property is the value placed by the owner on the
said property which is more than its actual value by reason of some
sentiments of longing, desire, affection to the property, or respect and
honor to its grantor.
2570. What is the effect of the presence of sentimental value in awarding
moral damages?
When by reason of a crime or quasi-delict, a property is attached some
sentimental value on the part of the owner, in the adjudication of moral damages,
the same may be favorably considered. The presence of sentimental value when
properly established will have the persuasive effect of justifying an increase in
the amount of moral damages payable to the owner.
2571. Give examples of properties having sentimental values
Personal things like jewelry donated by special people; medals and
trophies of honor; plaques of merits or achievements; certificates of appreciation;
antiquated religious images or icons, family bibles, portraits, by their nature do
carry sentimental value to the owner.
2572. Distinguished SENTIMENTAL VALUE FROM GOOD WILL
Sentimental value is different from goodwill. The former is the personal
attachment of the owner to the property. The latter refers to the public
patronage to one’s business like a shop, resort, hotel, restaurant, commercial
establishment, etc. which enhances its public image, attraction and reputation.
2573. Enumerate specific cases or instances where moral damages may be
recovered.
Moral damages may be recovered in the following and analogous cases:
1. A criminal offense resulting in physical injuries;
2. Quasi-delicts causing physical injuries;
3. Seduction, abduction, rape, or other lascivious acts;
4. Adultery or concubinage;
5. Illegal search;
6. Illegal or arbitrary detention or arrest;
7. Libel, slander or any ,other form of defamation;

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 8. Malicious prosecution;
9. Acts mentioned in Article 309
10. Acts and actions referred to in Articles 21, 26,27,28,29,30,32,34 and 35.

2574. What is the purpose of Moral damages?

It is settled that moral damages are not intended to enrich the
complainant but to serve to obviate his/her spiritual suffering by reason of
the culpable action of the defendant.
2575. As a general rule, moral damages must not be presumed and proof is
necessary, what is the exception?
It is basic that moral damages to be awarded, the claimant must
satisfactorily prove the factual basis and casual connection thereof with the
respondent’s acts.
However, in rape cases it has been held that moral damages is automatically
made without need of proof for it is assumed that the complainant has sustained
mental, physical and psychological sufferings.
2576. Is civil indemnity in rape the same as moral damages?
No, it is distinct from each other. Civil is mandatory upon the finding of the
fact of rape; it is distinct from and should not be denominated as moral damages
which are based on different jural foundations and assessed by the court in the
exercise of sound discretion.
2577. What are the REQUISITES for recovery of MORAL DAMAGES?
To recover moral damages, the following must be established:
1. There must be physical suffering, mental anguish, fright, serious
anxiety, etc. personally suffered by the plaintiff which must be
proved by testimonial evidence, among others.
2. As not all sufferings justify moral damages, the case must be one of
those enumerated or included in Articles 2219 and 2220.
3. There must be bad faith or wrongful act or omission.

2578. IS PROOF OF SUFFERING NECESSARY/ REQUIRED IN RAPE

CASES?
In rape cases, proof of mental and physical sufferings can be dispensed
with because it is recognized that the victim’s injury is concomitant with and
necessarily results from the odious crime of rape to warrant per se the award of
moral damages.
2579. What is the effect of UNSUCCESSFUL SUITS in relation to the award
of moral damages?
The mere filing of a suit does not render the plaintiff liable for
malicious prosecution should he be unsuccessful. Persons should have free
resort to the courts.
Furthermore, the worries and anxieties of a defendant in a litigation that was not
maliciously instituted are not the grounds for moral damages as contemplated in
the law.
Moral damages cannot be recovered from a person who has filed
complaint against another in good faith, or without malice or bad faith.
2580. May moral damages be automatically assessed against unsuccessful
plaintiffs?
If there was no bad faith in the filing of the plaintiff’s complaint, its
dismissal does not necessarily make him as losing party automatically liable for
moral damages to the defendant.
The law could not have meant to impose a penalty on the right to
litigate.
2581. Juan Tamad is the mortal enemy of Pedro Masipag. The long feud
between them starts way back during their childhood and is carried on until
now. The object of their animosity is their rivalry over Pepita, their most

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beautiful neighbor. When they were young, Juan gave a pendant to Pepita,
which the latter gave to Pedro. When Juan saw Pedro wearing the pendant,
Juan boxed him and cursed him to death. Pedro retaliated by poisoning
Juan’s dog. More confrontations happened between them. Enraged, Juan
religiously visits his church praying Pedro would die. Until one day, Juan
learned that Pedro has committed suicide. During the funeral of Pedro,
Juan interfered by lighting fireworks and even firing his gun to show his
joy, however such interference had caused the dispersal of the people
attending the funeral rite. Infuriated, the family of Pedro filed complaint
against Juan for the damages they suffered. Is Juan liable?
Yes, Juan is liable.
Under the law, any person who shows disrespect to the dead or wrongfully
interferes with a funeral shall be liable to the family of the deceased for damages.
In the problem given, Juan’s unjustifiable acts of causing boisterous disturbance
by firing his gun to disperse people attending the funeral rites are wrongful
interferences. They are actionable wrongs and therefore Juan is liable.
2583. In the problem given, who are allowed by law to file the action for
damages against the offenders?
The following, in the order named, may file the action for damages:
a. Spouse;
b. Descendants;
c. Ascendants; and
d. Brothers and sisters.

2584. What is the yardstick or guideline in granting moral damages?

The yardstick for moral damages should be that the amount awarded is
not palpably and scandalously excessive so as to indicate that it was the result of
passion, prejudice, or corruption on the part of the trial court.
2585. What factors are to be taken into account in assessing moral
damages?
They are the following:
a. Professional;
b. Social;
c. Political; and
d. Financial standing of the offended parties on one hand; and
e. Business and financial position of the other.

2586. Can a bank be held liable for moral damages?

Yes. Even if the negligence of the bank is not attended with malice or bad
faith, moral damages may be granted.
2587. Prudential Bank dishonored the check issued by private respondent
who turned out to have sufficient funds with petitioner. The Bank’s
negligence was the result of lack of due care and caution required of
managers and employees of a firm engaged in so sensitive and demanding
business as banking. Is the bank liable for damages?
The bank is liable for moral and exemplary damages. The law allows the
grant of exemplary damages by way of example for the public good. The public
relies on the bank’s sworn profession of diligence and meticulousness in giving
irreproachable service.
2588. May a CORPORATION WHICH IS AN ARTIFICIAL PERSON SUFFER
MORAL DAMAGES?
It depends on the specific basis relied upon.
If the corporation bases its claims for moral damages on physical
sufferings or mental anguish, fright, serious anxiety, wounded feelings, mental
shock, social humiliation and similar internal injury, the corporation cannot be

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awarded with moral damages for obvious reason that an artificial person cannot
suffer such internal feelings for lack of a nervous system.
However, if the corporation is basing its claim for moral damages, on
sufferance of besmirched reputation, then it is entitled to moral damages if
warranted by the evidence. It is essential that the corporation enjoys a good
reputation.
2589. Is willful injury to one’s property a basis for granting moral damages?
Explain.
Yes. Willful injury to the property of another entitles the latter to an
award of moral damages. Malicious mischief and arsons under the Revised
Penal Code are instances of willful injury to property. The civil aspects of these
crimes are deemed instituted with the criminal actions unless reservation is made
to prosecute them independently of the criminal actions or are file ahead of the
criminal actions.
2590. Can moral damages be recoverable to breaches of contracts?
Breaches of contracts do not justify moral damages unless it is proved
that the defendant has acted fraudulently or in bad faith.
2591. What is the meaning of bad faith in breaches of contracts under
Article 2220?
Malice or bad faith implies a conscious or intentional design to do a
wrongful act for a dishonest purpose or moral obliquity. Bad faith in Article 2220,
includes gross, but not simple negligence.
2592. On December 24, 1983, spouses Bendita Agua and Ben Tambling
sent a telegram of condolence to their cousins, Mr. Mrs. Bitoy Tabo,
through RCPI, to convey their deepest sympathy for the recent death of the
mother-in-law of Bitoy Tabo. The condolence telegram was correctly
transmitted. However, the message was typewritten in a “Birthday Card”
and placed inside a “Christmasgram envelope.” Believing that such
transmittal was done intentionally and with gross breach of contract
resulting to ridicule, contempt and humiliation, Spouses Tambling filed a
complaint for damages. The agent contends good faith on his part. Are the
spouses Tambling entitled to recover damages?
Yes, spouses Tambling.
Defendant did not comply with its contract as intended by the parties and
instead of transmitting the condolence message in an ordinary form, in
accordance with its guidelines, placed the condolence expressing sadness and
sorrow in forms conveying joy and happiness.
Defendant’s contention of good faith cannot be accepted. Gross
negligence or carelessness is evident in the problem. Knowing that the letter was
improperly placed and entering into a contract for the transmission of messages
in such forms, defendant committed acts of bad faith, fraud and malice.
2593. Telefast failed to send a cable to the relatives of the deceased
residing in the U.S. Because of such failure, only the sender of the cable,
the decedent’s daughter, was able to attend the funeral. Is Telefast liable
for damages?
Yes, as the Supreme Court properly observed:
“Who can seriously dispute the shock, the sorrow that the overseas
children must have suffered upon learning of the death of their mother after she
had already been interred, without being given the opportunity to even make a
choice on whether they wanted to pay her their last respects? There is no doubt
that these emotional sufferings were proximately caused by the Telefast’s
omission and substantive law provides for the justification for the award of moral
damages.”
2594. Is an employee subjected to sexual harassment entitled to damages?
Yes. An employer is liable to pay moral damages to an employee subjected to
sexual harassment, for the anxiety, the seen and unseen hurt that she suffered.
2595. What is the nature and purpose of NOMINAL DAMAGES?

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 Nominal damages are not for indemnification of loss but for
vindication of a right violated.
2596. May the Plaintiff provide assessment for the award of nominal
damages?
No. The assessment of nominal damages is left to the sound discretion of
the court in accordance with the circumstances of each case.
2597. In a judgment of a case, the judge awarded compensatory and
exemplary plus nominal damages. Was the decision proper? Explain.
Nominal damages cannot be awarded together with compensatory
damages. Where the court has already awarded compensatory and exemplary
damages that is already a juridical recognition that plaintiff’s right was violated.
Hence, the award of nominal damages is unnecessary and improper.
2598. Pepito, a private employee, borrowed a loan of Php 50,000 from SSS
for the repair of his house. Pedring, mortgaged his 50sq.m lot as a security
for payment of the loan. He regularly pays his obligation. However, SSS
employees attempted to foreclose mistakenly his mortgaged property.
Pepito filed a case against them and asked the court in his prayers for
moral and nominal damages. Is SSS liable? May the court grant such
reliefs?
Yes, employees of the Social Security System shall be held liable for their
attempt to foreclose mistakenly the mortgage of the borrower who was not
delinquent at all.
The court held SSS liable for nominal damages and attorney’s fees only.
No moral damages may be awarded
2599. What sources of obligations may give rise to nominal damages?
The five sources of obligation enumerated in Article 1157. The court may
award nominal damages in any obligation arising from said sources. (5
sources of an obligation)
2600. Aside from the five sources of obligations, what other
source/sources may give rise to nominal damages?
In addition to the five sources of an obligation, nominal damages may be
awarded where any property right has been invaded such as in trespass
upon property.
2601. What are those sources enumerated in Article 1157?
Article 1157 states that obligations arise from:
a. Law;
b. Contracts;
c. Quasi-contracts;
d. Acts or omissions punished by law;
e. Quasi-delicts

2602. What is the effect of granting nominal damages?

The effect of granting nominal damages is Res Judicata. After the final
adjudication of nominal damages by the court, there shall be no further contests
upon the right involved as well as accessory questions as between parties or
their respective heirs or assigns.
2603. What is the concept of TEMPERATE OR MODERATE DAMAGES?
These are the damages, the amount of which is left to the sound
discretion of the court, but it is necessary that there be some injury or
pecuniary loss established, the exact amount of which, could not be
determined by the plaintiff by reason of the nature of the case.
2604. What are the REQUISITES TO JUSTIFY AWARD OF TEMPERATE OR
MODERATE Damages?
To justify the award of temperate or moderate damages:
a. It is essential that “some pecuniary loss” had been suffered;
b. It’s exact amount cannot be proved with certainty; and

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 c. The court is allowed to calculate the amount.

2605. Pangito was charged with and convicted of the crime rape with
homicide by the RTC of Baguio. He was sentenced to suffer the penalty of
death. In addition, he was further ordered to indemnify the heirs of the
deceased the sum of P20,000 representing funeral expenses, the exact
amount of which was not proved. Can the trial court award the heirs of the
deceased an additional amount of P20,000 representing funeral expenses?
The list of expenses incurred for the wake, funeral and burial of the victim
amounting to P20,000 submitted by the victim’s father is self-serving and not
proved.
However, under Article 2224 of the Civil Code, temperate damages may
be recovered if it is shown that such party suffered some pecuniary loss
but the amount cannot, from the nature of the case, be proved with
certainty. As there is no doubt that the heirs of the victim incurred funeral
expenses, although the amount thereof has not been proved, it is appropriate to
award P15,000 by way of temperate damages to the heirs of the victim.
2606. What does ARTICLE 2225 provides?
ARTICLE 2225 provides that temperate damages must be reasonable
under the circumstances.
2607. What is the reasonableness of temperate damages?
What is reasonable will depend upon the circumstances of each particular
case. Generally, what is reasonable is one which is neither excessive nor very
low in the estimation of men of ordinary intelligence and discretion.
2608. May the plaintiff dictate the amount of temperate damages upon
himself?
No. In the determination thereof, the court must use its sound discretion.
2609. What is the guideline of the court in determining temperate
damages?
Whims and caprices should never be used as the swaying factors but it
must be the honest-to-goodness estimation based on sound reason of the court.
ARTICLE 2226 – 2240
2610. What are LIQUIDATED DAMAGES?
Liquidated damages are those agreed upon by the parties to a
contract, to be paid in case of breach thereof. (Article 2226)
2611. What is the nature of liquidated damages?
Liquidated damages are fixed damages previously agreed by the
parties to the contract and payable to the innocent party in case of breach.
(Torts and Damages Annotated-Pineda—2004 Edition—page 230)
2612. What is the purpose of liquidated damages?
The purpose of liquidated damages is to prevent breaches of
obligations between the contracting parties. (Civil Law Reviewer-Albano-
1998 Revised Ed. p.706)
2613. Distinguish PENALTY FROM LIQUIDATED DAMAGES.
As distinguished from liquidated damages, a “PENALTY” is a sum
inserted in a contract, not a measure of compensation for its breach, but rather
as a punishment for default, or by way of security for actual damages
which may be sustained by reason of non-performance, and it involves the
idea of punishment. A penalty is an agreement to pay a stipulated sum on breach
of contract, irrespective of the damages sustained. Its essence is a payment
of money stipulated as a terrorem of the offending party, while the essence OF
LIQUIDATED DAMAGES is a genuine covenanted pre-estimate of damages.
The amount is fixed and not subject to change; however, if the stipulated sum
is deemed to be a penalty, it is not enforceable and the non-defaulting party is
left to recover such actual damages as he can prove. (22 Am. Jur. 2d, 298-299;
cited in Sangco’s Torts and Damages, 2 Vol. II 1026-1027).

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2614. What is/are the similarity/similarities between “liquidated damages”
and “penalty”?
In effect, “liquidated damages” and “penalty” are the same. Neither
requires proof of actual damages. (Lambert vs. Fox—26 Phil. 588). It is so
because the parties had already agreed on the amount of damages to be paid in
case of breach of the contract. (Torts and Damages Annotated-Pineda—2004
Edition—page 231)
2615. What is the nature of ATTORNEY’S FEES expressly provided in
contracts recoverable as damages against the other party?
Attorney’s fees expressly provided in contracts recoverable as damages
against the other party are in the nature of liquidated damages and the
stipulation may be aptly called a penal clause. (Polytrade Corp.; vs. Blanco—
30 SCRA 187; SSS vs. Almeda—168 SCRA 474)
2616. How to determine the character of the stipulation?
The question of whether a stipulated sum is a penalty or for liquidated
damages is answered by the application of one or more aspects of the following
rule; stipulated sum is for liquidated damages only (a) where the damages
which the parties might reasonably anticipate are difficult to ascertain
because of their indefiniteness or uncertainty, and (b) where the amount
stipulated is either a reasonable estimate of the damages which would
probably be caused by a breach or is reasonably proportionate to the
damages which have actually been caused by the breach. (Philippine Law on
Torts and Damages—J. Sangco)
2618. What is the purpose in permitting a stipulation for damages?
It is settled that parties may stipulate, in advance, the amount to be paid
as compensation for the loss or injury which may result in the event of a breach,
and a stipulated sum which is determined to be liquidated damages rather than a
penalty, is enforceable. The purpose of permitting a stipulation for damages
as compensation is to render certain and definite that which appears to be
uncertain and not easily susceptible of proof. (Philippine Law on Torts and
Damages—J. Cezar S. Sangco—p. 563)
2619. Does the uncertainty in a provision for liquidated damages invalidate
the entire contract?
No. A provision for liquidated damages is not involved where the contract
provides for a recovery of such damages by the party only. Nor does uncertainty
in a provision for liquidated damages invalidate the entire contract. (Philippine
Law on Torts and Damages—J. Cezar S. Sangco—p. 563)
2620. Is the amount of liquidated damages subject to change?
No. The essence of liquidated damages is genuine consented pre-
estimate of damages. The parties are bound by a stipulation of liquidated
damages. The amount is fixed and is not subject to change. If the stipulated
sum is deemed to be a penalty, it is not enforceable and the non-defaulting party
is left to recover such actual damages as he can prove. (Notes on Torts and
Damages-2004 Ed. Judge Gonzalez-Decano-p. 250)
2621. When may the stipulated sum be REGARDED AS A PENALTY?
Ordinarily, a stipulated sum will be regarded as a penalty where it is
evident that the sum was fixed to evade the usury laws, or any other statute, or to
cloak oppression. Additionally, a stipulated sum will be regarded as a penalty
where the defaulting party is rendered liable for the same amount whether the
breach is total or partial, or where the sum is set without regard to the extent of
performance where, in the nature of the promises, the extent of the performance
would be important in determining the amount of actual damages which would
result. Where the contract provides for the payment of a fine in addition to the
amount of any damage caused by a breach, such fine cannot be considered as
liquidated damages but must be regarded as a penalty which cannot be
recovered. (Philippine Law on torts and Damages-J. Cezar Sangco)

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2622. Defendant Basilio Gonzales entered into an agreement with Plaintiff
Messrs. Yu Tek and Co. whereby defendant acknowledged the receipt of
the sum of P3,000 Philippine currency from Messrs. Yu Tek and Co., and
that in consideration of said sum he obligated himself to deliver to the said
Yu Tek and Co., 600 piculs of sugar of the first and second grade,
according to the result of the polarization, within the period of three
months, beginning on the 1st day of January, 1912, and ending on the 31st
day of March of the same year, 1912. Defendant agreed that in case he does
not deliver to Messrs. Yu Tek and Co. the 600 piculs of sugar within the
period of three months, as agreed upon the contract will be rescinded and
defendant will then be obligated to return to Messrs. Yu Tek and Co. the
P3,000 received and also the sum of P1,200 by way of indemnity for loss
and damages. The court below held that the portion in the contract stating
that the amount of P1,200 was simply a limitation upon the amount of
damages which could be recovered and not liquidated damages as
contemplated by the law. The plaintiff has appealed from the judgment of
the trial court on the ground that it is entitled to recover the additional sum
of P1, 200. Is the trial court correct?
No. The Court held: “We think it is a clear case of liquidated damages.
The contract plainly states that if the defendant fails to deliver the 600 piculs of
sugar within the time agreed on, the contract will be rescinded and he will be
obliged to return the P3,000 and pay the sum of P1,200 by way of indemnity for
loss and damages. There cannot be the slightest doubt about the meaning of this
language or the intention of the parties. There is no room for either interpretation
or construction. Under the provisions of article 1255 of the Civil Code contracting
parties are free to execute the contracts that they may consider suitable,
provided they are not in contravention of law, morals, or public order. In our
opinion there is nothing in the contract under consideration which is opposed to
any of these principles.” (Yu Tek and Co., vs. Gonzales--G.R. No. L-
9935;February 1, 1915)
2623. On September 4, 1961, the plaintiff [herein respondent Social Security
System] and the defendants [herein petitioners] Lirag Textile Mills, Inc. and
Basilio Lirag entered into a Purchase Agreement under which the plaintiff
agreed to purchase from the said defendant preferred shares of stock
worth ONE MILLION PESOS [P1,000,000. In the Purchase Agreement it
provides for the repurchase by the Lirag Textile Mills, Inc. of the shares of
stock at regular intervals of one year beginning with the 4th year following
the date of issue. The Purchase Agreement provides further that should
the Lirag Textile Mills, Inc. fail to effect any of the redemptions stipulated
therein, the entire obligation shall immediately become due and
demandable and the Lirag Textile Mills, Inc., shall be liable to the plaintiff in
an amount equivalent to twelve per cent [12%] of the amount then
outstanding as liquidated damages. Lirag Textile Mills was not able to
redeem the stock certificates. The failure of the Lirag Textile Mills, Inc. to
redeem the certificates of stock and pay dividends thereon were due to
financial reverses. Is Lirag Textile Mills liable for liquidated damages?
Yes. The Purchase Agreement provided that failure on the part of
petitioner to repurchase the preferred shares on the scheduled due dates
renders the entire obligation due and demandable, with petitioner in such
eventuality liable to pay 12% of the then outstanding obligation as liquidated
damages.
xxx
Petitioners' contention that it is beyond the power and competence of
petitioner corporation to redeem the preferred shares or pay the accrued
dividends due to financial reverses cannot serve as legal justification for their
failure to perform under the Purchase Agreement. The Purchase Agreement
constitutes the law between the parties and obligations arising ex contractu must

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be fulfilled in accordance with the stipulations. (LIRAG TEXTILE MILLS, INC.,
and BASILIO L. LIRAG vs. SOCIAL SECURITY SYSTEM, and HON. PACIFICO
DE CASTRO- G.R. No. L-33205 August 31, 1987).
2624. May LIQUIDATED DAMAGES be TEMPERED?
Yes. Liquidated damages, whether intended as an indemnity or
penalty, shall be equitably reduced if they are iniquitous or
unconscionable. (Article 2227)
2625. Where there is a partial or irregular performance in a contract
providing for liquidated damages, may the court mitigate the sum
stipulated therein?
Yes. Where there is a partial or irregular performance in a contract
providing for liquidated damages, the court may mitigate the sum
stipulated therein since it is to be presumed that the parties only
contemplated a total breach of the contract. And this is usually so because of
the difficulty or sometimes inability of the parties to ascertain or gauge
beforehand, the amount of indemnity in case of a partial breach, just as it is
equally perplexing to foresee the extent of a partial or irregular performance. And
so it has been held that a stipulation for liquidated damages in case of a total
breach of the contract cannot be enforced if the party has accepted a partial
performance thereof. (Tanembaum Son & Co. vs. Drumbor Bingle Co., C.C.A.
Pa.47 F. 2d 1009, certiorari denied, 52 S. St. 7; U.S. 619, 76 L. Ed. 588, cited 25
C.J.S. 695.)
2626. What is the reason for the equitable reduction of iniquitous or
unconscionable liquidated damages?
The reason is that, in both, the stipulation is contra bonos mores. It is a
mere technicality to refuse to lessen the damages to their just amount simply
because the stipulation is nonetheless immoral because it is called an indemnity.
(Report of the Code Commission, p. 75)
2627. A filed a complaint against R for collection of sum of money. The
complaint alleged that R, defendant, obtained from A, plaintiff, six (6)
separate loans for which the former executed in favor of the latter six (6)
separate promissory notes and issued several checks as guarantee for
payment. When the said loans became overdue and unpaid, especially
when the defendant’s checks were dishonored, plaintiff made repeated oral
and written demands for payment.
On the other hand, defendant claims that she was extended loans by the
plaintiff on several occasions, i.e., from November 13, 1987 to January 13,
1988, in the total sum of P320,000.00 at the rate of sixteen percent (16%)
per month. The notes mature[d] every four (4) months with unearned
interest compounding every four (4) months if the loan [was] not fully paid.
The Promissory Note carried a stipulation for attorney’s fees of 25 percent
of the principal amount and accrued interests. The trial court reduced the
stipulated penalty charge. Is the trial court justified?
Yes. Article 1229 of the Civil Code states thus: "The judge shall
equitably reduce the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable."
In exercising this power to determine what is iniquitous and
unconscionable, courts must consider the circumstances of each case. What
may be iniquitous and unconscionable in one may be totally just and equitable in
another. In the present case, iniquitous and unconscionable was the parties’
stipulated penalty charge of 5 percent per month or 60 percent per annum, in
addition to regular interests and attorney’s fees. Also, there was partial
performance by petitioner when she remitted P116,540 as partial payment of her
principal obligation of P320,000. Under the circumstances, the trial court was

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justified in reducing the stipulated penalty charge to the more equitable rate of 14
percent per annum.
The Promissory Note carried a stipulation for attorney’s fees of 25 percent
of the principal amount and accrued interests. Strictly speaking, this covenant on
attorney’s fees is different from that mentioned in and regulated by the Rules of
Court.18 "Rather, the attorney’s fees here are in the nature of liquidated damages
and the stipulation therefor is aptly called a penal clause." So long as the
stipulation does not contravene the law, morals, public order or public policy, it is
binding upon the obligor. (Imperial vs. Jaucian--G.R. No. 14900; April 14, 2004)
2628. Petitioners, the spouses Newton and Salvacion Jison, entered into a
Contract to Sell with private respondent, Robert O. Phillips & Sons, Inc.,
whereby the latter agreed to sell to the former a lot at the Victoria Valley
Subdivision in Antipolo, Rizal for the agreed price of P55,000.00, with
interest at 8,1965 per annum, payable on an installment basis. The spouses
failed to pay 10 monthly installments in the years 1966 and 1967. Thus in a
letter dated April 6, 1967, private respondent returned petitioners' check
and informed them that the contract was cancelled.
On January 9, 1969, the trial court rendered judgment in favor of private
respondent, dismissing the complaint and declaring the contract cancelled
and all payments already made by petitioner forfeited. Decide on the
legality of the rescission and forfeiture.
In the case of Jison vs. CA—G.R. No. L-45349-August 15, 1988, with
similar facts, the Supreme Court ruled: “While the resolution of the contract and
the forfeiture of the amounts already paid are valid and binding upon petitioners,
the Court is convinced that the forfeiture of the amount of P47,312.64 although it
includes the accumulated fines for petitioners' failure to construct a house as
required by the contract, is clearly iniquitous considering that the contract price is
only P55,000. The forfeiture of fifty percent (50%) of the amount already paid, or
P23,656.64 appears to be a fair settlement. In arriving at this amount the Court
gives weight to the fact that although petitioners have been delinquent in paying
their amortizations several times to the prejudice of private respondent, with the
cancellation of the contract the possession of the lot review.... to private
respondent who is free to resell it to another party. Also, had R.A. No. 65856,
been applicable to the instant case, the same percentage of the amount already
paid would have been forfeited. The Court's decision to reduce the amount
forfeited finds support in the Civil Code. As stated in paragraph 3 of the contract,
in case the contract is cancelled, the amounts already paid shall be forfeited in
favor of the vendor as liquidated damages. The Code provides that liquidated
damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable [Art. 2227.]
Further, in obligations with a penal clause, the judge shall equitably
reduce the penalty when the principal obligation has been partly or irregularly
complied with by the debtor [Art. 1229; Hodges v. Javellana, G.R. No. L-17247,
April 28, 1962, 4 SCRA 1228]. In this connection, the Court said:
It follows that, in any case wherein there has been a partial or irregular
compliance with the provisions in a contract for special indemnification in the
event of failure to comply with its terms, courts will rigidly apply the doctrine of
strict construction and against the enforcement in its entirety of the industry.'
where it is clear from the terms of the contract that the amount or character of the
indemnity is fixed without regard to the probable damages which might be
anticipated as a result of a breach of the terms of the contract; or, in other words,
where the indemnity provided for is essentially a mere penalty having for its
principal object the enforcement of compliance with the corporations; (Laureano
v. Kilayco, 32 Phil. 194 (1943).”
2629. What is the rule if the breach committed by the defendant was not
contemplated in the agreement on liquidated damages?

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 The rule is that when the breach of the contract committed by the
defendant is not the one contemplated by the parties in agreeing upon the
liquidated damages, the law shall determine the measure of damages, and
not the stipulation. (Article 2228)
2630. What are EXEMPLARY OR CORRECTIVE DAMAGES?
Exemplary or corrective damages are those damages imposed by way of
example or correction for the public good.(Article 2229)
2631. May exemplary or corrective damages be granted in the absence of
other kinds of damages?
No. In the absence of moral, temperate, liquidated, or compensatory
damages, no exemplary damages can be granted, for exemplary damages
are allowed only in addition to the four kinds of damages mentioned. (Article
2229--; Ventanilla vs. Centeno—L-14333—January 28, 1961)

2632. X Corporation persisted in oppressively invading another’s right

despite “cease and desist orders” from the Public Service Commission and
as such the corporation was held liable for exemplary damages. Was the
imposition correct?
Yes. Exemplary damages was correctly imposed against a corporation
which persisted in oppressively invading another’s rights despite “cease and
desist orders” by the Public Service Commission. The imposition of the
exemplary damages would be a reminder that the economic power will never
justify a reckless disregard of the rights of others. (Castro, et al. vs. Ice Cold
Storage Industries, et al.—L-10147—December 27, 1958)
2633. If the amount of exemplary damages is not specified, up to what
amount can the court grant?
If the amount of the exemplary damages is not specified, the court can
grant the same only in an amount that should not exceed its jurisdiction.
(Singson et al. vs. Aragon et al—92 Phil. 514)
2634. An overseer of a mango store abused the confidence of a female
customer by subjecting her to indignities. May that overseer be held liable
for exemplary damages?
Yes. According to the Court, this bespeaks of a perverse nature,
dangerous to the community. Thus exemplary damages may be awarded in this
case. (Domingding and Aranas vs, Ng, et al—103 Phil. 111)
2635. What is the nature or character of exemplary damages?
Exemplary damages are penal in character. The motive authorizing
their infliction will not be imposed by the presumption to the principal when the
act is committed by an agent or servant. Inasmuch as they are granted not by
way of compensation, but as a punishment to the offender and as a
warning to others, they can only be awarded against one who has
participated in the offense and the principal cannot be held liable for them
merely by reason of wanton, oppressive, or malicious intent on the part of
the agent. (Rotea vs. Halili-- L-1203-September 30, 1960)
Exemplary damages are mere accessories to other forms of
damages except nominal damages. They are mere additions to actual,
moral, temperate, and liquidated damages which may or may not be
granted at all depending upon the necessity of setting an example for the
public good as a form of deterrent to the repetition of the same act by one.
(Torts and Damages—Pineda—2004 Ed-page 234-235)
2636. If a victim was shot in the jaw by a minor with the use of his father’s
gun, is the victim entitled for exemplary damages?
Yes. The Court said that this will remind licensed possessors of firearms
of their peremptory duty to adequately safeguard such dangerous weapons at all
times, and to take all requisite measures to prevent minors and other
unauthorized parties from having access thereto. (Araneta, et al. vs. Arreglado,
et al.—104 Phil. 529)

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2637. May EXEMPLARY DAMAGES AND NOMINAL DAMAGES be awarded
simultaneously?
No. If exemplary damages are granted, nominal damages cannot be
given. (Medina,et al. vs. Crecsencia—L-8194—July 11,1956.)
2638. When MORAL DAMAGES ARE AWARDED, MAY EXEMPLARY
DAMAGES be also decreed or awarded?
Yes. When moral damages are awarded, exemplary damages may also
be decreed. Exemplary damages are imposed by way of example or
correction for the public good, in addition to moral, temperate, liquidated or
compensatory damages. (De Guzman vs. NLRC –G.R. No. 90856—July 23,
1992)
2639. Does the unjustified refusal to grant academic honors justify the
grant of exemplary damages?
Yes. Unjustified refusal to grant academic honors justifies exemplary
damages. Exemplary damages were imposed upon the President of the West
Visayan College (a government college) who through neglect of duty and moral
callousness, did not award Violeta Delmo the academic honors of “magna cum
laude” which the latter deserved. (Ledesma vs. CA---160 SCRA 449).
2640. Are exemplary damages recoverable in damage actions predicated
on a BREACH OF PROMISE TO MARRY?
No. Exemplary damages are not recoverable in damage actions
predicated on a breach of promise to marry. The reason for this is clear. The
mere breach of promise to marry is not actionable. Not being actionable, there
can be no possible basis for an award for damages, whether moral or exemplary.
(Hermosisima vs. CA, 109 Phil. 629; Estopa vs. Pinsay, 109 Phil. 640; Galang
vs. CA, 4 SCRA 55)
2641. X borrowed money from Y, executing a real estate mortgage over his
house and lot as security for the payment of his obligation. The obligation
bears interest at the rate of 24% per annum. When the obligation became
due and demandable, X failed to pay his obligation hence, Y foreclosed the
mortgage. This resulted in protracted litigation, where several cases were
filed by X resulting in the delay of the payment for more than 20 years. Can
the debtor X and his lawyer be held liable for damages? Why?
Yes. In Syjuco Co., vs. Castro, July 7, 1989, the Supreme Court said that
X and his lawyer can be held liable for the damages jointly and severally because
of bad faith and the manifest intent to defraud, as shown by the piecemeal filing
of cases, interposing defenses to the foreclosure which were available from the
beginning. These delayed the liquidation of the debt for more than 20 years.
The lawyer could be held liable with the client because of the abuse of
process, a trifling with the courts which could be attributed to him, for the client
could not have succeeded in delaying the course of justice without his aid and
advice, and his tireless espousal of the claim of his client and pretentions made
in the advocacy of cases concluded in a series of cases filed in court.
2642. May exemplary damages be imposed in criminal offenses?
Yes. In criminal offenses, exemplary damages may be awarded as part
of the civil liability. (Article 2230
2643. When may exemplary damages be imposed in criminal offenses?
Exemplary damages may be imposed as a part of civil liability in criminal
offenses when the crime was committed with one or more aggravating
circumstances. (Article 2230)
2644. How shall such damages be treated?
Such damages shall be treated as separate and distinct from fines and
shall be paid to the offended party. (Article 2230)
2645. In a criminal case, if a driver is convicted and made civilly liable, but
exemplary damages are NOT imposed, may the employer be held liable for
exemplary damages in a subsequent case brought to recover subsidiary
civil liability against him?

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 No. As Justice JBL Reyes pointed out—“No such damages were imposed
on the driver, and the master, as the person subsidiarily liable, cannot incur
greater civil liability then his convicted employee, any more than a guarantor can
be held responsible for more than the principal debtor.” (Bantoto, et al., vs. Bobis,
et al., and Vallejo—L-18966-November 22, 1966)
2646. If dwelling, as an aggravating circumstance, was not alleged in the
information, may it still be considered for the purpose of determining
liability for exemplary damages?
Yes. The Supreme Court in the case of “People of the Philippines vs.
Rafael Caloza, Jr. alias June Caloza,” G.R. Nos. 138404-06, January 28, 2003 ,
citing People vs. Catubig, 363 SCRA 621 (2001), held:
“x x x
As to damages, although dwelling was not alleged in the information, it
may nonetheless be considered for the purpose of determining liability
of Rafael for exemplary damages since it was proved by the
prosecution. The heirs of all the victims are entitled to exemplary
damages in the total amount of P75,000.00 pursuant to Article 2230 of
the Civil Code. x x x”.

2647. May exemplary or punitive damages still be recovered without

violation of the constitutional guaranty that no person shall be twice put in
jeopardy for the same offense of the wrongful act upon which the action is
based may be or has been punished criminally?
In some jurisdictions, recovery of exemplary damages for an injury
received in consequence of an act punishable under the criminal law is denied.
The reason given for this view is that the defendant might otherwise be twice
punished for the same offense. The fact that a criminal proceeding may never be
instituted does not change the rule or affect the principle involved.
In many other jurisdictions, however, the recovery of exemplary or punitive
damages will not be denied, merely because the wrongful act upon which the
action is based may be or has been punished criminally. The courts take the
position that the allowance of punitive damages in such cases does not violate
constitutional guaranties that no person shall be twice put in jeopardy for the
same offense, or deprived of his property without due process of law; this is so
even though such damages are recoverable by the State. In support of this rule,
it has been said that exemplary damages in a civil action are not awarded in lieu
of criminal or penal punishment and have no necessary relation to the penalty
incurred for wrong done to the public. Even though exemplary damages are
considered as strictly punitive, they are allowed for the punishment of the private
tort rather than of the public crime, against the State and an offense, in the sense
of crime, against the State and an offense in the sense of a tort, against a private
person, thus giving to the public and the person aggrieved each a distinct and
concurrent remedy. It follows, where such is the rule, that a judgment in one case
is no bar to a prosecution of the other. (Philippine Law on Torts and Damages-J.
Cezar S. Sangco p. 573, citing 22 Am. Jur 2d 338-39)
2648. On December 8, 1996, at around 8:00 o’clock in the evening, J was
alone in the house watching television when A arrived. Visibly drunk, he
approached J, pointed a bolo at her breast and ordered her to follow him to
the room. Extremely scared he might kill her, J followed him. Once inside
the room, A commanded her to remove her clothes and to lie down on the
bed. Still afraid, J obliged. A then hurriedly removed his short pants and
brief and placed himself on top of her, with his right hand holding the bolo
still pointed at her. In an Information for rape against A, the prosecution
alleged that the crime was committed with the use of a bolo. May A be held
liable for exemplary damages?
Yes. In the case of People vs. Manambay ( 422 SCRA 73- G.R. No.
130684;February 5, 2004) with similar facts, the Supreme Court held that: “With

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respect to appellant’s civil liability, we observed that the trial court awarded the
victim only moral damages of P50,000.00 for each count of rape. While such
award is correct, the victim is also entitled to P50,000.00 as indemnity ex delicto
in each case. Such award is mandatory upon the finding of the fact of rape.
Additionally, we award the victim exemplary damages because the rapes
were committed with the use of a deadly weapon. In People vs. Silverio
Montemayor, we declared: "x x x exemplary damages are justified under Article
2230 of the Civil Code if there is an aggravating circumstance, whether ordinary
or qualifying." Since the qualifying circumstance of the use of a deadly weapon
was present in the commission of the rapes subject of these cases, exemplary
damages in the amount of P25,000.00 may be awarded to the offended party in
each case.”
2649. J killed N. J was charged of murder based on the following
Information: “That on or about the 14th day of November, 1994, at
nighttime which was purposely sought, in the Municipality of Catbalogan,
Province of Samar, Philippines, and within the jurisdiction of this
Honorable Court, accused J, armed with a handgun, with deliberate intent
to kill, with treachery and evident premeditation, did then and there
willfully, unlawfully and feloniously attack, assault and shoot one N with
the use of said handgun with which the said accused had conveniently
provided himself for the purpose, thereby hitting and inflicting upon said N
gunshot wounds on his body and head, which wounds on his body and
head, which directly caused his instantaneous death.
CONTRARY TO LAW.” In this case, is J liable for exemplary damages?
Yes. In the case of People vs. Malinao (423 SCRA 34-G.R. No. 128148;
February 16, 2004) with similar facts, the Supreme Court held that: “ Finally, the
Court awards exemplary damages in the amount of P25,000.00, inasmuch as the
qualifying circumstance of treachery attended in the killing of Nestor. In People
vs. Catubig, we emphasized that insofar as the civil aspect of the crime is
concerned, exemplary damages in the amount of P25,000.00 is recoverable if
there is present an aggravating circumstance, whether qualifying or ordinary, in
the commission of the crime.”
2650. Olipio Machete, overseer of respondent Atty. Gabino Velasquez,
testified that petitioner (Mahinay) uttered the following malicious and
insulting statement against respondent: "Your master, a candidate for
Congressman, Ben Velasquez, is a land grabber." Machete informed
respondent of what petitioner said about him. This impelled the respondent
to file a complaint for damages against petitioner. The trial court ruled in
favor of respondent on the sole basis of the testimony of Machete and
awarded to respondent moral damages in the amount of P100,000 and
exemplary damages in the amount of P50,000. Is the court correct in
awarding moral and exemplary damages to despite his failure to take the
witness stand?
No. In order that moral damages may be awarded, there must be pleading
and proof of moral suffering, mental anguish, fright and the like. 5 While
respondent alleged in his complaint that he suffered mental anguish, serious
anxiety, wounded feelings and moral shock, he failed to prove them during the
trial. Indeed, respondent should have taken the witness stand and should have
testified on the mental anguish, serious anxiety, wounded feelings and other
emotional and mental suffering he purportedly suffered to sustain his claim for
moral damages. Mere allegations do not suffice; they must be substantiated by
clear and convincing proof. No other person could have proven such damages
except the respondent himself as they were extremely personal to him.
Neither is respondent entitled to exemplary damages. "If the court has no
proof or evidence upon which the claim for moral damages could be based, such
indemnity could not be outrightly awarded. The same holds true with respect to
the award of exemplary damages where it must be shown that the party acted in

141
a wanton, oppressive or malevolent manner." Furthermore, this specie of
damages is allowed only in addition to moral damages such that no exemplary
damages can be awarded unless the claimant first establishes his clear right to
moral damages. (Mahinay vs. Velasquez-419 SCRA 118)
2651. L was charged of rape based on the following Information: "That
sometime in March 1998, in the Municipality of Camiling, Province of
Tarlac, Philippines and within the jurisdiction of this Honorable Court, the
above-named accused did then and there wilfully, unlawfully and
feloniously by means of force and intimidation succeed in having sexual
intercourse with A, a 7-year old minor." The trial court found L guilty and
was sentenced to suffer reclurion perpetua and further ordered him to pay
P50,000 as moral damages and P25,000 as exemplary damages. On appeal,
the award of exemplary damages was deleted by the appellate court. Was
the appellate court correct in deleting the award of exemplary damages?
Yes. In the case of People vs. Cachapero (428 SCRA 773;G.R. No.
153008; May 20, 2004) with similar facts, the Supreme Court held that: “The
award of exemplary damages was improper.The trial court’s award of P25,000
for exemplary damages should be deleted. Such damages may be given only
when one or more aggravating circumstances are alleged in the information and
proved during the trial. In the present case, there are no such circumstances.
2652. In Quasi-delicts, may exemplary damages be awarded/granted?
Yes. In quasi-delicts, exemplary damages may be granted if the
defendant acted with gross negligence. (Article 2231)
2653. In quasi-delicts what must be shown by the plaintiff to justify the
grant of exemplary damages?
In quasi-delicts, gross negligence must be shown on the part of the
defendant to justify grant of exemplary damages to the plaintiff. (Palisoc vs.
Brillantes, 41 SCRA 548)
2654. Distinguish fraudulent, oppressive and malevolent manner.
If the act is tainted with deception or injurious misrepresentation of which the
plaintiff is unaware, the act is considered fraudulent. If it is arbitrary or
compulsive, it is considered oppressive. If it is done in bad faith, it is considered
malevolent. (Torts and Damages Annotated-Pineda 2004 Ed. Page-240)
2655. May exemplary damages be awarded if the deceased was chargeable
of contributory negligence?
No. In the case of Philippine National Railways vs. CA and Rosario
Tupang, G.R. No. 55374, Oct. 4, 1985, the Supreme Court held:
“But while the petitioner failed to exercise extraordinary diligence as
required by law, it appears that the deceased was chargeable with
contributory negligence. Since he opted to sit on the platform between
the coaches of the train, he should have held tightly and tenaciously to
the upright metal bar found at the side of said platform to avoid falling
off from the speeding train; such contributory negligence, while not
exempting the PNR from liability, nevertheless justified the deletion of
amount adjudicated as moral damages. By the same token, the award
of exemplary damages must be set aside. Exemplary damages may be
allowed only in cases where the defendant acted in wanton, fraudulent,
reckless, oppressive, or malevolent manner. ” (Vitug, p. 615)

2656. In contracts, may the court award exemplary damages?

Yes. The court may award exemplary damages in contracts. (Article 2232)
2657. What about in quasi-contracts, can the court award exemplary
damages?
Yes. The court may award exemplary damages in quasi-contracts. (Article
2232)
2658. When may a defendant be held liable for exemplary damages in
contracts and quasi-contracts?

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 A defendant may be held liable for exemplary damages in contracts
and quasi-contracts if he acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner. (Article 2232)
2659. A driver of a jeepney was found recklessly negligent in causing
injuries to his passenger. Is the owner-operator of the jeepney liable for
exemplary damages in addition to other kinds of damages?
Not necessarily. A principal or master can be held liable for exemplary or
punitive damages based upon the wrongful act of his agent or servant only when
he participated in the doing of such wrongful act or has previously authorized or
subsequently ratified it, with full knowledge of the facts. Exemplary damages
punish the intent—and this cannot be presumed on the part of the employer
merely because of the wanton, oppressive, or malicious intent on the part of the
agent. (Munsayac vs. De Lara—L-21151—June 26, 1968)
2660. The driver of a common carrier, thru gross or reckless negligence
caused injury to some of the passengers. May exemplary or corrective
damages be awarded?
Yes, exemplary damages may be awarded in contracts and quasi-
contracts if the defendant company, thru its driver, acted in a “wanton, fraudulent,
reckless, oppressive, or malevolent manner.” (Marchan and Philippine Rabbit
Bus Co., Inc. vs. Mendoza, et al., L-24471, January 31, 1969; See also Laguna-
Tayabas Bus Co. vs. Diasanta, L-19882, June 30, 1964)
2661. If an employee commits a wrongful act, may his employer be required
to pay exemplary damages?
No insofar as said employer had not participated in or ratified the act. The
rule is that exemplary damages are imposed primarily on the wrongdoer as
a deterrent in the commission of similar acts in the future. (Rotea vs. Halili-
L-1203-September 30, 1960)
2662. Plaintiff Senator Lopez who was then Senate President Pro-Tempore,
his wife, daughter and son-in-law made first class reservations with the
defendant air-carrier in its Tokyo-San Francisco flight. Through mistake,
defendant’s agents cancelled the reservations. Expecting that some
cancellations of booking would be made before the flight time, the
reservations supervisor withheld from the plaintiffs the information that
their reservations had been cancelled. Upon arrival in Tokyo, defendant
informed plaintiffs that there was no accommodation for them in the first
class stating that they could not go unless they take the tourist class. Due
to pressing engagements in the US, plaintiffs were constrained to take the
flight as tourist passengers, but they did so under protest. Subsequently,
they brought this action against the defendant for moral damages,
exemplary damages and attorney’s fees. Defendant, however, contends
that since the basis of the action is breach of contract and since there was
no bad faith of defendant, assuming that there was a breach of contract,
therefore, there can be no basis for an award of moral and exemplary
damages. Decide the case.
Actually, the above facts are identical to the factual backdrop of the case
of Lopez vs. Pan American World Airways (16 SCRA 431). In this case, the
SC held that in misleading plaintiffs into purchasing first class tickets in the
conviction that they had confirmed reservations to the same, when in fact they
had none, defendant willfully and knowingly placed itself into the position of
having to breach its aforesaid contracts with the plaintiffs should there be no last-
minute cancellations by the other passengers before the flight time, as it turned
out in this case. Such actuation of defendant may indeed have been promoted by
nothing more than the promotion of its self-interest in holding on to plaintiffs as
passengers in its flight and foreclosing their chances to seek the services of other
airlines that may have been able to afford them the first class accommodations.
All the same, the in the legal contemplation, such conduct already amounts to
action in bad faith. This is so because bad faith means a breach of a known duty

143
through some motive of interest or ill-will. Self enrichment or fraternal interest,
and not personal ill-will, may have been the motive, but it is malice nevertheless.

As a proximate result of defendant’s breach in bad faith of its contracts with

plaintiffs, the latter suffered social humiliation, wounded feelings, serious anxiety
and mental anguish. For plaintiffs were traveling with first class tickets issued by
the defendant and yet they were given only the tourist class. At stopovers, they
were expected to be among the first class passengers by those awaiting to
welcome them, only to be found among the tourist passengers. It may not be
humiliating to travel as a tourist passengers; it is humiliating to be compelled to
travel as such, contrary to what is rightfully to be expected from the contractual
undertaking.
Therefore, pursuant to the provisions on the Civil Code on moral damages
(Arts. 2217,2220), plaintiffs are given an award of P200,000 moral damages to
be divided thus: P100,000 for Senator Lopez; P50,000 for his wife; P25,000 for
his daughter and P25,000 for his son-in-law. In the case of exemplary
damages, as the name implies, its purpose is to provide an example for the
public good. In view of its nature, it should be imposed in such amount as
to sufficiently and effectively deter similar breach of contracts in the future
by the defendant or other airlines. Therefore, since the defendant had
breached its contracts in bad faith, and award of P75, 000 of exemplary
damages, applying Arts. 2229 and 2232 of the Civil Code is reasonable. In
the case of attorney’s fees, considering the prominence of Atty. Vicente
Francisco, counsel for the plaintiffs, in the legal profession and the work that he
has done in this case, an award of P50, 000 is also reasonable.
2663. Felicitas Sipe, remitted to her sister-in-law the amount of P3,000.00 to
pay for her tuition fee at U.P., Quezon City. When Felicitas went to PT & T
to claim it, she was advised that nothing was sent to her. Eventually,
however, she was informed that the money was sent to her. PT & T tried to
deliver it to her at her dormitory but failed to do so because she was not
around. Finally, when the check was delivered, she was not able to encash
it as there was no clearance from PT & T. She filed an action for damages,
aggrieved by the delay, where the RTC held PT & T liable for actual, moral
and exemplary damages. The CA affirmed on appeal. It deleted the award of
actual damages finding no proof of pecuniary loss but sustained the award
of moral and exemplary damages. Is the decision of the CA correct?
Yes. The deletion of the award of actual damages is correct. If there is no
evidence of pecuniary loss, there can be no award of actual damages. The
award of actual damages can be done only when proof of pecuniary loss in
action based on culpa contractual is essential. (PT & T Corp., vs. CA—
September 3, 2002)
As to moral damages, the same cannot be awarded in the absence of any
clear indication of bad faith or gross negligence amounting to bad faith. It would
be an error to award moral damages merely because the defendant was unable
to effect immediate delivery of the money sent through money orders. The
rationale for the rule is that, recovery of moral damages is more of an exception
rather than the rule. (Expert Travel and Tours, Inc. vs. CA 309 SCRA 141)
As to exemplary damages, the same cannot likewise be awarded.
Although such damages need not be proved, plaintiff must first show that he is
entitled to moral, temperate, or compensatory damages before a court can
favorably consider an award of exemplary damages. (Article 2234, PNB vs. CA,
266 SCRA 136). The defendant might have been remiss in the prompt delivery of
the sums sent through it to respondent, however, it would be hard put to say that
such delay under the facts obtaining can be described as being wanton,
fraudulent, reckless, or oppressive in character.
2664. When the plaintiffs placed an order for transmission of their social
condolence telegram, defendant did not inform the plaintiffs of the

144
exhaustion of such social condolence forms. Defendant-appellant accepted
through its authorized agent or agency the order and received the
corresponding compensation therefor. Defendant did not comply with its
contract as intended by the parties and instead of transmitting the
condolence message in an ordinary form, in accordance with its
guidelines, placed the condolence message expressing sadness and
sorrow in forms conveying joy and happiness. May the defendant be held
liable for exemplary damages?
Yes. In the case of Radio Communications Philippines inc., vs. CA et al.,
G.R. No. 79578, March 13, 1991, the Supreme Court found the findings of the
respondent Court to be persuasive. The SC ruled that:

“We cannot accept the defendant’s plea of good faith predicated on

such exhaustion of social condolence forms. Gross negligence or
carelessness can be attributed to defendant-appellant in not supplying
its various stations with such sufficient and adequate social
condolence forms when it held out to the public sometime in January,
1983, the availability of such social condolence forms and accepted for
a fee the transmission of messages on said forms. Knowing that there
are no such forms as testified too by its Material Control Manager
Mateo Atienza, and entering into a contract for the transmission of
messages in such forms, defendant-appellant committed acts of bad
faith, fraud or malice.x x x.

RCPI’s argument that it cannot be held liable for exemplary damages,

being penal or punitive in character (Petition 16; Rollo, 22), is without
merit. We have so held in many cases, and oddly, quite a number of
them likewise involved the herein petitioner as the transgressor.
xxx xx xxx
xxx In contracts and quasi-contracts, exemplary damages may be
awarded if the defendant acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. There was gross negligence on the
part of RCPI personnel in transmitting the wrong telegram, of which
RCPI must be held liable. Gross carelessness or negligence
constitutes wanton misconduct.
xxx xx xxx
x x x punitive damages may be recovered for willful or wantonly
negligent acts in respect of messages, even though those acts are
neither authorized or ratified. (Arkansas & L. R. Co. v. Stroude, 91 SW
18; West vs. Western U. Tel. Co., 17 P 807; Peterson vs. Western U.
Tel. Co., 77 NW 985; Brown vs. Western U. Tel. Co., 6 SE 146). Thus,
punitive damages have been recovered for mistakes in the
transmission of telegrams (Pittman vs. Western U. Tel. Co., 66 So 977;
Painter vs. Western U. Tel. Co., 84 SE 293)”. (RCPI vs. CA-No. 55194,
February 26, 1981-103 SCRA 359.)

2665. C, a first class passenger in a plane operated by Air France, while

already in the first class compartment of the plane immediately before the
start of the Bangkok-Tehran flight, was forced out of his seat by the
Bangkok Manager of the airline and transferred to the tourist class
compartment. His first class seat was then given to a white man.
Subsequently, when he came back to the Philippines, he brought an action
against Air France for moral damages, exemplary damages and attorney’s
fees. Defendant, however, contends that since the action is predicated on
breach of contract, there can be no basis for an award of moral damages,
exemplary damages and attorney’s fees. Decide the case?

145
 In a case with identical facts, the SC held that the defendant is liable for
moral damages, exemplary damages, and attorney’s fees both from the view
point tort and from the view point of breach of contract. As a matter of fact, the
Court awarded to the plaintiff P25,000 as moral damages, P10,000 as exemplary
damages, and P3,000 as attorney’s fees. (Air France vs. Carrascoso-18 SCRA
155)
xxx
From the viewpoint of contract, it must be observed that a contract to
transport passengers is quite different in kind and degree from any
other contractual relation. And this, because of the relation which an air
carrier sustains with the public. Its business is with the travelling public.
It invites people to avail of the comforts and advantages it offers. The
contract, therefore, generates a relation attended with a public duty.
Neglect or malfeasance of the carrier’s employees, naturally, could
give ground for an action for damages.
Passengers do not contract merely for transportation. They have a
right to be treated by the carrier’s employees with kindness, respect,
courtesy and due consideration. They are entitled to be protected
against personal misconduct, injurious language, indignities and
abuses from such employees. So it is, that any rude or discourteous
conduct on the part of the employees towards a passenger gives the
latter an action for damages against the carrier.

Hence, since there was bad faith on the part of the defendant carrier,
Arts. 2217, 2220, 2229, and 2232 of the Civil Code are applicable. In
other words, moral damages, exemplary damages and attorney’s fees
are recoverable. (Air France vs. Carrascoso-18 SCRA 155)

2666. May exemplary damages be recovered as a matter or right?

No. Exemplary damages cannot be recovered as a matter of right;
the court will decide whether or not they should be adjudicated. (Article
2233)
2667. Is the grant of exemplary damages automatic if there is gross
negligence?
No. The grant of exemplary damages is not automatic. It is still subject
to the discretion of the court. (Torts and Damages Annotated-Pineda 2004 Ed.
Page-239)
2668. Is there a need to prove the amount of exemplary damages?
There is no need. (Article 2234)
2669. Before the court may consider the question of whether or not
exemplary damages should be awarded, what must be shown by the
plaintiff?
While the amount of exemplary damages need not be proved, the plaintiff
must show that he is entitled to moral, temperate, or compensatory damages
before the court may consider the question of whether or not exemplary
damages should be awarded. (Article 2234)
2670. Before the court may consider the question of granting exemplary in
addition to liquidated damages, what must be shown by the plaintiff?
In case liquidated damages have been agreed upon, although no proof of
loss is necessary in order that such liquidated damages may be recovered,
nevertheless, before the court may consider the question of granting exemplary
in addition to the liquidated damages, the plaintiff must show that he would be
entitled to moral, temperate or compensatory damages were it not for the
stipulation for liquidated damages. (Article 2234)
2671. Is there still a need to plead in the complaint the amount of exemplary
damages?

146
 None. The amount of exemplary damages need not be pleaded in the
complaint because the same cannot be predetermined. (Benguet Electric
Cooperatice Inc., vs. CA-321 SCRA 524). It is enough if compensatory, moral or
temperate damages have been established. (Torts and Damages Annotated—
Pineda 2004 Ed.-page 243).
2672. What are the REQUIREMENTS FOR AWARD OF EXEMPLARY
DAMAGES?
The requirements for an award of exemplary damages are: (1) they may
be imposed by way of example in addition to compensatory damages, and only
after the claimant’s right to them has been established; (2) that they cannot be
recovered as a matter or right, their determination depending upon the amount of
compensatory damages that may be awarded to the claimant; (3) the act must be
accompanied by bad faith or done in a wanton, fraudulent, oppressive and
malevolent manner. (National Steel Corporation vs. Regional Trial Court of
Lanao Del Norte, Br. 2, Iligan City, 304 SCRA 597)
2673. How shall a stipulation whereby exemplary damages are renounced
in advance be treated?
A stipulation whereby exemplary damages are renounced in advance shall
be null and void. (Article 2235)
END OF PROVISIONS ON DAMAGES

2674. Up to what extent may the debtor be held liable for the fulfillment of
his obligation?

The debtor is liable with all his property, present and future, for the
fulfillment of his obligation, subject to the exemptions provided for by law. (Article
2236)

2675. If the debtor has no money, what can the creditor do to collect the
credit?

To collect the credit, the creditor can do any of the following:

a. Attach properties not exempt from attachment, forced sale, or

execution;
b. Exercise accion subrogatoria (the right to exercise all rights and
actions except those inherent in the person)

147
 c. Exercise accion pauliana (impugn or rescind acts or contracts done
by the debtor to defraud the creditors). (Art. 1177; see Arts. 1380-
1389).
d. In certain cases ask for datio in solutom, cession (assignment in
favor of the creditors), file insolvency proceedings (provided all the
requisite conditions are present)
e. Wait until the debtor has money or property in the future (after all,
liability is with present and future property) (Civil Code of the
Philippines Annotated-Vol. V--Edgardo L. Paras-p. 1361-1362)

2676. Give examples of properties that are exempt from attachment.

The following are properties which are exempt from attachment:

a. The family home, except in certain cases (Art. 155, Family Code)
b. The right to support, annuities, pensions (in certain instances)
c. Property in custodial egis (Springer vs. Odlin, 3 Phil. 348)
d. Properties of a municipal corporation used for government
purposes. (Viuda de Tan Toco vs. Municipal Council of Iloilo, 49
Phil. 52)
e. In certain cases, homesteads acquired under the Public Land Act
(See Beach vs. PCC & Sheriff, 49 Phil. 365)
f. Those mentioned in Rule 39, Section 13, Rules of Court
(Civil Code of the Philippines Annotated-Vol. V--Edgardo L. Paras-
p. 1362)

2677. In insolvency, what law shall govern?

Insolvency shall be governed by special laws insofar as they are not

inconsistent with the Code. ( Article 2237)

2678. What does the term solvency mean?

Solvency refers to the ability to pay one’s obligations and not to the pre-
disposition of the debtor to pay, and covers a situation when the debtor has more
assets then liabilities. (Commercial Law Reviewer-Villanueva—2009 Ed. P. 1186)

2679. What does the term insolvency mean?

Insolvency is the relative condition of a debtor’s assets and liabilities that

the former, if all made immediately available, would not be sufficient to discharge
the latter. (Commercial Law Reviewer-Villanueva—2009 Ed. P. 1186)

2680. What are the primary purposes of the Insolvency Law?

The following are the primary purposes of Insolvency Law:

a. Equitable distribution of debtor’s properties among the creditors;

and
b. To afford individual debtor in good faith a fresh start in life.
(Commercial Law Reviewer-Villanueva—2009 Ed. P. 1186)

2681. What are the two divisions of the Insolvency Law?

The following are the two divisions of the Insolvency Law:

148
 a. Suspension of Payments- Spanish in origin and copied from
provisions of the Code of Commerce.
b. Insolvency Proceedings- Insolvency proceedings work under
premise that the debtor has neither cash nor property of sufficient
value with which to pay all his debts.
(Commercial Law Reviewer-Villanueva—2009 Ed. P. 1186-1187)

2682. What is/are the distinction/s between suspension of payments and

insolvency proceeding?

The following are the distinctions between suspension of payments and

insolvency proceedings:

a. The purpose of suspension of payments is to suspend or delay

payments of debts; while the purpose of insolvency proceedings is
to compel presentment of all debts, whether due or not due, and
secure a complete discharge from such debts;
b. In suspension, the debtor has sufficient property to cover his
liabilities; while in insolvency, debtor’s assets are not sufficient to
cover his liabilities;
c. In suspension, amount of indebtedness is not affected, although
postponement of payment is declared while in insolvency, creditors
receive less than what they are entitled to, and in some cases,
where preferences are proper, some creditors receive nothing.
(Commercial Law Reviewer-Villanueva—2009 Ed. P. 1187)

2683. Distinguish voluntary from involuntary insolvency?

The following are the distinctions between voluntary and involuntary

insolvency:

a. In voluntary proceedings, debtor is the petitioner, while in

involuntary proceedings, three (3) or more creditors are the
petitioners;
b. In voluntary proceedings, debtor may have only one creditor while
in involuntary proceedings, debtor must have at least 3 creditors;
c. In voluntary proceedings, no requirements with respect to creditor
while in involuntary proceedings, creditors must be Philippine
residents whose credits accrued in the Philippines and none of
them became a creditor by assignment within 30 days prior to filing
of petition;
d. In voluntary proceedings, no bond is required for the petition while
in involuntary proceedings, bond is required;
e. In voluntary proceedings, order of adjudication may be granted ex
parte while in involuntary proceedings, it is granted only after
hearing;
f. In voluntary proceedings, debtor must not have committed an act of
insolvency to get discharge while in involuntary proceedings, debtor
must have committed an act of insolvency as basis by which
creditors file petition; and
g. In voluntary proceedings, petition must be filed with the RTC where
the petitioner-debtor resided for 6 months prior to filing while inn
involuntary proceedings, length of residence is immaterial.
(Commercial Law Reviewer-Villanueva—2009 Ed. P. 1187)

2684. In case of conflict between the Civil Code and the Special law, what
law shall prevail?

149
 The provisions of the Civil Code prevail in case of conflict. Insolvency shall
be governed by special laws insofar as they are not inconsistent with the Code.
(Article 2237)

2685. In a petition for voluntary insolvency, what properties must be

included in the inventory?

All real and personal properties, estate, and effects of the debtor, whether
exempt from execution or not should be included in the inventory to be filed
together with the petition. (Section 16, Insolvency Law). Although properties
exempt from execution must be included in the inventory, said properties,
however, will not be taken away from the debtor, as the purpose of including
such kind of properties in the inventory is merely to prevent the debtor from
falsely claiming exemption. (The Insurance Code and the Insolvency Law with
Comments and Annotations-Fifth Edition-2006-Hernando Perez-p. 463)

2686. What are the requisites of involuntary insolvency?

In order that a debtor may be adjudged insolvent in a proceeding for

involuntary insolvency, the following requisites must exist:

a. The debtor must have committed one or more acts of insolvency.

b. The petition must be filed three or more creditors, residents of the
Philippines, whose credits are in the aggregate not less than
P1,000 and none of said creditors has become a creditor by
assignment within thirty days prior to the filing of said petition.
c. The petition must be accompanied by a bond conditioned to pay to
the debtor all costs, expenses, and damages occasioned by the
proceedings, in case said petition does not prosper. (The Insurance
Code and the Insolvency Law with Comments and Annotations-
Fifth Edition-2006-Hernando Perez-p. 466)

2687. May properties of the conjugal partnership or the absolute

community be taken possession by the assignee for the payment of the
insolvent debtor’s obligations?

No. So long as the conjugal partnership or the absolute community

subsists, its property shall not be among the assets to be taken possession of by
the assignee for the payment of the insolvent debtor’s obligations. (Article 2238)

2688. What is/are the exception/s of the above rule, if any?

The exception is that when the debtor’s obligations have redounded to the
benefit of the family. (Article 2238)

2689. May the administration of the community property or the absolute

community be transferred?

Yes. If it is the husband who is insolvent, the administration of the conjugal

partnership or the absolute community may, by order of the court, be transferred
to the wife or to a third person other than the assignee. (Article 2238)

2690. What are the requirements in order that properties of the conjugal
partnership or the absolute community may be exempted?

The exemption applies provided that:

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 a. The conjugal partnership or the absolute community subsists; and
b. The obligation did not redound to the benefit of the family. (Article
2238)

2691. What is the rule in case of co-ownership?

The undivided share or interest shall be possessed by the assignee. (Civil

Code of the Philippines Annotated-Vol. V--Edgardo L. Paras-p. 1365)

2692. What is the nature of office of the assignee?

An in insolvency occupies a triple position. First, he is an officer of the

court. Second, he is the representative of the insolvent debtor and administrator
of the property belonging to the latter. Third, he is also a representative of the
creditors especially in all actions and proceedings to set aside preferences and
fraudulent transactions entered into by the debtor. (The Insurance Code and the
Insolvency Law with Comments and Annotations-Fifth Edition-2006-Hernando
Perez-p. 469)

2693. How is the assignee chosen?

An assignee in insolvency is elected by the creditors of the insolvent at the

meeting set be the court. And as a rule, all the creditors of the insolvent are
entitled to vote at the elections of the assignee. (The Insurance Code and the
Insolvency Law with Comments and Annotations-Fifth Edition-2006-Hernando
Perez-p. 469-- citing Sections 18, 19, 24, and 25 of the Insolvency Law)

2694. As a rule, all the creditors of the insolvent are entitled to vote at the
election of the assignee. Is/are there exception/s?

Yes. As a rule, all the creditors of the insolvent are entitled to vote at the
election of the assignee except the following:

a. Those who did not file their claims in the office of the clerk of court
in which proceedings are pending at least two days prior to the time
appointed for such election. (Section 29, Insolvency Law).
b. Those whose claims are barred by the statute of limitations.
(Section 29, Insolvency Law)
c. Those that hold any mortgage, pledge or lien of any kind whatever
as security for the payment of his claim. (Section 29, Insolvency
Law)
d. Those whose claims are not provable against the estate in
insolvency. (Section 53, Insolvency Law)
(The Insurance Code and the Insolvency Law with Comments and
Annotations-Fifth Edition-2006-Hernando Perez-p. 469-470)

2695. How many votes are necessary to elect an assignee?

The majority of the creditors who have proven their claims, such majority
being both in number and amount, must concur for the election of an assignee.
(The Insurance Code and the Insolvency Law with Comments and Annotations-
Fifth Edition-2006-Hernando Perez-p. 470- citing Section 30 of the Insolvency
Law)

2696. When can the court appoint an assignee?

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 Ordinarily, the assignee in insolvency is elected by the creditors of the
insolvent. However, if, on the day appointed for the meeting, the creditors do not
attend, or fail or refuse to elect an assignee, or if, after election, the assignee
shall fail to qualify, or if vacancy occurs by death or otherwise, the court shall
appoint an assignee. (The Insurance Code and the Insolvency Law with
Comments and Annotations-Fifth Edition-2006-Hernando Perez-p. 470- citing
Section 31 of the Insolvency Law)

2697. What are the properties which will not pass to the assignee?

As a rule, all properties of the insolvent debtor shall be assigned and

transferred to the assignee in insolvency. (Section 32, Insolvency Law).
However, the following properties will not pass to the assignee in insolvency:

a. After-acquired property.
b. Property exempt from execution.
c. Property held in trust.
d. Right of action for personal injury to the insolvent.
e. Expectancy to inherit.
f. Encumbered property.
g. Life insurance policy even if the proceeds are payable to the
insolvent himself or his legal representative, if it has no cash
surrender value at the time of the commencement of the
proceedings in insolvency.
(The Insurance Code and the Insolvency Law with Comments and
Annotations-Fifth Edition-2006-Hernando Perez-p. 471)

2698. What are the duties of an assignee?

An assignee in an insolvency has the following duties:

a. To register the assignment within one month after the making

thereof. (Section 34, Insolvency Law)
b. To prepare and file the schedule and inventory if the same have not
been filed by the creditor. (Section 34, Insolvency Law)
c. To convert the estate, real and personal, into money. (Section 39,
Insolvency Law)
d. To keep a regular account of all money received by him as
assignee. (Section 39, Insolvency Law)
e. To distribute the funds of the estate to the creditors. (Sections 44
and 47, Insolvency Law)
f. To file his final account within one year from the date of order of
adjudication. (Section 43, Insolvency Law)
(The Insurance Code and the Insolvency Law with Comments and
Annotations-Fifth Edition-2006-Hernando Perez-p. 471-472)

2699. Can the assignee redeem mortgages and conditional contracts?

Yes. Under Section 36 of the Insolvency Law, one of the powers of the
assignee in to redeem all valid mortgages and conditional contracts, and all valid
pledges of personal property, and to satisfy any judgment which may be an
encumbrance on any property sold by him. (The Insurance Code and the
Insolvency Law with Comments and Annotations-Fifth Edition-2006-Hernando
Perez-p. 472)

2700. When may the assignee be discharged by the court?

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 An assignee may be discharged by the court in any of the following
instances:

a. When the assignee refuses or neglects to render his accounts.

b. When the assignee refuses or neglects to pay over a dividend
when he has sufficient funds for that purpose.
c. When the assignee neglects or mismanages the estate.
d. When the assignee violates any provision of the Insolvency Law.

(The Insurance Code and the Insolvency Law with Comments and
Annotations-Fifth Edition-2006-Hernando Perez-p. 473- citing
Section 36 of the Insolvency Law)

2701. May properties held by the insolvent debtor as trustee be included in

the insolvency proceedings?

No. Property held by the insolvent debtor as a trustee of an express or

implied trust, shall be excluded in the insolvency proceedings. (Article 2240)

2702. What is the reason for the exemption?

The reason for the exemption is that the trustee is not the owner of the
property held. Hence, it should not respond for the insolvent trustee’s obligations.
(Civil Code of the Philippines Annotated-Vol. V--Edgardo L. Paras-p. 1365)

ARTICLE 2241 – 2255

2703. In relation to art.2241, what is the rule if a person becomes insolvent

and there are two or more credits with respect to his specific movable
property?

If there are two or more credits with respect to the same specific movable
property, they shall be satisfied pro rata, after the payments of duties, taxes and
fees due the state or any subdivision thereof.

2704. Although art. 2241 states that the claims or lien shall be preferred,
does this mean that the claim of credits therein be given preference
according to its order?

No, there is no preference in the order mentioned in art.2241: there is only

a concurrence. Hence, for example, if a person becomes insolvent and he incurs
debts to two or more persons, it shall be paid pro rata but the state shall be paid
first the taxes and fees incurred by the debtor.
2705. What is the nature of the claims or credits enumerated in art.2241?

The claims or credits enumerated in Art. 2241 are considered: (a) pledges
of personal property; (b) or liens within the purview of legal provisions governing
insolvency.

2706. Are liens mentioned in Art.2241 possessory liens?

No, Generally, unless otherwise stated, they are not possessory liens with
the right of retention. As liens, they are considered charges.

2707. What is the remedy of the creditor if the movables to which the lien or
preference is attaches have been wrongfully taken?

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 If the movables to which the lien or preference is attaches have been
wrongfully taken, the creditor may demand them from any possessor, within thirty
days from the unlawful taking.

2708. Duma’s car was subject to mortgage. On October 15.2010, the car
was overhauled by Donaire.Duma did not pay the repair of the car. Latter,
the car was foreclosed so Pedro, the mortgagee, went to Donaire to take
the car. Has Donaire have the right to refuse surrender of the car until
payment of the value his services?

Yes, a person who has made repairs upon an automobile at the request of
the owner is entitled to retain the it until he has been paid the price of the work
executed. This lien of mechanic or repairer on the car is superior to the right of
the chattel mortgage, and the latter cannot take possession of the thing without
first satisfying the claim of the former for the value of his service.

2709. Are the owner of the hotel has the right to retain in pledge the
clothing’s of boarders’ until he has paid the rent therein?

Yes, this is supported under art.2241 par. 10,which provides that credits
for lodging and supplies furnished to travelers by hotel keepers, on the movable
belonging to the to the guest as long as the movables are in the hotel, may retain
by the owner of the hotel until he is paid the rent.

2710. What are the requisites in order for an unpaid vendor mentioned in
Art. 2241 to be entitled as a preferred creditor?

For an unpaid vendor to entitle as a preferred creditor, he must prove that

(1) the money claimed must be due to him as the selling price of the property
from which it proceeds; (2) the property must be capable of identification and
must be identified as the same property whose selling price is unpaid and; (3) the
property upon which the selling price was due must be found in the possession o
the debtor.
2711. Mario mortgaged has properly to Dallo. During the time of the
mortgage, Mario barrowed money to Binay for the cultivation of the Copra.
Mario did not pay his loan, the property then was foreclosed. Dallo was not
satisfied with the proceeds of the property. He then asked the court to levy
the ungathered crops but Binay opposed contending that he has preferred
claim over the crops. Is the contention of Binay correct?

Yes, because under Article 2241, credits advanced to the debtor for
expenses of cultivation and harvesting are preferred lien on the proceeds of the
crop and this is preferred to those liens created by mortgage over the land.
(Kabangkalan Sugar Co. vs. rubin, 54 Phil. 645)

2712. Binay, however, invoked preference over the land of Mario in the
foreclosure proceeding in case the latter does not pay his debt?

No, because the mortgage is prefers over the land of Mario. Such being
as immovable property. The mortgagee of the real estate mortgage enjoys the
preference in the collection out of the value of the mortgage property, over other
credits.

2713. What is being referred to as laborer’s lien contemplated in Art. 2241?

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 The laborer’s lien contemplated in Art. 2241 refers to chattels or movables
to imposable, and in only in favors of laborers engaged by the owner of the
goods to be manufactured. It does not also include those engaged by contractors
who do not work for the owners.

2714. Assuming that the debtor sold his car, can the credit or demand the
return of the property because he has a vendor’s lien over the property?

No. the last paragraph stated in Art. 2241 is applicable only to cases
wherein the right to ownership in such property continues in the debtor and not
applicable only to case wherein the debtor has sold the property and parted with
his ownership therein.

2715. Who is more preferred a preliminary attachment over the land or a

mortgage?

A preliminary attachment made on the mortgaged property is subordinate

to the mortgage, and unless the whole indebtedness for which the property is
mortgaged is wholly paid, the attaching creditors acquire no right over said
mortgage property for the satisfaction of their credits. (Director of public works vs.
Sing Juco,53 Phil. 205)

2716. Pedro barrowed money from Juan to finance the construction of a

building, mortgaging his land and the building to be constructed thereon to
secure the loan. After the building was erected, Pedro failed to pay the
laborers who work in the building, and some suppliers who furnished
materials thereon. Upon foreclosure of the mortgage, who would have
preferential right to the proceeds of the sale; the laborers, the suppliers, or
the mortgagee?

Regarding the proceeds of the sale of the land, the mortgagee has the
preferential right, because the laborers and the suppliers certainly have no lien
on the land.However, as to the proceeds of the sale of the building, the
morgagee, the labors, and the suppliers will all share pro rata after the taxes on
the building have been paid, provided, however, the mortgage credit has been
recorded in Registry of Property.

2717. Pedro sold his land to Xerox, apparently, Betag did not pay.
Subsequently, Betag was able to obtain a clean certificate of title and he
mortgaged the same to Paterno. Betag failed to pay the mortgage. Pedro
file a motion to recognize his vendor’s lien and was granted. The court
distributed the proceeds of sale pro rata basing its decision under Article
2242. Who is preferred the vendor’s lien or the mortgage?

It is the mortgage that is preferred and not the vendor’s lien because
although Article 2242 states that vendor’s lien is preferred but in case of
mortgages, the first who recorded it is more preferred than those who did not. If
pro rata distribution be allowed by the court then it would defeat the purpose of
Torrens title.Hence, relied provision is improper in this case.

2718. Leo was the owner of a certain warehouse. He was indebted to Mario,
the mortgagee, and Maria, the person who furnished materials used in its
contruction.There is no other creditors. Is there a need of insolvency
proceedings?

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 There is no need for insolvency proceedings, because the two credits can
be satisfied pro rata from the amount that can be obtained in the foreclosure sale
of the warehouse, applying Arts.2242 and 2249 of the civil code.

2719. What is reason of Pro rata sharing in Art.2241 as well as in Art.2242?

According to the framer of the code, the reason of pro rata sharing is
because it is extremely difficult to determine a just order of preference among the
debtors; the holder of the lien or encumbrance could give plausible reason why
his claims should be placed ahead of the others. But it would seem to be fairer
course to divide the value of the property prop rata among the lien holders.

2720. What is reflationary credit in art.2242?

This is a credit for the repair or reconstruction of something that had

previously been made.

2721. Who is more preferred a judgment credit or a mortgage?

A Judgment credit cannot have any preference over a credit secured by a
pledge or mortgage with respect to the property given. (National Bank Vs. Viuda
de Limengco,57 Phil.81.)

2722. What is the nature of credits mentioned in Article 2244 in order for it
to be collectible?

The credits to which art.2244 gives preference are those which are due,
and until they are demandable the legal provisions contained therein are not
applicable.

2723. To what credits article 2244 applies?

a.) Unpaid credits

b.) Preferred credits
c.) Concurred credits
d.) Matured credits

2724. In preference of credits, are notarial documents considered public

document within the meaning of Art. 2244 Par. 14 if such document does
document does not contain evidence of debts or credits?

No. in Roman vs. Herridge 47 Phil 98, the court said, where the notarial
document in itself does not contain debs or credits created, such document does
not create a preference and is not a public instrument within the meaning of this
article.

2725. The preference of public document and a final judgment can be

determined;

a) When it was executed by the parties concerned.

b) According to their dates.
c) When such is only filed in court.
d) When such is approved by the Office of the Register of Deeds.

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2726. In case there are several judgments secured on singe debt set out on
the public instrument. To collect such credits, how can we determine the
preference of date?

Where several judgments have been secured in a single debt set out in
the public instrument, preference among said judgments is determined by the
date of the public instrument and not by the dates of the judgments secured by
virtue of such public instrument. (Somes v. Molina, 15 Phil.133)

2727. Is the right to a preference secured by judgment creditor lost by mere

perfecting of an appeal in the judgment?

No. The right to a preference secured to a judgment creditor in the

distribution of funds of the state of his judgment debtor, is not lost by the
perfecting of the appeal from the judgment in cases wherein execution is not
stayed upon the judgment pending appeal (McMicking vs. Lichauco,27 Phil.386)

2728. Supposed an assignee was recommended by the judgment creditor

to be a representative by the latter. Is that considered a waiver to his
preference in the credits?

No. In O’Brien v. China Banking Corporation, 55 Phil. 353, the Supreme

court states when the judgment creditor recommend to the court that an assignee
be appointed cannot be considered as a waiver of creditor’s preferred credit. A
waiver is the intentional relinquishment of a known right, and such
recommendation does not amount to an intentional relinquishment of a preferred
credit.

2729. Pedro obtained a favorable judgment over a parcel of land in a

collection suit filed against Romeo. But Pedro did not do something to
enforce the judgment. After forty years, Romeo mortgaged the property to
Francisco. Upon knowledge of the mortgage, Pedro filed a second case to
enforce the prior judgment and a second judgment was rendered and,
thereafter, the same property was attached. Is the attachment made in the
second judgment preferred over the mortgage?

No, in Francisco v. Guitote, (C.A.) G.R. No. 12, 29 May, 1943,the court
stated that when the party in whose favor a judgment for recovery of sum of
money was rendered in a civil suit, fails to execute his judgment and allows the
same to remain unexecuted and unsatisfied, notwithstanding the lapse of five
years and periods provided by the rules of court, and a mortgage was thereafter
executed over the same parcel of land, a second judgment rendered involving
the same controversy does not preferred or given priority over the mortgage on
the same land given by the judgment debtor in favor of a third party, who brought
a suit for foreclosure, where it appears that such mortgage was executed prior to
the promulgation of the second judgment in the revived action.

2730. Unlike in Art.2241 and 2242, in the distribution of credits stated in

Art.2244, does we follow the rule on concurrence?

No, the distribution of debts should be preference, as such, in case of the

insolvency of the debtor, the enumeration in Art. 2244 should be preference in
application; the funeral expenses should come first, then laborers service, and so
on. But this applies only to property other than real or personal property.

2731. Abubakar owes Kevin the amount of 50,000 pesos for the services he
performed for the construction of the house of the former. Abubakar also

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incurred debt amounting 50,000 pesos to Carlo for his hospital expenses.
And when he was still studying in Harvard he barrowed money to Denis in
the amount of 1 million pesos. Give the order of preference of the various
creditors involved.

Applying Art.2244 of the civil code, Kevin should be paid first for the labor
he performed, then Carlo for hospital expenses, then Denis for the expenses to
support himself. There is no pro rata sharing; there is a preference.Threfore, the
50,000 shall be paid to Kevin,50,000 also to Carlo, and Denis cannot recover his
1 million pesos.

2732. Berting is the owner of a parcel of land, there were several

attachment and execution that was annotated therein; the first for
10,000;the second for 10,000;the third is 30,000; and the fourth is 40,000.the
property is only sold at the public sale for 30,000,who would share in this
amount?

As a general rule, there is no preference in the distribution of credits if

specific property is involved, but only concurrence. But the exception is when
there are attachments and execution in the property which means that there is
still preference among them .those who recorded it in the registry should be
satisfied first. Therefore, the 30,000 should satisfy first the 3 attachments, and
the remainder, if any, shall be given to the 4rth attachment.

2733. What credits that is not given preference in law?

Under art. 2245 provides that credits of any kind or class, or by any other
right or title not comprised in art.2241 and 2244, shall enjoy no preference.

2734. In ranking of liens involving property other than real or personal

property, which lien should be satisfied first?

a) Expenses for savage goods.

b) Laborers’ service
c) Taxes and fees owed to the state
d) Funeral expenses.

2735. What does preference in relation to specific real property exclude?

Those credits which enjoy preference in relation to specific real property or

real rights, exclude all others to the extent of the value of the immovable real
right to which the preference refers.

2736. If there are two or mare credits with respect to the same specific real
property or real rights they shall be divided:

a) equally
b) proportionately
c) successively
d) pro rata

2737. In payments of credits with respect to real or personal property, the

payment should not be made except;

a) Upon payment of funeral expenses.

b) Upon payment of taxes and fees due the government.

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 c) Upon payment of hospital expenses.
d) Upon payment of fines and civil indemnification arising from a
criminal offence.

2738. What is the rule if there is an excess after payment of the credits with
respect to specific property, either real or personal?

The rule is if after payment of the credits which enjoy preference with
respect to specific property, real or personal, it shall be added to the free
property of which the debtor may have, for the payment of other credits.

2739. How can common credits referred to in art.2245 be satisfied?

a) By pro rata distribution of credits.

b) By pro rata distribution of credits, regardless of dates.
c) By payment periodically.
d) By propionate distribution.

2740. The following are the exception to the rule that laws shall not have
retroactive effect except:

a) When the law provides for its retroactivity.

b) When the law creates new substantive rights.
c) When the provisions of the code do not impair any vested rights.
d) When the law is curative in character.

2741. There are new provisions and rules laid down by the NCC which may
prejudice or impair vested rights. Do they have retroactive effect?

No, they do not have retroactive effect. According to art. 2252,changes

made and new provisions and rules laid down by this code which may prejudice
vested rights in accordance with the old legislation shall have no retroactive
effect.

2742. The reason remedial or procedural law may be given retroactive

effect is because:

a.) There are no substantial rights involved.

b.) The law so declares.
c.) It will favor the accused.
d.) It will determine whether the accused will be entitled to acquittal or
not.

2743. All laws should take effect prospectively because:

a.) The law so provides.

b.) if it will take effect retroactively it will impair vested rights.
c.) It will impose greater punishment.
d.) Judges will not find hard time to impose the law.

2744. Is there a need for a new law to mention the retroactivity of its
provisions, if that law is to create new rights?

159
 No need. Laws creating new rights may take effect retroactively despite
the absence of any provisions that gives retroactive application, provided,
however, such law must not impair rights.

2745. Penal law enacted is considered favorable to the accused when at the
time the law is passed, the penalty of the crime has been reduced except:

a.) When the law has given retroactive application.

b.) When it aggravates the crime or penalty of the crime is increased.
c.) When he is not a habitual delinquent.
d.) When the penalty of the crime has benefited the accused as well as
his companions.

2746. Can successional right be given retroactive effect to an illegitimate

child regarding the estate of the deceased person if such was only granted
by the new law?

No, Successional rights granted by the new civil code in favor to

illegitimate children cannot be given retroactive effect and be made to apply to
the estate of the deceased who died before the effectivity of the new civil code,
for the same would have the effect of impairing the vested rights of another who
is deemed to become owner of the property of the decease d upon the latter’s
death during the regime of the old civil code.

2747. Is it correct to say that acquisition of vested rights cannot in any 2ay
be questioned?

No, because according to art. 2254 of the civil code, no vested right can
arise from acts or omissions which are against the law or which infringe the rights
of others.

2748. Shall contracts with a condition or a period which were executed

before the NCC took effect be regulated by said NCC in the event that the
condition should be fulfilled or the period should arrive at the time the NCC
become effective?

NO, because art. 2255 declares that the former laws shall regulate acts
and contracts with a period, which were executed or entered into before the
effectivity of this code, even though the condition or period may still be pending
at the time this body of laws goes into effect.

2749. Article 2256 of the civil cod provides that rights granted to acts and
contracts executed under the old law shall be regulated by that old law.
What governs if there were revocation or modification on that such acts or
contracts after the beginning of the new law?

The second paragraph of art. 2256 states that the revocation or

modification of acts or contracts after the beginning of the effectivity of this code
shall be subject to the provisions of the new body of laws. Hence, the new law
shall govern.

2750. Pitong sold to Pitang a parcel of land with a right of repurchase

within 10 years from the date of sale. After 10 years, Pitang sold again the
same to Lamun without the knowledge of Pitang. Lamun tender payment to
Pitang but the latter refuse to accept the payment on the ground that the
title of the property has already been consolidated. Assuming that the time

160
of execution of the contract no right of repurchase is established by law, it
is only after 10 year that the new law has granted that right, may the vendor
exercise his right of repurchase?

No, because art.2256 provides that conditional rights are subject to the
law in fore in the old law, Therefore, the vendee’s right of ownership became
absolute immediately upon failure of the vendor to redeem the property in de
time, certainly the right would be impaired if the latter is now to be given the
privilege to redeem beyond the period stipulated.

ARTICLE 2256 – 2270

2751. If there are two (2) or more credits with respect to the same specific
immovable property, how shall they be satisfied?

If there are two or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro rata, after the payment of the
taxes and assessments upon the immovable property or real right.

2752. How shall credits be satisfied? If there are two or more credits with
respect to the same specific immovable property.

If there are two or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro rata, after the payment of the
taxes and assessments upon the immovable property or real right.

2753. There are new provisions and rules laid down by the New Civil Code
which may prejudice or impair vested rights. Do they have retroactive
effect?
No. They do not have retroactive effect. Although the New Civil Code,
following a well established principle of modern legislation, provides that if a right
should be declared for the first time in said code, it shall effective at once, even
though the act or event in which gives rise thereto may have been done or may
have occurred under the prior legislation, nevertheless, there is an exception and
that is when said right prejudices or impairs a vested or acquired right. In such a
case, such right shall be prospective and not retroactive.

2754. Shall contracts with a condition or a period which were executed

before the New Civil Code took effect be regulated by said New Civil Code
in the event that the condition should be fulfilled or the period should
arrive at the time said New Civil Code become effective?

No, such contracts shall not be regulated by the New Civil Code even
though the condition should be fulfilled or the period should arrive at the time said
New Civil Code became effective. This is clear in provision of said New Civil
Code which declares that the former laws shall regulate acts and contracts with
regulation or period, which were executed or entered into before the effectivity of
this code even though the condition or period may still be pending at the time this
body of laws goes into effect.

2755. What is the repealing clause of the New Civil Code?

The following laws and regulations are hereby repealed:

1) Those parts and provisions of the Civil Code of 1889 which are in force
on the date when the New Civil Code becomes effective;

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 2) The provisions of the Code of Commerce governing sales, partnership,
agency, loan, deposit, guaranty;
3) The provisions of the Code of Civil Procedure on prescription as far as
inconsistent with the code; and
4) All laws, acts, parts of acts, rules of court, executive orders, and
administrative regulations which are inconsistent with the code.

2756. What laws and regulations repealed by the New Civil Code?

The following laws and regulations are repealed by the new civil code,
those parts and provisions of the Civil Code of 1889 which are in force on the
date when the New Civil Code becomes effective; it includes the provisions of the
Code of Commerce governing sales, partnership, agency, loan, deposit,
guaranty; the provisions of the Code of Civil Procedure on prescription as far as
inconsistent with the code; and all laws, acts, parts of acts, rules of court,
executive orders, and administrative regulations which are inconsistent with the
code.

2757. Enumerate the laws and regulations repealed by the New Civil Code.

The following laws and regulations are hereby repealed by the new civil
code: (a)Those parts and provisions of the Civil Code of 1889 which are in force
on the date when the New Civil Code becomes effective; (b)The provisions of the
Code of Commerce governing sales, partnership, agency, loan, deposit,
guaranty;(c) The provisions of the Code of Civil Procedure on prescription as far
as inconsistent with the code; and All laws, acts, parts of acts, rules of court,
executive orders, and administrative regulations which are inconsistent with the
code.

2758. Are laws and regulations under the Spanish civil code completely
repealed by the New Civil Code?

No, only those parts and provisions of the Civil Code of 1889 which are in
force on the date when the New Civil Code becomes effective; it includes the
provisions of the Code of Commerce governing sales, partnership, agency, loan,
deposit, guaranty; the provisions of the Code of Civil Procedure on prescription
as far as inconsistent with the code; and all laws, acts, parts of acts, rules of
court, executive orders, and administrative regulations which are inconsistent
with the code.

2759. When was the Spanish Civil Code repealed?

The Spanish Civil Code was repealed by Rep. Act No. 386, otherwise
known as the Civil Code of the Philippines, on August 30, 1950. The reason for
this is that it was on this date that the New Civil Code became effective.

2760. If the Spanish Civil Code was repealed on 1950, what code should
governed with those acts and contracts entered on August 10, 1948?

The acts and contracts entered on 1948 as long as it is valid in

accordance therewith shall continue to be fully operative, with the limitations
established in the new civil code. But in case of its revocation or modification
after the beginning of the effectivity of the new civil Code, the acts and contracts
entered under the former code shall be to the provisions of the new body of
Laws.

162
2761. If Mr. X enters into a contracts of sale with Mr. Y on June 15, 1945,
does the new civil code govern these contracts entered into by the parties?

No, as long as the acts and contracts entered into by the parties under the
regime of the old laws are valid in accordance therewith, it shall continue to be
fully operative, with the limitations established in the new civil code. But in case
of its revocation or modification after the beginning of the effectivity of the new
civil Code, the acts and contracts entered under the former code shall be to the
provisions of the new civil code.

2762. The Spanish Civil Code is repealed by what act?

The Spanish Civil Code was repealed by Republic Act No. 386, otherwise
known as the Civil Code of the Philippines, on August 30, 1950.

2763. When is the effectivity of the new civil code?

The date of effectivity of the new civil code was on August 30, 1950.

2764. When was the new civil code become effective?

The new civil code becomes effective on August 30, 1950.

2765. When was the new civil code approved?

The new civil code approved on June 18, 1949.

2766. What is the effect of acts and contracts under the regime of the old
laws?

All acts and contracts under the regime of the old laws, if they are valid in
accordance therewith, shall continue to be fully operative, with the limitations
established in the new civil code.

2767. What is the effect in case of revocation of acts and contracts under
the regime of the old laws?

The Acts and contracts under the regime of the old laws, if they are valid
in accordance therewith, shall continue to be fully operative, with the limitations
established in the new civil code. But the revocation or modification of these acts
and contracts entered into after the beginning of the effectivity of Code shall be
subject to the provisions of the new body of Laws.

2768. What is the effect in case of modification of acts and contracts under
the regime of the old laws?

All Acts and contracts under the regime of the old laws, if they are valid in
accordance therewith, shall continue to be fully operative, with the limitations
established in the new civil code. But the revocation or modification of these acts
and contracts after the beginning of the effectivity of Code shall be subject to the
provisions of the new body of Laws.

2769. After the effectivity of the New Civil Code, what is the effect of acts
and contracts entered into under the regime of the old laws?

If the Acts and contracts under the regime of the old laws are validly
entered in accordance therewith, it shall continue to be fully operative, with the

163
limitations established in the New Civil Code. But the revocation or modification
of these acts and contracts after the beginning of the effectivity of Code shall be
subject to the provisions of the new body of Laws.

2770. In case of revocation of contracts entered into under the old laws and
after the effectivity of the New Civil Code, what code should govern?

It depends, if the acts and contracts under the regime of the old laws, if
they are valid in accordance therewith, shall continue to be fully operative, with
the limitations established in these rules. But the revocation or modification of
these acts and contracts after the beginning of the effectivity of Code shall be
subject to the provisions of the new body of Laws.

2771. Does the New Civil Code expressly revoke those contracts entered
into under the old code?

No, those Acts and contracts under the regime of the old laws, if they are
valid in accordance therewith, shall continue to be fully operative as provided in
the same, with the limitations established in these rules. But the revocation or
modification of these acts and contracts after the beginning of the effectivity of
Code shall be subject to the provisions of the new body of Laws.

2772. What is the effect if the new civil code attach a civil sanction or
penalty on violations of contracts entered into by the contracting parties?

The Provisions of the New Civil Code which attach a civil sanction or
penalty or a deprivation of rights to acts or omissions which were not penalized
by the former laws, are not applicable to those who, when said laws were in
force, may have executed the acts or incurred in the omission, forbidden or
condemned by the New Civil Code.

2773. What could be the remedy in case, fault is punished by the old and
new code?

If the fault is punished by the old and new code, the less severe sanction
shall be applied. Wherein if the new civil code provide lesser punishment to the
acts committed by either both of the parties, the provision of the new civil code
shall be applied.

2774. What is the effect if the old code does not provide any sanction or
penalty to acts or omissions, but it was repeatedly committed after the
effectivity of the new code.

If a continuous or repeated act or omission was commenced before the

beginning of the effectivity of the New Civil Code, and the same subsists or is
maintained or repeated after the new body of laws has become operative, the
sanction or penalty prescribed in the New code shall be applied, even though the
previous laws may not have provided any sanction or penalty therefore.
2775. Compromise the exercise of the rights or of the action if commenced
under the old laws but is pending on the date the new code takes effect.

If the exercise of the right or of the action was commenced under the old
laws, but is pending on the date the new code takes effect, and the procedure
was different from that established in the new body of laws, the parties
concerned may choose which method or course to pursue.

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2776. Procedures in the exercise of the rights or of the action which came
into being but were not exercised before the effectivity of the new code.

In case of actions and rights which came into being by either of the parties
over the other but were not exercised before the effectivity of the New Code,
shall remain in full force in conformity with the old legislation; but their exercise,
duration and the procedure to enforce them shall be regulated by the new code
and by the rules of court.

2777. What code is governed with respect to the capacity of married

woman to execute acts and contracts?

The capacity of married woman to execute acts and contracts is governed

by the New Civil Code, even if her marriage was celebrated under the former
laws.

2778. Ana married to Jason on November 1, 1940. What code should

governed her capacity to enter into a contract without the consent of her
mother?

The capacity of married woman to execute acts and contracts is governed

by the New Civil Code, even if her marriage was celebrated under the former
laws.

2779. Does the capacity of married woman to execute acts and contracts
governed by the old code?

No, the capacity of married woman to execute acts and contracts is

governed by the New Civil Code, even if her marriage was celebrated under the
former laws.

2780. Does the new civil code govern the capacity of married woman to
execute acts and contracts?

Yes, the new civil code shall govern the capacity of married woman to
execute acts and contracts, even if her marriage was celebrated under the
former laws.

2781. In case of voluntary recognition of a natural child, who was born

before the effectivity of the new civil code, what code should govern?

The voluntary recognition of a natural child shall take place according to

the New Civil Code, even if the child was born before the effectivity of the new
body of laws.

2782. What code should govern in case of voluntary recognition of a

natural child?

It has been settled that even if the child was born before the effectivity of
the new civil code. The New Civil Code should govern in case of voluntary
recognition of a natural child.

2783. Does the provisions of the new civil concerning voluntary recognition
of a natural child applicable even if the child was born before its
effectivity?

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 Yes, It has been settled that even if the child was born before the
effectivity of the new civil code. The provisions of the New Civil Code should
govern in cases of voluntary recognition of a natural child.

2784. In case of granting exemption prescribed in the old code with respect
to any support, pension or gratuity, how should be applied.

The exemption prescribed in the old code shall stay to be applicable to

any support, pension or gratuity already existing or granted before the new civil
Code becomes effective.

2785. what is the effect of a Guardianship with respect to the property of

minors, appointed by the courts before this Code goes into effect.

Although the guardian of the property of minor was appointed by the court
before the effectivity of the new civil code, these guardians shall continue to act
such, to avoid disturbances in the administration of the property of minor
children.

2786. What code should apply in case of rights of the heirs to the
inheritance?

It depends, the rights to the inheritance of a person who died, with or

without a will, before the effectivity of the new civil Code, shall be governed by
the Civil Code of1889, by other previous laws, and by the Rules of Court, but he
inheritance of those who, with or without a will, die after the beginning of the
effectivity of this code, shall be adjudicated and distributed in accordance with
the new body of laws and the Rules of Court.

2787. Rule on the rights of heirs to the inheritance of a person who died
before the effectivity of the new civil code.

It has been settled that the rights to the inheritance of a person who died
before the effectivity of the new civil Code, leaving a will or not shall be governed
by the Civil Code of1889, by other previous laws, and by the Rules of Court.

2788. Rule on the rights of heirs to the inheritance of a person who died
after the effectivity of the new civil code.
The rights of an heirs to the inheritance, whether the decedent leave a will
or not, and die after the beginning of the effectivity of the new civil code, shall be
adjudicated and distributed in accordance with the new body of laws and the
Rules of Court, but the testamentary provisions shall be carried out insofar as
they may be permitted by this Code. Therefore, legitimes, betterments, legacies
and bequests shall be respected; however, their amount shall be reduced if in no
other manner can every compulsory heir be given his full share according to the
new civil code.

2789. Is proof of filiation under the new civil code required in case a child
claims recognition in order to inherit from his alleged natural father?

If the alleged natural father died before the effectivity of the new civil code,
proofs of filiation allowed under the new civil code are useless in order that the
child claiming recognition may inherit from his alleged natural father.

2790. Enumerate those provisions which are not only prospective, but also
has a retroactive effect:

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 They are the following, (a) ART. 315, whereby a descendant cannot be
compelled, in a criminal case, to testify against his parents and ascendants; (b)
Articles 101 and 88, providing against collusion in cases of legal separation and
annulment of marriage; (c) Articles 283, 284, and 289, concerning the proof of
illegitimate filiation; (d) Article 838, authorizing the probate of a will on petition of
the testator himself; (e)Articles 1359 to 1369, relative to the reformation of
instruments;(f)Articles 476 to 481, regulating actions to quiet title, and lastly, (g)
Articles 2029 to 2031, which are designed to promote compromises.

2791. Enumerate those provisions that are applicable not only to future
cases but also to those pending on the date the new civil code becomes
effective.

They are the following provisions, (a) ART. 29, relative to criminal
prosecutions wherein the accused is acquitted on the ground that his guilt has
not been proved beyond reasonable doubt, and, (b) ART. 33, concerning cases
of defamation, fraud and physical injuries.

2792. What happen in the suits between members of the same family which
are pending at the time the new civil code goes into effect.

The suits between members of the same family shall be suspended, under
such terms as the court may determine, in order that a compromise may be
earnestly sought or in case of legal separation proceedings, for the purpose or
effecting if possible, reconciliation.

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