Credit Transactions

Credit transactions include all transactions involving purchase or loan of goods, services, or money in the present with a promise to pay or deliver in the future. By the use of credit, more exchanges are possible, persons are about to enjoy a thing today but pay for it later, and through the banking system, actual money transfer is eliminated by cancellation of debts and credits.

Credit Transactions
Scope of Credit Transactions: The study of Credit Transaction is wider in scope than Bailments, the following make up the whole credit transactions: 1. Commodatum it is the gratuitous loan of a thing, to be used for a certain time and for certain purpose and with the obligation to return the same thing after the time expires or the purpose accomplished. (Art. 1935) 2. Mutuum A contract by virtue of which one of the contracting parties delivers to the other money or any other consumable thing subject to the condition that the same amount of the same kind and quality to be paid or return (Art. 1938)

Credit Transactions
3. Deposit When a person receives a thing belonging to another, with the obligation to safely keeping and returning it at the instance of the owner or depositor. 4. Pledge The deposit of personal property by a debtor a creditor as security for payment of debt. 5. Lease A written agreement under which possession and use of property is granted for a specified time, for a specified payment. The landlord (lessor) and tenant ( lessee) relationship.

Credit Transactions
6. Warehouse Receipt A receipt showing storage of goods or property in a warehouse. 7. Usury Charging a rate of interest in excess of the maximum rate allowed by law. 8. Guaranty An undertaking to be legally responsible for the payment of a debt of another or for performance of anothers act secondarily that is required as a legal obligation. 9. Suretyship A contract where one party agrees to be answerable for the debt of another solidarily in an agreement reduced to a formal contract.

Credit Transactions
10. Mortgage the transfer of property passing conditionally as a security for a debt. Mortgage may be: a. Real Estate Mortgage: I is an accessory obligation whereby real property is offered as security for debt or loan. b. Chattel Mortgage: It is an accessory obligation whereby personal property is offered as security for a debt. 11. Antichresis- A contract by virtue of which the creditor acquires the right to receive the fruits if 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. (Art. 2132)

Bailment

Credit Transactions

Etymology of the word bailment-It is derivative of the French word bailler which means to deliver. Bailment is defined as the delivery of goods or personal property in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned. How created? Generally bailment is created by agreement. Bailment by operation of law may also be created.

Credit Transactions
Parties in Bailment a) BAILOR one who delivers goods or personal property to another in trust. The giver; and b) BAILEE One who receives the goods or personal property in trust with the obligation to return them at the request of the owner of the goods or personal property. The recipient;

Credit Transactions
Nature of contract Bailments:

Bailments create different rights and obligations on the part of the bailor and the bailee although different kinds are of the same general character. There is always obligation on the part of bailee to restore.

Credit Transactions
(1) Those for the sole benefit of the bailor belonging to gratuitous deposit. Bailment of goods without recompense where the mandatory or person to whom the property is delivered undertakes to do some act with respect to the same as simply to carry it or otherwise to do something with respect to it gratuitously.

Credit Transactions
(2) Those for sole benefit of the bailee- commodatum
and gratuitous mutuum or simple loan.

(3) Those for the benefit of both: Bilateral includes deposit for compensation,

Credit Transactions
Subjects Under the Bailments:

1. 2. 3. 4. 5.

Commodatum Mutuum Deposit Pledge Lease

Definition: By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.

LOANS

LOANS
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. ( Art. 1933)

LOANS
Two kinds of Loans a) Mutuum (Simple Loan) b) Commodatum Loans under the Old Law a) Civil loans governed by the old Civil Code; and b) Commercial Law governed by the Code of Commerce. Under the new Civil Code this distinction has been abolished. (Art. 2270)

LOANS
An accepted promise to deliver something by way of commodatum or simple loan is binding upon parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract. (ART. 1934) Nature of the Contract of Law: Commodatum and loan are real contracts. They are perfected by the delivery of the object loaned.

LOANS
Consideration or Cause in a Bailment of loan Insofar as the borrower is concerned, the cause is the acquisition of the thing; insofar as the lender is concerned, it is the right to require the return of the same thing or its equivalent.

LOANS
MUTUUM a) Equivalent amount to be returned (subject matter is fungible). b) May be gratuitous or onerous ( with interest) COMMODATUM a) Same thing to be returned (subject matter is non-fungible) b) Essentially gratuitous (if there is compensation it cease to be commodatum)

LOANS
MUTUUM c. Ownership goes to borrower or bailee. d. Refers to personal property only. e. Referred to as LOAN FOR CONSUMPTION.

COMMODATUM c. Ownership retained by lender or borrower. d. May involve real or personal property. e. Referred to as LOAN FOR USE OR TEMPORARY POSSESSION

LOANS
COMMODATUM MUTUUM f) Borrower, because of his f) Lender because of his ownership bears risk of lost. ownership bears risk of g) While generally obliged to lost. g) Can be generally obliged to return object at the end of period, still in some cases it can pay only at the end of the even be demanded before the period. end of the period. h) Not personal in character. h) Personal in character

COMMODATUM
The bailee in commodatum acquires the used 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. (Art. 1935) 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. (Art. 1936) 1937. Movable or immovable property may be the object of commodatum. (Art. 1937)

CONSUMABLE VS. NON-CONSUMABLE

NON CONSUMABLE
CONSUMABLE

A movable which cannot be used in a manner appropriate to its nature without its being consumed. Example:
Gasoline

A movable which can be used in a manner appropriate to its nature without its being consumed. Example: a book

FUNGIBLE VS. NON-FUNGIBLE

FUNGIBLE
NON-FUNGIBLE

If the intention is to allow a substitution of the thing given.

If the intention is to compel the return of the identical thing given.

Whether a thing is consumable or not depends on the nature of the thing; whether it is fungible or not depends on the intention of the parties. Hence, sugar is consumable and ordinarily fungible, but if the intention is merely to display the sugar for exhibition, then it is still consumable (nature) but non-fungible ( intention)

COMMODATUM
COMMODATUM- is a real, principal, essentially gratuitous and personal contract where one of the parties (called the bailor or lender) delivers to another (called the bailee or borrower) a non-consumable object, so that the latter may USE the same for certain period and later return it. The term is derived from Latin term commodum (usefulness) or commodo (particular usefulness to a borrower)

COMMODATUM
Commodatum gives the right to use and not the right to the fruits otherwise the contract is usufruct. But a stipulation that the bailee may make use of the fruits of the thing loaned is valid (Art. 1940). In such case the right is merely incidental and not the main cause of the contract.

COMMODATUM
Subject Matter: Usually, only non-consummable goods may be object of a commodatu,m for the thing itself should not be consumed and must be returned. But given merely for exhibition the thing itself is not consumed. In this example is non-fungible though consumable.

COMMODATUM
Nature of the Object of Commodatum a) Immovable b) Movable Art. 1938. The bailor in commodatum need not be the owner of the thing loaned. Reason: The contract of commodatum does not transfer ownership. All that is required is that the bailor has the right to the use of the property which he is lending and that he is allowed to alienate the right to use.

COMMODATUM
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. (Art. 1939)

COMMODATUM
Example for 1st paragraph: A loaned to B the formers car by way of commodatum. If either A or dies, the contract is extinguished. Example for 2nd paragraph: A loaned to B a phonograph by way of commodatum. B cannot lend or lease this to a friend. But the children of B in his household may use the same unless there is a stipulation to the contrary. But said phonograph cannot be used as a chair, because the nature of thing forbids such use.

COMMODATUM

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

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. Reason: The bailee is supposed to return the identical thing. (Art. 1933, so he is obliged to take care of the thing with, as a rule, the diligence of a good father of family. It follows necessarily that ordinary expenses for use and preservation of thing loaned must be borne by the bailee.

Obligations of 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; As a rule, a debtor of a thing is not responsible for its lost due to fortuitous event. Exception is if he is guilty of bad faith and abuse of generosity the fact that commodatum is gratuitous.

Obligations of the Bailee

(2) If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted; Reason: Bailee is guilty of certain kind of default

Obligations of the Bailee

(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; Reason: Evidently the giving of the value was made to hold the bailee liable for after all this is not a sale and neither is ownership transferred in commodatum. Exception when there is a stipulation to the contrary. It may in a sense be said that the appraisal converts the commodatum to mutuum.

Obligations of the Bailee

(4) If he lends or leases the thing to a third person, who is not a member of his household; Reason: This prohibited by the law for it amounts to a violation of the personal character of a commodatum.

Obligations of the Bailee

(5) If, being able to save either the thing borrowed or his own thing, he chose to save the latter. Reason: This amounts to an act of ingratituted and to a failute to exercise due diligence, considering the fact that commodatum is gratuitous.

Obligations of the Bailee

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

Obligations of the Bailee

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. (Art. 1944)

Obligations of the Bailee

Generally borrower cannot retain. Bailee is not allowed to set up compensation against the bailor. Facultative compensation. Art. 1287 provides Compensation shall not be proper when one of the debts arises from a depositum or from obligatios of a depositary or bailee in commodatum.

Obligations of the Bailee

Reason: Bailment implies a trust that as soon as the time has expired, or the purpose accomplished, the bailed property must be resored to the bailor.

Obligations of the Bailee

When there are two or more bailees to whom a thing is loaned in the same contract, they are liable solidarily. (Art. 1945)
This is one of the instances when solidary liability is imposed by law.

Obligations of the Bailor

The bailor cannot demand the return of the thing loaned till after the expiration of the period stipulated, or after the accomplishment of the use for which the commodatum has been constituted. However, if in the meantime, he should have urgent need of the thing, he may demand its return or temporary use.

Obligations of the Bailor

In case of temporary use by the bailor, the contract of commodatum is suspended while the thing is in the possession of the bailor. (Art. 1946)

Obligations of the Bailor

Reasons: 1st paragraph Generally, bailor cannot demand immediate return. A commodatum is for a certain time (Art. 1933) This is the reason for the 1st sentence of Art. 1946. This is based on equitable grounds for otherwise the bailee may not be able to make proper use of the thing.

Obligations of the Bailor

2nd paragraph: A bailor usually lends his property because he does not need it. Hence the reason for the exception. Note that the return may not only temporary but also permanent. This is sob because the law uses its retun ( meaning permanent) or temporary use. The gratuitous use by the borrower must yield to the necessity of the lender. This follows naturally from the gratuitous nature of a commodatum.

Obligations of the Bailor

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.(Art. 1947) Precarium is a special form of commodatum. In a true commodatum, the possession of the borrower is more secured. The possession of the borrower in precarium is precarious, that is borrower on the lenders will, hence the name is precarium. Above relates to two (2) kinds of precarium.

Obligations of the Bailor

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

Obligations of the Bailor

Art. 765. The donation may also be revoked at the instance of the donor, by reason of ingratitude in the following cases: (1) If the donee should commit some offense against the person, the honor or the property of the donor, or of his wife or children under his parental authority;

Obligations of the Bailor

(2) If the donee imputes to the donor 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 donee himself, his wife or children under his authority; (3) If he unduly refuses him support when the donee is legally or morally bound to give support to the donor.

Obligations of the Bailor

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.

Obligations of the Bailor

If the extraordinary expenses arise on the occasion of the actual use of the thing by the bailee, even though he acted without fault, they shall be borne equally by both the bailor and the bailee, unless there is a stipulation to the contrary. (Art. 1949)

As a rule, extraordinary expenses should be paid by the bailor because it he who profits by said expenses otherwise the thing borrowed would be destroyed. Generally notice is required because the bailor should be given discretion as to what he wants to do with his own property.
In the second paragraph, this is most equitable solution. The bailee pays one half because of the benefit derived from the use of the thing loaned to him and the bailor pays the other half because he is the owner of the thing.

EXAMPLE: A borrowed a bicycle from B. While A was riding on it, he met with an accident which greatly damaged the bicycle. A was nto at fault for he was driving carefully. Both A and B should share equally in the extraordinary expenses unless there is a stipulation to the contrary.

OBLIGATION OF THE BAILOR

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. Example : The borrower of the car buys extra jack to be used as a reserve on a trip. Here, he is not entitled to reimbursement.

OBLIGATION OF THE BAILOR

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. (Art. 1951) The bailor cannot exempt himself from the payment of expenses or damages by abandoning the thing to the bailee. (Art. 1952)

OBLIGATION OF THE BAILOR

Reason for Article 1951 When a person lends, he ought to confer a benefit and not to do a mischief. If he does not reveal the flaws, he is liable for bad faith. Right of retention or legal pledge. For the damages suffered by the bailee on the given instance, he can retain the thing borrowed until paid of said damages. The flaws referred to herein are hidden defects and not the obvious ones.

OBLIGATION OF THE BAILOR

Bailor cannot exempt himself from paying the expenses or damages by abandoning the thing to the bailee because the value of the thing borrowed might be less than the value of the expenses or damages.

Notes in Contract of Simple Loan (Mutuum)

Definition of 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.

Notes in Contract of Simple Loan (Mutuum)

Ownership passes to the borrower, but of course he must pay later. It is also similar to an abnormal usufruct. Fixed, savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning loan.

Notes in Contract of Simple Loan (Mutuum)

Parties: The Lender or creditor who delivers to another the money or other fungible things The Borrower or debtor who receives the money or fungible things and become owner thereof with obligation to pay the creditor an equal amount of the same kind and quality.

Notes in Contract of Simple Loan (Mutuum)

Capacity of the Parties: The lender must be the owner or must have authority from the owner to lend the thing, because he is obliged to transfer ownership thereof to the borrower. The borrower, of course, must have capacity to enter into a contract.

Notes in Contract of Simple Loan (Mutuum)

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. A contract of barter is defined as one of the parties binds himself to give one thing in consideration of the others promise to give another thing. (Article 1638) In barter, the object is non-consumable. In mutuum, the object is fungibles things or consumable things.

Notes in Contract of Simple Loan (Mutuum)

The word non-fungible should be taken as non-consumable because the object here shall not be returned but instead an equivalent thereof is given.

Notes in Contract of Simple Loan (Mutuum)

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.

Notes in Contract of Simple Loan (Mutuum)

Liability of Borrower of money is governed by Articles 1249 as amended by Republic Act. No. 8183 and Articles 1250.

Notes in Contract of Simple Loan (Mutuum)

Payment of debts in money shall be made only in the Philippine currency which the legal tender pursuant to Art. 1249 of the Civil Code in relation to Republic Act No. 8183. Obligation shall now be payable in the legal tender in the Philippines. Legal tender means the currency which the debtor may compel his creditor to accept payment of his debt. However, the parties may stipulate that the payment may be made in currency under than the legal tender of Philippines at the time of payment. ( R.A. No. 8183)

Notes in Contract of Simple Loan (Mutuum)

Note that under the New Central Bank Act: Centavo (0.25) and above is legal tender up to P 50.00 Centavo (0.10) and below is legal tender up to P 20.00 All coins P 1.00 and above including bills are legal tender up to any amount

Notes in Contract of Simple Loan (Mutuum)

In case of extraordinary inflation and deflation of the Philippine currency should supervene the basis of the value of the currency for payment shall be the value of the currency at the time of the establishment of the obligation. Unless there is a stipulation to the contrary (Art. 1250)

Notes in Contract of Simple Loan (Mutuum)

Two interpretations:
Basis of payment shall be the value of the currency at the time of the establishment of the obligation. Hence if the value at the time of establishment is P 5,000 and later on extraordinary inflation or deflation supersedes, the amount remains the same unless there is a contrary agreement.

Notes in Contract of Simple Loan (Mutuum)

Value of the currency at the time of the establishment of the obligation is computed by using the following formula.
Amount to be paid at maturity =
Amount of the obligation x Amount of Obligation Value at the date of Maturity

Notes in Contract of Simple Loan (Mutuum)

D borrowed P 1 Million from c payable at the end of 10 years. Suppose that before maturity of the loan, an extraordinary inflation supervened causing the value of the debt to fall to P 500,000 on the date of maturity. Following the above formula: A = ( 1 million/500,000.00) x P 1Million =2xP1M = P 2 Million is the equivalent value of P 1 M in the date of maturity

Notes in Contract of Simple Loan (Mutuum)

Suppose that before maturity of the loan, an extra-ordinary deflation supervened causing the value of the debt to rise to P 4 Million on the date of the maturity of the loan, how much must D pay C on maturity? A = ( 1M/4 M) x 1 M = P 250,000 equivalent value of P 1 M on the date of maturity

Notes in Contract of Simple Loan (Mutuum)

Art. 1956. No interest shall be due unless it has been expressly stipulated in writing. Interest refers to the compensation allowed by law or fixed by the parties for the loan or forbearance of money, goods or credits.

Notes in Contract of Simple Loan (Mutuum)

Formality for Interest (for the Use of the Money) The interest must be stipulated in writing. Otherwise, it is void in the absence thereof. Example: A borrowed P 1,000 from B. No mention was made of interest. No interest can be charged. But if interest had been stipulated upon in writing, but no rate was mentioned, then it is 12% per annum provided of course the agreement as to interest was made in writing.

Notes in Contract of Simple Loan (Mutuum)

Purpose of Interest: Interest may be paid either as compensation for the use of the money (monetary interests) or as damages (compensatory interests). Article 1956 refers to interest for use of money.

Notes in Contract of Simple Loan (Mutuum)

Requisites for recovery of interest: The payment must be expressly stipulated. The agreement as to interest must be in writing. Interest must be lawful.

Notes in Contract of Simple Loan (Mutuum)

Kinds of Interest: Simple Interest paid for the principal at certain rate fixed or stipulated by the parties. Compound Interest- imposed upon interest due and unpaid. The accrued interest is added to the principal sum and the whole (principal and accrued interest) is treated as a new principal upon which the interest for the next period is calculated. Legal interest The interest imposed by law in the absence of stipulation by the parties. Central Bank Circular No. 416 (July 29.1974) imposes legal interest at the rate of 12% per annum.

Notes in Contract of Simple Loan (Mutuum)

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. Usury law was suspended by the Central Bank pursuant to Central Bank No. 905. It was not repealed because the Central Bank cannot repeal laws passed by Congress. Today, there is no more maximum rate of interest. The rate will just depend in the mutual agreement of the parties. Banks and other financial corporations are regulated by the Central Bank as to impositions of interest. Ceilings are prescribed to protect the general public and avoid fraud.

Notes in Contract of Simple Loan (Mutuum)

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. Determination of Interest in Kind: Value of said goods or products shall be at the time and place of payment.

Notes in Contract of Simple Loan (Mutuum)

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 Accrued Interest Earns Interest:

Notes in Contract of Simple Loan (Mutuum)

The general rule is that accrued interest ( interest due and unpaid) will not bear interest except: If there is agreement to this effect (art. 1959) If there is judicial demand (Art. 2212) Then such accrued interest will bear interest at the legal rate unless a different rate is stipulated.

Notes in Contract of Simple Loan (Mutuum)

Compound Interest is interest in accrued interest. It is valid to charge compound interest but there must be a written agreement to this effect, otherwise the compound interest should not be charged unless it be the interest charged upon judicial demand.

Notes in Contract of Simple Loan (Mutuum)

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.

Notes in Contract of Simple Loan (Mutuum)

Effect of payment without stipulation of interest. Example: A borrowed money. No interest was stipulated. If by mistake he pays, then this will be a question of undue payment or solution indebiti. Hence, the interest should be returned. If borrower borrows money and orally agrees to pay legal interest at 10% percent per annum, there is really no obligation to pay interest since the interest was not agreed upon in writing. Nevertheless, if he pays said interest because he considers the same as his moral obligation, he cannot recover the interest that he has given voluntarily. This will now be a natural obligation.

Notes in Contract of Simple Loan (Mutuum)

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. Usury law is now suspended.