INTERPRETATION OF CONTRACTS

CIVIL CODE ART 1370 - 179

Art. 1370. If the terms of a contract are clear and leave
no doubt upon the intention of the contracting parties,
the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident
intention of the parties, the latter shall prevail over the
former. (1281)
Art. 1371. In order to judge the intention of the
contracting parties, their contemporaneous and
subsequent acts shall be principally considered. (1282)
Art. 1372. However general the terms of a contract may
be, they shall not be understood to comprehend things
that are distinct and cases that are different from those
upon which the parties intended to agree. (1283)
Art. 1373. If some stipulation of any contract should
admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it
effectual. (1284)
Art. 1374. The various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones
that sense which may result from all of them taken
jointly. (1285)
Art. 1375. Words which may have different significations
shall be understood in that which is most in keeping
with the nature and object of the contract. (1286)
Art. 1376. The usage or custom of the place shall be
borne in mind in the interpretation of the ambiguities of
a contract, and shall fill the omission of stipulations
which are ordinarily established. (1287)

Art. 1377. The interpretation of obscure words or

stipulations in a contract shall not favor the party who
caused the obscurity. (1288)
Art. 1378. When it is absolutely impossible to settle
doubts by the rules established in the preceding
articles, and the doubts refer to incidental
circumstances of a gratuitous contract, the least
transmission of rights and interests shall prevail. If the
contract is onerous, the doubt shall be settled in favor of
the greatest reciprocity of interests.
If the doubts are cast upon the principal object of the
contract in such a way that it cannot be known what
may have been the intention or will of the parties, the
contract shall be null and void. (1289)
Art. 1379. The principles of interpretation stated in Rule
123 of the Rules of Court shall likewise be observed in
the construction of contracts. (n)
RULES OF COURT RULE 130 SEC 10-19
Section 10. Interpretation of a writing according to its
legal meaning. The language of a writing is to be
interpreted according to the legal meaning it bears in
the place of its execution, unless the parties intended
otherwise. (8)
Section 11. Instrument construed so as to give effect to
all provisions. In the construction of an instrument,
where there are several provisions or particulars, such a
construction is, if possible, to be adopted as will give
effect to all. (9)
Section 12. Interpretation according to intention;
general and particular provisions. In the construction

of an instrument, the intention of the parties is to be

pursued; and when a general and a particular provision
are inconsistent, the latter is paramount to the former.
So a particular intent will control a general one that is
inconsistent with it. (10)
Section 13. Interpretation according to circumstances.
For the proper construction of an instrument, the
circumstances under which it was made, including the
situation of the subject thereof and of the parties to it,
may be shown, so that the judge may be placed in the
position of those who language he is to interpret. (11)
Section 14. Peculiar signification of terms. The terms
of a writing are presumed to have been used in their
primary and general acceptation, but evidence is
admissible to show that they have a local, technical, or
otherwise peculiar signification, and were so used and
understood in the particular instance, in which case the
agreement must be construed accordingly. (12)
Section 15. Written words control printed. When an
instrument consists partly of written words and partly of
a printed form, and the two are inconsistent, the former
controls the latter. (13)
Section 16. Experts and interpreters to be used in
explaining certain writings. When the characters in
which an instrument is written are difficult to be
deciphered, or the language is not understood by the
court, the evidence of persons skilled in deciphering the
characters, or who understand the language, is
admissible to declare the characters or the meaning of
the language. (14)
Section 17. Of Two constructions, which preferred.
When the terms of an agreement have been intended in
a different sense by the different parties to it, that sense

is to prevail against either party in which he supposed

the other understood it, and when different
constructions of a provision are otherwise equally
proper, that is to be taken which is the most favorable
to the party in whose favor the provision was made.
(15)
Section 18. Construction in favor of natural right.
When an instrument is equally susceptible of two
interpretations, one in favor of natural right and the
other against it, the former is to be adopted. (16)
Section 19. Interpretation according to usage. An
instrument may be construed according to usage, in
order to determine its true character. (17)
BASIC STATUTORY PROVISIONS ON LOANS
SIMPLE LOANS
CIVIL CODE ART 1953-1961
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. (1753a)
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. (n)
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. (1754a)
Art. 1956. No interest shall be due unless it has been
expressly stipulated in writing. (1755a)
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. (n)
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. (n)
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. (n)
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. (n)
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. (n)
SOLIDBANK CORP V PERMANENT HOMES
FACTS:

The Respondent, Permanent Homes Inc. is a real

estate development company that applied and was
granted an Omnibus Line credit facility in the
Solidbank to finance its housing project known as
Buena Vida Townhomes in the amount of sixty million
pesos.
Of the sixty million available to Permanent Homes,
it availed of a total of 41.5 million pesos, covered by
three (3) promissory notes wherein it irrevocably
authorized Solidbank to increase or decrease at any
time the interest rate based on the prevailing rates in
the local or international capital markets. The
adjustment of the interest rates shall be effective from
the date indicated in the written notice or if no date was
indicated the time the notice was sent. If Permanent
Homes disagrees with the interest rate adjustment, they
shall prepay all amounts due within thirty (30) days,
from the receipt of the written notice. Otherwise, they
shall be considered to have given their consent to the
interest rate adjustment. Contrary to the stipulations
indicated in the promissory note. There was a standing
agreement by both parties that any increase or
decrease in the interest rates shall be subject to the
mutual agreement of the parties. There were three loan
availments done, each with a series of increases and
decreases in the interest rates as the provisions of the
promissory note stipulated.
It is now the contention of Permanent Homes that
Solidbank unilaterally and arbitrarily accelerated the
interest rates without any declared basis of such
increases, of which Permanent Homes did not agree to
or been informed of. That this was contrary to their
standing agreement that any interest rate changes will
be subject to mutual agreement of the parties. They

aver that they could not protest the actions of the Bank
for fear that it would cut off their credit facility.
Solidbank, on the other hand, avers that
Permanent Homes has no cause of action against it, as
the aforementioned pertinent provisions of the Omnibus
Credit Line and the promissory notes stipulated and
agreed to and duly signed by PERMANENT HOMES.
Thus, in accordance with said provisions, SOLIDBANK
was authorized to, upon due notice, periodically adjust
the interest rates on PERMANENT HOMES loan
availments during the monthly interest repricing dates,
depending on the changes in prevailing interest rates in
the local and international capital markets.
ISSUE: Whether or not the interest rate repricing of
Solidbank in the course of the loan valid?
HELD:
The Supreme Court held that the repricing of the
interest rates were VALID. The validity of the actions of
the bank are (1) the parties mutually agreed on said
stipulations; (2) repricing takes effect only upon
Solidbanks written notice to Permanent of the new
interest rate; and (3) Permanent has the option to
prepay its loan if Permanent and Solidbank do not agree
on the new interest rate. The interest rates
implemented by Solidbank were consistent with
prevailing rates in the local or international capital
markets.
In order that obligations arising from contracts
may have the force of law between the parties, there
must be a mutuality between the parties based on their
essential equality. A contract containing a condition
which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties is

void. There was no showing that either Solidbank or

Permanent coerced each other to enter into the loan
agreements. The terms of the Omnibus Line Agreement
and the promissory notes were mutually and freely
agreed upon by the parties.
SPOUSES JUICO V CHINABANKING CORP
Spouses Ignacio and Alice Juico got a loan from China
Banking Corporation as evidenced by 2 promissory
notes. The loan was secured by a Real Estate Mortgage
over the Juico couples property located at White Plains,
Quezon City. The notes contained the following
escalation clause stating that the interest rate would
change every month based on the prevailing market
rate:
I/We hereby authorize the CHINA BANKING
CORPORATION to increase or decrease as the case may
be, the interest rate/service charge presently stipulated
in this note without any advance notice to me/us in the
event a law or Central Bank regulation is passed or
promulgated by the Central Bank of the Philippines or
appropriate government entities, increasing or
decreasing such interest rate or service charge.
The Juicos failed to pay the monthly amortizations due.
As of February 23, 2001, the amount due on the two
promissory notes totaled P19,201,776.63 representing
the principal, interests, penalties and attorneys fees.
The mortgaged property was sold at public auction, with
China Bank as the highest bidder for the amount of Php
10,300,000.
After the auction, China Bank filed a collection case with
the Regional Trial Court (RTC) of Makati City for Php
8,901,776.63, the amount of deficiency after applying
the proceeds of the foreclosure sale to the mortgage
debt.

In their Answer, the Juicos admitted their debt but

claimed that the principal of the loan was already paid
when the mortgaged property was extrajudicially
foreclosed and sold for Php 10,300,000. They contended
that should they be held liable for any deficiency, it
should be only for Php 55,000 representing the
difference between the total outstanding obligation of
Php 10,355,000 and the bid price of Php 10,300,000.
At the trial, China Bank presented Ms. Annabelle Cokai
Yu, its Senior Loans Assistant, as witness. She testified
that she handled the account of the Juicos and assisted
them in processing their loan application. She called
them monthly to inform them of the prevailing rates to
be used in computing interest due on their loan.
On cross-examination, Ms. Yu reiterated that the interest
rate changes every month based on the prevailing
market rate and she notified the Juicos of the prevailing
rate by calling them monthly before their account
becomes past due. When asked if there was any written
authority from the Juicos to increase the interest rate
unilaterally, Ms. Yu answered that they signed a
promissory note indicating that they agreed to pay
interest at the prevailing rate.
In defense, Ignacio Juico testified that before the loans
release, he was required to sign a blank promissory note
and was informed that the interest rate on the loan will
be based on prevailing market rates. On crossexamination, Ignacio testified that he is a Doctor of
Medicine and also engaged in the business of
distributing medical supplies. Ignacio admitted having
read the promissory notes and that he is aware of his
obligation under them before he signed them.
The RTC rules against the Juicos

The trial court held that:

(1) Ignacios claim that he signed the promissory notes
in blank cannot negate or mitigate his liability since he
admitted reading the Promissory Notes before signing
them.
(2) Considering the substantial amount involved, it is
unbelievable that the Juicos threw all caution to the
wind and simply signed the documents without reading
and understanding the contents.
The Court of Appeals affirms RTC ruling
The CA recognized China Banks right to claim the
deficiency because the proceeds of the foreclosure sale
were insufficient to cover the amount of the debt.
Also, the CA found as valid the stipulation in the
promissory notes that interest will be based on the
prevailing rate. It noted that the parties agreed on the
interest rate which was not unilaterally imposed by the
bank but was the rate offered daily by all commercial
banks as approved by the Monetary Board. Having
signed the promissory notes, the Juicos are bound by
the stipulations.
Supreme Court rules partly for the Juicos and partly for
China Bank
The Juico couple appealed to the Supreme Court.
According to the Juicos, the issues are:
(1) The interest rates imposed by China Bank are not
valid as they were not by virtue of any law or Bangko
Sentral ng Pilipinas regulation or any regulation that was
passed by an appropriate government entity. They insist
that the interest rates were unilaterally imposed by the

bank and thus violate the principle of mutuality of

contracts.
(2) The escalation clause in the promissory notes does
not give China Bank the unbridled authority to increase
the interest rate unilaterally. Any change must be
mutually agreed upon.
The Courts ruling in favor of the Juicos:
(1) Escalation clauses are not necessarily void. These
clauses are valid stipulations in commercial contracts to
maintain fiscal stability and to retain the value of money
in long term contracts.
(2) The Juicos were not coerced into signing the
promissory notes and they did not protest the new rates
imposed on their loan. Nevertheless, an escalation
clause granting the creditor an unbridled right to adjust
the interest independently and upwardly, completely
depriving the debtor of the right to assent to an
important modification in the agreement is void. A
stipulation of this nature violates the principle of
mutuality of contracts under Article 1308 of the New
Civil Code.
(3) An escalation clause is void where the creditor
unilaterally determines and imposes an increase in the
stipulated rate of interest without the express
conformity of the debtor.
(4) Changes in the rate of interest for loans under an
escalation clause must be the result of an agreement
between the parties.
(5) China Bank should have given a detailed billing
statement based on the new imposed interest with
corresponding computation of the total debt. The

statement would have enabled the Juicos to make an

informed decision. China Bank should also have
provided an appropriate form to be signed by the Juicos
to indicate their conformity to the new rates.
The Courts ruling in favor of China Bank:
The Court ordered the Juicos to pay China Bank Php
4,761 ,865. 79 (instead of Php 8,901,776.63, the
amount originally claimed) representing the amount of
deficiency inclusive of interest, penalty charge and
attorneys fees.
Overview of Supreme Court rulings on escalation cases
The controlling case and ruling on escalation clauses is
New Sampaguita Builders Construction, Inc. v. Philippine
National Bank. The Court ruled that an escalation
clause is void where the creditor unilaterally determines
and imposes an increase in the stipulated rate of
interest without the express conformity of the debtor.
The Court explained:
Courts have the authority to strike down or to modify
provisions in promissory notes that grant the lenders
unrestrained power to increase interest rates, penalties
and other charges at the latters sole discretion and
without giving prior notice to and securing the consent
of the borrowers. This unilateral authority is anathema
to the mutuality of contracts and enable lenders to take
undue advantage of borrowers. Although the Usury Law
has been effectively repealed, courts may still reduce
iniquitous or unconscionable rates charged for the use
of money. Furthermore, excessive interests, penalties
and other charges not revealed in disclosure statements
issued by banks, even if stipulated in the promissory
notes, cannot be given effect under the Truth in Lending
Act.

Posted below are some other cases on escalation

clauses.
Banco Filipino Savings &
Ruling:
Mortgage Bank v. Navarro, No. L46591, July 28, 1987, 152 SCRA
Escalation clause void because:
346, 353
Circular No. 494 issued by the
Monetary Board on January 2,1976,
I/We hereby authorize Banco
because said circular is not a law
Filipino to correspondingly
although it has the force and effect
increase the interest rate
of law Escalation clause has no
stipulated in this contract
provision for reducing the stipulated
without advance notice to
interest in the event that the
me/us in the event a law should applicable maximum rate of interest
be enacted increasing the lawful is reduced by law or by the Monetary
rates of interest that may be
Board (de-escalation clause).
charged on this particular kind
of loan.
Philippine National Bank v. Court
of Appeals, G.R. No. 107569,
November 8, 1994, 238 SCRA 20
The promissory notes authorized
PNB to increase the stipulated
interest per annum within the
limits allowed by law at any
time depending on whatever
policy [PNB] may adopt in the
future; Provided, that, the
interest rate on this note shall
be correspondingly decreased in
the event that the applicable
maximum interest rate is
reduced by law or by the
Monetary Board. Philippine
National Bank v. Court of
Appeals, 273 Phil. 789 (1991)

Ruling:
Although the contract included a deescalation clause, increases
unilaterally imposed by PNB violated
the principle of mutuality essential in
contracts.

Philippine National Bank v. Court

of Appeals, 328 Phil. 54, 61-62
(1996)
Escalation clause authorized
PNB to raise the stipulated
interest rate at any time
without notice, within the limits
allowed by law.
Philippine Savings Bank v.
Castillo, G.R. No. 193178, May
30, 2011, 649 SCRA 527
The rate of interest and/or
bank charges herein stipulated,
during the terms of this
promissory note, its extensions,
renewals or other modifications,
may be increased, decreased or
otherwise changed from time to
time within the rate of interest
and charges allowed under
present or future law(s) and/or
government regulation(s) as the
[PSBank] may prescribe for its
debtors.

Ruling:
PNB did not secure the conformity of
the borrower to the successive
increases in the interest rate. The
borrowers assent to the increases
cannot be implied from lack of
response to the letters sent by PNB,
informing them of the increases.
Ruling:
Escalation clause void despite
provision for de-escalation.
The increase or decrease of interest
rates under such clause hinges solely
on the discretion of petitioner as it
does not require the conformity of
the maker before a new interest rate
could be enforced. We also said that
respondents assent to the
modifications in the interest rates
cannot be implied from their lack of
response to the memos sent by
petitioner, informing them of the
amendments, nor from the letters
requesting for reduction of the
rates.

Some observations:
[1] The Juicos should have asked for the reduction of the
attorneys fees demanded by China Bank amounting to 10% or
about Php 1.36 million. In New Sampaguita Builders
Construction, Inc. v. Philippine National Bank, the Supreme
Court equitably reduced the attorneys fees to just 1%.
[2] The Supreme Court rulings on escalation clauses also apply
to credit card agreements. See Polotan, Sr. v. CA (Eleventh
Div.), 357 Phil. 250 (1998).

PLEDGE, CHATTEL MORTGAGE, ANTICHRESIS

CIVIL CODE ART 2085 2141
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. (1857)
Art. 2086. The provisions of Article 2052 are applicable
to a pledge or mortgage. (n)
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. (1858)
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.
(1859a)
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 expected 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 the
portion of the debt for which each thing is specially
answerable is satisfied. (1860)
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. (1861)
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.
(1862)
CHAPTER 2

PLEDGE
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. (1863)
Art. 2094. All movables which are within commerce may
be pledged, provided they are susceptible of
possession. (1864)
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. (n)
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.
(1865a)
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. (n)
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. (1866a)
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. (1867)
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. (n)
Art. 2101. The pledgor has the same responsibility as a
bailor in commodatum in the case under Article 1951.
(n)
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.
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. (1868a)
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.
(1869)

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. (1870a)
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. (1871)
Art. 2106. If through the negligence or wilful 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 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)
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. (n)
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)
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. (1872a)

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)
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. (n)
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. (n)
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)
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. (1873a)
CHAPTER 3
MORTGAGE

Art. 2124. Only the following property may be the object

of a contract of mortgage:
(1) Immovables;

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)

(2) Alienable real rights in accordance with the laws,

imposed upon immovables.

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)

Nevertheless, movables may be the object of a chattel

mortgage. (1874a)
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
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. (1875a)
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. (1876)
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.
(1877)

Art. 2130. A stipulation forbidding the owner from

alienating the immovable mortgaged shall be void. (n)
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)
CHAPTER 4
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. (1881)
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. (n)
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)

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)
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)
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)
Art. 2138. The contracting parties may stipulate that the
interest upon the debt be compensated with the fruits of
the property which is the object of the antichresis,
provided that if the value of the fruits should exceed the
amount of interest allowed by the laws against usury,
the excess shall be applied to the principal. (1885a)

Art. 2139. The last paragraph of Article 2085, and

Articles 2089 to 2091 are applicable to this contract.
(1886a)
CHAPTER 5
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)
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. (n)
CHATTEL MORTGAGE LAW
Section 1. The short title of this Act shall be "The Chattel
Mortgage Law."
Sec. 2. All personal property shall be subject to
mortgage, agreeably to the provisions of this Act, and a
mortgage executed in pursuance thereof shall be
termed chattel mortgage.
Sec. 3. Chattel mortgage defined. A chattel mortgage
is a conditional sale of personal property as security for
the payment of a debt, or the performance 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 become void,
and the mortgagee is thereby divested of his title.

Sec. 4. Validity. A chattel mortgage shall not be valid

against any person except the mortgagor, his executors
or administrators, unless the possession of the property
is delivered to and retained by the mortgagee or unless
the mortgage is recorded in the office of the register of
deeds of the province in which the mortgagor resides at
the time of making the same, or, if he resides without
the Philippine Islands, in the province in which the
property is situated: Provided, however, That if the
property is situated in a different province from that in
which the mortgagor resides, the mortgage shall be
recorded in the office of the register of deeds of both
the province in which the mortgagor resides and that in
which the property is situated, and for the purposes of
this Act the city of Manila shall be deemed to be a
province.
Sec. 5. Form. A chattel mortgage shall be deemed to
be sufficient when made substantially in accordance
with the following form, and shall be signed by the
person or persons executing the same, in the presence
of two witnesses, who shall sign the mortgage as
witnesses to the execution thereof, and each mortgagor
and mortgagee, or, in the absence of the mortgagee, his
agent or attorney, shall make and subscribe an affidavit
in substance as hereinafter set forth, which affidavit,
signed by the parties to the mortgage as above stated,
and the certificate of the oath signed by the authority
administering the same, shall be appended to such
mortgage and recorded therewith.

municipality of ___________, Province of ______________,

Philippine Islands, mortgagee, witnesseth:
"That the said mortgagor hereby conveys and
mortgages to the said mortgagee all of the followingdescribed personal property situated in the municipality
of ______________, Province of ____________ and now in
the possession of said mortgagor, to wit:
(Here insert specific description of the property
mortgaged.)
"This mortgage is given as security for the payment to
the said ______, mortgagee, of promissory notes for the
sum of ____________ pesos, with (or without, as the case
may be) interest thereon at the rate of ___________ per
centum per annum, according to the terms of
__________, certain promissory notes, dated _________,
and in the words and figures following (here insert copy
of the note or notes secured).
"(If the mortgage is given for the performance of some
other obligation aside from the payment of promissory
notes, describe correctly but concisely the obligation to
be performed.)
"The conditions of this obligation are such that if the
mortgagor, his heirs, executors, or administrators shall
well and truly perform the full obligation (or obligations)
above stated according to the terms thereof, then this
obligation shall be null and void.

FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.

"This mortgage made this ____ day of ______19____ by
_______________, a resident of the municipality of
______________, Province of ____________, Philippine
Islands mortgagor, to ____________, a resident of the

"Executed at the municipality of _________, in the

Province of ________, this _____ day of 19_____
____________________
(Signature of mortgagor.)

"In the presence of

"_________________
"_________________
(Two witnesses sign here.)
FORM OF OATH.
"We severally swear that the foregoing mortgage is
made for the purpose of securing the obligation
specified in the conditions 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."
FORM OF CERTIFICATE OF OATH.
"At ___________, in the Province of _________, personally
appeared ____________, the parties who signed the
foregoing affidavit and made oath to the truth thereof
before me.
"_____________________________"
(Notary public, justice of the peace, 1 or other officer, as
the case may be.)
Sec. 6. Corporations. When a corporation is a party to
such mortgage the affidavit required may be made and
subscribed by a director, trustee, cashier, treasurer, or
manager thereof, or by a person authorized on the part
of such corporation to make or to receive such
mortgage. When a partnership is a party to the
mortgage the affidavit may be made and subscribed by
one member thereof.
Sec. 7. Descriptions of property. The description of
the mortgaged property shall be such as to enable the
parties to the mortgage, or any other person, after
reasonable inquiry and investigation, to identify the
same.

If the property mortgaged be large cattle," as defined by

section one of Act Numbered Eleven and forty-seven, 2
and the amendments thereof, the description of said
property in the mortgage shall contain the brands,
class, sex, age, knots of radiated hair commonly known
as remolinos, or cowlicks, and other marks of ownership
as described and set forth in the certificate of ownership
of said animal or animals, together with the number and
place of issue of such certificates of ownership.
If growing crops be mortgaged the mortgage may
contain an agreement stipulating that the mortgagor
binds himself properly to tend, care for and protect the
crop while growing, and faithfully and without delay to
harvest the same, and that in default of the
performance of such duties the mortgage may enter
upon the premises, take all the necessary measures for
the protection of said crop, and retain possession
thereof and sell the same, and from the proceeds of
such sale pay all expenses incurred in caring for,
harvesting, and selling the crop and the amount of the
indebtedness or obligation secured by the mortgage,
and the surplus thereof, if any shall be paid to the
mortgagor or those entitled to the same.
A chattel mortgage shall be deemed to cover only the
property described therein and not like or substituted
property thereafter acquired by the mortgagor and
placed in the same depository as the property originally
mortgaged, anything in the mortgage to the contrary
notwithstanding.
Sec. 8. Failure of mortgagee to discharge the mortgage.
If the mortgagee, assign, administrator, executor, or
either of them, after performance of the condition
before or after the breach thereof, or after tender of the
performance of the condition, at or after the time fixed

for the performance, does not within ten days after

being requested thereto by any person entitled to
redeem, discharge the mortgage in the manner
provided by law, the person entitled to redeem may
recover of the person whose duty it is to discharge the
same twenty pesos for his neglect and all damages
occasioned thereby in an action in any court having
jurisdiction of the subject-matter thereof.
Sec. 9-12. (inclusive) 3
Sec. 13. When the condition of a chattel mortgage is
broken, a 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 this Act.
Sec. 14. Sale of property at public auction; Officer's
return; Fees; Disposition of proceeds. The mortgagee,
his executor, administrator, or assign, may, after thirty
days from the time of condition broken, cause the
mortgaged property, or any part thereof, to be sold at
public auction by a public officer at a public place in the
municipality where the mortgagor resides, or where the
property is situated, provided at least ten days' notice of
the time, place, and purpose of such sale has been
posted at two or more public places in such
municipality, and the mortgagee, his executor,
administrator, or assign, shall notify the mortgagor or
person holding under him and the persons holding
subsequent mortgages of the time and place of sale,
either by notice in writing directed to him or left at his

abode, if within the municipality, or sent by mail if he

does not reside in such municipality, at least ten days
previous to the sale.
The officer making the sale shall, within thirty days
thereafter, make in writing a return of his doings and file
the same in the office of the register of deeds where the
mortgage is recorded, and the register of deeds shall
record the same. The fees of the officer for selling the
property shall be the same as in the case of sale on
execution as provided in Act Numbered One hundred
and ninety, 4 and the amendments thereto, and the
fees of the register of deeds for registering the officer's
return shall be taxed as a part of the costs of sale, which
the officer shall pay to the register of deeds. The return
shall particularly describe the articles sold, and state
the amount received for each article, and shall operate
as a discharge of the lien thereon created by the
mortgage. The proceeds of such sale shall be applied to
the payment, first, of the costs and expenses of keeping
and sale, and then to the payment of the demand or
obligation secured by such mortgage, and the residue
shall be paid to persons holding subsequent mortgages
in their order, and the balance, after paying the
mortgages, shall be paid to the mortgagor or person
holding under him on demand.
If the sale includes any "large cattle," a certificate of
transfer as required by section sixteen of Act Numbered
Eleven hundred and forty-seven 5 shall be issued by the
treasurer of the municipality where the sale was held to
the purchaser thereof.
Sec. 15. 6, 6a
Sec. 16. This Act shall take effect on August first,
nineteen hundred and six.

PAMECA WOOD PLANT V CA

Facts: Pameca loaned P2million from DBP and executed
a promissory note, secured by its inventory of furniture
and equipment. A month before the mortgage contract,
its supposed market value was P2.5milion. They
defaulted, so DBP extrajudicially foreclosed on the
chattels. It was the only bidder so it was able to buy it
for around P322,000. Then for the deficiency, it filed a
complaint against Pameca and its solidary debtors
(Teveses and Pulido) according to the promissory note it
signed
The RTC-Makati ordered Pameca to pay the P4mil. CA
affirmed.
Issues/Held:
WON an action can be instituted for deficiency of a debt
after foreclosure of the chattel mortgage.
In pledge, the sale of the thing pledged
extinguishes the entire principal obligation such that
the pledgor may no longer recover the proceeds of the
sale in excess of the amount of the principal obligation.
Section 14 of the Chattel Mortgage Law, on the other
hand, expressly entitles the mortgagor to the balance of
the proceeds upon satisfaction of the principal
obligation and costs. Since the Chattel Mortgage Law
bars the creditor mortgagee from retaining the excess
of the sale proceeds, there is a corollary obligation on
the part of the debtor-mortgagor to pay the deficiency
in case of a reduction in the price at public auction.
WON public auction sale is void on the grounds of fraud
and inadequacy of price.
The mere fact that the mortgagee was the
sole bidder for the mortgaged property in the public
sale does not warrant the conclusion that the
transaction was attended with fraud. Fraud is a serious
allegation that requires full and convincing evidence.

CREDIT WORTHINESS
RA 8791 GENERAL BANKING LAW
Sec. 40. Requirement for Grant Of Loans or 0ther Credit
Accommodations. - Before granting a loan or other
credit accommodation, a bank must ascertain that the
debtor is capable of fulfilling his commitments to the
bank.
Toward this end, a bank may demand from its credit
applicants a statement of their assets and liabilities and
of their income and expenditures and such information
as may be prescribed by law or by rules and regulations
of the Monetary Board to enable the bank to properly
evaluate the credit application which includes the
corresponding financial statements submitted for
taxation purposes to the Bureau of Internal Revenue.
Should such statements prove to be false or incorrect in
any material detail, the bank may terminate any loan or
other credit accommodation granted on the basis of
said statements and shall have the right to demand
immediate repayment or liquidation of the obligation.
In formulating rules and regulations under this Section,
the Monetary Board shall recognize the peculiar
characteristics of micro financing, such as cash flowbased lending to the basic sectors that are not covered
by traditional collateral.
Sec. 41. Unsecured Loans or Other Credit
Accommodations. The Monetary Board is hereby
authorized to issue such regulations as it may deem
necessary with respect to unsecured loans or other
credit accommodations that may be granted by banks.

Sec. 42. Other Security Requirements for Bank Credits.

- The Monetary Board may, by regulation, prescribe
further security requirements to which the various types
of bank credits shall be subject, and, in accordance with
the authority granted to it in Section 106 of the New
Central Bank Act, the Board may by regulation, reduce
the maximum ratios established in Sections 36 and 37
of this Act, or, in special cases, increase the maximum
ratios established therein.

Sec. 43. Authority to Prescribe Terms and Conditions of

Loans and Other Credit Accommodations. - The
Monetary Board, may, similarly in accordance with the
authority granted to it in Section 106 of the New Central
Bank Act, and taking into account the requirements of
the economy for the effective utilization of long-term
funds, prescribe the maturities, as well as related terms
and conditions for various types of bank loans and other
credit accommodations. Any change by the Board in the
maximum maturities, as well as related terms and
conditions for various types of bank loans and other
credit accommodations. Any change by the Board in
the maximum maturities shall apply only to loans and
other credit accommodations made after the date of
such action.
The Monetary Board shall regulate the interest imposed
on micro finance borrowers by lending investors and
similar lenders such as, but not limited to, the
unconscionable rates of interest collected on salary
loans and similar credit accommodations.
RA 9510 - AN ACT ESTABLISHING THE CREDIT
INFORMATION SYSTEM AND FOR OTHER
PURPOSES

Be it enacted by the Senate and House of

Representatives of the Philippines in Congress
assembled::
Section 1. Title. - This Act shall be known as the "Credit
Information System Act".
Section 2. Declaration of Policy. - The State recognizes
the need to establish a comprehensive and centralized
credit information system for the collection and
dissemination of fair and accurate information relevant
to, or arising from, credit and credit-related activities of
all entities participating in the financial system. A credit
information system will directly address the need for
reliable credit information concerning the credit
standing and track record of borrowers.
The operations and services of a credit information
system can be expected to: greatly improve the overall
availability of credit especially to micro, small and
medium-scale enterprises; provide mechanisms to make
credit more cost-effective; and reduce the excessive
dependence on collateral to secure credit facilities.
The State shall endeavor to have credit information
provided at the least cost to all participants and shall
ensure the protection of consumer rights and the
existence of fair competition in the industry at all times.
An efficient credit information system will also enable
financial institutions to reduce their over-all credit risk,
contributing to a healthier and more stable financial
system.
Section 3. Definition of Terms. - For purposes of this Act:

(a) "Accessing Entity" refers to any submitting entity or

any other entity authorized by the Corporation to access
basic credit data from the Corporation.
(b) "Basic Credit Data" refers to positive and negative
information provided by a borrower to a submitting
entity in connection with the application for and
availment of a credit facility and any information on the
borrowers creditworthiness in the possession of the
submitting entity and other factual and objective
information related or relevant thereto in the submitting
entitys data files or that of other sources of information:
Provided, that in the absence of a written waiver duly
accomplished by the borrower, basic credit data shall
exclude confidential information on bank deposits
and/or clients funds under Republic Act No. 1405 (Law
on Secrecy of Bank Deposits), Republic Act No. 6426
(The Foreign Currency Deposit Act), Republic Act No.
8791 (The General Banking Law of 2000), Republic Act
No. 9160 (Anti-Money Laundering Law) and their
amendatory laws.
(c) "Borrower" refers to a natural or juridical person,
including any local government unit (LGU), its
subsidiaries and affiliates, that applies for and/or avails
of a credit facility.
(d) "BSP" refers to the Bangko Sentral ng Pilipinas,
created under Republic Act No.7653.
(e) "Corporation" refers to the Credit Information
Corporation established under Section 5 of this Act.
(f) "Credit facility" refers to any loan, credit line,
guarantee or any other form of financial accommodation
from a submitting entity: Provided, That for purposes of
this Act, deposits in banks shall not be considered a

credit facility extended by the depositor in favor of the

bank.
(g) "Credit Rating" refers to an opinion regarding the
creditworthiness of a borrower or of an issuer of debt
security, using an established and defined ranking
system.
(h) "Credit Report" refers to a summary of consolidated
and evaluated information on creditworthiness, credit
standing, credit capacity, character and general
reputation of a borrower.
(i) "Government Lending Institutions" refers to existing
and future government (GFIs), government-owned and
controlled corporations (GOCCs) primarilly engaged in
lending activities.
(j) "Negative Credit Information" refers to
information/data concerning the poor credit
performance of borrowers such as, but not limited to,
defaults on loans, adverse court judgments relating to
debts and reports on bankruptcy, insolvency, petitions
or orders on suspension of payments and corporate
rehabilitation.
(k) "Non-Accessing Entity" refers to an entity other than
a Submitting Entity, Special Accessing Entity or
Borrower that is authorized by the Corporation to access
credit information from a Special Accessing Entity.
(l) "Outsource entity" refers to any accredited third
party provider to whom the Corporation may outsource
the processing and consolidation of basic credit data
pertaining to a borrower or issuer of debt or convertible
securities under such qualifications, criteria and strict
confidentiality guidelines that the Corporation shall
prescribe and duly publish.

(m) "Positive credit information" refers to

information/data concerning the credit performance of a
borrower such as, but not limited to, information on
timely repayments or non-delinquency.
(n) "Relevant Government Agencies" refers to the
Department of Finance, Department of Trade and
Industry, Bangko Sentral ng Pilipinas, Insurance
Commission and the Cooperative Development
Authority.
(o) "SEC" refers to the Securities and Exchange
Commission.
(p) "Special Accessing Entity" refers to a duly accredited
private corporation engaged primarily in the business of
providing credit reports, ratings and other similar credit
information products and services.
(q) "Submitting Entity" refers to any entity that provides
credit facilities such as, but not limited to, banks, quasibanks, trust entities, investment houses, financing
companies, cooperatives, nongovernmental, microfinancing organizations, credit card companies,
insurance companies and government lending
institutions.
Section 4. Establishment of the Credit Information
System. - In furtherance of the policy set forth in Section
2 of this Act, a credit information system is hereby
established.
(a) Banks, quasi-banks, their subsidiaries and affiliates,
life insurance companies, credit card companies and
other entities that provide credit facilities are required
to submit basic credit data and updates thereon on a
regular basis to the Corporation.

(b) The Corporation may include other credit providers

to be subject to compulsory participation: Provided, That
all other entities qualified to be submitting entities may
participate subject to their acceptance by the
Corporation: Provided, further, That, in all cases,
participation under the system shall be in accordance
with such standards and rules that the SEC in
coordination with the relevant government agencies my
prescribe.
(c) Participating submitting entities are required to
submit to the Corporation any negative and positive
credit information that tends to update and/or correct
the credit status of borrowers. The Corporation shall fix
the time interval for such submission: Provided, That
such interval shall not be less than fifteen (15) working
days but not more than thirty (30) working days.
(d) The Corporation should regularly collect basic credit
data of borrowers at least on a quarterly basis to
correct/update the basic credit data of said borrowers.
(e) The Corporation may also access credit and other
relevant information from government offices, judicial
and administrative tribunals, prosecutorial agencies and
other related offices, as well as pension plans
administered by the government.
(f) Each submitting entity shall notify its borrowers of
the formers obligation to submit basic credit data to the
Corporation and the disclosure thereof to the
Corporation, subject to the provisions of this Act and the
implementing rules and regulations.
(g) The Corporation is in turn authorized to release
consolidated basic credit data on the borrower, subject
to the provisions of Section 6 of this Act.

(h) The negative information on the borrower as

contained in the credit history files of borrowers should
stay in the database of the Corporation unless sooner
corrected, for not more than three (3) years from and
after the date when the negative credit information was
rectified through payment or liquidation of the debt, or
through settlement of debts through compromise
agreements or court decisions that exculpate the
borrower from liability. Negative information shall be
corrected and updated within fifteen (15) days from the
time of payment, liquidation or settlement of debts.
(i) Special Accessing Entities shall be accredited by the
Corporation in accordance with such standards and
rules as the SEC in coordination with the relevant
government agencies, may prescribe.
(j) Special accessing entities shall be entitled access to
the Corporations pool of consolidated basic credit data,
subject to the provisions of Section s 6 and 7 of this Act
and related implementing rules and regulations.
(k) Special accessing entities are prohibited from
releasing basic credit data received from the
Corporation or credit reports and credit ratings derived
from the basic credit data received from the
Corporation, to non-accessing entities unless the written
consent or authorization has been obtained from the
Borrower: Provided, however, That in case the borrower
is a local government unit (LGU) or its subsidiary or
affiliate, the special accessing entity may release credit
information on the LGU, its subsidiary or affiliate upon
written request and payment of reasonable fees by a
constituent of the concerned LGU.
(l) Outsource Entities, which may process and
consolidate basic credit data, are absolutely prohibited

from releasing such data received from the Corporation

other than to the Corporation itself.
(m) Accessing Entities shall hold strictly confidential any
credit information they receive from the Corporation.
(n) The borrower has the right to know the causes of
refusal of the application for credit facilities or services
from a financial institution that uses basic credit data as
basis or ground for such a refusal.
(o) The borrower, for a reasonable fee, shall have, as a
matter of right, ready and immediate access to the
credit information pertinent to the borrower. In case of
erroneous, incomplete or misleading credit information,
the subject borrower shall have the right to dispute the
erroneous, incomplete, outdated or misleading credit
information before the Corporation. The Corporation
shall investigate and verify the disputed information
within five (5) working days from receipt of the
complaint. If its accuracy cannot be verified and cannot
be proven, the disputed information shall be deleted.
The borrower and the accessing entities and special
accessing entities who have received such information
shall be informed of the corresponding correction or
removal within five (5) working days. The Corporation
should use a simplified dispute resolution process to fast
track the settlement/resolution of disputed credit
information. Denial of these borrowers rights, without
justifiable reason, shall entitle the borrower to
indemnity.
Section 5. Establishment of the Central Credit
Information Corporation. - There is hereby created a
Corporation which shall be known as the Credit
Information Corporation, whose primary purpose shall
be to receive and consolidate basic credit data, to act as
a central registry or central repository of credit

information, and to provide access to reliable,

standardized information on credit history and financial
condition of borrowers.
(a) The Corporation is hereby authorized to adopt, alter,
and use a corporate seal which shall be judicially
noticed; to enter into contracts; to incur liabilities; to
lease or own real or personal property, and to sell or
otherwise dispose of the same; to sue and be sued; to
compromise, condone or release any liability and
otherwise to do and perform any and all things that may
be necessary or proper to carry out the purposes of this
Act.
(b) The authorized capital stock of the Corporation shall
be Five hundred million pesos (P500,000,000.00) which
shall be divided into common and preferred shares
which shall be non-voting. The National Government
shall own and hold sixty percent (60%) of the common
shares while the balance of forty percent (40%) shall be
owned by and held by qualified investors which shall be
limited to industry associations of banks, quasi-banks
and other credit related associations including
associations of consumers. The amount of Seventy-five
million pesos (PhP75,000,000.00) shall be appropriated
in the General Appropriations Act for the subscription of
common shares by the National Government to
represent its sixty percent (60%) equity share and the
amount of Fifty million pesos (PhP50,000,000.00) shall
be subscribed and paid up by such qualified investors in
accordance with Section 5(d) hereof.
(c) The National Government may subscribe or purchase
securities or financial instrument that may be issued by
the Corporation as a supplement to capital.
(d) Equal equity participation in the Corporation shall be
offered and held by qualified private sector investors

but in no case shall each of the qualified investor

represented by an association of banks, quasi-banks
and other credit-related associations including the
associations of consumers have more than ten percent
(10%) each of the total common shares issued by the
Corporation.
(e) The SEC in coordination with relevant government
agencies, shall prescribe additional requirements for the
establishment of the Corporation, such as industry
representation, capital structure, number of
independent directors, and the process for nominating
directors, and such other requirements to ensure
consumer protection and free, fair and healthy
competition in the industry.
(f) The Chairman of the SEC shall be the Chairman of
the Board of Directors of the Corporation. Whenever the
Chairman of the SEC is unable to attend a meeting of
the Board, he/she shall designate an Associate
Commissioner of the SEC to act as his/her alternate.
The powers and functions of the Corporation shall be
exercised by a board of directors composed of fifteen
(15) members. The directors representing the
government shares shall be appointed by the President
of the Philippines.
(g) The directors and principal officers of the
Corporation, shall be qualified by the "fit and proper"
rule for bank directors and officers. To maintain the
quality of management of the Corporation and afford
better protection to the system and the public in
general, the SEC in coordination with the relevant
government agencies, shall prescribe, pass upon and
review the qualifications and disqualifications of
individuals elected or appointed directors of the
Corporation and disqualify those found unfit. After due

notice to the board of directors of the Corporation, the

SEC may disqualify, suspend or remove any director
who commits or omits an act which render him unfit for
the position. In determining whether an individual is fit
and proper to hold the position of a director of the
Corporation, due regard shall be given to his integrity,
experience, education, training and competence.
The members of the Board of Directors must be Filipino
citizens and at least thirty (30) years of age. In addition,
they shall be persons of good moral character, of
unquestionable integrity, of known probity, and have
attained competence in the fields of law, finance,
economics, computer science or information technology.
In addition to the disqualifications imposed by the
Corporation Code, as amended, no person shall be
nominated by the national government if he has been
connected directly with a banking or financial institution
as a director or officer, or has substantial interest
therein within three (3) years prior to his appointment.
(h) The Board of Directors may appoint such officers and
employees as are not otherwise provided for in this Act,
define their duties, fix their compensations and impose
disciplinary sanctions upon such officers and
employees, for cause. The salaries and other
compensation of the officers and employees of the
Corporation shall be exempt from the Salary
Standardization Law. Appointments in the Corporation,
except to those which are policy-determining, primarily
confidential or highly technical in nature, shall be made
only according to the Civil Service Law.
(i) The Corporation shall acquire and use state-of-the-art
technology and facilities in its operations to ensure its
continuing competence and capability to provide
updated negative and positive credit information; to
enable the Corporation to relay credit information

electronically as well as in writing to those authorized to

have access to the credit information system; and to
insure accuracy of collected, stored and disseminated
credit information. The Corporation shall implement a
borrowers identification system for the purpose of
consolidating credit information.
(j) The provisions of any general or special law to the
contrary notwithstanding, the importation by the
Corporation of all equipment, hardware or software, as
well as all other equipment needed for its operations
shall be fully exempt from all customs duties and from
all other taxes, assessments and charges related to
such importation.
(k) The Corporation shall have its principal place of
business in Metro Manila, but may maintain branches in
such other places as the proper conduct of its business
may require.
(l) Any and all acquisition of goods and services by the
Corporation shall be subject to Procurement Laws.
(m) The national government shall continue to hold
sixty percent (60%) of the common shares for a period
not to exceed five (5) years from the date of
commencement of operations of the Corporation. After
the said period, the national government shall dispose
of at least twenty percent (20%) of its stockholdings in
the Corporation to qualified investors which shall be
limited to industry associations of banks, quasi-banks
and other credit-related associations, including
associations of consumers. The national government
shall offer equal equity participation in the Corporation
to all qualified investors. When the ownership of the
majority of the common voting shares of the
Corporation passes to private investors, the
stockholders shall cause the adoption and registration

with the SEC of the amended articles of incorporation

within three (3) months from such transfer of ownership.
Section 6. Confidentiality of Credit Information. - The
Corporation, the submitting entities, the accessing
entities, the outsource entities, the special accessing
entities and the duly authorized non-accessing entities
shall hold the credit information under strict
confidentiality and shall use the same only for the
declared purpose of establishing the creditworthiness of
the borrower. Outsource entities which may process and
consolidate basic credit data are absolutely prohibited
from releasing such data received from the Corporation
other than to the Corporation.
The accreditation of an accessing entity, a special entity
and/or an outsource entity which violates the
confidentiality of, or which misuses, the credit
information accessed from the Corporation, may be
suspended or revoked. Any entity which violates this
section may be barred access to the credit information
system and penalized pursuant to Section 11 of this Act.

to create awareness on the rights of

consumers/borrowers to access their credit reports
collected, stored and disseminated by the Corporation;
to disseminate the rights of the borrowers to dispute
any incorrect/inaccurate credit information in the
database file of the Corporation; to familiarize
consumers of the procedure in collecting, storing and
disseminating credit information of borrowers by the
Corporation; and to brief consumers of other related
information.
Section 8. Rules and Regulations. - For purposes of
creating a healthy balance between the need for reliable
credit information and safeguarding consumer
protection, ensuring free and healthy competition in the
industry, the SEC, in coordination with relevant
government agencies and existing industry
stakeholders, shall issue the implementing rules and
regulations (IRRs), which shall be reviewed, revised and
approved by the Oversight Committee to ensure
consistency and compliance with the provisions of this
Act, embodying among others:

The Corporation shall be authorized to release and

disclose consolidated basic credit data only to the
Accessing Entities, the Special Accessing Entities, the
Outsource Entities and Borrowers. Basic Consolidated
basic credit data released to Accessing Entities shall be
limited to those pertaining to existing Borrowers or
Borrowers with pending credit applications. Credit
information shall not be released to entities other than
those enumerated under this Section except upon order
of the court.

(a) The basic credit data shall be limited or confined in

form and content to an objective and factual information
and shall exclude any subjective information or opinion;

Section 7. Educational Campaign. - A continuing

nationwide educational campaign shall be developed
and undertaken by the Corporation to promote the
benefits of a credit information system to the economy;

(d) Requirements and standards for the establishment

of the Corporation including, but not limited to,
ownership, industry representation, independent
directors and process of nomination of directors;

(b) Restrictions on the use and transfer of credit

information;
(c) Rights of the borrowers to access their respective
credit information and to dispute the factual accuracy of
such credit information;

(e) Accreditation standards for submitting entities and

special accessing entities and non-accessing entities;
(f) Sanctions to be imposed by the Corporation on:
(i) The submitting entities for non-submission of reports
and for delayed and/or erroneous reporting;
(ii) Accessing entities, special accessing entities,
outsource entities and duly authorized non-accessing
entities, for breaches of the confidentiality of misuse of,
the credit information obtained from the credit
information system; and
(iii) Violations of other applicable rules and regulations:
Provided, That these administrative sanctions shall be in
the form of fines in amounts as may be determined by
the Corporation but in no case to exceed Thirty
thousand pesos (PhP30,000.00) a day for each violation,
taking into consideration the attendant circumstances,
such as the nature and gravity of the violation or
irregularity. Imposition of administrative sanctions shall
be without prejudice to any criminal and other sanctions
as may be applicable under this Act and relevant laws;
(g) Suspension or cancellation of the rights of any
Accessing Entity or Special Accessing Entity to access
Credit Information from the Corporation; Provided, That
the SEC in coordination with relevant government
agencies and existing industry stakeholders, may issue
subsequent regulations consistent with the IRR as
approved by the Congressional Oversight Committee.
In addition, the SEC may regulate access to the credit
information system as well as the fees that shall be
collected by the Corporation from the Accessing and
Special Accessing Entities, taking into consideration the

policy of lowering the cost of credit, promoting fair

competition, and the need of the Corporation to employ
state-of-the-art technology; and
(h) The basic credit data about a borrower shall be
limited to credit information existing on the date of the
enactment of this Act and thereafter.
Section 9. Congressional Oversight Committee. - There
is hereby created a congressional oversight committee,
composed of seven (7) members from the Senate and
seven (7) members from the House of Representatives.
The Members from the Senate shall be appointed by the
Senate President with at least three (3) Senators
representing the minority. The Members of the House of
Representatives shall be appointed by the Speaker with
at least three (3) members representing the minority.
After the Oversight Committee approved the
implementing rules and regulations, it shall thereafter
become functus officio, and therefore cease to exist:
Provided, That the Congress may revive the
Congressional Oversight Committee in case of a need
for any major revision/s in the implementing rules and
regulations.
Section 10. Indemnity in Favor of the Corporation, its
Officers and Employees. - Unless the Corporation or any
of its officers and employees is found liable for any
willful violation of this Act, bad faith, malice and/or gross
negligence, the Submitting Entities, Accessing Entities,
Special Accessing Entities, Outsource Entities and duly
authorized non-accessing entities shall hold the
Corporation, its directors, officers and employees free
and harmless to the fullest extent permitted by law and
shall indemnify them from any and all liabilities, losses,
claims, demands, damages, deficiencies, costs and
expenses of whatsoever kind and nature that may arise

in connection with the performance of their functions

without prejudice to any criminal liability under existing
laws.
Section 11. Penalties. - Any person who willfully violates
any of the provisions of this Act or the rules and
regulations promulgated by the SEC in coordination with
the relevant government agencies shall, upon
conviction, suffer a fine of not less than Fifty thousand
pesos (PhP50,000.00). nor more than One million pesos
(PhP1,000,000.00) or imprisonment of not less than one
(1) year nor more than five (5) years, or both, at the
discretion of the court.
Section 12. Inviolable Nature of the Secrecy of Bank
Deposits and/or Client Funds. -Pursuant to Republic Act
No. 1405 (Law on Secrecy of Bank Deposits), Republic
Act No. 6426 (The Foreign Currency Deposit Act),
Republic Act No. 8791 (The General Banking Law of
2000), Republic Act No. 9160 (Anti-Money Laundering
Law) and their amendatory laws, nothing in this Act
shall impair the secrecy of bank deposits and and/or
client funds and investments in government securities
or funds.
Section 13. Annual Report. - The SEC shall submit an
annual report to Congress on the status of the
implementation of this Act.
Sec. 14. Principal Government Agency. - The SEC shall
be the lead government agency to implement and
enforce this Act. As lead agency, the SEC shall consult
and coordinate with other relevant government
agencies in the adoption of all rules and regulations for
the full and effective implementation and enforecement
of this Act, taking into account the policy objectives
contained in Section 2 hereof.

Section 15. Separability Clause. - Should any provision

of this Act or the application thereof to any person or
circumstance be held invalid, the other provisions or
sections of this Act shall not be affected thereby.
Section 16. Repealing Clause. - This Act repeals
Presidential Decree No. 1941 in its entirety. All laws,
decrees, executive orders, rules and regulations or parts
thereof which are inconsistent with this Act are hereby
repealed, amended or modified accordingly.
Section 17. Effectivity Clause. - This Act shall take effect
fifteen (15) days following its publication in the Official
Gazette or in at least two (2) newspapers of general
circulation.
FINER POINTS ON MORTGAGES
RA 8791 GENERAL BANKING LAW
Sec. 37. Loans and Other Credit Accommodations
Against Real Estate. Except as the Monetary Board
may otherwise prescribe, loans and other credit
accommodations against real estate shall not exceed
seventy-five percent (75%) of the appraised value of the
respective real estate security, plus sixty percent (60%)
of the appraised value of the insured improvements,
and such loans may be made to the owner of the real
estate or to his assignees.
GUARANTY
CIVIL CODE ART 2047-2081
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. (1822a)
Art. 2048. A guaranty is gratuitous, unless there is a
stipulation to the contrary. (n)
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. (n)
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. (n)
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. (1823)
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. (1824a)
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. (1825a)

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.
(1826)
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. (1827a)
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. (1828a)
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. (1829a)
CHAPTER 2
EFFECTS OF GUARANTY
SECTION 1. - 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. (1830a)
Art. 2059. The excussion shall not take place:
(1) If the guarantor has expressly renounced it;

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. (1834a)

(3) In case of insolvency of the debtor;

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. (1835a)

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

the Philippines unless he has left a manager or
representative;

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)

(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. (1831a)

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.

(2) If he has bound himself solidarily with the 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. (1832)
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. (1833a)
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

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. (1837)
SECTION 2. - 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;

Art. 2071. The guarantor, even before having paid, may

proceed against the principal debtor:
(1) When he is sued for the payment;

(3) The expenses incurred by the guarantor after having

notified the debtor that payment had been demanded of
him;

(2) In case of insolvency of the principal debtor;

(4) Damages, if they are due. (1838a)

(3) When the debtor has bound himself to relieve him

from the guaranty within a specified period, and this
period has expired;

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. (1839)
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. (1840)
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. (1841a)
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. (1842a)

(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. (1834a)
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. (n)

SECTION 3. - Effects of Guaranty as Between CoGuarantors

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. (1844a)
Art. 2074. In the case of the preceding article, the coguarantors 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. (1845)
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. (1846)
CHAPTER 3
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. (1847)
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. (1849)

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. (1850)
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 extention
of time referred to herein. (1851a)
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.
(1852)
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. (1853)
SPS TECKLO V RURAL BANK OF PAMPLONA

Roberto
and
Maria
obtained
Antonett
from
RBPI
Co
100,000
April
loan
due
on
thereafter).
Collateral:
estate
mortgage,
Real
a
262-sq.
residential
m
lot
owned
by
the
Felipe,
covered
Naga
by
TCT
City
No.
24196.
Such
registered
mortgage
in
was
RD
Naga
City
duly
Entry
No.
58182.
mortgaged
contract):
property
The
would
for
the
also
future
answer
loans
of
mortgagor.
the
Sps.
Obtained
a
2
the
150,000
amount
due
on
June
months).
2,
1994
(3
Benedict
and
Maricel
(herein
petitioners)
Dy
Tecklo
instituted
against
an
action
No.
94-3161
in
RTC
Naga
case,
City).
a
writ
In
of
that
attachment
issued
on
was
property
of
the
spouses
notice
thereof
and
the
was
annotated
TCT
of
the
on
the
as
Entry
No.
58941.
became
due
and
demandable.
thereby
instituted
RBPI
extrajudicial
foreclosure
executed
a
Petition
Foreclosure
Extrajudicial
dated
September
where
it
5,
1994
the
first
loan
although
the
2
due
and
1994:
held.
Public
RBPI
auction
offered
bid
of
Php
winning
142,000.00
did
not
include
which
2
CERTIFICATE
PROVISIONAL
OF
SALE
favor
was
of
the
issued
bank
in
on
the
TCT
of
60794.
exercised
Sps.
Cos
right
successors-inof
redemption
interest
Co
(judgment
of
the
Sps.
debtors).
sps.
Php
155,769.50
Tecklo
offered
as
based
on
the
price
Sheriff.
Provincial
following
1.
grounds:
That
the
2
included
computation
in
of
the
payment
redemption
(If
it
will
be
amount
due
to
the
bank
But
remember
will
increase.
that
when
this
property
only
originally
sought
1
to
cover
the
loan
and
not
2
loan);
applicable
interest
rate
should
fixed
in
be
the
the
mortgage
was
24%
which
annum
charge
per
annum
and
annum.
18%
Provincial
per
sheriff
here
claiming
objected
12%
per
annum.
annul
the
by
the
the
Sps.
City
before
RTC
96-3521).
(Partly
in
favor
of
Sps.
Tecklo)
annotated
TCT,
thus
it
on
cannot
bind
3
Sps.
Tecklo);
rate
as
fixed
mortgage.
in
the
Thus,
total
price
to
is
Php
(in
RBPI);
RBPIs
annulment
complaint
for
redemption.
ordered
Sps.
It
Tecklo
deficiency.
pay
ruled
that
2
it
was
not
TCT
(in
favor
on
the
increased
the
price
to
be
paid
by
to
the
Php
204,407.18.
Tecklo
Tecklo.
brought
Sps.
issue
to
SC.
includes
amount
2
of
even
Php
if
150,000.00
it
was
not
application
for
foreclosure.
extrajudicial
MERITORIOUS.
arguments:
annotated
as
an
additional
the
TCT
loan
on
mortgaged
property
not
2.
bind
them;
private
between
contract
RBPI
and
binding
Co
to
which
3
is
not
until
they
are
duly
registered;
was
Foreclosure
RBPI
appealed.
referred
EJ
solely
to
the
1
Maria
Roberto
Antonett
and
Co
obtained
100,000
loan
from
due
RBPI
on
April
Collateral:
thereafter).
Real
estate
262-sq.
mortgage,
m
a
residential
owned
by
lot
Felipe,
Naga
City
covered
24196.
by
TCT
No.
Such
mortgage
was
registered
Naga
City
in
duly
RD
Entry
No.
58182.
contract):
The
would
also
answer
for
the
the
future
loans
mortgagor.
Obtained
a
2
amount
150,000
June
2,
1994
due
(3
on
months).
Benedict
Maricel
Dy
and
Tecklo
(herein
instituted
petitioners)
an
action
against
No.
Naga
94-3161
City).
In
in
that
RTC
case,
attachment
a
writ
of
was
issued
on
property
spouses
and
of
the
the
notice
thereof
was
of
the
as
Entry
No.
58941.
became
demandable.
due
and
RBPI
thereby
instituted
foreclosure
executed
Extrajudicial
a
Petition
September
5,
dated
1994
where
it
although
the
first
the
loan
2
due
and
1994:
Public
auction
offered
held.
RBPI
winning
bid
142,000.00
of
Php
which
did
not
include
PROVISIONAL
CERTIFICATE
SALE
was
issued
OF
in
favor
of
the
bank
on
the
TCT
of
60794.
exercised
right
of
redemption
Sps.
Cos
interest
successors-inof
the
Sps.
Co
debtors).
(judgment
sps.
Tecklo
offered
Php
155,769.50
price
as
based
on
the
of
Provincial
Sheriff.
the
grounds:
following
1.
That
the
2
included
in
computation
redemption
of
the
payment
(If
it
will
be
amount
bank
will
due
increase.
to
the
But
when
remember
this
property
that
only
sought
originally
to
cover
the
1
loan
and
not
the
2
loan);
applicable
should
interest
be
the
rate
mortgage
fixed
in
which
the
24%
per
annum
charge
and
18%
per
annum
annum.
sheriff
objected
Provincial
here
claiming
12%
per
annum.
annul
the
the
before
by
the
RTC
Sps.
City
96-3521).
(Partly
Sps.
in
Tecklo)
favor
of
not
annotated
on
cannot
TCT,
bind
thus
3It
it
Sps.
Tecklo);
fixed
in
the
rate
as
mortgage.
total
price
is
Thus,
to
Php
RBPI);
(in
RBPIs
complaint
for2
annulment
redemption.
ordered
pay
Sps.
Tecklo
deficiency.
ruled
that
2
it
on
was
not
TCT
(in
favor
increased
to
be
paid
the
by
price
204,407.18.
to
Php
Tecklo.
Sps.
Tecklo
issue
to
brought
SC.
amount
includes
2
Php
150,000.00
even
if
it
was
not
application
extrajudicial
for
foreclosure.
MERITORIOUS.
arguments:
annotated
additional
loan
as
an
on
mortgaged
TCT
property
bind
them;
2.
private
contract
between
Co
which
RBPI
and
is
not
binding
to
3
until
registered;
they
are
duly
RBPI
appealed.
EJ
Foreclosure
solely
to
the
referred
1
nd
st
rd
nd
st
nd
st
nd
rd
st

SURETY
CIVIL CODE 1207 1222

Art. 1207. The concurrence of two or more creditors or

of two or more debtors in one and the same obligation
does not imply that each one of the former has a right
to demand, or that each one of the latter is bound to
render, entire compliance with the prestation. There is a
solidary liability only when the obligation expressly so

states, or when the law or the nature of the obligation

requires solidarity. (1137a)
Art. 1208. If from the law, or the nature or the wording
of the obligations to which the preceding article refers
the contrary does not appear, the credit or debt shall be
presumed to be divided into as many shares as there
are creditors or debtors, the credits or debts being
considered distinct from one another, subject to the
Rules of Court governing the multiplicity of suits.
(1138a)

Art. 1215. Novation, compensation, confusion or

remission of the debt, made by any of the solidary
creditors or with any of the solidary debtors, shall
extinguish the obligation, without prejudice to the
provisions of Article 1219.
The creditor who may have executed any of these acts,
as well as he who collects the debt, shall be liable to the
others for the share in the obligation corresponding to
them. (1143)

Art. 1209. If the division is impossible, the right of the

creditors may be prejudiced only by their collective acts,
and the debt can be enforced only by proceeding
against all the debtors. If one of the latter should be
insolvent, the others shall not be liable for his share.
(1139)

Art. 1216. The creditor may proceed against any one of

the solidary debtors or some or all of them
simultaneously. The demand made against one of them
shall not be an obstacle to those which may
subsequently be directed against the others, so long as
the debt has not been fully collected. (1144a)

Art. 1210. The indivisibility of an obligation does not

necessarily give rise to solidarity. Nor does solidarity of
itself imply indivisibility. (n)

Art. 1217. Payment made by one of the solidary debtors

extinguishes the obligation. If two or more solidary
debtors offer to pay, the creditor may choose which
offer to accept.

Art. 1211. Solidarity may exist although the creditors

and the debtors may not be bound in the same manner
and by the same periods and conditions. (1140)
Art. 1212. Each one of the solidary creditors may do
whatever may be useful to the others, but not anything
which may be prejudicial to the latter. (1141a)

He who made the payment may claim from his codebtors only the share which corresponds to each, with
the interest for the payment already made. If the
payment is made before the debt is due, no interest for
the intervening period may be demanded.

Art. 1213. A solidary creditor cannot assign his rights

without the consent of the others. (n)

When one of the solidary debtors cannot, because of his

insolvency, reimburse his share to the debtor paying the
obligation, such share shall be borne by all his codebtors, in proportion to the debt of each. (1145a)

Art. 1214. The debtor may pay any one of the solidary
creditors; but if any demand, judicial or extrajudicial,
has been made by one of them, payment should be
made to him. (1142a)

Art. 1218. Payment by a solidary debtor shall not entitle

him to reimbursement from his co-debtors if such

payment is made after the obligation has prescribed or

become illegal. (n)

HEIRS OF POE V MALAYAN INSURANCE

ESCANO V ORTIGAS

Art. 1219. The remission made by the creditor of the

share which affects one of the solidary debtors does not
release the latter from his responsibility towards the codebtors, in case the debt had been totally paid by
anyone of them before the remission was effected.
(1146a)
Art. 1220. The remission of the whole obligation,
obtained by one of the solidary debtors, does not entitle
him to reimbursement from his co-debtors. (n)
Art. 1221. If the thing has been lost or if the prestation
has become impossible without the fault of the solidary
debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all
shall be responsible to the creditor, for the price and the
payment of damages and interest, without prejudice to
their action against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the
performance has become impossible after one of the
solidary debtors has incurred in delay through the
judicial or extrajudicial demand upon him by the
creditor, the provisions of the preceding paragraph shall
apply. (1147a)
Art. 1222. A solidary debtor may, in actions filed by the
creditor, avail himself of all defenses which are derived
from the nature of the obligation and of those which are
personal to him, or pertain to his own share. With
respect to those which personally belong to the others,
he may avail himself thereof only as regards that part of
the debt for which the latter are responsible. (1148a)

Facts:
On April 28, 1980, Private Development Corporation of
the Philippines (PDCP) entered into a loan agreement
with Falcon Minerals, Inc. (Falcon) amounting to
$320,000.00 subject to terms and conditions
On the same day, three (3) stockholder-officers of
Falcon: Ortigas Jr., George A. Scholey, and George T.
Scholey executed an Assumption of Solidary Liability to
assume in their individual capacity, solidary liability with
Falcon for due and punctual payment of the loan
contracted by Falcon with PDCP. Two (2) separate
guaranties were executed to guarantee payment of the
same loan by other stockholders and officers of Falcon,
acting in their personal and individual capacities.
One guaranty was executed by Escao, Silos, Silverio,
Inductivo and Rodriguez. Two years later, an agreement
was developed to cede control of Falcon to Escao, Silos
and Matti. Contracts were executed whereby Ortigas,
George A. Scholey, Inductivo and the heirs of then
already deceased George T. Scholey assigned their
shares of stock in Falcon to Escao, Silos and Matti.
An Undertaking dated June 11, 1982 was executed by
the concerned parties, namely: with Escao, Silos and
Matti as sureties and Ortigas, Inductivo and Scholeys
as obligors. Falcon eventually availed of the sum of
$178,655.59 from the credit line extended by PDCP. It
would also execute a Deed of Chattel Mortgage over its
personal properties to further secure the loan. However,
Falcon subsequently defaulted in its payments. After
PDCP foreclosed on the chattel mortgage, there
remained a subsisting deficiency of Php 5,031,004.07
which falcon did not satisfy despite demands.
Issue:

Whether the obligation to repay is solidary, as

contended by respondent and the lower courts, or
merely joint as argued by petitioners.
Ruling:
The obligation to repay is only jointly as declared by the
Court. In case there is a concurrence of two or more
creditors or of two or more debtors in one and the same
obligation, Article 1207 of the Civil Code states that
among them, there is a solidary liability only when the
obligation expressly so states, or when the law or the
nature of the obligation requires solidarity. Article 1210
supplies further caution against the broad interpretation
of solidarity by providing: The indivisibility of an
obligation does not necessarily give rise to solidarity.
Nor does solidarity of itself imply indivisibility. These
Civil Code provisions establish that in case of
concurrence of two or more creditors or of two or more
debtors in one and the same obligation, and in the
absence of express and indubitable terms characterizing
the obligation as solidary, the presumption is that the
obligation is only joint. It thus becomes incumbent upon
the party alleging that the obligation is indeed solidary
in character to prove such fact with a preponderance of
evidence. Note that Article 2047 itself specifically calls
for the application of the provisions on joint and solidary
obligations to surety ship contracts. Article 1217 of the
Civil Code thus comes into play, recognizing the right of
reimbursement from a co-debtor (the principal debtor,
in case of suretyship) in favor of the one who paid (i.e.
the surety).
However, a significant distinction still lies between a
joint and several debtor, on one hand, and a surety on
the other. Solidarity signifies that the creditor can
compel any one of the joint and several debtors or the
surety alone to answer for the entirety of the principal
debt. The difference lies in the respective faculties of
the joint and several debtor and the surety to seek
reimbursement for the sums they paid out to the

creditor. In the case of joint and several debtors,

Article1217 makes plain that the solidary debtor who
effected the payment to the creditor may claim from
his co-debtors only the share which corresponds to
each, with the interest for the payment already made.
Such solidary debtor will not be able to recover from the
co-debtors the full amount already paid to the creditor,
because the right to recovery extends only to the
proportional share of the other co-debtors, and not as to
the particular proportional share of the solidary debtor
who already paid. In contrast, even as the surety is
solidarily bound with the principal debtor to the creditor,
the surety who does pay the creditor has the right to
recover the full amount paid, and not just any
proportional share, from the principal debtor or debtors.
Such right to full reimbursement falls within the other
rights, actions and benefits which pertain to the surety
by reason of the subsidiary obligation assumed by the
surety.
Decision:
Petitioners and Matti are jointly liable to Ortigas, Jr. in
the amount of P1.3M; Legal interest of 12% per annum
on P 1.3M computed from March 14, 1994. Assailed
rulings are affirmed. Costs against petitioners.
TRUST RECEIPTS
TRUST RECEIPTS LAW
Section 1. Short Title. This Decree shall be known as the
Trust Receipts Law.
Section 2. Declaration of Policy. It is hereby declared to
be the policy of the state (a) to encourage and promote
the use of trust receipts as an additional and convenient
aid to commerce and trade; (b) to provide for the
regulation of trust receipts transactions in order to

assure the protection of the rights and enforcement of

obligations of the parties involved therein; and (c) to
declare the misuse and/or misappropriation of goods or
proceeds realized from the sale of goods, documents or
instruments released under trust receipts as a criminal
offense punishable under Article Three hundred and
fifteen of the Revised Penal Code.

possession and the face of the instrument to be the

owner. "Instrument" shall not include a document as
defined in this Decree.
(f) "Purchase" means taking by sale, conditional sale,
lease, mortgage, or pledge, legal or equitable.
(g) "Purchaser" means any person taking by purchase.

Section 3. Definition of terms. As used in this Decree,

unless the context otherwise requires, the term
(a) "Document" shall mean written or printed evidence
of title to goods.
(b) "Entrustee" shall refer to the person having or taking
possession of goods, documents or instruments under a
trust receipt transaction, and any successor in interest
of such person for the purpose or purposes specified in
the trust receipt agreement.
(c) "Entruster" shall refer to the person holding title over
the goods, documents, or instruments subject of a trust
receipt transaction, and any successor in interest of
such person.
(d) "Goods" shall include chattels and personal property
other than: money, things in action, or things so affixed
to land as to become a part thereof.
(e) "Instrument" means any negotiable instrument as
defined in the Negotiable Instrument Law; any
certificate of stock, or bond or debenture for the
payment of money issued by a public or private
corporation, or any certificate of deposit, participation
certificate or receipt, any credit or investment
instrument of a sort marketed in the ordinary course of
business or finance, whereby the entrustee, after the
issuance of the trust receipt, appears by virtue of

(h) "Security Interest" means a property interest in

goods, documents or instruments to secure
performance of some obligations of the entrustee or of
some third persons to the entruster and includes title,
whether or not expressed to be absolute, whenever
such title is in substance taken or retained for security
only.
(i) "Person" means, as the case may be, an individual,
trustee, receiver, or other fiduciary, partnership,
corporation, business trust or other association, and two
more persons having a joint or common interest.
(j) "Trust Receipt" shall refer to the written or printed
document signed by the entrustee in favor of the
entruster containing terms and conditions substantially
complying with the provisions of this Decree. No further
formality of execution or authentication shall be
necessary to the validity of a trust receipt.
(k) "Value" means any consideration sufficient to
support a simple contract.
Section 4. What constitutes a trust receipt transaction. A
trust receipt transaction, within the meaning of this
Decree, is any transaction by and between a person
referred to in this Decree as the entruster, and another
person referred to in this Decree as entrustee, whereby
the entruster, who owns or holds absolute title or

security interests over certain specified goods,

documents or instruments, releases the same to the
possession of the entrustee upon the latter's execution
and delivery to the entruster of a signed document
called a "trust receipt" wherein the entrustee binds
himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or
otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed
of, in accordance with the terms and conditions
specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the
goods or procure their sale; or (b) to manufacture or
process the goods with the purpose of ultimate sale:
Provided, That, in the case of goods delivered under
trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall
retain its title over the goods whether in its original or
processed form until the entrustee has complied fully
with his obligation under the trust receipt; or (c) to load,
unload, ship or tranship or otherwise deal with them in a
manner preliminary or necessary to their sale; or

d) to effect their presentation, collection or renewal

The sale of goods, documents or instruments by a
person in the business of selling goods, documents or
instruments for profit who, at the outset of the
transaction, has, as against the buyer, general property
rights in such goods, documents or instruments, or who
sells the same to the buyer on credit, retaining title or
other interest as security for the payment of the
purchase price, does not constitute a trust receipt
transaction and is outside the purview and coverage of
this Decree.
Section 5. Form of trust receipts; contents. A trust
receipt need not be in any particular form, but every
such receipt must substantially contain (a) a description
of the goods, documents or instruments subject of the
trust receipt; (2) the total invoice value of the goods and
the amount of the draft to be paid by the entrustee; (3)
an undertaking or a commitment of the entrustee (a) to
hold in trust for the entruster the goods, documents or
instruments therein described; (b) to dispose of them in
the manner provided for in the trust receipt; and (c) to
turn over the proceeds of the sale of the goods,
documents or instruments to the entruster to the extent
of the amount owing to the entruster or as appears in
the trust receipt or to return the goods, documents or
instruments in the event of their non-sale within the
period specified therein.

2. In the case of instruments,

a) to sell or procure their sale or exchange; or
b) to deliver them to a principal; or
c) to effect the consummation of some transactions
involving delivery to a depository or register; or

The trust receipt may contain other terms and

conditions agreed upon by the parties in addition to
those hereinabove enumerated provided that such
terms and conditions shall not be contrary to the
provisions of this Decree, any existing laws, public
policy or morals, public order or good customs.

Section 6. Currency in which a trust receipt may be

denominated. A trust receipt may be denominated in
the Philippine currency or any foreign currency
acceptable and eligible as part of international reserves
of the Philippines, the provisions of existing law,
executive orders, rules and regulations to the contrary
notwithstanding: Provided, however, That in the case of
trust receipts denominated in foreign currency, payment
shall be made in its equivalent in Philippine currency
computed at the prevailing exchange rate on the date
the proceeds of sale of the goods, documents or
instruments held in trust by the entrustee are turned
over to the entruster or on such other date as may be
stipulated in the trust receipt or other agreements
executed between the entruster and the entrustee.
Section 7. Rights of the entruster. The entruster shall be
entitled to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt
to the entrustee to the extent of the amount owing to
the entruster or as appears in the trust receipt, or to the
return of the goods, documents or instruments in case
of non-sale, and to the enforcement of all other rights
conferred on him in the trust receipt provided such are
not contrary to the provisions of this Decree.
The entruster may cancel the trust and take possession
of the goods, documents or instruments subject of the
trust or of the proceeds realized therefrom at any time
upon default or failure of the entrustee to comply with
any of the terms and conditions of the trust receipt or
any other agreement between the entruster and the
entrustee, and the entruster in possession of the goods,
documents or instruments may, on or after default, give
notice to the entrustee of the intention to sell, and may,
not less than five days after serving or sending of such
notice, sell the goods, documents or instruments at
public or private sale, and the entruster may, at a public

sale, become a purchaser. The proceeds of any such

sale, whether public or private, shall be applied (a) to
the payment of the expenses thereof; (b) to the
payment of the expenses of re-taking, keeping and
storing the goods, documents or instruments; (c) to the
satisfaction of the entrustee's indebtedness to the
entruster. The entrustee shall receive any surplus but
shall be liable to the entruster for any deficiency. Notice
of sale shall be deemed sufficiently given if in writing,
and either personally served on the entrustee or sent by
post-paid ordinary mail to the entrustee's last known
business address.
Section 8. Entruster not responsible on sale by
entrustee. The entruster holding a security interest shall
not, merely by virtue of such interest or having given
the entrustee liberty of sale or other disposition of the
goods, documents or instruments under the terms of
the trust receipt transaction be responsible as principal
or as vendor under any sale or contract to sell made by
the entrustee.
Section 9. Obligations of the entrustee. The entrustee
shall (1) hold the goods, documents or instruments in
trust for the entruster and shall dispose of them strictly
in accordance with the terms and conditions of the trust
receipt; (2) receive the proceeds in trust for the
entruster and turn over the same to the entruster to the
extent of the amount owing to the entruster or as
appears on the trust receipt; (3) insure the goods for
their total value against loss from fire, theft, pilferage or
other casualties; (4) keep said goods or proceeds
thereof whether in money or whatever form, separate
and capable of identification as property of the
entruster; (5) return the goods, documents or
instruments in the event of non-sale or upon demand of
the entruster; and (6) observe all other terms and

conditions of the trust receipt not contrary to the

provisions of this Decree.
Section 10. Liability of entrustee for loss. The risk of loss
shall be borne by the entrustee. Loss of goods,
documents or instruments which are the subject of a
trust receipt, pending their disposition, irrespective of
whether or not it was due to the fault or negligence of
the entrustee, shall not extinguish his obligation to the
entruster for the value thereof.
Section 11. Rights of purchaser for value and in good
faith. Any purchaser of goods from an entrustee with
right to sell, or of documents or instruments through
their customary form of transfer, who buys the goods,
documents, or instruments for value and in good faith
from the entrustee, acquires said goods, documents or
instruments free from the entruster's security interest.

violation or offense is committed by a corporation,

partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed
upon the directors, officers, employees or other officials
or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal
offense.
Section 14. Cases not covered by this Decree. Cases not
provided for in this Decree shall be governed by the
applicable provisions of existing laws.
Section 15. Separability clause. If any provision or
section of this Decree or the application thereof to any
person or circumstance is held invalid, the other
provisions or sections hereof and the application of such
provisions or sections to other persons or circumstances
shall not be affected thereby.

Section 12. Validity of entruster's security interest as

against creditors. The entruster's security interest in
goods, documents, or instruments pursuant to the
written terms of a trust receipt shall be valid as against
all creditors of the entrustee for the duration of the trust
receipt agreement.

Section 16. Repealing clause. All Acts inconsistent with

this Decree are hereby repealed.

Section 13. Penalty clause. The failure of an entrustee to

turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to
the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred and
fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code. If the

PAYMENT
CIVIL CODE 1233, 1236-1238, 1240, 1242, 12431251

Section 17. This Decree shall take effect immediately.

METROBANK V GO

Art. 1233. A debt shall not be understood to have been

paid unless the thing or service in which the obligation
consists has been completely delivered or rendered, as
the case may be. (1157)
Art. 1236. The creditor is not bound to accept payment
or performance by a third person who has no interest in

the fulfillment of the obligation, unless there is a

stipulation to the contrary.

In obligations to do or not to do, an act or forbearance

cannot be substituted by another act or forbearance
against the obligee's will. (1166a)

Whoever pays for another may demand from the debtor

what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can
recover only insofar as the payment has been beneficial
to the debtor. (1158a)

Art. 1245. Dation in payment, whereby property is

alienated to the creditor in satisfaction of a debt in
money, shall be governed by the law of sales. (n)

Art. 1237. Whoever pays on behalf of the debtor without

the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him in his rights, such
as those arising from a mortgage, guaranty, or penalty.
(1159a)

Art. 1246. When the obligation consists in the delivery

of an indeterminate or generic thing, whose quality and
circumstances have not been stated, the creditor cannot
demand a thing of superior quality. Neither can the
debtor deliver a thing of inferior quality. The purpose of
the obligation and other circumstances shall be taken
into consideration. (1167a)

Art. 1238. Payment made by a third person who does

not intend to be reimbursed by the debtor is deemed to
be a donation, which requires the debtor's consent. But
the payment is in any case valid as to the creditor who
has accepted it. (n)
Art. 1240. Payment shall be made to the person in
whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to
receive it. (1162a)
Art. 1242. Payment made in good faith to any person in
possession of the credit shall release the debtor. (1164)
Art. 1243. Payment made to the creditor by the debtor
after the latter has been judicially ordered to retain the
debt shall not be valid. (1165)
Art. 1244. The debtor of a thing cannot compel the
creditor to receive a different one, although the latter
may be of the same value as, or more valuable than
that which is due.

Art. 1247. Unless it is otherwise stipulated, the

extrajudicial expenses required by the payment shall be
for the account of the debtor. With regard to judicial
costs, the Rules of Court shall govern. (1168a)
Art. 1248. Unless there is an express stipulation to that
effect, the creditor cannot be compelled partially to
receive the prestations in which the obligation consists.
Neither may the debtor be required to make partial
payments.
However, when the debt is in part liquidated and in part
unliquidated, the creditor may demand and the debtor
may effect the payment of the former without waiting
for the liquidation of the latter. (1169a)
Art. 1249. The payment of debts in money shall be
made in the currency stipulated, and if it is not possible
to deliver such currency, then in the currency which is
legal tender in the Philippines.

The delivery of promissory notes payable to order, or

bills of exchange or other mercantile documents shall
produce the effect of payment only when they have
been cashed, or when through the fault of the creditor
they have been impaired.
In the meantime, the action derived from the original
obligation shall be held in the abeyance. (1170)
Art. 1250. In case an extraordinary inflation or deflation
of the currency stipulated should supervene, the value
of the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is
an agreement to the contrary. (n)
Art. 1251. Payment shall be made in the place
designated in the obligation.
There being no express stipulation and if the
undertaking is to deliver a determinate thing, the
payment shall be made wherever the thing might be at
the moment the obligation was constituted.
In any other case the place of payment shall be the
domicile of the debtor.
If the debtor changes his domicile in bad faith or after
he has incurred in delay, the additional expenses shall
be borne by him.
These provisions are without prejudice to venue under
the Rules of Court. (1171a)
APPLICATION OF PAYMENT
CIVIL CODE ART 1252 1254
Art. 1252. He who has various debts of the same kind in
favor of one and the same creditor, may declare at the

time of making the payment, to which of them the same

must be applied. Unless the parties so stipulate, or
when the application of payment is made by the party
for whose benefit the term has been constituted,
application shall not be made as to debts which are not
yet due.
If the debtor accepts from the creditor a receipt in which
an application of the payment is made, the former
cannot complain of the same, unless there is a cause for
invalidating the contract. (1172a)
Art. 1253. If the debt produces interest, payment of the
principal shall not be deemed to have been made until
the interests have been covered. (1173)
Art. 1254. When the payment cannot be applied in
accordance with the preceding rules, or if application
can not be inferred from other circumstances, the debt
which is most onerous to the debtor, among those due,
shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the
payment shall be applied to all of them proportionately.
(1174a)
PAYMENT BY CESSION
CIVIL CODE ART 1255
Art. 1255. The debtor may cede or assign his property
to his creditors in payment of his debts. This cession,
unless there is stipulation to the contrary, shall only
release the debtor from responsibility for the net
proceeds of the thing assigned. The agreements which,
on the effect of the cession, are made between the
debtor and his creditors shall be governed by special
laws. (1175a)
COMPENSATION

CIVIL CODE ART 1278 - 1290

Art. 1278. Compensation shall take place when two
persons, in their own right, are creditors and debtors of
each other. (1195)
Art. 1279. In order that compensation may be proper, it
is necessary:
(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind,
and also of the same quality if the latter has been
stated;
(3) That the two debts be due;

the former may set it off by proving his right to said

damages and the amount thereof. (n)
Art. 1284. When one or both debts are rescissible or
voidable, they may be compensated against each other
before they are judicially rescinded or avoided. (n)
Art. 1285. The debtor who has consented to the
assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the
compensation which would pertain to him against the
assignor, unless the assignor was notified by the debtor
at the time he gave his consent, that he reserved his
right to the compensation.
If the creditor communicated the cession to him but the
debtor did not consent thereto, the latter may set up
the compensation of debts previous to the cession, but
not of subsequent ones.

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor. (1196)
Art. 1280. Notwithstanding the provisions of the
preceding article, the guarantor may set up
compensation as regards what the creditor may owe the
principal debtor. (1197)
Art. 1281. Compensation may be total or partial. When
the two debts are of the same amount, there is a total
compensation. (n)

If the assignment is made without the knowledge of the

debtor, he may set up the compensation of all credits
prior to the same and also later ones until he had
knowledge of the assignment. (1198a)
Art. 1286. Compensation takes place by operation of
law, even though the debts may be payable at different
places, but there shall be an indemnity for expenses of
exchange or transportation to the place of payment.
(1199a)

Art. 1282. The parties may agree upon the

compensation of debts which are not yet due. (n)

Art. 1287. Compensation shall not be proper when one

of the debts arises from a depositum or from the
obligations of a depositary or of a bailee in
commodatum.

Art. 1283. If one of the parties to a suit over an

obligation has a claim for damages against the other,

Neither can compensation be set up against a creditor

who has a claim for support due by gratuitous title,

without prejudice to the provisions of paragraph 2 of

Article 301. (1200a)
Art. 1288. Neither shall there be compensation if one of
the debts consists in civil liability arising from a penal
offense. (n)

operation of law, and extinguishes both debts to the

concurrent amount, even though the creditors and
debtors are not aware of the compensation. (1202a)
NOVATION
CIVIL CODE ART 1291

Art. 1289. If a person should have against him several

debts which are susceptible of compensation, the rules
on the application of payments shall apply to the order
of the compensation. (1201)

Art. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;

Art. 1290. When all the requisites mentioned in Article

1279 are present, compensation takes effect by

(3) Subrogating a third person in the rights of the

creditor. (1203)

(2) Substituting the person of the debtor;